Mariano's Fresh Market Doesn't Justify Buying Roundy's and Its Dividend

When it comes to grocery stocks, there's no more appealing dividend than Roundy's (NYSE: RNDY  ) 5.2% yield. The company has a dominant share of its home turf, and a promising new brand -- Mariano's Fresh Market in the Chicago area -- that promises to drive future growth.

Yet I think investors are better off looking elsewhere if they want a solid investment. Read on to see why the company's market position isn't what it seems to be, and why Mariano's won't be enough to really make a difference in the coming years.

A dying giant?

Source: Roundy's. 

Currently, Roundy's operates 161 grocery stores, 75% of which are located in Wisconsin, many under the Pick 'n Save banner. Though it currently has a dominant 42% market share of the greater Milwaukee area, that number doesn't tell the whole story.

As recently as three years ago, Roundy's had a 58% share of the Milwaukee market. Then Wal-Mart (NYSE: WMT  ) and other large grocers began making aggressive moves to offer lower prices to shoppers. Because Roundy's doesn't offer a fundamentally different shopping experience, it was thought, consumers would be more likely to gravitate toward the lower prices.

Three years later, it appears that this theory has played out. Not only has Roundy's lost 16% of its home market in such a short time, but Wal-Mart has also gone from a 6% to a 16% share.

Just as alarming, sales at the flagship stores have been in a downward spiral ever since the company went public in 2012. Just look at how, even after adjusted for shifts in the reportable calendar months, the company has lost traffic in droves.

Quarter

Comparable Store Sales

Q1 2012

(2.1%)

Q2 2012

(3.3%)

Q3 2012

(3.6%)

Q4 2012

(1.3%)

Q1 2013

(0.8%)

Q2 2013

(3.9%)

Source: SEC filings.

Though CEO Bob Mariano says his company is aggressively spending to provide a differentiated shopping experience for customers, it's clear that the strategy isn't working. Speaking from experience (I live right in the middle of Roundy's home market), I can tell you that there's nothing special about what Roundy's core stores offer, and it's just as easy to find competitive prices elsewhere.

A new brand to the rescue?
If there has been one silver lining to Roundy's life as a public company, it has been in the form of its Mariano's Fresh Markets, which are taking hold in Chicago. These stores -- again, speaking from personal experience -- are much more akin to what one would experience if one shopped at a Trader Joe's: a quirky and vibrant atmosphere with differentiated product offerings.

These stores have been a huge hit. Mariano said that, as of the most recent quarter, the 11 Chicago stores are averaging more than $1 million per week in sales. That's well above the company's stated goal of $750,000. Realizing that it might have captured lightning in a bottle, management plans to invest aggressively and open five new stores per year until it hits 30 in the greater Chicago area.

The problem, for bullish Roundy's investors comes when you look at what a small portion Mariano's Fresh Markets makes up of Roundy's base.

Source: SEC filings. 

Even if Mariano's continues to outperform, the eroding businesses in Wisconsin and Minnesota will continue to drag on the company's stock.

Kenneth Goldman, an analyst at JP Morgan Chase, realizing this scenario, asked during the most recent conference call if Roundy's management would be willing to sell off all of its non-Mariano's business if the right buyer came along. Mariano said the question "painted a wonderful picture, but the reality is that there's no such offer" existing.

Until an offer like that comes along, I think there are much better options out there for investors.  For instance, there's one grocer that I've invested a whopping 7.5% of my real-life holdings into. To find out which grocer that is -- as well as two other promising plays -- check out "3 Companies Ready to Rule Retail." Uncovering these top picks is free today; just click here to read more.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 21, 2013, at 4:02 PM, waltorfer wrote:

    Thanks for the analysis. I frequent the Mariano's in Avondale, and it's a well-priced, enjoyable buying experience. The only drawback is that the store is way too crowded on weekends.

    Since I do work in the Milwaukee area, I end up at Pick 'n Saves every once in a while as well. The experience couldn't be more different. The stores are outdated, the product line is weak -- I have no trouble believing that the Walmarts of the world are luring away customers in droves.

    Even with the attractive dividend, I won't invest in Roundy's unless their Pick 'n Save stores start feeling a lot less like a Jewel-Osco built in the 80s and a lot more like a Hy-Vee or a Mariano's.

    Two questions:

    1. Is there any chance for a spin-off of Mariano's at some point, or is that wishful thinking?

    2. Any chance that Roundy's converts some of its Pick 'n Save locations into Mariano's?

  • Report this Comment On August 22, 2013, at 2:32 PM, raybraemer wrote:

    I too live in the midst of the Roundy's home territorry. We do most of our shopping at their stores and have been to the Mariano's location in Elmhurst. As well as Copps in Madison. We've had good experience at all locations with product quality and employee service.

    The reason I'm taking the time to comment is that I disagree with the author's post. I also invest in Roundy's (RNDY) stock and this year alone have increased my worth on this stock by over 110%. I am investing on the company as a whole, not just the focus in the addition of more stores in Illinois. For example, they have an initiative going on with their Wisconsin Pic stores to reinvent quality and service. I can tell you from personal experience, it is working. I have been to 2 different stores that have implemented the changes and found the experience to be rewarding. I'm looking forward to more of the same, because I'm personally not looking for a 5% return on my investment from dividens - I am looking for GROWTH.

  • Report this Comment On October 31, 2013, at 4:41 PM, Johnnynutsack wrote:

    Your analysis is awful. Mariano's sales are shooting thru the roof and they have ambitious growth plans. It doesn't matter that they are ceding market share to walmart in their pic n save territories - that is a dying industry anyways as walmart continues to undercut them and the middle class being eroded away by the day and being forced to value shop - Mariano's is their plan for the future. Whole Foods and Trader Joes started it all. A different grocery experience. And Mariano's is really on to something. The place is always packed. I like to invest in things i can see and experience. You should, too. And quit writing for the fool. All of these amateur writers really ruin the experience.

  • Report this Comment On December 04, 2013, at 7:16 PM, dbears55 wrote:

    Investing in a turnaround like RNDY is not for the faint of heart, however after reading this report I couldn't think of a better pair trade than long RNDY and short WFM (which is recommended by the author). WFM, already 40% penetrated to it's growth target is capped on margins as competition sets in and comps/traffic will become more difficult to drive given all the other growing competitors, These guys all will start butting heads for real estate against each other. On the other hand, RNDY is a turnaround play, with the "re-imaging of Pic n' Save - not saying they will pull a Kroger, but they will improve." And Mariano's is just an added growth story to tack on. In the meantime, FCF yield is still pretty solid and that sort of depressed valuation provides some downside protection. If I had worries, I'd monitor the credit as they are levered almost 5x.

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