KR - Kroger

[Viking]

We have spent a fair bit of time over the years talking about SVU and SWY. It looks to me that KR offers the best long term value. KR is almost as cheap as SVU and SWY; however, it doesn't have as much debt and its past performance and future prospects are much, much better.

 

For those interested, here is a recent presentation that provides a great overview: www.thekrogerco.com/finance/financialinfo_investorconferencecalls.htm

 

The stock trades at $22.10/share; est Earnings for 2012 = $2.30 (53 wks); PE = 9.6

 

Why KR?

1.) best in class retailer: their 10 year track record for same store sales increases is second to none. This means their top line is growing.

2.) management: seasoned management group with a very good long term track record

3.) VERY shareholder friendly: between dividend and buying back shares, over the past few years 90% of free cash flow has been returned to investors

4.) strong balance sheet: reasonable amount of debt; able to make large aquisitions should the right opportunities come along

5.) scale: the largest traditional grocer (witha number 1 or 2 position in almost all their core markets)

 

The company has a goal of earning shareholders a return of 8-10% per year (incl dividends).

It looks to me that KR would be a great company to hold in place of holding a bond.

[FCharlie]

I like Kroger. I own Kroger. I used to own a ton of it, and then I discovered Safeway.

 

Kroger vs. Safeway is a perfect example of how Wall Street favors businesses with growing sales over all else. Kroger has consistently improving ID sales and growing volume as well. As a result, KR gets all the love. (assuming a P/E of nine qualifies as "all the love") Safeway, which has a 20%+ FCF yield, raises it's dividend by 20%+ annually for seven years in a row, repurchases nearly 50% of it's shares in the past four years, gets no love, no attention whatsoever.

 

I think nearly the entire grocery sector can be bought here. It's absolutely essential to life as we know it, yet possibly the most ignored sector out there. Most of the big chains own enormous amounts of real estate and generate mountains of free cash flow year in and year out. Kroger sits back with it's 10B 5-1 plan and sucks up millions of shares every month. They've been doing this for years. They're an incredible company. Very stable. Very well run.

 

 

[fenris]

1.) best in class retailer: their 10 year track record for same store sales increases is second to none. This means their top line is growing.

Right, but their bottom line isn't. How comfortable are you they will be able to stop margin erosion in the long run?

[Viking]

Fenriss, during the meeting I think that question was asked. The answer was that they look at total gross profit dollars for each category in the store and not just the margin. If they feel lowering price will drive enough incremental volume to grow the gross profit pie they may do so.

 

Another of the questions asked during the conference was about the risks to the traditional grocery business model from Amazon and dollar store growth. Kroger said they heard the same concerns when the wholesale clubs (Costco) and also when the mass merchandisers (Walmart/Target) came along. Kroger said the business is always evolving and facing competitive threats from new players. Regarding Amazon, Kroger feels their model may work best with food in high density locations like New York City, not a core market for KR. Amazon will likely not be as successful in suburban communities where people are driving by a Krogers store a couple times a day. Kroger also talked about how they are doing a test in a couple of markets with using their c-stores to fill in the gaps with their larger retail stores. Most importantly Kroger feels their underlying business model of offering their customers competitive pricing and a great shopping experience etc will resonate with enough consumers that they will continue to deliver 10% returns to investors. I feel KR has a very strong moat.

 

FCharlie, I am not sure that Wall Street (or anyone) favours Kroger. 5 years ago the stock was just under $30. If you go to Seeking Alpha or Gurufocus you will find few, if any, articles on Kroger. RBC does not cover any of the three retailer. Looks to me like the sector is pretty out of favour. SVU, SWY and KR all look cheap but each offers a much different risk/reward tradeoff and investors can pick a company that fits their personal preference.

[FCharlie]

 

 

 

FCharlie, I am not sure that Wall Street (or anyone) favours Kroger. 5 years ago the stock was just under $30. If you go to Seeking Alpha or Gurufocus you will find few, if any, articles on Kroger. RBC does not cover any of the three retailer. Looks to me like the sector is pretty out of favour. SVU, SWY and KR all look cheap but each offers a much different risk/reward tradeoff and investors can pick a company that fits their personal preference.

 

 

That's why I said "if you consider a P/E of nice 'all the love'.....

