VLGEA - Village Supermarket

[RVP]

Predominantly New Jersey-based grocer (ShopRite brand) with hard to intrude locations. Geoff Gannon of Focused Compounding wrote the best/ most comprehensive report (in my opinion) on the company back in 2014; a lot of it remains relevant, so I won't re-hash it entirely here. Not sure if the report is still freely available, but check in with them if you want to find out.

 

Main challenges today include: local competitor openings (they come and go), continued trend in restaurant spending, online grocery delivery.

 

On local competitor openings - legitimate threats, but hard to displace VLGEA in some of their core markets because of the size and locations of their land (no more such availability).

 

On trend in restaurant spending - no view, but in a recession, this should likely taper off.

 

On online grocery delivery - much more pronounced now than in 2014. Although still a small % of overall grocery spend, there seems to be real customer demand here. VLGEA can adapt because they are part of a larger network (Wakefern), which is the largest retail co-op group of supermarkets (basically the members pool resources to achieve economies of scale). If consumers increasingly demand online delivery, this may compress margins for VLGEA and others going forward, at least in the intermediate term.

 

At today's prices, the opportunity is more attractive than the risks, in my opinion. Things I like:

- Majority family owned and operated

- Industry leading inventory turns (which lets them offer among the lowest prices)

- Historically resilient through economic cycles

- Net cash balance sheet

- Owns a lot of valuable properties in high income communities

- Owns 12.5% of Wakefern

 

The company trades at roughly 14x non-peak earnings, but if netting out their owned properties and cash, there is a case to be made that you are getting the business for free, along with the 12.5% Wakefern stake (private).

 

Note: Specific member agreements with Wakefern make it very unlikely/ tough for non-members/ outside parties to take over the company (Read the annual reports for detail).     

[RVP]

Village looking to buy up to 5 NY Fairway stores and its distribution center for $70M.

 

https://www.nytimes.com/2020/01/22/nyregion/fairway-market-bankruptcy.html

 

Not sure what to think, but cautiously optimistic.

[DTEJD1997]

VLGEA has been on my watch list for a long, Long, LONG time.

 

I first found them in the mid 90's at around $5/share.  Obviously, I wish I bought some back then.

 

I think VLGEA is a good company, probably somewhat above average.  They are also much better capitalized and more conservative than most.

 

One of the problems is that I think the only way to really do well with it is to buy it at a super discount.    I just don't see them expanding sales too much, nor do I see their multiple expanding much.  If they are successful in purchasing the locations out of CH.11 and then fixing them up & integrating them, that might be game changer?

 

If not, maybe wait to the next big market downswing and then load up?

[Spekulatius]

VLGEA has been on my watch list for a long, Long, LONG time.

 

I first found them in the mid 90's at around $5/share.  Obviously, I wish I bought some back then.

 

I think VLGEA is a good company, probably somewhat above average.  They are also much better capitalized and more conservative than most.

 

One of the problems is that I think the only way to really do well with it is to buy it at a super discount.    I just don't see them expanding sales too much, nor do I see their multiple expanding much.  If they are successful in purchasing the locations out of CH.11 and then fixing them up & integrating them, that might be game changer?

 

If not, maybe wait to the next big market downswing and then load up?

 

It’s trading for $22 and change now. If you bought it for $5 in the mid nineties, wouldn't you have underperformed?

[DTEJD1997]

VLGEA has been on my watch list for a long, Long, LONG time.

 

I first found them in the mid 90's at around $5/share.  Obviously, I wish I bought some back then.

 

I think VLGEA is a good company, probably somewhat above average.  They are also much better capitalized and more conservative than most.

 

One of the problems is that I think the only way to really do well with it is to buy it at a super discount.    I just don't see them expanding sales too much, nor do I see their multiple expanding much.  If they are successful in purchasing the locations out of CH.11 and then fixing them up & integrating them, that might be game changer?

 

If not, maybe wait to the next big market downswing and then load up?

 

It’s trading for $22 and change now. If you bought it for $5 in the mid nineties, wouldn't you have underperformed?

 

I am not sure, but I am going to guess NO?  Are you factoring in dividends/splits?  You would be getting 20% on your initial investment every year.

 

I also think there were a couple of stock splits along the way?  2 2 for 1's?

 

So let us say that I bought 400 shares back when I first saw it for about $4.75/share ($1,900 investment)....I would now have 1,600 shares worth something like $36,800? That is a compound annual rate of return of something a bit more than 12%?

 

Then VLGEA has been paying dividends for a number of years/decades?  I would be getting very close to a 85% yield on my initial investment every year.  I don't think they have been paying steadily since I first saw it.  I know they have been paying dividends since at least the early 2000's.  Surely that must add a couple few percentage points per year?

 

So I think you would be getting a compound rate of return in the low to maybe mid teens?

 

Finally, I think there were a couple of times that VLGEA paid a special OR abnormally big dividend?

 

Let us say it is maybe a 14% rate of return.  If that has underperformed the market, I don't think it is by much.  You would also probably have a LOT less volatility when you factor back the dividends.

