CAPScall of the Week: Roundy's

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For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Roundy's (Nasdaq: RNDY  ) .

What Roundy's does
Roundy's operates as a grocery in the Midwest under five chains: Pick 'n Save, Rainbow, Copps, Metro Market, and Mariano's Fresh Market. In its latest quarterly results, Roundy's reported a 2.4% increase in sales; however, comparable-store sales fell 2.1% from the year earlier. Overall profit came in at $0.06 versus the $0.29 it reported in the year-ago period due to an early extinguishment of debt and the Green Bay Packers' early exit from the playoffs, according to management.

Who it competes against
Traditional grocers haven't had an easy go of things in recent years. Locations like Roundy's, Safeway (NYSE: SWY  ) and SUPERVALU (NYSE: SVU  ) have suffered from rising commodity costs, weaker consumer spending, and general macroeconomic slowdown.

Worse yet, these traditional grocers have fallen prey to attacks from each end of the economic spectrum. Dollar stores like Dollar Tree (Nasdaq: DLTR  ) are drawing deal-seeking, cost-conscious consumers away from traditional grocers and providing them a similar selection of goods at a much simpler price tier (everything is $1 or less). On the flip side, organic and premium health-food grocers like Whole Foods Market (NYSE: WFM  ) are capitalizing on the trend toward healthier living and consumers' willingness to pay for premium organic products in order to achieve that goal.

With few avenues to growth, grocers like Safeway and SUPERVALU have had to be innovative to keep customers coming back and to keep shareholders happy. Safeway has been adding fuel stations in the hopes that its stores will become a one-stop shop for consumers. SUPERVALU has turned to store remodels and making greater strides to pay down its debt to appease its shareholders and get consumers back into its grocery stores.

Roundy's is a completely different beast. It's attempting to lure investors by dangling a carrot in front of their face in the form of a $0.23 quarterly dividend. If you're scoring at home, that is indeed a 9.1% annual yield. Numbers like that are sure to turn a few heads -- especially since the company remains committed to its dividend payout despite more than $700 million in debt on its books.

The call
After reviewing the prospects for Roundy's, I've decided to enter a CAPScall of underperform on this Midwestern grocer.

Roundy's dividend is very enticing, but that's about the only aspect of the company that appears redeemable. In its latest quarterly report, outside of its ridiculous finger-pointing at the Packers for its weaker results, the company cautioned that same-store sales for the remainder of the year would fall by 0.5% to 1.5%. Increasing competition from Wal-Mart, dollar stores, and premium markets is beginning to take a bite out of Roundy's already small pie. While not as bad as SUPERVALU's, Roundy's large debt load is also a concern. It makes little sense to return $0.92 annually to shareholders when it has loans and payments coming due in 2017 and 2019. Until it can wave its magic wand and figure out a way to grow its existing locations, it will remain an underperform call in my CAPS portfolio.

Just as I'm scouring the market for the next great stock, so is our team of analysts at Motley Fool Stock Advisor. In a recent report, our chief investment officer laid out his case for why a company he refers to as the "Costco of Latin America" is the top pick of the year. Click here and find out this company's identity for free!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of SUPERVALU and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Whole Foods Market, as well as purchasing calls on SUPERVALU and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always the right price: free!

Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On June 20, 2012, at 11:05 AM, axiom71 wrote:

    While I can appreciate the apparent joke of blaming a football team on lower same store sales, I think Roundy's deserves a bit more credit for this claim then they are getting...

    According to their recent slide deck from the Jefferies Global Consumer Conference (earlier this week) they operate 119 stores in Wisconsin, 32 in Minnesota and another 8 in Illinois.

    119 stores in Wisconsin competing not only against other stores for market share and consumer dollar, but competing against the previous year when the Packer's won the Super Bowl.

    The Packers were beaten in the second week of the playoffs, two full weeks of games lost compared to the previous year.

    TWO WEEKS, but not just two weeks of football, two weeks of PLAYOFF football, and the two biggest games of the year - the NFC Championships and the Super Bowl.

    Game parties like these often run into the hundreds, if not thousands, of dollars to pull off.

    Paper plates, cups, snacks, meats, vegetable trays, dips, sodas, beer, etc. Most fans (and Wisconsin is big on its football) will go extra deep into the budget to host parties around these kind of events.

    To the same sentiment in reverse, an early exit for a team expected to return to the Super Bowl to defend its title would cause an economic blow to the businesses that support those fans. Who in Wisconsin was going to go all out to throw a Super Bowl party for the Giants vs the Patriots.

    A single day event - like Thanksgiving - is a national day of economic impact for grocers and the suppliers that sell themed and related products. To ridicule the lost economic impact from 2010's Super Bowl run and win, to 2011's early exit, is to seem ignorant of how consumers actually spend their money.

    My average monthly spend on groceries is around $400. But a day like a Super Bowl party could be a $100 day for me - just me - depending on the level of food I decide to buy (steaks versus burgers, 7-layer dip and chips vs Doritos, etc)

    I would bet that those two lost games easy accounts for the lost 2% of same-store sales. Or at least a large chunk of it.

    And I think any investor who is interested in RNDY to go to their investor relations page and listen to the Jefferies presentation and check out the slides.

    The confidence they have in their stores' ability to compete and continue to perform has me much more enthusiastic about my shares. I think they could surprise many with a much better QR, and the dividend continues to seem like a safe bet for the foreseeable future.

    Disclosure: I own RNDY shares and do not intend to change that status within the next 72 hours. :)

  • Report this Comment On June 20, 2012, at 11:20 AM, axiom71 wrote:

    If that came off as heavy handed, I apologize, but I would call them a "market perform" level stock with a juicy dividend opportunity. The new stores in Illinois are gaining good reviews and sales.

    They, along with Walmart, have increased market share since 2002, at the cost of secondary grocers and independents.

    They have stayed consistent with profits, while looking to move consumer buying to higher margin perishables and own-brand goods. Two differentiators that they can offer to compete on quality, not just on price.

    They are growing their deployment in Illinois - 4-5 stores a year, with five open Mariano's, 3 more coming in 2012, and another 7 leases already signed for 2013/14 with another 10 sites in various stages of development.

    They open stores that generally range in the 60-70k sq foot size...with full service pharmacies.

    80% of their store base are either new or remodeled stores within the past 10 years. (50% over the past 6 years).

    so, 2-3% growth in new stores, a move to higher margin goods and better efficiencies in the store staffing and distribution areas, and an admitted weakness in same store sales expected to track at closer to 0.5% and not the 2.1% seen in the last quarter.

    This is a buy and hold stock for the next 24 months and possibly the next 24 years.

    Who else is offering such a committed dividend payback to their stockholders?

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