Will Roundy's Long Uphill Climb Be Worthwhile?

Supermarket operator Roundy's (NYSE: RNDY  ) is being pulled in two different directions. In some sense, the company could be an attractive investment because it has a very valuable asset in the form of the Mariano's Fresh Market banner. On the other hand, other chains still make up the bulk of Roundy's operations, namely Pick 'n Save, Rainbow, and Copps, and they are weighing on its overall performance.

Roundy's is working hard to expand its Mariano's brand and sell nonperforming locations to peers like SUPERVALU (NYSE: SVU  ) , but that's proving more difficult than anyone could have imagined. Even though Mariano's is highly successful, Roundy's is still reporting falling same-store revenue. Poor performance is why its shares fell more than 20% after it reported first-quarter earnings. It's clear that until the churn in store counts finishes, Roundy's will likely continue to post unimpressive results.

Sweet home Chicago
Roundy's has a well-established presence across the Midwest if you include all of its different banners. However, when it comes to Chicago, one name reigns supreme: Mariano's, a high-end specialty grocer. In fact, the success of Mariano's has been so impressive that Roundy's recently announced it would leave the Twin Cities altogether, where it operates several Rainbow stores.

Roundy's struck a deal to sell some of the 18 Rainbow stores in the Minneapolis/St. Paul area for $65 million in cash to SUPERVALU, the operator of Cub Foods and Shop 'n Save. Roundy's isn't stopping there. Eventually, it plans to unload its remaining nine Rainbow stores as well, and will fully exit the Twin Cities altogether.

It seems that when it comes to the banners other than Mariano's, Roundy's is fighting a losing battle. However, that doesn't mean that Roundy's isn't investing. It plans to use the proceeds from the Rainbow sales to invest further in expanding its Mariano's brand in Chicago. There's good reason for this.


Chicago is its growth market
That's how Roundy's CEO Robert Mariano described his company's presence in Chicago during the first-quarter conference call with analysts. On the other hand, Roundy's views Wisconsin much differently. Rather than planning aggressive growth there, Roundy's priority for Wisconsin, which primarily holds its Pick 'n Save stores, is just to stabilize the market.

By contrast, Roundy's is aggressively investing to expand its Mariano's store count in Chicago. Roundy's opened five Mariano's stores in the Chicagoland area in the first quarter alone, bringing the total number of Mariano's stores to 21. Going forward, Roundy's is on track to open another eight Mariano's by the end of the year.

This is a wise strategy. The average weekly sales for Mariano's stores in the first quarter reached $1 million, far better than those of Roundy's other banners. However, its other poorly performing brands are why its companywide same-store sales, which include locations open for at least one year, fell 3.7% year over year.

Roundy's: A tale of two grocers
It's clear that Mariano's is hugely successful, which might make you think that Roundy's is a compelling investment opportunity. The problem with that, however, is that Mariano's still makes up a frustratingly small part of Roundy's overall store count. Even after including the eight Mariano's that Roundy's plans to open this year, the brand represents only about 1 out of every 6 Roundy's stores. The rest are comprised of the Pick 'n Save, Copps, and Metro Market banners, which are not doing well.

Roundy's long-term vision for Mariano's is to build out the Chicago market to 45-50 stores. This will take years of aggressive investment, which will weigh on profits. In addition, it takes a couple of years even after new stores open up before they reach full maturity. As a result, if you're looking for a quick turnaround you'll likely be disappointed, as was the market when Roundy's reported its earnings. However, if you're in it for the long haul, it's clear that Roundy's has an ace in the hole in the form of Mariano's.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (5)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2953673, ~/Articles/ArticleHandler.aspx, 9/2/2015 9:00:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,058.35 -469.68 0.00%
S&P 500 1,913.85 -58.33 0.00%
NASD 4,636.11 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:01 PM
RNDY $2.39 Down -0.06 +0.00%
SVU $8.09 Down -0.15 +0.00%
Supervalu CAPS Rating: **