Title: Village Super Market VLGEA
1Village Super Market (VLGEA)
- Sell Pitch
- February 25th
- By James Cullen
2Some Resources
- http//collegeanalysts.com/?page_id246
- SEC Filings
- Financials
- Historical Valuation
- Wide Moat Companies
- Video About USG
3Background
- 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)
4The 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
5What 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
6Why 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
7Why 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
8What 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
9Industry/Sector Comps
- Fourth lowest margins in a sector (services) with
the second lowest margins of all types of
businesses
10Everyone 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?
11How 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?
12The 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?
13The 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
14S-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
15Marginal 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
16End Markets NJ and East PA
17Time 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
18Closing Questions?