[Spekulatius]

VLGEA has been on my watch list for a long, Long, LONG time.

 

I first found them in the mid 90's at around $5/share.  Obviously, I wish I bought some back then.

 

I think VLGEA is a good company, probably somewhat above average.  They are also much better capitalized and more conservative than most.

 

One of the problems is that I think the only way to really do well with it is to buy it at a super discount.    I just don't see them expanding sales too much, nor do I see their multiple expanding much.  If they are successful in purchasing the locations out of CH.11 and then fixing them up & integrating them, that might be game changer?

 

If not, maybe wait to the next big market downswing and then load up?

 

It’s trading for $22 and change now. If you bought it for $5 in the mid nineties, wouldn't you have underperformed?

 

I am not sure, but I am going to guess NO?  Are you factoring in dividends/splits?  You would be getting 20% on your initial investment every year.

 

I also think there were a couple of stock splits along the way?  2 2 for 1's?

 

So let us say that I bought 400 shares back when I first saw it for about $4.75/share ($1,900 investment)....I would now have 1,600 shares worth something like $36,800? That is a compound annual rate of return of something a bit more than 12%?

 

Then VLGEA has been paying dividends for a number of years/decades?  I would be getting very close to a 85% yield on my initial investment every year.  I don't think they have been paying steadily since I first saw it.  I know they have been paying dividends since at least the early 2000's.  Surely that must add a couple few percentage points per year?

 

So I think you would be getting a compound rate of return in the low to maybe mid teens?

 

Finally, I think there were a couple of times that VLGEA paid a special OR abnormally big dividend?

 

Let us say it is maybe a 14% rate of return.  If that has underperformed the market, I don't think it is by much.  You would also probably have a LOT less volatility when you factor back the dividends.

 

I looked at the long term chart and if you bought it in the mid 90’s, you definitely outperformed overall. The stock had two 2:1 splits in the early 2000’s, so you have 4x the number of shares compared to your initial investment. the dividends only got relevant recently. The stock was a huge winner from the mid 90’s to 2007 and has been basically flat since then. Interesting enough, the revenues seem to be up only 3x since 1994.

https://www.otcmarkets.com/stock/VLGEA/overview

 

So the performance depends heavily on the timeframe of your investment in this “compounder”.

[Cigarbutt]

This is an interesting idea and reviewing it was instructive. This stock’s situation is in line with present discussions on how the 2020 period may rhyme with the 2000 era and how ‘value’ stocks may deserve more praise than presently discounted.

 

Based on the above and some info below, here are the annualized total returns (unaudited) comparing with the S&P 500 index for two holding periods (assuming no taxes paid on reinvested dividends):

 

-Jan 1995 to now

VLGEA: 14.0%

S&P 500: 10.2%

 

-April 2001 to now

VLGEA: 14.0%

S&P 500: 7.6%

 

VLGEA has underperformed lately (last few years) and with the announced retail apocalypse, this may be an area to look into. Long story short: Based on a few reasonable assumptions, this stock could deliver a 5%+ annual return over the next few years which, IMHO, may correspond to relative outperformance.

 

An historical review of numbers shows that they have adapted their model reasonably well over time. Grocery stores' industry is highly competitive and larger players have taken up shelf space (Walmart, Costco and other consolidators).  VLGEA is basically an extended version of a family business. Generational transition will continue to be tricky (this would require scuttlebutt) and unusual competence and vision as shown by one of the founders (who died in 2009) cannot be reasonably expected going forward. Since 1995, they have grown sales at an annual rate of 3.8% with variable levels of profitability related to intrinsic and extrinsic factors such a new competition. They did very well (fundamentals) in the late 1990s and early 2000s and this was eventually recognized with a lag. Somebody was bright enough to spot the opportunity.

https://www.valueinvestorsclub.com/idea/Village_Supermarkets_Cl_A/2826482481

 

The catalyst that the author suggested did not materialize (still relevant today) but good things tend to happen when certain ingredients are united.

 

During the golden period, they increased same store sales over about 50 consecutive quarters and they often had tough-to-beat previous comparables. From 1997 to 2007 they increased net income at an annual rate of about 26% (from 22 to 23 stores!). The CEO then opportunistically invested (capex ++) into strategic upgrades and remodels (with high IRRs). When the VIC report came out, the PE was about 5 and the P/B was about 0.5. If I could have spotted that opportunity, I probably (hard to be sure in retrospect but reasonable) would have sold in the first part of 2007 when the PE reached above 15, the P/B reached above 1.5 and when a stock split was announced. It is interesting to note that the differential return between VLGEA and the S&P 500 during that period would have been Buffettesque.

