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Grocery store chain Roundy's (NYSE:RNDY) reported disappointing results for its second quarter. Sales increased 1.7% year-over-year to $996 million, slightly shy of consensus expectations and marked by same-store sales sinking 3.3%. Earnings of $0.42 per share were slightly weaker than estimated as well, falling 28% year-over-year. The firm slashed its non-GAAP earnings guidance to $1.10-$1.24 per share from $1.30-$1.42 per share, approximately a 20% haircut (in-line with the share price decline following the release). Revenue growth is expected to be 1-2% versus the firm's previous estimate of 2.5-3.5%.

Undoubtedly, the quarter was not good. Wisconsin locations are coming under increased pressure from Walmart (NYSE:WMT) and Woodman's, leading to growing promotional activity and declining margins. We pointed to the firm's position in Wisconsin as one of the reasons why we liked the firm so much, but as it turns out, Walmart was looking at the same data we were. We expect pricing to remain weak in the region going forward, as the grocers will likely compete on market share rather than profits.

Still, the firm intends to pay its dividend, a decision we do not agree with and expect to be reversed, particularly if financial conditions continue to deteriorate. We're not banking on the dividend as part of the long-term return of the firm, and we'd rather have CEO Bob Mariano allocate more capital to expanding Mariano's grocery stores, which are gaining serious traction in the Chicago market. We recently correctly predicted a dividend-cut in the grocery universe (please view our archives on Supervalu (NYSE:SVU)--and think Roundy's could be next. Management currently pegs Chicago's saturation at 25-30 stores, but we think this is conservative given the struggles of SuperValu-owned Jewel. In the near-term, success at Roundy's is uncertain, as Mariano's is still too small of a segment to compensate for struggles in Wisconsin and Minnesota.

Even though the firm has loads of debt, we think shares are fundamentally attractive after the stock's fall. However, the firm registers just a 6 on our Valuentum Buying Index and essentially told investors that 2012 will be a bad year and that the firm might not necessarily pay a dividend in 2013--when it will re-evaluate its capital allocation strategy. We like management, but the stock simply has too many headwinds in the near term to be attractive at this time.

Source: Roundy's Faces Stiff Competition; Earnings Fall