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Village Super Market VLGEA

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Operates 23 ShopRite supermarkets with 2 new store locations under construction ... 'Further, since our store base is concentrated in densely populated metropolitan ... – PowerPoint PPT presentation

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Title: Village Super Market VLGEA


1
Village Super Market (VLGEA)
  • Sell Pitch
  • February 25th
  • By James Cullen

2
Some Resources
  • http//collegeanalysts.com/?page_id246
  • SEC Filings
  • Financials
  • Historical Valuation
  • Wide Moat Companies
  • Video About USG

3
Background
  • We own 400 shares of VLGEA, purchased at 13.57
    in September 2003
  • The stock closed Friday at 44.65, for a total
    gain of 230
  • VLGEA is currently the portfolios single largest
    holding (about 5.7)

4
The Gameplan
  • Use limit orders to create a collar
  • Enter a stop loss at 44.00
  • Enter a limit sell at 46.00
  • Volume in VLGEA is light, typically less than
    5,000 shares trade per day
  • A 400 share market sell would otherwise incur
    significant transaction costs

5
What Does Village Do?
  • Operates 23 ShopRite supermarkets with 2 new
    store locations under construction
  • Two dozen locations throughout New Jersey and one
    in NE Pennsylvania
  • Focuses on superstore approach
  • These are higher margin items
  • Bakery
  • Pharmacy
  • Prepared Food

6
Why We Should Sell
  • Inherently Poor Business Economics
  • Company-Specific Issues
  • Reasonable Selling Price
  • Raise Cash for Portfolio
  • Further, since our store base is concentrated
    in densely populated metropolitan areas,
    opportunities for future store expansion may be
    limited

7
Why Poor Economics?
  • Products Largely Commodity-Based
  • Price takers
  • Ultra-low Margins
  • Need High Inventory Turns
  • Real same-store sales growth
  • Working Capital Intensive
  • In two words No Moat

8
What is a Moat?
  • Sustainable trait that allows a company to earn
    above-average returns on capital (i.e. create
    value) over a long time period
  • Incomparable economy of scale
  • Network effects
  • Intellectual property rights
  • High switching costs
  • Supermarkets have none of these

9
Industry/Sector Comps
  • Fourth lowest margins in a sector (services) with
    the second lowest margins of all types of
    businesses

10
Everyone Following?
  • I want to make sure everyone understands the
    underlying business economics as well as the
    concept of a moat because doing so is crucial
    to understanding why we should sell VLGEA
  • Any quick questions on what weve covered so far?

11
How Do Supermarkets Make Money?
  • Need to leverage economies of scale on gross
    margin, operating expense
  • Can Village find/exploit further efficiencies?
  • I dont see it happening
  • Wakefern for inventory purchases
  • Leveraging operating costs/SGA
  • Increase customer volume at stores to drive more
    (quicker) inventory turns
  • Can NJ get any more crowded?

12
The Net Margin QuestionPeaking, or Room for
Expansion?
I give management credit - margins have more than
tripled in the last 10 years but where to from
here?
13
The Net Margin Question
  • Village already purchases substantially all
    inventory through Wakefern, a co-op
  • Wakefern allows all ShopRites to combine
    purchasing power
  • Operating leverage requires store growth without
    matching increases in SGA
  • Store growth and selling sq. footage has
    essentially been constant
  • 2 net margin is top-end of industry range
  • Arden (ARDNA) and GAP arent really special

14
S-S Comps Growth vs. Cost Pressures
  • The other key component of supermarket
    profitability is high inventory turnover, which
    requires growing same-store sales
  • I believe that recent S-S comps growth is not
    organic, but due to cost inflation
  • Sales growth was 4.8, with 3.6 s-s (mrq)
  • But, COGS was up 5
  • Massive inflation in food prices that almost
    makes BCDS prices look reasonable

15
Marginal Return on Capital
  • We already know the supermarket industry is less
    than ideal for investment
  • But Village has historically done a pretty good
    job at driving ROMIC while the company is growing
    (about 10)
  • I believe saturation and food cost inflation is
    going to pressure ROMIC
  • More money tied up in inventory where prices in
    excess of costs cannot be passed along will weigh
    on ROMIC going forward

16
End Markets NJ and East PA
17
Time to Sell Reposition Portfolio
  • Supermarkets are not the kind of industry we want
    to invest in
  • Difficult to see Village improving from present
    state
  • Lock in a good return
  • Portfolios cash balance is low

Earnings from a stable company will tend to be
most highly valued in difficult times, i.e.
now VLGEA has little growth potential, but trades
at 14x earnings
18
Closing Questions?
  • Ask away
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