 

So, what about now? Is it as cheap as it was in the early 2000s? The PE now is 12-13 and P/B is at 1. The story has evolved since the late 2000s with a new generation of Sumas. They are trying to adapt reasonably but the competitive landscape is more threatening (IMO). So I would say it’s a combination of less stellar management capabilities and tougher competition. Their ‘moat’ (if a grocer can manifest such thing) is the ‘local’ knowledge of their markets while being large enough to benefit from economies of scale. They have expanded in Maryland (2 stores) and I’m not sure this is working out too well. Recently, they also acquired smaller specialty stores in Manhattan which is sort of a new venture. Their core operations remain in New Jersey, with large ‘value superstores’. FWIW, I don’t think Amazon is a significant threat in their specific markets. They’ve maintained a strong balance sheet and have some flexibility going forward. Their net margins are lowish (NPM at 1.55% end of their 2019 period) and they have benefitted from lower tax rates which may not be sustainable in itself.

 

I really like their reporting (consistent and clear). They had an issue with pension liabilities for a while but their plans are funded at 93.2% now. Not great but the issue was significant and they have done so much better than other companies I look at these days.

 

Disclosures to force me to reveal mistakes in this area:

In the past, I have held Metro shares (a national grocer in my area) and sold after it reached my intrinsic value measure failing to see that it was a true long term compounder adapting to its market over the long term. This reminds me also that Metro had a chunk of Couche-Tard (now a global convenience store franchise) shares and then failed to fully appreciate the entrepreneurial value of top management even if this was in plain sight (scuttlebutt, financial numbers, basic analysis).

 

I haven’t looked into the last acquisition (announced Jan 2020) and plan to follow this. Thanks.

 

[RVP]

 

Their ‘moat’ (if a grocer can manifest such thing) is the ‘local’ knowledge of their markets while being large enough to benefit from economies of scale. They have expanded in Maryland (2 stores) and I’m not sure this is working out too well. Recently, they also acquired smaller specialty stores in Manhattan which is sort of a new venture. Their core operations remain in New Jersey, with large ‘value superstores’.

 

 

My line of thinking is similar to the above perspective regarding their moat (if it exists). But if I could flesh it out a little more:

 

I think their economies of scale are made entirely possible due to their association with Wakefern, and incidentally I also think it's the most underappreciated aspect of the company. From a high level, those studying the company probably understand that their main stores handle a ton of volume and that they turnover inventory very rapidly, which enables better pricing for customers. But they probably go even beyond that.

 

Digging deeper into their income statement reveals that they run their operations at virtually break-even, and their profit can basically be chalked up to patronage dividends received from Wakefern. Andrew Walker at Rangeley Capital brings up this issue in a post here: http://yetanothervalueblog.com/2020/01/some-things-and-ideas-january-2020.html

 

To me, this is remarkably similar to the Costco model - make profits from annual membership fees, and sell everything as close to cost as possible. In the case of VLGEA, replace "annual membership fees" with "Wakefern patronage dividends". (Wakefern patronage dividends are, as per the 10-K, "...a share of substantially all of its earnings in proportion to the dollar volume of purchases by the stockholder from Wakefern during each fiscal year").

 

Because Wakefern enjoys purchasing scale advantages made possible by its co-op network (strength in numbers), it symbiotically allows its members to punch above their weight. In the long-term, this only works if your co-op members are strong. Which touches on the second aspect of "local knowledge".

 

VLGEA has been successful over time because of their relationship with Wakefern AND their ability to identify very productive stores. Local knowledge is certainly a key factor, but I also think the family's domain of focus is equally as important (I'm inferring here). It's easy to ascribe local knowledge to those who have boots on the ground, but even within a locality, there are many niches. My guess is that the Sumas family's niche is "quality" over "price" in regards to grocery location selection (though they've been pretty disciplined with price too). The Fairway stores bankruptcy acquisition is the latest example - they're cherry picking the best stores, instead of just picking up all the stores at a potential bargain (which would provide a greater boost to sales).

 

Together, I think this creates a portfolio of very resilient stores which enables a stronger Wakefern, which then goes on to enable stronger co-op members. We'll see if this is enough to compete in a consolidating industry as well as the behemoth that is Amazon / Wal-Mart, but I think being a low-cost operator along with some of the most productive locations create a very tough competitor to beat. 

[DTEJD1997]

Hey all:

 

I've been doing a little poking around with VLGEA over the past couple of days.  I've noticed a very interesting thing.

 

VLGEA made it's first move into the NYC market in 2018 with the opening of it's Bronx store.

 

VLGEA is making further substantial moves into the metro NYC area, primarily Manhattan.  They have already bought out "Gourmet Garage".  This is apparently a high end grocer?  VLGEA paid $5.3mm for 3 locations.  Would be interesting to see what these locations do in terms of sales.

 

Now they are trying to acquire five (5) Fairway locations for $70mm.  VLGEA also gets a distribution center in that deal.

 

I am going to guess that the 5 locations VLGEA wants do more than the average Fairway location in sales OR that they have advantageous leases, locations, or some combination of all 3.

 

If the Fairway deal closes on Feb. 28th, VLGEA is going to have a foothold in NYC, and that will be the major avenue of growth for VLGEA.

 

VLGEA will have spent AT LEAST $75mm (+Bronx store) getting into NYC.  This is $75mm for a $225mm market cap company.  So this is going to be transformative expansion.

