Some notes on Roundy’s

ROUNDY’S (NYSE:RDNY) – $211m. Owns and operates 158 supermarkets largely in Wisconsin. IPO’ed in Feb 2012 at $8.50 (22m shares, 14.7m new shares to pay down debt. 38% owned by Willis Stein (13.8m).

Valuation

Currently trades at $4.62, earned $0.96 in the TTM -> 4.8x, projected earnings are $1.06, Forward P/E 4.32x, CFO-Capex in the TTM was $3.18 despite capex doubling. Overall very cheap for what appears to be a stable, well-established business although not one without problems.

Balance Sheet

$690m of debt (EBITDA turn 3.45x), operating leverage with rental expense of $105.7m in FY’11 (off-BS liabilities). Inventory control is worsening, since FY’10 to the TTM 10 inventory days have been added (if FIFO, this would have been significantly higher).

Ex-PE Company

Perhaps the biggest problem with Roundy’s is that is ex-PE (bought in 2002 by Willis Stein). Roundy’s was previously a co-operative, owned 66% by wholesale customers, the remainder held by employees. The motive for the buyout was to sell the wholesale operations (which generated 50% of sales), leverage cash flows, and grow the number of stores (pre-buyout there were ~61 company-owned/operated stores, now there are ~160).

New management was brought in to manage this company led by CEO Mariano (previously ran Dominick’s which was sold to Safeway in 1998 and appears to have operated in Wisconsin market), much of the senior management appears to have followed, and only one is from old Roundy’s. 5 directors, including Mariano, 3 are Managing Partners at Willis Stein, the last is an ex-senior supply chain exec from P&G. As a “controlled company” (where Willis Stein have majority voting power) do not have to have independent directors (although it does need more independents for audit committee). Comp is generous but not ridiculous.

Presumed reason for IPO is the failure to find anyone else to sell it (Mariano appointment is relevant here) to or find anyone willing to refinance debt (although they kept filing with SEC until 2005 so maybe not). The price is down 48% since IPO. Willis Stein seems to have recovered a significant amount of their original cash investment of $314m (the net consideration was $543m, I estimate they have at least $175-200m back) so are probably quite interested to get out after having to dilute their stake (pre-IPO they owned around 20m shares, now they own 13.8m of 44m) and a poor IPO.

Main concern is that PE has bled the company dry and problems will start emerging. Management does appear capable though. Perhaps hoped Mariano could help with sale to Safeway as with Domnicks.

Weaknesses

EBITDA margins down 128bps due to increasingly promotional marketplace. Debt/leverage is clearly a problem, not so much financial as the huge operating leverage involved with some $800m worth of leases. Minority shareholder, board is not independent, Willis Stein are quite small and local (based in Illinois) but one wonders how interested they are now they have most of the cash back (although current stake is still worth $63.75m). Wonder what other stuff may come out of the woodwork as time goes on. Unable to allocate a full position due to these weaknesses.

Strengths

Long history in Wisconsin market means it has big stores in good locations. Majority of sales in number one market share markets. Believe they can leverage regional expertise to enter Chicago market. Very cheap. Decent management, who appear to be incentivized, Mariano owns 2.5% of the company. The Board appears to have cleaned up its act somewhat, no more loans/consulting agreements. Operating gains were realized in buyout: sales per store increased from $22.5m in 2002 to $23.7m in FY’11, profit per store increased from $710k to $902k (have margins been squeezed too far though?). Ultimately, is very cheap price for a decent, but not great, business.