Business Description:
$140 billion potential market with currently $27 billion market and $38 billion existing customer opportunity
Major Competitors: SpartanNash (NASDAQ:SPTN), C&S Wholesales Groger and Kehe
Minor competitors (serves mostly to restaurants, schools and other small units): Sysco (NYSE:SYY) and US Food Holdings (NYSE:USFD)
Over 60 distribution centers (total 28.8 million sq ft) vs 19 for SPTN (8.2 million sq ft)
Diversified with moat in fast growing natural and organic
Customers:
Chains
Independent retailers
supernatural
retail
Largest customer: Whole Foods with about 18% of revenues in 2020
6 product categories:
Grocery and general merchandise
Produce
Perishables and frozen foods
Nutritional supplements and sports nutrition
Bulk and food service products
Personal care items
2 business segments
Wholesale
Retail
Catalysts:
Changing consumer habits into natural and organic
Deal with Amazon extended till 2027
Divestiture of retail business to raise capital for debt repayment
Inflation is a tailwind
Risks:
Took high debt for Supervalu acquisition with high interest payments
Depends on derivatives to handle debt repayments at lower interest rates
Unionized workers and high pension expenses
Financial Analysis:
Revenues of $6.62 billion in 3Q21 down 5.3% from 3Q20
Revenues of $27.8 billion in TTM up from 26.5 billion in FY20 (ended in July 2020) and $8.4 billion in FY16
Adjusted EBITDA of $206 million in 2Q21 up 54% from 2Q20
Net income of $48.5 million in 3Q21 vs $88.1 million in 3Q20 (net tax benefits of $18 million compared to 3Q21)
Net income of $198 million in TTM vs net loss of $254 million for FY20
Net loss in FY19 and FY20 mostly because of impairment of goodwill of $293 million and $495 million respectively, after the Supervalu acquisition
FCF of $117 million vs $284 million for FY20 (excluding $102 million in divestitures from sales of retail stores)
Owner’s earnings (including divestitures as they offset interest payments to bondholders) of $219 million in TTM vs $382 million in FY20
Net debt repayment of $62 million in 3Q21
Balance Sheet
Total assets: $7.52 billion ; total liabilities: $6.21 billion; book value: $1.30 billion
Cash: $39 million, debts: $2.33 billion, current assets: $3.58 million, current liabilities: $2.26 billion
Valuations
My personal Biases:
Bullish on industry
Belief in ability to repay debt with divestitures
Largest position of my portfolio at 7.0%
Assumptions for base case:
Use Discounted Owner’s earnings to calculate intrinsic value
$100 million in divestitures in 2022 and 2023 each
Revenue growth of 4% per year
Profit margins of 1.5% in the long-term (2021 and 2022 lower with synergy costs)
Depreciations of $300 million per year and Capex of $250 million per year
All of owner’s earnings used to repay debt
Discount Rate of 15% till 2026
Terminal Growth rate of 2%
Bull case with extra 10% extra revenues in 2026 compared to base
Bear case with 10% less revenues in 2026 compared to base
Shares outstanding grow from 59 million to 70 million
Conclusion
Undervalued even with 50% margin of safety
13% expected returns per year
Full analysis on my Research Partnership: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/32922580