 

If VLGEA can execute it well, it certainly may be a bargain?  Stock price is down, company should be growing by about 1/3 in a year?  Maybe much more growth to come in NYC market?

 

Going to be interesting and I'll be paying more attention.

 

 

[DooDiligence]

This is an interesting idea and reviewing it was instructive. This stock’s situation is in line with present discussions on how the 2020 period may rhyme with the 2000 era and how ‘value’ stocks may deserve more praise than presently discounted.

 

Based on the above and some info below, here are the annualized total returns (unaudited) comparing with the S&P 500 index for two holding periods (assuming no taxes paid on reinvested dividends):

 

-Jan 1995 to now

VLGEA: 14.0%

S&P 500: 10.2%

 

-April 2001 to now

VLGEA: 14.0%

S&P 500: 7.6%

 

VLGEA has underperformed lately (last few years) and with the announced retail apocalypse, this may be an area to look into. Long story short: Based on a few reasonable assumptions, this stock could deliver a 5%+ annual return over the next few years which, IMHO, may correspond to relative outperformance.

 

An historical review of numbers shows that they have adapted their model reasonably well over time. Grocery stores' industry is highly competitive and larger players have taken up shelf space (Walmart, Costco and other consolidators).  VLGEA is basically an extended version of a family business. Generational transition will continue to be tricky (this would require scuttlebutt) and unusual competence and vision as shown by one of the founders (who died in 2009) cannot be reasonably expected going forward. Since 1995, they have grown sales at an annual rate of 3.8% with variable levels of profitability related to intrinsic and extrinsic factors such a new competition. They did very well (fundamentals) in the late 1990s and early 2000s and this was eventually recognized with a lag. Somebody was bright enough to spot the opportunity.

https://www.valueinvestorsclub.com/idea/Village_Supermarkets_Cl_A/2826482481

 

The catalyst that the author suggested did not materialize (still relevant today) but good things tend to happen when certain ingredients are united.

 

During the golden period, they increased same store sales over about 50 consecutive quarters and they often had tough-to-beat previous comparables. From 1997 to 2007 they increased net income at an annual rate of about 26% (from 22 to 23 stores!). The CEO then opportunistically invested (capex ++) into strategic upgrades and remodels (with high IRRs). When the VIC report came out, the PE was about 5 and the P/B was about 0.5. If I could have spotted that opportunity, I probably (hard to be sure in retrospect but reasonable) would have sold in the first part of 2007 when the PE reached above 15, the P/B reached above 1.5 and when a stock split was announced. It is interesting to note that the differential return between VLGEA and the S&P 500 during that period would have been Buffettesque.

 

So, what about now? Is it as cheap as it was in the early 2000s? The PE now is 12-13 and P/B is at 1. The story has evolved since the late 2000s with a new generation of Sumas. They are trying to adapt reasonably but the competitive landscape is more threatening (IMO). So I would say it’s a combination of less stellar management capabilities and tougher competition. Their ‘moat’ (if a grocer can manifest such thing) is the ‘local’ knowledge of their markets while being large enough to benefit from economies of scale. They have expanded in Maryland (2 stores) and I’m not sure this is working out too well. Recently, they also acquired smaller specialty stores in Manhattan which is sort of a new venture. Their core operations remain in New Jersey, with large ‘value superstores’. FWIW, I don’t think Amazon is a significant threat in their specific markets. They’ve maintained a strong balance sheet and have some flexibility going forward. Their net margins are lowish (NPM at 1.55% end of their 2019 period) and they have benefitted from lower tax rates which may not be sustainable in itself.

 

I really like their reporting (consistent and clear). They had an issue with pension liabilities for a while but their plans are funded at 93.2% now. Not great but the issue was significant and they have done so much better than other companies I look at these days.

 

Disclosures to force me to reveal mistakes in this area:

In the past, I have held Metro shares (a national grocer in my area) and sold after it reached my intrinsic value measure failing to see that it was a true long term compounder adapting to its market over the long term. This reminds me also that Metro had a chunk of Couche-Tard (now a global convenience store franchise) shares and then failed to fully appreciate the entrepreneurial value of top management even if this was in plain sight (scuttlebutt, financial numbers, basic analysis).

 

I haven’t looked into the last acquisition (announced Jan 2020) and plan to follow this. Thanks.

 

Discount rate seems very conservative, at nearly half the national average.

 

"...we utilized a weighted-average discount rate of 3.41% at July 27, 2019 compared to 3.99% at July 28, 2018. Changes in the discount rate and updated assumptions on mortality tables and improvement scales resulted in a net increase in the projected benefit obligation by approximately $5,923 at July 27, 2019. Village evaluated the expected increase in compensation costs of 4.50% and concluded no changes in this assumption was necessary in estimating pension plan obligations and expense. In fiscal 2018, the Company transitioned to a liability-driven investment ("LDI") strategy. A LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk.  This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability.  The investment allocation to fixed income instruments will increase as each plans funded status increases.  Based on the Company’s transition to an LDI strategy, the Company assumed a 5.50% long-term rate of return on plan assets for fiscal 2019."