 

I think the entire sector is dirt cheap. The reason I would say Kroger gets the love is because they are the only one that consistently produces ID sales growth. If you watch the sector, after every earnings report all the media focus is on sales. If sales miss expectations, the stocks get smashed. If sales are better than expected, the stocks rise. It makes no sense because you can have a company like Safeway with a $4.45 Billion market cap that says "We expect to generate $5.7 Billion FCF over the next five years, but our ID sales were flat this quarter"    The stock gets slaughtered. SWY is down 17 of the past 18 days... A FCF yield of 20%+ with no ID sales growth.

 

KR, SVU, and SWY can all be bought here in my opinion. For the risk averse, go with KR and SWY. They at least have the firepower to repurchase tons of shares at these prices. At some point, that will matter.

[Viking]

KR announced very strong Q1 earnings. The more familiar I get with the company the more I like it. They are not trying to build an empire or spike short term earnings. They have a methodical, long term approach that has been very, very successful. At current price ($22) the stock looks to be a lock to earn investors 8 to 10% per year moving forward. Great hold in place of a bond.

 

Earnings guidance (for 2012) was increased to about $2.35/share = forward PE under 10. 

Q1 Conference Call: great learning opportunity for those who want to learn more about the company and what differentiates them from other food retailers.

 

http://www.thekrogerco.com/finance/financialinfo_investorconferencecalls.htm

[FCharlie]

KR announced very strong Q1 earnings. The more familiar I get with the company the more I like it. They are not trying to build an empire or spike short term earnings. They have a methodical, long term approach that has been very, very successful. At current price ($22) the stock looks to be a lock to earn investors 8 to 10% per year moving forward. Great hold in place of a bond.

 

Earnings guidance (for 2012) was increased to about $2.35/share = forward PE under 10. 

Q1 Conference Call: great learning opportunity for those who want to learn more about the company and what differentiates them from other food retailers.

 

http://www.thekrogerco.com/finance/financialinfo_investorconferencecalls.htm

 

I don't see how you can lose with Kroger here. I like that they plan to push up leverage ratios to 2.0X and repurchase more stock. This will add about $400-$450 million of share repurchase and, plain and simple, management is doing it because the stock price is so low.

 

That said, is Kroger that much better of a business that you'd prefer it at 10% free cash flow yield over Safeway with a 22% free cash flow yield or SuperValu with a 45% free cash flow yield?

 

 

 

 

[stahleyp]

Where are you getting the 8-10% returns?

 

 

This is total returns so it includes dividends from my understanding.

 

http://performance.morningstar.com/stock/performance-return.action?t=KR&region=USA&culture=en-US

[TheEnterprisingInvestor]

KR announced very strong Q1 earnings. The more familiar I get with the company the more I like it. They are not trying to build an empire or spike short term earnings. They have a methodical, long term approach that has been very, very successful. At current price ($22) the stock looks to be a lock to earn investors 8 to 10% per year moving forward. Great hold in place of a bond.

 

Earnings guidance (for 2012) was increased to about $2.35/share = forward PE under 10. 

Q1 Conference Call: great learning opportunity for those who want to learn more about the company and what differentiates them from other food retailers.

 

http://www.thekrogerco.com/finance/financialinfo_investorconferencecalls.htm

 

 

This looks cheap, as do all the others in the category, but I'm pretty sure it will continue to look cheap all the way down.  I agree they're probably the best supermarket operator, as evidenced by growing topline, but I wonder if that's merely at the expense of weaker competitors (SVU, etc.) as the category shrinks.  I'd think that eventually the competitive threats will start to eat into their business, and it's quite clear that supermarkets can't shrink the overhead fast enough.  To me, 5x EBITDA seems like the correct price for this business.  Just my two cents...

 

 

[Viking]

stahleyp, KR's stock price traded over $32 in 1999; 13 years later it is now trading below $23. I agree, in the past 13 years the stock price has performed terribly. Moving forward, I expect the stock price (and dividend) of KR to deliver investors much better returns (i.e. 8 to 10% on average). 

 

Theenterprisinginvestor, I agree that given the challenges most traditional grocers face growing their profitability, trading at 4 (SWY, SVU) or 5 (KR) times EBITDA is perhaps a reasonable multiple. KR at 5 just looks cheap to me given their strengths. This does not mean that Mr. Market will not take the multiples lower. If we get a 20% sell off in the general market going into the fall I would expect food retailers to also get hit (although KR to get hit less than SWY or SVU). We have seen the market PE (for US stocks) fall steadily since 2000; my guess is we have not hit bottom yet.

