Is There Light at the End of the Tunnel for Roundy's?

Do weak earnings imply that Roundy's game is finally over?

Feb 10, 2014 at 1:39PM

Supermarket chain Roundy's (NYSE:RNDY) continues to feel the heat of severe competition in the US retail market. Is there any hope or will the company continue losing ground to its rivals? Let's have a look at Roundy's and also analyze Safeway (NYSE:SWY) and SUPERVALU (NYSE:SVU).

Third-quarter earnings
In the third quarter, Roundy's earnings per share fell drastically to $0.07 from $0.20 in its last third quarter. This also missed the consensus estimate by $0.06. This decline in earnings came because of higher operational and administrative expenses, which resulted directly from vigorous marketing campaigns undertaken by the company.

Operating expenses rose 4% for the quarter to $234.9 million. On the sales front Roundy's did better, though it missed analysts' expectations by 1.1% with revenue of $984.16 million. Same-store sales also dipped by 3.7%.

What is Roundy's up to?
Roundy's recently bought 11 Dominick's locations from Safeway for $36 million. Earlier in October, Safeway decided to exit the Chicago market, therefore it wanted to sell all of its Dominick's stores in the region. Before acquiring the Dominick's locations, Roundy's had 13 stores in Chicago in addition to 5 stores which are under construction. The newly acquired stores will be opened under the Mariano's brand which has done a great job lately.

Roundy's has also decided that it will not pay out its quarterly dividend of $0.12 as the company needs more cash to invest in Mariano's. The decision, however, faced criticism from analysts as the company' stock price slipped by 5% as soon as this news was released. 

As Roundy's is looking to raise more capital for investments, it filed a registration statement with federal securities regulators to sell 27.6 million common shares. Soon after this announcement, the company's stock price plunged by more than 6%. Once Roundy's gets the approval for the sale, more shares will float in the market. The sale will help the company raise capital but at the same time its stock price will take a hit once again.

The investment group Willis Stein & Partners, which bought Roundy's in 2002, is also among the selling shareholders. Moreover, some of the Roundy's executives are also selling the company's stock. During the last three months, insiders have sold more than 6,000 shares of Roundy's. This indicates that the insiders aren't very hopeful about the future prospects of the company.

Keeping in view the economic headwinds which are driving down retail margins, Roundy's has given rather dim guidance for fiscal 2013. Roundy's now expects its full year diluted per-share earnings to be around $0.71 to $0.72. Sales are projected to grow by 1.5% to 1.7%, however, comparable sales are expected to decline.

Earlier, Safeway, the parent company of Dominick's, decided to shut down its operations in Chicago as the company was losing money over there. In the latest quarter, Safeway's earnings fell by 58% to $0.27 while revenue grew by 1.1%. Back in 2013, Safeway sold its Canadian business; the cash from the deal will be used to pay off debt and repurchase shares. Presently, the company is focusing on its established markets rather than expanding. There are also rumors going around regarding the possible buyout of Safeway which is why the company is adopting a poison-pill strategy.

In the most recent quarter, SUPERVALU benefited from its cost-cutting measures and posted earnings per share of $0.12. The quarterly result reflects a huge improvement from the third quarter of the previous year when the company generated earnings per share of just $0.80. Sales, however, slipped 1% to $4 billion.

As SUPERVALU continues to compete against big rivals such as Kroger and Whole Foods, the company won't be able to boost margins by increasing prices. SUPERVALU will have to keep reducing its operating expenses to earn more profits in the future.

Final thoughts
Roundy's latest quarterly performance showed a rather disappointing result. The company failed to earn considerable income as its operating costs continued to increase. Many insiders and institutional investors have lost faith in the company which is evidenced by their selling behavior.

Roundy's only hope is its Mariano's business. Mariano's, which caters to the upscale market, has had great success and it is considered to be a major future driving force for the company. The company is trying to raise capital so it can invest the funds in Mariano's. The dividend has also been suspended because the company needs money to invest in Mariano's. However, Roundy's seems to be relying on Mariano's growth too much, which appears to be a risky move. Considering all of the aspects discussed above, I believe Roundy's is a risky investment. Hence, it doesn't present an attractive buying opportunity at this point in time.

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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