Supermarket operator Roundy's (UNKNOWN:RNDY.DL) 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.