 

I think KR began implementing its current strategy 7 or 8 years ago. During this time they have established themselves as the best managed traditional grocer. More importantly, they are very well positioned moving forward to compete with mass merchandisers, club stores, dollar stores, drug stores etc.

 

I do not hold any bonds in my portfolio. Rather, I choose to hold a small number of well run, fairly predictable, boring stocks. I buy them when they are out of favour (usually the overall market or the sector sells off and they go along for the ride even though their business is doing fine). My goal with this part of my portfolio is to earn 8-12%. Often I will buy a stock that fits this category and it will pop 10% over a couple of months; I will be happy to sell it if this happens. I am not looking for 20 or 30% returns with the companies I buy in place of holding a bond. Perhaps what Lynch would call a 'stallwart'. With this part of my portfolio I only want to buy the market leaders (hence my preference for KR over SWY or SVU). Should the stock go lower after I buy I will be happy to hold; usually I will buy more (and double up my position).

 

The markets are VERY skittish right now. Given all the issues in Europe, China, US debt ceiling & elections etc my guess is high volatility will be with us for the remainder of 2012. In this environment I will be happy to buy when stocks sell off and also be happy to sell when stocks trade higher. Cash is a beautiful thing in volatile markets.

[Viking]

Here is a quick update of the large food retailers:

 

            Mkt Cap  Debt    EV    EBITDA  EV/EBITDA  Int Exp  Sales

KR          $12.5      $8.1  $20.6    $3.9        5.3          $435    $90.4

SWY        $4.3      $4.8    $9.1    $2.4        3.8          $272    $43.6

SVU        $1.0      $6.1    $7.1    $1.8        3.9          $509    $36.1

 

Both KR and SWY have recently been juicing EPS with aggressive stock buy backs financed via free cash flow and increased debt (SWY more than KR).

 

Looks like SWY got taken out to the woodshed. Sounds like the debt markets have spoken regarding the accelerated stock repurchase. Moodys and Fitch downgraded their debt. Their CDS spreads have 'widened out' the past few months (comment on conference call). To calm markets, SWY held a conference call on Friday and basically said they would be using free cash flow moving forward to get their credit ratios back to historical levels. Free cash flow will focus on improving investment grade rating (i.e. at Moodys and Fitch) and not shares repurchases. They expect this will take until the end of 2013.

 

By engaging in the aggressive share repurchase over the past 12 months all SWY did was:

1.) drive the price of the stock higher in the short run (making it more expensive to buy back stock with what funds they had)

2.) hurt their credit rating

3.) hurt credibility of management (how could they proceed with the accelerated repurchase knowing the rating agencies were going to downgrade their debt rating if they took on debt to fund share repurchase)

4.) removed their ability to buy back stock in the future (and now it is trading below 18... hello 52 week low at $16?).

What a poor, short sighted decision to do the accelerated stock repurchase. The bond market has spoken! Will be interesting to see how the CEO spins things when they release results the end of July. They had better not miss earnings estimates.

[Arden]

I know the research about how EV multiples are better, but using it on SVU seems pretty ridiculous BECAUSE it has so much debt.

 

If this logic is valid, than if I decide the right EBITDA multiple for SVU is 3, the common is worth 0 and maybe even a negative few millions, for a company that distributes about 70 millions in dividends a year, and buybacks Debt instead of stocks in the hundreds of millions a year.

 

Besides, maybe debt is not such a bad thing. SVU makes 400-500 FCF a year, and I know for a fact it alsways has where to invest that money to get a return without risk- buying back debt, which yields the company a 6.5% return, So even with declining sales (Though, admittedly, not crashing sales) it can maintain the FCF, the dividend and the buybacks of debt.

 

 

[Viking]

Arden, the reason I posted the stats was to hopefully get some discussion. When looking at the comparables I asked the same questions as you regarding SVU. The equity really does not have much further to fall. Is SVU a good investment? This is difficult for me to answer. I do like what the CEO is trying to do and they certainly have walked the talk in 2011. I am just not sure about the important details... Are they investing enough in their stores? Is their business model sustainable medium term? Regardless, the EV for SVU cannot decline much further from here (given it is pretty much all debt).

