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
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
Not going through with divestitures of retail business
New CEO yet to prove himself
Financial Analysis:
Revenues of $6.7 billion in 4Q21 down 0.5% from 4Q20
Revenues of $26.9 billion in FY21 up from 26.5 billion in FY20 (ended in July 2020) and $8.4 billion in FY16
Net income of $43 million in 4Q21 vs $52.3 million in 4Q20
Net income of $149 million in FY21 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 $304 million vs $284 million for FY20 (excluding $102 million in divestitures from sales of retail stores)
Balance Sheet
Total assets: $7.52 billion ; total liabilities: $6.01 billion; book value: $1.51 billion
Cash: $41 million, debts: $2.17 billion, current assets: $3.55 million, current liabilities: $2.48 billion
Valuations
My personal Biases:
Bullish on industry
Belief in ability to repay debt with divestitures
Largest position of my portfolio at 11.3%
Assumptions for base case:
Use Discounted Owner’s earnings to calculate intrinsic value
Revenue growth of 4% per year (as per forecast)
Earnings Growth of 16% per year (as per forecast)
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 Owner’s earnings in 2026 compared to base
Bear case with 10% less owner’s earning in 2026 compared to base
Shares outstanding grow from 59 million to 70 million
Conclusion
Undervalued but not with margin of safety
8% expected returns per year
