Grocery Stocks: Managing the Cash Conversion Cycle

by: Bennington Investment Ideas

An old adage states that "retail is detail." Grocery stores face a challenging market place where they have large fixed costs and razor thin margins. The industry has slowly grown more concentrated with emergence of superstores (Wal-Mart) and a constant push towards ever greater scale to enhance purchasing power. The success of a grocery store is about being able to efficiently turnover goods, many of which are perishable, in a timely manner.

Evaluating retail stocks requiers significant assessment of their operational capabilities. Metrics such as inventory turnover and cash conversion cycles are key. More detailed metrics around same store sales growth - is the organization growing because it is adding more stores at significant capital expenditures or selling more goods at existing stores.

Currently, Wal-Mart (NYSE:WMT) is the dominant player in both the grocery and retail space. However, other companies have found ways to challenge their position by going upscale or even in some ways downscale. Whole Foods, Inc. (WFMI) has gone for the upscale challenge. Costco (NASDAQ:COST) took a different approach by going for a wholesale approach. Both Costco and Wal-Mart sell other goods besides groceries which make the comparison to a Whole Foods and Kroger (NYSE:KR) less accurate. However, the pressure exerted on them by Wal-Mart is very real.

This article is focused on the grocery segment and includes analysis of the companies in Table 1:

Table 1: Leading Grocery Stores
Ticker Name Equity Value ($ Billions) Enterprise Value ($ Billions) Enterprise/ EBITDA Trailing P/E Revenue ($ Billions)
WMT Wal-Mart Stores Inc. $ 199.6 $ 245.2 7.4x 13.9x $ 408.2
TGT Target Corp. $ 38.4 $ 53.5 7.5x 14.2x $ 65.4
COST Costco Wholesale Corp. $ 32.4 $ 29.2 9.8x 24.4x $ 77.9
KR The Kroger Co. $ 14.2 $ 20.8 5.6x 13.2x $ 76.7
WFMI Whole Foods Market, Inc. $ 9.2 $ 9.0 12.4 37.0x $ 9.0
SWY Safeway Inc. $ 7.8 $ 12.3 5.0x N/A $ 40.9
TFM The Fresh Market, Inc. $ 1.9 $ 1.9 19.9x 49.8x $ 0.9
SVU SUPERVALU Inc. $ 1.7 $ 9.0 4.6x N/A $ 40.6
WINN Winn-Dixie Stores, Inc. $ 0.4 $ 0.3 2.4x N/A $ 7.2

Data is provided by Yahoo!Finance as of February 4, 2011

It is clear to see that several stores appear to be struggling to survive negative earnings and high debt levels despite large sales. The hypothesis would be that The larger and more profitable stores are that way due to superior operations that would be reflected in key metrics. The following metrics will be reviewed:

  1. Inventory turns - calculated as COGS/average inventory
  2. Cash conversion cycle - calculated in days as DIO + DSO - DPO where DIO is days inventory outstanding, DSO is days sales outstanding and DPO is days payables outstanding
  3. Asset turnover - revenues/ total assets
Table 2: Inventory Turnover
Ticker Most Recent Full Year Year Prior
TFM 18.8 NA
WFMI 18.5 16.5
SVU 12.5 12.6
COST 12.3 11.9
KR 12.0 12.0
SWY 11.4 11.7
WMT 9.0 8.7
WINN 7.8 8.0
TGT 6.6 6.8

Data is provided by Yahoo!Finance as of February 4, 2011

The inventory turnover shows that the specialty grocery stores have the highest turnover rates - most likely due to high standards for perishable goods and maintaining a high level freshness. Furthermore, their ratio of perishable to non perishable is typically higher. For example, the ratio of perishables to total sales for The Fresh Market is almost 70% while it is under 40% for Safeway.

Table 3: Cash Conversion Cycle (Days)
Ticker Most Recent Full Year Year Prior
WMT -14.7 -9.9
SWY -9.7 -9.6
COST -4.7 -4.8
WFMI 1.5 3.7
SVU 2.4 1.6
KR 3.7 3.8
WINN 4.3 6.8
TFM 5.8 NA
TGT 22.0 34.1

Data is provided by Yahoo!Finance as of February 4, 2011

The cash conversion cycle shows Wal-Mart as the dominant company with Safeway (NYSE:SWY) and Costco (COST) also having negative cash conversion cycles.

Table 4: Asset Turnover
Ticker Most Recent Full Year Year Prior
WINN 4.0 4.1
TFM 3.7 NA
COST 3.4 3.3
KR 3.3 3.3
SWY 2.5 2.5
WMT 2.4 2.5
SVU 2.4 2.3
WFMI 2.3 2.2
TGT 1.5 1.5
Data is provided by Yahoo!Finance as of February 4, 2011

The Asset Turnover ratios don't reveal any clear patterns. Target (NYSE:TGT) and Wal-Mart both have relatively low Turnovers. Whole Foods (WFMI) also has a relatively low turnover perhaps due to more elaborate store design and layout. Yet the upsale The Fresh Market has a high asset turnover - should be noted that it is just for one year though.

Table 5: Net Margin
Ticker Most Recent Full Year Year Prior Two Years Prior
TFM 5.7% 4.0% 4.2%
TGT 3.8% 3.4% 4.5%
WMT 3.5% 3.3% 3.4%
WFMI 2.7% 1.8% 1.4%
COST 1.7% 1.5% 1.8%
SVU 1.0% -6.4% 1.3%
WINN 0.4% 0.5% 0.2%
KR 0.1% 1.6% 1.7%
SWY -2.7% 2.2% 2.1%
Data is provided by Yahoo!Finance as of February 4, 2011

The net margin shows that scale or specialty dominate with the top 5 spaces held by either small upscale specialty grocery stores - The Fresh Market and Whole Foods - or large scale enterprises - Wal-Mart, Target, and Costco. These five companies also represent 3 of the top 4 spots in the other 3 metrics.


The grocery store business is a very competitive business that provides essentially two options to compete - scale or upscale. The top performers in either option typically exhibit superior performance across key operating metrics. Furthermore, the grocery business has some differences to general retail due to the perishable nature of certain food items. Net margin shows a high correlation to valuation metrics and also corresponds to the other operating metrics.

The Fresh Market (NASDAQ:TFM), with its recent IPO, will represent a key challenge to Whole Foods. With the exception of its cash conversion cycle, it has superior metrics to Whole Foods.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

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