 

SWY will be interesting to watch as they have lots more market cap to play with (to lose). My issue with SWY is management looks to have put the company in run off, milking it for cash flow to buy back stock. They tout gift cards or real estate development on conference calls. Or some new marketing program (Just 4 U). They seem to have thrown in the towel of building a great food retailer that will be around in 50 years. But as Fcharlie has pointed out, as the stock continues to nose dive, it is getting cheap because it does throw off alot of cash and this will likely continue for at least the next few years. It could be worse and SWY could be using its free cash on overpriced aquisitions or squandering it in some other way... perhaps I should not be so hard on the company for driving it all to share repurchases. Kind on reminds me of a friend who jacked up his mortgage payments because he and his wife were terrible savers... excess cash flow went into paying down his mortgage versus getting spent on consumption; pretty smart I thought.

[Rabbitisrich]

I don't think things are THAT bad at SWY just yet. Management has been rolling out an interesting customer loyalty program where you "upgrade" your membership card at the store. Logging onto the Safeway website then offers you access to discounts based upon your shopping history. Some of these discounts are quite severe, such as a 2 lbs Tillamook cheese loaf for $3.99 (normally $9.99), and Peasoup Anderson's for $0.99 ($2.50).

 

My local Safeway posts two employees with tablets to aid customers in upgrading accounts. Despite the dropoff in capex, there is still innovation.

 

If anything, I would accuse management of excessive financial engineering, playing too cute with interest rate expectations, and borrowing too much from the pension plan.

[FCharlie]

Looks like S&P, the agency that *Didn't* downgrade SWY's debt rating, gives them the green light to continue repurchasing shares, though at a much slower rate.

 

 

 

In our view, this should allow the company to repurchase additional shares, but the pace should moderate considerably.

 

http://www.reuters.com/article/2012/06/19/idUSWLA889220120619?feedType=RSS&feedName=financialsSector&rpc=43

 

[FCharlie]

 

I think KR began implementing its current strategy 7 or 8 years ago. During this time they have established themselves as the best managed traditional grocer. More importantly, they are very well positioned moving forward to compete with mass merchandisers, club stores, dollar stores, drug stores etc.

 

 

 

Kroger's strategy has been to grow it's sales and tonnage and they've allowed their gross margin to get clobbered in the meantime.

 

Historically, KR's gross margin:

 

2003  26.38%

2004  25.38%

2005  24.80%

2006  24.27%

2007  23.65%

2008  23.20%

2009  23.25%

2010  22.31%

2011  21.13%

 

Now, you can make the point that fuel sales are behind most of this decline, but if you go through all the 10K's you see that ex-fuel gross margin still declines essentially every year. Kroger is trading gross margin rate for sales. Their strategy has worked. KR hasn't had a decline in ID Sales in many years.

 

Safeway's gross margin rate in 2003 was 30.0% In 2011 it was 27.0%  Fuel has been behind this decline as well, but Safeway claims a much greater percentage of sales for itself than Kroger does, and Safeway sales ex- fuel are still higher than they were in 2003

 

So, at the end of the day, which business would you want to own? Kroger may be the better business, but does it deserve to be valued twice as high? In my opinion, Kroger is undervalued and Safeway is *Drastically* undervalued.

 

 

[Tim Eriksen]

Regarding SWY.  What are the drawbacks if they said screw the rating agencies and issued $1 billion of additional debt ($500 million 5 year and $500 million 10 year)?  The agencies would knock them down a notch.  Existing bond holders would be upset.  But is management supposed to act in bondholders interest or shareholders? SWY's borrowing cost would still be low due to the current low rates.  Let's use 4% on the 5 year and 5% on the ten year (versus approximately 3.3% and 4.5% currently).  It results in additional interest costs of $45 million annually.  Net income falls from $600 million to $570 million.  SWY would have $1 billion to buyback an additional 50 million shares.  Their last reported share count was 240 million as of April 25.  A 50 million share buyback is more than 20% of outstanding shares. 

 

Overall debt would be higher.  Annual interest costs would be around $350 million versus nearly $2 billion in cash from operations, and $1 billion of free cash flow, which isn't that bad.  It makes sense to me assuming operations are stable.   

