Blaming the Packers is Not a Great Idea, Roundy's
Halina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For those of you who don't live in the Midwest and specifically Wisconsin, Roundy's Inc. (NYSE: RNDY) may not be a familiar name to you when it comes to grocery shopping. However, for folks like me who live in America's Dairyland, Roundy's is synonymous with my local Copp's and Pick 'n Save stores, which I frequent at least twice a week during their Double Daze double coupon days. Aside from Copp's and Pick 'n Save, Roundy's also operates the Rainbow, Mariano's and Metro Market stores located throughout Wisconsin, Minnesota and Illinois.
Because I am so intimately affiliated with Roundy's (hey, it gets no more intimate than when I'm pouring Roundy's Clear Value brand detergent on my unmentionables), I was happy to see it go IPO earlier this year. The company used the almost $112 million raised to pay off some of its debt, which I thought was a very responsible way of handling its new money. The company also declared that it would be paying a $0.23/share dividend by the end of its second fiscal quarter this year, a move that I consider quite admirable given that its stock has been on the market fewer than three months.
Roundy's growth was rather phenomenal following its IPO and by April I was kicking myself for not investing in the stock. By early May, RNDY was trading at over $12/share. At its highest, the company stock was almost 50% higher than its starting price of $8.40/share.
Then, Roundy's reported its first quarter results and all hell broke loose. As of Friday, the company stock was down over 16% and hovering just above $10/share. Analysts like Peter Benedict have downgraded RNDY from Outperform to Buy. Given such a huge drop in price, you'd expect negative earnings, a dividend retraction or spiraling corporate debt to be the leading culprits, right? Wrong!
Blame it on the Packers
Roundy's declared a healthy $0.28 EPS, beating earnings estimates by $0.03. Revenues were up 2.4% for Q1 of 2012 as compared to the same quarter in 2011. Additionally, the company's total debt was reduced by 14.4%, thanks in large part to the money made at the IPO. Just to assuage any rumors of a Roundy's dividend not coming to fruition, the company reiterated its intention to make that happen.
So, why did the market beat up Roundy's despite its good news? The biggest reason lies with its earnings forecasts for the remainder of 2012 and fiscal year 2013. Robert Mariano, the president, CEO and chairman of Roundy's, declared two lower earnings forecasts; whereas 2012 earnings had been estimated at $1.42/share, they were now marked at $1.36. For 2013, the revised estimation was $1.40 and not $1.45. Mr. Mariano also noted that revenue declined 2.4% to $938.2 million and same-store sales were 2.1% lower than one year ago due to a number of factors, including, among other things, the Packers. For those of you living outside of the land where cheese curds are deep-fried, the 2012 NFL playoffs did not include the Green Bay Packers competing in the Super Bowl. It makes sense -- when Wisconsin holds fewer Super Bowl parties, fewer Roundy's Clear Value chips and salsas are purchased too. It probably also didn't help that the Minnesota Vikings had a 3-13 season this year. Likewise, an unusually warm winter prevented people from stocking up their pantries in anticipation of the usual Midwestern blizzards, adding to the slump in Roundy's product sales.
However, does such a realistic approach by Roundy's to current economic conditions necessitate a 16%+ drop in its stock price? It's not as if the stock was overvalued; at its highest price of $12.50/share and an estimated EPS of $1.42, RNDY only had a P/E of 8.8. However, when investors look to other dividend-paying stores such as Family Dollar (NYSE: FDO) and hear about its 4.5% increase in same-store sales, it's hard to feel the love for Roundy's. Likewise, when investors look to specialty stores like Whole Foods Market (NASDAQ: WFM) and see its 14% increase in revenue and 9.5% increase in same-store sales, they definitely start scratching their heads about Roundy's. And let's keep in mind that Whole Foods also pays a quarterly dividend.
What can Roundy's Do About Its Lackluster Results?
As a regular customer of Roundy's, I can definitely attest to the store's low prices and the inherent attractiveness of its double coupon days and Fuelperks program. However, I still sneak out to Whole Foods, Metcalfe's Market and area farmer's markets because Roundy's lacks much of the specialty and organic food selection that I require. At the other end of the scale, when I'm just looking to satisfy my sweet/salty tooth, Target's and Aldi's prices are way better. Therefore, I think Roundy's needs to reassess its corporate image and provide a unique advantage to its shoppers. Taking the middle ground approach and offering middle ground goods just doesn't cut it with either the more affluent or those looking to save money on groceries. Maybe that advantage is an expanded local foods department or a stockpile of "new and improved" store brand snacks. Alternately, the store could create a prepared foods dine-in area, a marketing initiative that the Chicago-based Dominick's stores started years ago and which garnered tremendous success.
Unfortunately, Roundy's is still contending with its $720 million debt that still needs to be paid off, IPO money notwithstanding. Thus, it is understandable that the store may not wish to explore any new marketing initiatives right now. The bottom line, though, is that something needs to be done to garner more traffic and interest in Roundy's stores. The question is what?
halina23 has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.