 

Cash flow provides enough to fund capex, dividends & a small buyback.

 

"Capital expenditures primarily include costs associated with the Bronx, New York store, the Stroudsburg replacement store, expansion of self-checkout, several smaller remodels and small equipment purchases."

 

"Village has budgeted $55 million for capital expenditures for fiscal 2020.  Planned expenditures include the construction of a replacement store in Stroudsburg, Pennsylvania, three major remodels, expansion of ShopRite from Home, and various merchandising, technology, equipment and facility upgrades. The Company’s primary sources of liquidity in fiscal 2020 are expected to be cash and cash equivalents on hand at July 27, 2019 and operating cash flow generated in fiscal 2020."

 

"In November 2019, ShopRite launched the Bowl & Basket and Paperbird store brands. Bowl & Basket foods pair thoughtfully selected ingredients at a budget friendly price and Paperbird offers a new line of effective and beautifully designed household products.  More than 100 newly branded items, including packaged salads, salty snacks, cooking oils, bottled water and paper goods, were introduced in early November. ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products over the next 18 months. The introduction of Bowl & Basket and Paperbird follows the successful 2016 launch of ShopRite’s Wholesome Pantry brands, which include the Wholesome Pantry Organic line as well as a range of products free from 110 ingredients and artificial additives and preservatives. Wholesome Pantry will also be introducing new products in the coming months, rounding out ShopRite’s reinvention of its own brands portfolio."

 

Gloomy SSS outlook could surprise to the upside.

 

"We expect the same store sales trends to range from a 2.0% decrease to flat in fiscal 2020, including the impact of expected investments in retail pricing and expansion of private label/own brand product offerings."

 

Very little Goodwill & Other on the balance sheet.

 

$12,650,000 & $17,116,000

 

---

 

Class A shares have 1 vote per share & get $1/sh dividend

Class B shares have 10 votes per share & get $0.65/sh dividend

 

Seems fair to me.

Compensation also seems fair.

 

Gourmet Garage results were not included in the last 10K & nothing much to add from the latest 10Q.

 

Latest 10K

 

www.sec.gov/Archives/edgar/data/103595/000010359519000015/vlgea2019727-10xk.htm

 

Latest 10Q

 

www.sec.gov/Archives/edgar/data/103595/000010359519000020/vlgea2019102610-q.htm

 

Latest Proxy

 

www.sec.gov/Archives/edgar/data/103595/000119312519275914/d814076ddef14a.htm

 

---

 

Reports are a quick & easy read & seem forthright.

 

They're not sitting on their hands & the stock seems cheapish.

 

As you said, some scuttlebutt would be helpful.

 

Also, would be useful to hear from anyone who lives in the operational area & could comment on the Village SM & Gourmet Garage stores.

[Gregmal]

OK so I live in/around the area where some of these are, and have visiting a few of the stores over the years. Its all anecdotal, but if it helps anyone, great.

 

Shoprite is dominant in much of NJ. There are always other supermarkets coming and going, only a few seem to stay. Those are almost always Shoprites.

 

Shoprite is almost always the cheapest out of all the supermarkets.

 

The Village stores are generally much nicer and well setup. The Village Shoprite of Greater Morristown is quite possibly the nicest supermarket Ive ever been to, including Whole Foods and Kings type of places. They have an in store liquor store which is very rare in NJ, a very high quality on the go food station with sushi chefs on call, basically catering to the grab and go business folks in surrounding business parks. They also have an attached restaurant/bar, the first of which I'd ever seen at a Shoprite(or any grocery store for that matter).

 

There is a different ownership group by me which owns a closely located collection of maybe a half dozen Shoprites, and they been around forever and do very well, similar to Village. There is definitely some sort of secret sauce in the Shoprite mix. I think a lot of the comparisons to Costco are valid. The employees Ive talked to at locations love working there, get paid well, and STAY.

[DooDiligence]

Here's a quick & easy read from SA to add a little flesh to this one.

 

https://seekingalpha.com/article/4319417-village-super-market-inc-growing-through-fairways-misfortune

 

VLGEA is the 1st thing besides Ulta that's made me go further than a cursory glance.

[Spekulatius]

I lived in Long Island a few years ago, so I am familiar with the Shoprite and Fairway stores. The Shoprite stores where I lived where pretty drab and we rarely wen there, going to a close by Costco, a family Supermarkt and Trade Joe instead. I felt those Shoprite will become competitive roadkill sooner or later. What Gregmal describes as try Village owned Shoprite sounds much more upscale and viable.

I also knew one of the suburban Fairway store and it was a pretty nice store. We liked going there, even if it was a little out of the way. I don’t know if this store is problem child for this chain , but in any case it is not amongst the stores that Village supermarkets is going to acquire. it seems that Village is going after Fairways crown je well stores and I would think that this will end up being to their benefit.

[RVP]

I remember reading an article about Ace Hardware a few years back, a rare piece that I enjoyed and saved for records. I think it's quite relevant, and hope it adds color when looking at Wakefern/ VLGEA.