 

   

[Junto]

I know the research about how EV multiples are better, but using it on SVU seems pretty ridiculous BECAUSE it has so much debt.

 

If this logic is valid, than if I decide the right EBITDA multiple for SVU is 3, the common is worth 0 and maybe even a negative few millions, for a company that distributes about 70 millions in dividends a year, and buybacks Debt instead of stocks in the hundreds of millions a year.

 

Besides, maybe debt is not such a bad thing. SVU makes 400-500 FCF a year, and I know for a fact it alsways has where to invest that money to get a return without risk- buying back debt, which yields the company a 6.5% return, So even with declining sales (Though, admittedly, not crashing sales) it can maintain the FCF, the dividend and the buybacks of debt.

 

I am not following your logic why the debt is a large impediment to using EV/EBITDA multiples? Can you explain further? I tend to believe it is one of the best ways to review companies with large debt burdens as it is a driver in bankruptcy restructuring activities and buyout sales.

 

SVU certainly can look daunting to the ordinary investor, but I think there are several items they have been successfully implementing and can further implement to continue to reduce debt, improve earnings, and stabilize sales going forward. Add on top the shares are nearly 50% sold short, SVU has become one of my largest positions over the last month in my portfolio given what I have determined its risk/reward ratio.

[FCharlie]

Regarding SWY.  What are the drawbacks if they said screw the rating agencies and issued $1 billion of additional debt ($500 million 5 year and $500 million 10 year)?  The agencies would knock them down a notch.  Existing bond holders would be upset.  But is management supposed to act in bondholders interest or shareholders? SWY's borrowing cost would still be low due to the current low rates.  Let's use 4% on the 5 year and 5% on the ten year (versus approximately 3.3% and 4.5% currently).  It results in additional interest costs of $45 million annually.  Net income falls from $600 million to $570 million.  SWY would have $1 billion to buyback an additional 50 million shares.  Their last reported share count was 240 million as of April 25.  A 50 million share buyback is more than 20% of outstanding shares. 

 

Overall debt would be higher.  Annual interest costs would be around $350 million versus nearly $2 billion in cash from operations, and $1 billion of free cash flow, which isn't that bad.  It makes sense to me assuming operations are stable.   

 

 

 

The drawback would be a ratings downgrade and higher borrowing costs and that Safeway heavily uses commercial paper to fund day to day operations. On the most recent conference call SWY said they can have a $200 million swing in commercial paper between a Friday and a Tuesday just based on the need for inventory and bill paying on Friday and the cash coming in over the weekend.

 

I'm not worried though because as you say, interest rates are already so low. SWY is borrowing commercial paper at less than 1%.

 

That said, I don't think they need to say "Screw the ratings agencies". I just think they should pay debt off slowly and use free cash flow to buy back stock with a 23% FCF yield.

 

I hope the news from S&P today will change SWY's mind and SWY will continue to buyback shares, although I'm not holding my breath.

[Tim Eriksen]

I said that too strongly.  I don't mean to actually say "screw the rating agencies."  My point was for SWY to not worry about paying off debt and keep aggressively repurchasing shares.  In other words, to do what is in shareholders interests over bond holders interests.  Bondholders would prefer SWY to retain cash and pay off other loans so the debt they own is even safer.  Shareholders prefer a wise use of debt based on the stability of the company's cash flows, interest rates, and the alternative uses for cash (such as share repurchases) versus debt pay down. 

 

SWY's debt and coverage ratios do not appear to be much different than Kroger's.  Kroger has better SSS, but that makes sense due to SWY's exposure to California.  SWY has better margins and is still more profitable on a per store basis.     

[Viking]

Fcharlie, you made a key point regarding Krogers: their total gross profit has been pretty flat for many years. Their top line is growing nicely. They have chosen to invest the incremental gross margin back into the business (lower prices etc) year after year after year (and buy back shares). As a result their gross margin % has been falling (as planned).

 

Another interesting thing about Krogers is their store count is flat to declining slightly. My read is they are being VERY responsible with what they do with their cash.

