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Arden Group- Compelling valuations

July 25, 2010 | About:
vinayn

vinayn

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Arden group is a parent company, which operates 18 stores in Southern California by name Gelson. It mostly caters to wealthy customers thereby creating a niche in highly competitive retail sector. It is famous for its high quality meat, seafood, wine liquor & above all exceptional service. In addition to the customary supermarket offerings, Gelson’s offers specialty items such as imported foods, unusual delicatessen items and organic and natural food products. Gelson’s stores include the typical service departments such as meat, seafood, delicatessen, floral, sushi, cheese and bakery. In addition, some stores offer further services including fresh pizza, coffee bars, hot bars, gelato bars and carving carts offering cooked meats. Currently the stock is trading near to its 52-weeks low at $ 89.20. It is a stock, which is ignored by Wall Street & has done quite well over the decade. Valuations-

Price: $ 89.20

Shares outstanding: 3.16 million

Market Cap: $ 282 million

Enterprise Value: $ 230 million

Debt: $ 1.2 million

LTM EPS: $ 6.6

LTM EBIDTA: $ 34.76 million

LTM FCF: $ 23.26

P/E: 13.1

Return on equity: 31.1%

Return on assets: 18.8%

Investment thesis:

1) Valuations-

I. Arden has better operating margin, net margin than most competitors for the last 10 years. LTM operating margin & net margin are 8.1% & 4.1% resp.

II. Revenue is increasing steadily for last 10 years with only to decrease by 3% during the last year. It has weathered well to the economic downturn & limited its losses.

III. EPS has seen a consistence increase in last 10 years. In 2000, EPS was $ 3.45 & LTM EPS is $ 6.6 IV. COGS has remained steady V. Currently trading at 13.6 x EPS

2) Qualitative factors-

I. Large insider holding: CEO Bernard Briskin currently holds 57% of Class A shares. It makes his interests fall in line with the shareholders.

II. Share buy backs: Company has periodically bought back the shares & current number of shares outstanding is 3.16 million. Insider trading involved only buying in the last few years. It indicates that most believe in the potential of the company.

III. Niche market so unlikely to have competitors- It caters mostly to high end customers. Most of the competitors trying to cut prices, Arden emphasizes on giving the service better to those who value it. It is not in the market of low cost grocery. It has successfully maintained its income steady in spite of fierce competition & its limited resources. I doubt that it will be a takeover target for its competitors because Arden’s motto is different than most of its competitors making its mission out of line with others.

IV. Dividend payout- Company has paid out minuscule dividend of $ 1 every year with special dividends of $ 21 & $ 26 in 203 & 2008 respectively. It shows that management is interested in distributing the cash to the shareholders than expanding.

V. Need for financing- Company has very little debt implying its ability to sustain the business without any financing. The share buy back confirms this fact.

VI. Management seems to be convinced that the only way to growth is through cutting costs. It has not added a single store in the last decade. The fact that its cost of goods sold has remained steady despite the downturn.

VII. Goodwill- Company relies on loyal customer base than anything else. Employees are encouraged to recognize customers by their names. It values the service & the quality of the product. Company is able to increase the prices without losing customers because of their high income. This is one of the reasons behind company’s higher operating & net margin.

VIII. Costs in 2010- Company has got favorable rent terms. The rent expenses in the last 3 years were $ 10 million, $ 10.57 million & $ 10.6 million. In 2010 it is expected to be $ 10.3 million. Cost of sales (Warehouse, transportation, purchasing, advertising, occupancy) have actually been steady for the last 3 years at around $ 34 million. I believe the costs are going to be steady in 2010. With economic condition improving, company can perform better than 2009.

3) Risks-

1. Limited expansion- Company has resisted the expansion for quite a lot of time now. This leaves company to grow only through expansion of current stores. The reason for this I cite is its affluent customer base. Company has to open stores in areas suitable to its mission.

2. Succession plan- CEO Bernard Briskin is 85 years old. He has been around for a while now. It will be a tough task to find a replacement for him. I guess Arden will be run by conservative management style until Briskin runs the office.

3. Low trading volume- Arden has very low trading volume. But I doubt it will be a problem for the stock to unleash its value. The stock has reached a 52- week high of 132. Before that it was trading in the 150s range. So the stock has performed well in the past. With conditions improving, I see no reason for the business & stock do well in next 2-3 years. I would recommend the stock to buy at this level & hold it at least for 2-3 years & a possible sell above $ 150.

Disclosure- I don't own the stock.

Rating: 3.2/5 (5 votes)

Comments

graemew
Graemew - 3 years ago
Having looked at the ten year data here on Gurfocus it is clear that the eps and EBITDA have been steadily decreasing for the last three or four years...even though as you say the eps was $3.45 in year 2000. If this declining trend continues then the current share price is too high in my opinion. Unless there is some factor indicating an upward momentum in eps...which doesn´t seem apparent from what you have said, then it is possible that the next several years will bring little or no growth or even declining earnings if the trend line continues. Taking inflation into consideration, I would therefore value the company at no more than about 7 times trailing earnings rather than the current 13.6 times earnings. To make things worse the company does not pay a good divdend, which means that you could end up holding this company for say ten years, receive few dividends and then see the company go broke....you end up with nothing.

With top quality companies like JNJ and WMT selling at a similar P/E I can see no reason for buying this stock.

But thanks for posting your analysis.

vinayn
Vinayn - 3 years ago
Yes you are right in pointing out that EPS has decreased recently. Its my mistake that I didn't made it clear the reason behind. Let me give it here. There are two sporadic increase in EPS- one in 2004 & other is in 2007. The reason for the increase in 2004 was the strike of Union Food and Commercial Union with three major supermarkets in Southern California. Arden was one of the few alternatives. When strike ended, customers might have returned to the low cost supermarkets. Revenue in 2007 increased mainly due to increased product prices. As management admits in annual report that this was partially offset by reduced customers. I believe Arden has a comfortable EPS band of $ 5-7 with some sporadic increase in between which results from favorable conditions. During the worst time Arden has weathered well. Now that it is somewhat behind us, with costs not increasing way too much in 2010 (I say this from the management discussion in annual report) it should be able to post good results.

Having looked at the ten year data here on Gurfocus it is clear that the eps and EBITDA have been steadily decreasing for the last three or four years...even though as you say the eps was $3.45 in year 2000. If this declining trend continues then the current share price is too high in my opinion. Unless there is some factor indicating an upward momentum in eps...which doesn´t seem apparent from what you have said, then it is possible that the next several years will bring little or no growth or even declining earnings if the trend line continues. Taking inflation into consideration, I would therefore value the company at no more than about 7 times trailing earnings rather than the current 13.6 times earnings. To make things worse the company does not pay a good divdend, which means that you could end up holding this company for say ten years, receive few dividends and then see the company go broke....you end up with nothing.

With top quality companies like JNJ and WMT selling at a similar P/E I can see no reason for buying this stock.

But thanks for posting your analysis.

graemew
Graemew - 3 years ago


Thanks for the extra information. Have you had a look at Tesco?....this is the big Brittish supermarket chain which is my top pick at the moment. Good growth over the last ten years, growing investments in Asia and an attractive P/E ratio right now.

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