 

https://www.forbes.com/sites/clareoconnor/2015/02/11/how-ace-hardware-turned-corner-stores-into-a-4-7-billion-co-op/#202659d152e1

[Cigarbutt]

Discount rate seems very conservative, at nearly half the national average.

 

"...we utilized a weighted-average discount rate of 3.41% at July 27, 2019 compared to 3.99% at July 28, 2018. Changes in the discount rate and updated assumptions on mortality tables and improvement scales resulted in a net increase in the projected benefit obligation by approximately $5,923 at July 27, 2019. Village evaluated the expected increase in compensation costs of 4.50% and concluded no changes in this assumption was necessary in estimating pension plan obligations and expense. In fiscal 2018, the Company transitioned to a liability-driven investment ("LDI") strategy. A LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk.  This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability.  The investment allocation to fixed income instruments will increase as each plans funded status increases.  Based on the Company’s transition to an LDI strategy, the Company assumed a 5.50% long-term rate of return on plan assets for fiscal 2019."

 

...

Reports are a quick & easy read & seem forthright.

They're not sitting on their hands & the stock seems cheapish.

As you said, some scuttlebutt would be helpful.

Also, would be useful to hear from anyone who lives in the operational area & could comment on the Village SM & Gourmet Garage stores.

----) Side discussion on the pension numbers

Following this largely irrelevant passage for VLGEA' pension plans, you will find 2 references which are included only if you have an unusual interest in pension accounting and which I could use as procuration if the following is characterized as idiotic. :)

The discount rate they use for 2019 is slightly on the conservative side but within the normative range. Their expected return on assets of 5.5% is interesting and was likely suggested or rubber-stamped by fancy actuarial models. Interesting because the models (including the LDI-aligning-risk-return-duration type) involve scenarios and rear-view mirror analysis (backed by fancy equations) that sometimes need to be filtered through a common sense prism. Most of the pension assets will be invested in fixed income. The 10-yr risk-free these days is at about 1.5% and the Baa spread is quoted at around 2% with a swollen potential fallen angel category. A very difficult reality to circumvent is that, almost invariably, the return (mostly true if the appointment with face value is quite far in the future; backed by some math and the historical record) of fixed income is very strongly tied to beginning yield. I have a feeling that reaching for yield may result in a hard to reach goal (at VLGEA and a few other places). Please, don't spend too much time on such trivialities and enjoy the Super Bowl or something (I'm rooting for the Chiefs). I hear Florida is hosting.

https://us.milliman.com/insight/Pension-Funding-Index-January-2020

https://www.soa.org/globalassets/assets/files/resources/research-report/2019/liability-driven-investment.pdf

 

----) Back to reality

 

I came across a report (see below) that RVP referred to in the initial post.

It is quite extensive. It's interesting that they came up with an intrinsic value of 38.02 in May 2014 when the stock was trading around 24-25 and now the stock is trading at around 22. It just happened that administrative and operating expenses resulted in operating margins at the lower end of the spectrum they had defined. And now, VLGEA is changing course to some extent on strategy and location so who knows what the future has in store but it's potentially interesting. The report does help to understand the relative 'edge' that they developed in their market. They also mention that the A shares should be valued more than the B shares because of the dividend differential, a conclusion I disagree with because I think that the top (controlling) management get their own special dividends through compensation.

https://focusedcompounding.com/wp-content/uploads/2017/05/Village-Supermarkets-1.pdf

1.4 Billion Chicken Wings are about to be eaten.

 

[DooDiligence]

Thanks guys.

 

I skimmed the 1st few pages of Singular Diligence & it looks informative.

I'll read the whole thing in the morning.

 

---

 

I went to a Super Bowl party & can't even tell you who won.

 

Some friends brought a game called ChickAPig & half of us spent the majority of the football game playing that & generally goofing around.

The rules of the game are simple to understand but a winning strategy is tricky.

It's fun as crap to play.

 

www.chickapig.com/chickapig

[Cigarbutt]

If brought to fruition, the 70M stalking horse bid for the 5 Fairway stores in Manhattan (with a distribution center) is somewhat transformational: quite a large transaction for VLGEA, high real estate price area, high taxes, high competition, different clientele with different tastes. The first link below suggests that Fairway had lost its way a few years ago and the core Manhattan stores are potentially the jewel in the crown in need of management with real grocer knowledge and vision. The second link is from city agents with a different agenda but there is some useful info about the local competitive landscape.

https://www.grubstreet.com/2020/02/inside-fairway-bankruptcy-and-closing.html#_ga=2.179826596.1006169879.1581362240-1555628792.1581362240

https://www.manhattanbp.nyc.gov/downloads/pdf/2017-6-13-Supermarket%20Report%20and%20Age%20Friendly%20Combined.pdf

 

From different disclosures, including SEC stuff from previous Fairway Market, I come to an estimate of 265M sales for the five stores that would be acquired although this number may underestimate sales as Manhattan locations tend to sell more per square foot (shelf space is very expensive). It's hard to be precise but, given expected reasonable margins at those core stores, the price paid appears to be reasonable: relatively high for a distressed transaction but also relatively low given the opportunity to appropriate a footprint in an area that would be essentially impossible to penetrate otherwise. The acquisition also appears complementary to the Gourmet Village incursion (geographic and grocer 'style').