 

Regarding share buybacks, I just do not understand the value in doing an accelerated buyback like SWY did. If they are so confident that free cash flow will be $900 million per year for the next 5 years why not simply buy a bunch of stock back every year (keeping debt levels at historical levels and the ratings agencies happy). This is largely what KR has done, although they are taking on a little more debt right now to buy back more stock. However, I am sure the added debt KR is taking on has been reviewed with the ratings  agencies and they are comfortable with it.

 

Regardless, I do find KR, SWY & SVU interesting opportunities. Each has a very different business model and risk return profile.     

[FCharlie]

I said that too strongly.  I don't mean to actually say "screw the rating agencies."  My point was for SWY to not worry about paying off debt and keep aggressively repurchasing shares.  In other words, to do what is in shareholders interests over bond holders interests.  Bondholders would prefer SWY to retain cash and pay off other loans so the debt they own is even safer.  Shareholders prefer a wise use of debt based on the stability of the company's cash flows, interest rates, and the alternative uses for cash (such as share repurchases) versus debt pay down. 

 

SWY's debt and coverage ratios do not appear to be much different than Kroger's.  Kroger has better SSS, but that makes sense due to SWY's exposure to California.  SWY has better margins and is still more profitable on a per store basis.   

 

 

I'm with you. I don't want Safeway to say "Screw You" to Moody's & Fitch. I just think they should say, "Look, we will repay debt gradually, but we will repurchase stock too"

 

After all, opportunities like this don't happen every day. People would happily sell their Safeway all day at a 23% FCF yield and buy something cool like Whole Foods. When the market hands you lemons, make lemonade. Safeway could repurchase 50% of their shares in the next two years if they hold back on debt repayment. This is after having repurchased 50% of their shares over the past four and a half years. Eventually, somethings gonna give with the stock price, and then Safeway can worry about paying off debt.

 

 

[FCharlie]

Fcharlie, you made a key point regarding Krogers: their total gross profit has been pretty flat for many years. Their top line is growing nicely. They have chosen to invest the incremental gross margin back into the business (lower prices etc) year after year after year (and buy back shares). As a result their gross margin % has been falling (as planned).

 

Another interesting thing about Krogers is their store count is flat to declining slightly. My read is they are being VERY responsible with what they do with their cash.

 

Regarding share buybacks, I just do not understand the value in doing an accelerated buyback like SWY did. If they are so confident that free cash flow will be $900 million per year for the next 5 years why not simply buy a bunch of stock back every year (keeping debt levels at historical levels and the ratings agencies happy). This is largely what KR has done, although they are taking on a little more debt right now to buy back more stock. However, I am sure the added debt KR is taking on has been reviewed with the ratings  agencies and they are comfortable with it.

 

Regardless, I do find KR, SWY & SVU interesting opportunities. Each has a very different business model and risk return profile.   

 

Yes, Kroger has declining margins and that is according to plan. Safeway has been defending it's gross margin and ex-fuel, they've done pretty well.

 

Kroger just said they want to lever up to 2.0 -2.2 X debt to EBITDA. They simultaneously announced a $1 billion buyback. I expect they will lever up about $450 million and use free cash flow for the rest. KR has a 10-B-5 buyback. They buy every day, every week, every  month. The lower the stock, the more they buy.  Kroger is a very stable and consistent company with no real surprises to worry about.

 

Safeway, in my opinion, accelerated two years worth of share repurchase because they genuinely believe Just For You is a game changer. To me, I agree. I think the idea is fantastic. If it's not going to work, it's simply because it's ahead of it's time. If you listen to Investor Day, Steve Burd spends an incredible amount of time discussing Just For You. The test markets have directly resulted in a $10 weekly improvement in sales per user. Sounds small, but the rate of people who sign up and then become regular users is 50%. The goal is to have about 1,200 regular users per store. 1,200 regular users spending $10 per week more is $1 billion in sales added. These sales will be at a higher gross margin rate because there will be no need to offer broad deals anymore. The logic here is that the average shopper only buys about 450 sku's per year, so why offer 30% of the store on sale to everyone? Basically, why offer deals to everyone across the board that the competitors can easily see? Why not offer "stealth" deals to people based on what they already buy. Kroger then can't possibly know what Safeway is offering to each person because each persons prices paid and e coupons are unique based on their shopping patterns, and Safeway will guarantee to beat Kroger or anyone else on price if you buy something over and over.  I truly think it's a brilliant plan. People don't understand it though because it hasn't been rolled out or even discussed. The only way you'd know about it is to be in a test market (Chicago, or California) or to listen to Safeway conference calls and investor day and I'd assume 99.99% of the US population doesn't tune in. So, Safeway is betting that it's a game changer. Like I said, the only downside is that it's ahead of it's time.  Combine this with a 10 cents off per gallon on fuel if you spend $100 on groceries, or 20 cents off if you spend $200, Safeway really thinks ID sales will be rising strongly by year end.

