When it comes to supermarkets and other retail chains, many investors might think of the large players in the space. The major national and international brands that comprise the largest chunk of the market. But while those companies might offer some attractive returns over the long run, perhaps the best returns might come from the smaller players that are often overlooked. One interesting prospect the fits this description is Village Super Market (NASDAQ:VLGEA). Over the past few years, the company has exhibited fairly attractive growth on its top line. Although profits and cash flows have been mixed, the company makes up for this with a low share price. All things considered, the company represents a compelling opportunity, especially if revenue continues to expand moving forward.
When I say that Village Super Market is a small player in the supermarket space, I mean it is really small. As of the end of its 2021 fiscal year, for instance, the company operated just 37 stores. Its portfolio included 29 ShopRite supermarkets, 5 Fairway Markets, and 3 Gourmet Garage specialty markets. All of its stores are split between just four states. These are New Jersey, New York, Pennsylvania, and Maryland. In addition to this, the company is also a member of Wakefern Food Corporation, the largest retailer owned food cooperative in the nation. The company currently owns a 12.2% interest in Wakefern’s stock.
*Taken from Village Super Market
Through its stores, Village Super Market aims to offer customers what it considers to be a one stop shopping experience. What management means by this is that its locations have most anything that a typical consumer would want from a supermarket chain. Examples include an on-site bakery, a delicatessen, a variety of natural and organic foods, various ethnic in international foods, prepared foods and products you would find in pharmacies. As of the end of its latest quarter, the company generated 34.7% of all of its revenue from various groceries. Another 17.2% came from dairy and frozen products, while 13.2% was attributable to produce. Other products include meats, deli products, seafood, liquor, and more. For the most part, its stores are fairly small in size. Only 16 of its 37 locations are greater than 60,000 square feet. In all, the average store size for the company is just over 39,000 square feet.
*Taken from Village Super Market
Over the past few years, the financial performance of the company on the top line has been quite appealing. Revenue expanded consistently, climbing from $1.61 billion in 2017 to $2.03 billion in 2021. Growth continued even throughout the COVID-19 pandemic, with sales in 2020 coming in 9.8% higher than they did in 2019 and sales in 2021 coming in 12.5% than they did in 2020. Part of this top line performance can be chalked up to an increase in store count. Between 2017 and 2020, for instance, the company's store count grew from 29 locations to 38. By 2021, its store count had dropped, but only by 1 to 37. Another contributor has been positive same store sales. Despite these sales remaining virtually flat between 2017 and 2019, the company saw a bump up of 5.7% in 2020 followed by a 2.3% increase in 2021.
With sales rising, you might expect profitability to climb too. But that has not happened yet. In fact, some profitability metrics have suffered some. Take, as an example, net income. After hovering in a narrow range of between $22.92 million and $25.54 million in the four years ending in 2020, profitability dropped to $19.99 million in 2021. Fortunately, other profitability metrics held up better. Operating cash flow did fall from $83.95 million in 2020 to $52.69 million in 2021. But it's worth noting that the 2020 figure was an outlier compared to what the company had seen in prior years. The 2021 figure was more typical when comparing the company's performance at year to the past. Even if we adjust for changes in working capital, we see this to be the case, with the reading of $54.28 million in 2021 fitting in nicely with the $52.42 million to $61.42 million range experienced between 2017 and 2019. To put this in context, 2020's adjusted operating cash flow totaled $72.24 million. Even more stable has been EBITDA. Over the past five years, this metric has ranged from a low of $62.17 million to a high of $68.78 million. The high point was achieved in 2021.
While it would be better to see profitability rise with sales, the stability of profitability is a plus for investors. Such stability can be difficult to come across. Seeing just these profitability figures, I would expect to see a company that is trading at a rather lofty multiple. But that is not the case. Although on a price to earnings basis, the company is trading at a multiple of 16.2, its price to operating cash flow multiple is just 6.1, while its EV to EBITDA multiple stands at 4.5. To put these figures in perspective, I then decided to compare the company to some peers identified by as Seeking Alpha itself.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Village Super Market||16.2||16.1||4.5|
|Natural Grocers by Vitamin Cottage (NGVC)||14.4||5.5||5.1|
|Blue Apron Holdings (APRN)||N/A||N/A||N/A|
|Grocery Outlet Holding Corp. (GO)||33.9||12.1||16.8|
|Sprouts Farmers Market (SFM)||11.2||8.2||4.9|
|Casey's General Stores (CASY)||23.5||10.6||12.1|
On a price to earnings basis, these companies ranged from a low of 11.2 to a high of 33.9. Village Super Market was cheaper than all but two of the companies. Using the price to operating cash flow approach, I ended up with a range of 5.5 to 12.1. Here, only one prospect was cheaper than our target. And using the EV to EBITDA approach, I ended up with a range of 4.9 to 16.8. In this case, our prospect was the cheapest of the group. You might think that there's some justification for this low multiple, but I cannot find it. One possible explanation would be high leverage, but the company currently has cash in excess of debt totaling $16.86 million. So the risk of some insolvency problem is virtually nonexistent.
Based on all of the data provided, I must say that Village Super Market appears to me to offer an attractive opportunity for investors who like the supermarket space. This company is small, which does expose it to certain competitive risks. But on the whole, management has demonstrated the ability of the firm to continue growing while generating consistent levels of cash flow. The company has no net debt, and left instead with an abundance of cash on hand. And relative to the competition, it looks cheap while also being cheap on an absolute basis. This to me makes the company a prime prospect for investors who do like the retail space.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.