 

[DooDiligence]

If brought to fruition, the 70M stalking horse bid for the 5 Fairway stores in Manhattan (with a distribution center) is somewhat transformational: quite a large transaction for VLGEA, high real estate price area, high taxes, high competition, different clientele with different tastes. The first link below suggests that Fairway had lost its way a few years ago and the core Manhattan stores are potentially the jewel in the crown in need of management with real grocer knowledge and vision. The second link is from city agents with a different agenda but there is some useful info about the local competitive landscape.

https://www.grubstreet.com/2020/02/inside-fairway-bankruptcy-and-closing.html#_ga=2.179826596.1006169879.1581362240-1555628792.1581362240

https://www.manhattanbp.nyc.gov/downloads/pdf/2017-6-13-Supermarket%20Report%20and%20Age%20Friendly%20Combined.pdf

 

From different disclosures, including SEC stuff from previous Fairway Market, I come to an estimate of 265M sales for the five stores that would be acquired although this number may underestimate sales as Manhattan locations tend to sell more per square foot (shelf space is very expensive). It's hard to be precise but, given expected reasonable margins at those core stores, the price paid appears to be reasonable: relatively high for a distressed transaction but also relatively low given the opportunity to appropriate a footprint in an area that would be essentially impossible to penetrate otherwise. The acquisition also appears complementary to the Gourmet Village incursion (geographic and grocer 'style').

 

I've looked at grocers in the past & couldn't get excited, but the NY city & NJ markets are definitely different than the rest of the country.

 

It would be interesting to know how much debt VLGEA would assume in a purchase & if there were any other potential bidders.

 

Would they have to renegotiate labor contracts?

 

If they complete this purchase, it could be a big deal for Village, and if they don't, they'll continue making money in a great market with barriers to entry.

 

---

 

The Fairway fanatics comments in this article are interesting.

 

www.westsiderag.com/2020/01/23/fairway-will-live-on-under-agreement-announced-thursday

[Cigarbutt]

I've looked at grocers in the past & couldn't get excited, but the NY city & NJ markets are definitely different than the rest of the country.

 

It would be interesting to know how much debt VLGEA would assume in a purchase & if there were any other potential bidders.

 

Would they have to renegotiate labor contracts?

 

If they complete this purchase, it could be a big deal for Village, and if they don't, they'll continue making money in a great market with barriers to entry.

 

---

 

The Fairway fanatics comments in this article are interesting.

 

www.westsiderag.com/2020/01/23/fairway-will-live-on-under-agreement-announced-thursday

This looks like an S363 asset sale so debt will not be assumed and i guess the acquirer, if no higher bids or propositions come along, will treat the acquisition as a going concern (from the legal and “marketing” point of view) so they are likely to look for employee (individuals and contractual aspects) retention, at least initially, with gradual adjustments thereafter. I understand that the typical employees at Village Supermarkets are relatively well treated (à la Costco) which, in itself, is not necessarily a bad thing for the shareholder.

 

The main risk with their upfront bid is that the price submitted may be too high but I suspect that the Village people did not enter this adventure with their eyes closed to the same degree that previous Fairway management had their eyes wide shut to mounting operational problems.

 

And I agree that there may be a future in selected brick-and-mortar grocery stores:

-there are implicit switching costs when people develop shopping habits (specific products, store lay-out, geographic proximity)

-the private label paradigm has been changing: it’s not only price as some products and product segments are being sold at a premium (at the expense of ‘brands’)

-winners may include those who can combine mass appeal (scale with Wakefern) and relative personalized customization (local community feel)

-there are products (fresh stuff, meat etc) that will prevent the experience becoming purely an on-line transaction

 

[DooDiligence]

"An ad hoc group of the company’s senior lenders are supportive of the sale process and have agreed to provide the company with up to $25 million in debtor in possession financing. According to court documents, Ankura Trust is serving as administrative agent and collateral agent for the DIP financing."

 

www.abfjournal.com/dailynews/ankura-trust-agents-25mm-dip-funding-for-fairway-market/

 

---

 

https://cases.omniagentsolutions.com/?clientId=CsgAAncz%2B6a0sTEEVO2%2B31R0GJ7DUJV0%2FiYsw8rK3HbsyGyvHy6nozffohj0W6CnTTkhOTG26ec%3D

[DooDiligence]

By my estimate, Friday March the 13th to the 18th will be when the stalking horse bid / sale must be completed (yes or no?)

