It Can Get Worse for Roundy's
Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Roundy's (NYSE: RNDY) operates 158 grocery stores in the upper midwest under the names Pick 'n Save, Rainbow, Copps, Metro Mart & Mariano's Fresh Market. Yesterday, Roundy's announced poor earnings and an even worse outlook. For the second quarter, Roundy's reported earnings per share of $0.42, down 28% from the prior year. Even worse than that, Round's only sees revenue growth of 1-2% for the year.
Some investors were drawn to Roundy's for the potential growth of the Mariano's chain. More often, investors were drawn to its extremely high dividend (now at almost 12%). However, Roundy's is a stock that absolutely should not be owned, especially by individual investors.
I posted on May 10 (see here) about the dangers of owning Roundy's, hoping to keep as many people as possible out of the stock before it reported Q1 earnings. At that point, Roundy's was at $12.25. It closed on Friday at $7.71. That's a nasty 37% drop. No high dividend yield can offset that sickening decline.
When I posted previously, I noted that Roundy's finished 2011 with $87 million in cash compared to $245 million of accounts payable and $809 million of long-term debt. Consider also that they generated only $33 million of operating cash flow for the first six months of the year. At an annualized rate of $66 million operating cash flow, they don't have much chance of paying off that debt this decade, especially as they make capital investments and pay out the giant dividend.
So, if Roundy's is such a lousy investment, why did it go public? Who is it good for? Simple: the pre-IPO owners. They were able to create a liquid market for their investment and pay out a crazy high dividend at the same time. Good for them. Bad for future investors.
It makes me sad to do Google searches on Roundy's stock and see so many people recommend using this stock for dividend income and stability. There is nothing stable about a company with little growth and an insurmountable debt balance.
Competitors
What about the competition? That doesn't look much better. A look at the 5-year chart below shows how much each of them has flattened, at best. No post-2008 recovery for any of them.
Safeway (NYSE: SWY) has a 9 P/E, but it also has low margins and 2% revenue growth. Don't reach for their 4.5% dividend either. Supervalu (NYSE: SVU) is coming off a year of big losses. They have a 14.6% dividend yield. Similar to Roundy's, don't get sucked into this high dividend. A stock doesn't get that high of a dividend yield and that low of a stock price ($2.44) for no reason.
Kroger (NYSE: KR) is in the best shape of this group. However, their earnings, while positive, have not grown at all recently. Given that, it is tough to justify a P/E of 20+. Not only that, but Kroger is also saddled with 6.7 billion of long-term debt, compared to only $1.4 billion in cash.
Bottom Line
Seems like unless your name is Whole Foods, it is tough to be in the grocery business. That's not a new revelation. That business has always had low margins, so execution is critical. But now, competition and other alternatives are really putting the hurt on chain grocery stores. Don't jump into these stocks for the dividend yields. Your total return is not safe.
Zaegs has no positions in the stocks mentioned above. The Motley Fool owns shares of SUPERVALU INC. 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.