 

If Safeway thinks PDC (Property Development Corp) can produce ongoing operating income of $100 million annually with no cash demands from headquarters, Blackhawk is growing 25% annually, and the core grocery biz can produce positive sales between 2-4% then the stock at four times free cash flow is a complete bargain, so buy two years worth of shares before you roll out Just For You, and then you aren't buying a $30 stock. Time will tell if this was a good idea or not.

 

 

[Tim Eriksen]

Fcharlie, you made a key point regarding Krogers: their total gross profit has been pretty flat for many years. Their top line is growing nicely. They have chosen to invest the incremental gross margin back into the business (lower prices etc) year after year after year (and buy back shares). As a result their gross margin % has been falling (as planned).

 

Another interesting thing about Krogers is their store count is flat to declining slightly. My read is they are being VERY responsible with what they do with their cash.

 

Regarding share buybacks, I just do not understand the value in doing an accelerated buyback like SWY did. If they are so confident that free cash flow will be $900 million per year for the next 5 years why not simply buy a bunch of stock back every year (keeping debt levels at historical levels and the ratings agencies happy). This is largely what KR has done, although they are taking on a little more debt right now to buy back more stock. However, I am sure the added debt KR is taking on has been reviewed with the ratings  agencies and they are comfortable with it.

 

Regardless, I do find KR, SWY & SVU interesting opportunities. Each has a very different business model and risk return profile.   

 

I understand your point of disliking the decision to accelerate the buyback only to then choose to stop.  They then likely overpaid.  My desire is for SWY to keep aggressively buying as long as the market lets them buy at such a cheap price (just over 4 x times FCF).  If they just bought $900 million per year the stock price would likely rise over time as the market saw the steadily increasing EPS and dividend.  The problem is that the average repurchase price would end up being much higher.  By accelerating the buyback when the price is low, management is buying low which is what I want. 

 

The current market cap is $4.3 billion (240 million shares x $17.77) versus ~ $1 billion in annual FCF.  I would love for them to borrow a billion (take the one notch downgrade), use the near billion of free cash flow they will generate over the next twelve months. and the $100 million from the sale of Genuardi's, to buy all the stock  they can at $20 per share.  That is potentially nearly half their market cap.  For those who don't know, between Oct 2011 and March 2012 SWY repurchased 89 million shares and the stock price is largely unchanged.    If the share price goes up then SWY can choose debt reduction.  If it doesn't, then "wash, rinse, repeat."

 

It would also be fun to see how the shorts respond since short interest is 60 million shares (25% of shares o/s).

 

[FCharlie]

 

 

The current market cap is $4.3 billion (240 million shares x $17.77) versus ~ $1 billion in annual FCF.  I would love for them to borrow a billion (take the one notch downgrade), use the near billion of free cash flow they will generate over the next twelve months. and the $100 million from the sale of Genuardi's, to buy all the stock  they can at $20 per share.  That is potentially nearly half their market cap.  For those who don't know, between Oct 2011 and March 2012 SWY repurchased 89 million shares and the stock price is largely unchanged.    If the share price goes up then SWY can choose debt reduction.  If it doesn't, then "wash, rinse, repeat."

 

It would also be fun to see how the shorts respond since short interest is 60 million shares (25% of shares o/s).

 

If Safeway did this, assume an extra $100 million of interest expense after taxes. Free cash flow falls to $900 million and shares outstanding fall to 120 million.  The new level of free cash flow per share is $7.50 for a 42% FCF yield on today's purchase price.

 

Our main problem is that management isn't going to listen to us. Ha!  So.....

 

In the meantime, I'm not holding my breath on much in the way of share repurchases. This will be one where I myself will have to do the buying, not unlike Bank of America. I fully expect BAC to have massive share repurchase in the future, but today, if I want to own more at $8, I buy it myself.