A good dividend can sucker even the best investors into a bad decision. For many, that's what has happened with Roundy's (UNKNOWN:RNDY.DL), the upper-Midwest grocer that, until this year, offered a yield as high as 10%.
The story line behind the company was enticing: a new brand of natural/organic stores -- dubbed Mariano's Fresh Market -- was taking the greater Chicago area by storm. While the other grocery chains under Roundy's management weren't performing nearly as well, owning the stock seemed worthwhile with a high payout and a promising chain growing in the third-largest U.S. city.
A little over a year ago, I warned investors not to fall for this story. Since then, the company's stock has lost over 60% of its value. You might think following such a drop that the stock is a steal. But buying in now would still be a mistake. Read below to find out why.
A dividend no more
One of the biggest disappointments for investors who picked up the stock last year is that there is no longer a dividend. But it's not necessarily all bad news for investors.
In 2012, Safeway (UNKNOWN:SWY.DL) announced that it would sell all of its Dominick's brand grocery stores in the greater Chicagoland area. This meant that some prime real estate was up for grabs to the highest bidder.
Seizing the opportunity, Roundy's announced that it would acquire 11 of the former Dominick's locations and convert them all into Mariano's Fresh Markets. To pull the deal off, the company needed to use a lot of operating cash, as well as take on a significant portion of debt. Management decided that suspending the dividend in order to fund the growth of Mariano's was a trade-off worth making.
You've got to look at the bigger picture
While the Mariano's banner might be doing great businesses -- with an established location on average pulling in roughly $1 million per week -- Roundy's has many other stores that aren't doing nearly as well. You don't hear much about about Pick n' Save, Metro Market, and Copps in Wisconsin, or about Rainbow Foods in Minnesota. in fact, Mariano's still makes up only 14% of Roundy's stores.
The company has started to sell off several Rainbow locations in the Twin Cities, and that chain might not even exist by the end of 2015. This signals an important move away from this struggling brand and toward Mariano's, but that might not be enough.
Pick 'n Save still makes up over 50% of Roundy's locations. Being a Wisconsin resident myself, I can tell you there's nothing distinctive about the chain, and it is losing ground to both cheaper alternatives -- including Wal-Mart (NYSE:WMT)-- and to locally owned stores.
That becomes abundantly clear when looking at the company's same-stores sales over the past eight quarters.
These are absolutely awful numbers, and the addition of more Mariano's stores doesn't seem to be moving the needle much.
Mariano's isn't going to run in Chicago without competition, either. Whole Foods (NASDAQ:WFM) counts the greater Chicago area as one of its largest markets, and the company also bought up a number of former Dominick's locations.
If you invest with Roundy's, you need to have a firm conviction that the company can turn things around at Pick n' Save. Without that, waiting for Mariano's to become the headline store could be a fool's errand.