 

---

 

No later than fifty (50) days after Commencement Date

 

Bankruptcy Court shall have entered Sale Order approving winning bid to Stalking Horse Bid (if no Auction held); or

 

No later than fifty-five (55) days after Commencement Date

 

Debtors shall complete Auction for substantially all assets in accordance with Bidding Procedures (other than Stalking Horse Package

if no other Qualified Bids received)

 

(and the sale to VLGEA would be completed or not (my words))

 

No Later than seventy (70) days after Commencement Date

 

Debtors shall have consummated sale(s) of Stalking Horse Package to winning bidder(s) at Auction(s)

 

---

 

"the Stalking Horse Agreement provides for the payment of a break-up fee in an amount equal to three percent (3%) of the Cash Purchase Price (the “Termination Payment”) as an administrative expense that will be included in the “Carve-Out” (as defined in the DIP Orders) in the event that the Stalking Horse Bid is not selected or the Debtors consummate one or more Sale Transactions for the Assets in the Stalking Horse Package with one or more other bidders."

 

https://casedocs.omniagentsolutions.com/cmsvol2/pub_47371/791525_21.pdf

 

---

 

Do these things frequently go to the Stalking Horse bidder?

I would assume the courts would want to avoid the 3% breakup fee unless a higher bid were to offset it.

 

There are multiple debt owners & I notice that KKR is one.

 

The next earnings date for VLGEA will be 3 March.

 

* edit: It looks to me like there's no downside for VLGEA if they don't complete this purchase & as Cigarbutt said, overpaying would be a small possibility if they DO complete the purchase. The price seems fair to me though. I'm thinking about adding a bit more with the intent to sell the newer shares in the event that the purchase goes through & it pops on the news. The shares I already own will be kept for a longer period & no harm, no foul if there's no Fairway store(s) purchase and/or quick pop. I'll own everything in a tax advantaged account.

 

---

 

You guys already know this stuff but just for reference, here's where I learned about these types of bids.

I now understand the purpose of providing a reserve price / stalking horse for distressed asset auctions.

 

www.investopedia.com/terms/s/stalkinghorsebid.asp

[Cigarbutt]

...

---

-

Do these things frequently go to the Stalking Horse bidder?

I would assume the courts would want to avoid the 3% breakup fee unless a higher bid were to offset it.

 

There are multiple debt owners & I notice that KKR is one.

...

Bankruptcies are fascinating 'cause they provide a corridor with a timeline to accelerate valuation process outcomes.

Anything could happen and sometimes timelines can be significantly extended.

The documents describe that the Fairway assets have been aggressively marketed for some time. My guess is that Village management have been vigilant observers and careful participants. They ultimately were the winners of the two potential stalking-horse bidders. The context of the bankruptcy, the extent of the pre-petition marketing process, the nature of the underlying business (grocery business is very competitive and operating lulls due to any reasons can be devastating) and the fact that they were able to "win" that part of the game by fleshing out the core assets seem to indicate that they are likely to get what they want at the price submitted. They also have the possibility to increase their bid if one comes out of the blue. It seems that Village is very well prepared to harvest the fruits (know the market and have done deep due diligence). I don't see credit bids coming and another low-ball stalking horse bid may come for the other assets but that wouldn't change the outcome for VLGEA. Also, Fairway has already suffered from leveraged resuscitation efforts twice so another round of a leveraged rise from the ashes is less likely.

This is still discovery in the making but the Bronx distribution center may hold significant value (size and location).

[DTEJD1997]

Hey all:

 

I am going to postulate that there will be volatility in VLGEA around earnings report(s) and the possible acquisition of the Fairway stores & distribution center.

 

I would suspect that VLGEA has a pretty good handle on the sales volume of the stores they are bidding on, potential profitability, problems that need to be addressed, strengths, and other operating aspects.

 

If the acquisition goes through AND is digested and integrated fairly well, then it is a game changing event.  A $70mm acquisition for a company with a market cap of $225mm is pretty significant.

 

You might also see some people want to get out.  There is plenty of risk here.  Fairway is a x2 dog, could it be a three time loser?  You've also got execution/integration risk.  The first level is that the Fairway brand name could be too damaged/tarnished.  You've next got the problem that key people and good workers jump ship.  Here in Detroit Land, we've got a tight labor market..tightest I've seen it in a LONG time.  I would assume it is the same in NYC.  If Fairway loses workers, especially good workers, it is going to be extremely difficult to replace them.  Next, you've got possible problems with VLGEA integrated Fairway.  While they are both grocers, they address different market segments.  VLGEA is more broad market, where Fairway is upscale.  Upscale shoppers are notoriously finicky and may jump ship.

 

Overall, I think this is probably a good move, and will probably work...but maybe something like 60/40 odds of success?

 

Going to be interesting!

[bizaro86]

I love the acquisition, but I'm concerned about competition in New Jersey starting to heat up. A big part of the thesis for me was that these stores are really productive. However, if the small format discount grocers take share, that could really hurt them. Would be very curious what people think about that?

 

https://www.northjersey.com/story/news/bergen/bergenfield/2019/12/18/aldi-and-lidl-german-grocery-chains-competing-north-jersey/2650269001/

[Gregmal]

I am sure, in the short term, you are also going to see supermarkets gets whacked because everyone is terrified of the coronavirus