What’s to make of Smart & Final?
The Commerce-based warehouse grocer missed earnings estimates last month, yet the stock has traded up 28 percent on the New York Stock Exchange since July.
It turns out, private equity is at play.
Supermarket holding company Casino Guichard-Perrachon, based in Saint-Etienne, France, owns 53 percent of Smart & Final, but the company has had financial difficulties of late and announced earlier this year that it would be selling off assets.
Then, in April, Smart & Final announced it had retained Goldman Sachs Group Inc. to explore alternatives for the company, immediately sending the stock $2 higher to $18 on speculation that a private equity firm may take it private with a healthy premium.
“It’s definitely trading on take-out speculation right now,” said Karen Short, an analyst with Freidman Billings Ramsey & Co. Inc., who maintains a buy rating on the stock and a $20 price target. “Performance from a core-operating perspective has been less than stellar.”
The company which sells to individual consumers, focuses on restaurants, concession stands and caterers specializes in bulk-size groceries, paper products and cleaning supplies. The non-membership-based operation has 252 locations in the U.S. and Mexico. Of the two other analysts tracked by Bloomberg News, one maintains a buy rating and the other a hold.
On first glance, the company reported solid earnings for the quarter ended Oct. 8 of $7.5 million, but at 23 cents a share that was far off analysts’ expectations of 42 cents.
And while same store sales growth was up 3.8 percent, the company has opened up 10 new stores in the last year and their performance has not been outstanding, with some cannibalization of existing stores.
However, one line of thinking on Wall Street is that private equity firms, which don’t shy away from selling off assets to finance their acquisitions, may like the company as a real estate play.
The company owns 30 percent of its store locations outright, and selling off underperforming stores could bring a huge windfall for any new owner. “It’s pretty solid real estate,” Short said. “It’s B+ to A- depending on the location.”
Gelson’s run
Another company that has had a surprising run up of late has been Compton-based Arden Group Inc., which operates 18 Gelson’s stores, all in Southern California.
Its stock has been up 53 percent since a low of $84.01 on March 21, closing at $130.65 on Nov. 24.
The retailer specializes in serving affluent customers with its gourmet prepared foods, bakery products and high-end grocery offerings. Its Century City location even offers valet parking.
However, the stock has been all but ignored on Wall Street, where only one analyst covers it Ivan Feinseth of the upstart financial services house Matrix USA and with good reason.
Chairman and chief executive Bernard Briskin holds 1.9 million shares, or 59 percent of outstanding stock. And with a public float of just 1.2 million shares, less than 1,000 shares can trade hands on an average trading day.
However, the company has been a consistently profitable performer that small investors have noticed. It’s also well positioned in a retail food market that has seen solid growth both in the value tier and upper end.
“There is a divergence in the market. People either want stores with good quality prepared food, healthy choices, or they’re discount shoppers,” said Feinseth. “You buy your staples at warehouse clubs, and meats and prepared food and produce at a higher-end supermarket. And so all the stores in between are having a tough time.”
Third quarter earnings, released earlier this month, were up 19 percent to $5.8 million, from $4.9 million the year earlier. The Gelson’s model also seems well-positioned for changes in the grocery business.
Bill Greer of the Food Marketing Institute said grocery chains that are doing well offer a wide array of prepared foods, ready to heat and eat for young and old alike.
“It’s very important for time-starved dual-income couples looking to the supermarket industry to save them steps in the cooking process,” Greer said. “When you look at the demographics on our research, the up-and-coming generation are eating a lot of prepared food in restaurants or take out.”
A preference by high-end shoppers for organic food also has fed into Gelson’s success. The store is offering a wider range of such fare and holds nutrition events at its stores.
