I don't know how many investors predicted two years ago that Western U.S. warehouse grocer Smart & Final (NYSE:SMF) was poised to put up massive, market-smashing gains, but those who did are, finally, looking pretty smart -- and they looked even smarter yesterday following the shares' 4% pop, driven by the solid Q3 financial results the company announced Monday night.
The company turned in three-month revenue (from continuing operations) growth of 12%, which left it at $603 million. Same-store sales ended ahead an impressive 12%, and with both cost of goods sold and operating expenses falling as a percentage of sales -- as well as decreased interest expense as the company has paid down debt -- Smart & Final managed to turn in both large income from continuing operations growth and huge net income growth.
Turns out the company was more than right to get out of the businesses it finished divesting a year ago: Smart & Final no longer operates food service distribution businesses in northern California nor geographically incongruous retail and food service distribution businesses in Florida. Not coincidentally, it no longer posts the steep net losses to which investors had grown accustomed.
The grocery business isn't glamorous, and competing with the likes of Albertson's (NYSE:ABS), Kroger (NYSE:KR), and Safeway (NYSE:SWY) -- to say nothing of Wal-Mart (NYSE:WMT) and others -- is hardly a cakewalk down the aisles, especially in a low-margin business where scale is king.
But Smart & Final has a good wrinkle on the warehouse business -- it doesn't do memberships -- which isn't likely to lose favor in good economic times or bad. It's in no hurry to grow faster than its distribution can support in such a manner as to help it provide the cost efficiencies it demonstrated in its latest earnings report. Meanwhile, it has no doubt benefited this year from the well-publicized labor struggles its California competition experienced -- possibly picking up some new loyal customers.
And its return to profitability has improved cash flows, allowing it to fund more of its investments with its own money rather than its bankers' money. All told, it's easy to understand why investors have cheered this encouraging turnaround tale.
Fool contributor Dave Marino-Nachison doesn't own any of the companies mentioned in this story.
