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Arden Group: Balance Sheet Weakened with Special Dividend and Operating Leases
Posted by: Mark Lin (IP Logged)
Date: December 10, 2012 09:49AM
This is one in a series of articles where I will be covering most of the "30 Obscure, Profitable Stocks" listed by Geoff Gannon on his blog on Nov. 29, 2012. Many thanks to Geoff Gannon for the wonderful list of interesting stock ideas.
Arden Group Inc.(ARDNA) is a holding company which conducts operations through its wholly owned subsidiary, Arden-Mayfair Inc., and Arden-Mayfair’s wholly owned subsidiary, Gelson’s Markets, which
operates supermarkets in Southern California. It also owns certain real estate properties through a subsidiary, Mayfair Realty Inc., which is wholly owned by ARDNA and Arden-Mayfair.
Gelson’s currently operates 17 full-service supermarkets in Southern California, which carry both perishable and dry grocery products. Gelson’s offers a broad selection of local and national brands as well as a limited number of private label items. Gelson’s targets the consumer who values superior customer service, merchandise, presentation and selection. Gelson’s closed its store located in Northridge, California on Feb. 25, 2012, due to the lack of profitability of the Northridge location for the past several years. Gelson’s entered into a lease for a supermarket location in Long Beach, California in September 2012 and plans to open a new Gelson’s supermarket at that location in late 2013.
ARDNA currently trades at a trailing twelve months P/E of 15.63 and a trailing 12 months EV/EBITDA of 5.77. In terms of asset-based valuations, it is currently valued at 2.63x P/B, a 37% discount to its five-year average P/B of 4.18. However, its P/B valuation is distorted by the special cash dividend of $20 per share, with the share price falling to reflect the huge cash payout, but the books remain dated with the existing cash. ARDNA achieved a 18.1% ROE for the past 12 months and a five-year average ROE of 27.6%.
Financial and Business Risks
ARDNA is in a strong net cash financial position with net cash and short-term investments of $75 million representing 28% of its current market capitalization of $269 million. The cash balance does not take into account the cash outflow from the special cash dividend amounting to $61.4 million. Also, there are operating leases on ARDNA's books amounting to approximately $115 million.
ARDNA has not been aggressive in expansion; it has not opened a new store for more than a decade. The most recent opening of a Gelson’s store occurred in September 2001 when Gelson's opened a new store in Pasadena, Calif. Gelson’s plans to open a new supermarket in Long Beach, Calif., but that is merely a replacement for its old store in Northridge, Calif. The lack of new stores expansion may be attributed to the difficulty of finding suitable locations that meet its demographic and operational requirements at a reasonable cost.
ARDNA has minimal store leases renewal risk at the moment, with the average term remaining on its supermarket leases, including renewal options near 16 years.
ARDNA does not face significant supplier concentration risk. Its largest supplier, Unified Grocers Inc., accounts for 14% of Gelson's purchases in fiscal year 2011 and no other supplier accounts for more than 4% of Gelson’s purchases. Moreover, Unified Grocers has been a supplier to Gelson's for 38 years.
Business Quality and Capital Allocation
Gelson's Markets is one of the nation's premier supermarket chains and every single store is positioned as the area's best market for superior produce, highest quality meat, seafood and deli, an unmatched selection of wine and liquor, and exceptional service. Gelson’s merchandising includes premium products and specialty items such as imported foods, unusual delicatessen items and organic and natural food products. Gelson’s also emphasizes customer service by offering a variety of service departments including meat, delicatessen, sushi and cheese departments, with certain stores including additional service departments such as fresh pizza, coffee bars, gelato bars and carving carts offering cooked poultry and meats.
ARDNA's wholly-owned subsidiary, Mayfair Realty, currently owns two freestanding Gelson’s supermarket properties and a shopping center in which a Gelson’s Market is located. The shopping center owned by Mayfair Realty, located in Calabasas, Calif., consists of approximately 58,000 leasable square feet. Mayfair Realty also owns a 30,000 square-foot office building in Compton, Calif., which serves as ARDNA's headquarters.
ARDNA is profitable for every single year in the past decade and free cash flow positive in 9 out of the past 10 years. ARDNA has paid dividends in every single year since 2003 and currently sports a dividend yield of 1%. Dividends are paid quarterly. On Nov. 20, 2012, ARDNA announced that its board of directors declared a special cash dividend of $20 per share on its Class A Common Stock. It also paid out special dividends of $25 and $20 per share in 2008 and 2004 respectively. ARDNA has 132,806 shares that remain authorized for repurchase. In April 2011, it purchased and retired 90,098 shares for an aggregate purchase price of approximately $6.6 million.
Valuations are unattractive, after adjusting for the special cash dividend. Also the balance sheet is weakened with significant cash outflow from the special dividend and the huge operating leases obligations. In addition, the regular annual dividend of $1.00 per share provides investors with a modest 1% dividend yield.
The author does not have a position in any of the stocks mentioned.