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Chuck Royce Buys Arden Group (ARDNA) as it Hits New Lows

February 09, 2011 | About:
As part of GuruFocus’s premium service you can see real time picks of the gurus in which you subscribe. To take a look at this service, click here. If you're not already a subscriber, I highly recommend it. Since last quarter, Chuck Royce, portfolio manager of Royce & Associates’ Premier Fund, picked up a few more shares of the Arden Group (ARDNA). He’s owned the position for at least five years and slightly added to his position on January 11. Royce owns more than 5% of Arden. Jim Simons also owns a very small position.

The $243 million company hit a new 52 week low today at $76.80. I’m not seeing any specific event that is causing the Arden Group to drop, but everything is trending in the wrong direction for the company. Revenue has generally been dropping since 2003 as has their gross profit. Their operating income has gone up simply because their SG&A has been dropping. That can’t go on forever. However, their net margins are astronomically high for a supermarket chain which goes to their successful operations within their niche.

In addition to their margins, Royce might be attracted to their balance sheet. They’ve got more than $15 million of cash and only $1 million in long term debt, and they paid a large special dividend some time ago. Don’t forget about the value of their real estate as well. They currently sport a 1.3% dividend yield.

Let’s look at their background. The Arden Group itself is a holding company. Its subsidiaries own real estate, which I believe consists of two stores and a shopping center, and they operate 18 supermarkets in southern California under the Gelson’s Markets name. They also run a distribution center. 86 year old Chairman and CEO Bernard Briskin is the principal owner of the company’s A shares. Unfortunately for shareholders, Briskin takes home about $1.7 million per year while the company made about $32 million over the last four quarters. Because of his large ownership interest, trading volume is anemic, averaging only about 3,000 shares per day. The company is headquartered in Compton. Yes, that Compton, on South Central Ave.

Gelson’s is unique because they have created an upscale niche for themselves that protects them from grocers like Wal-Mart (WMT) and other chains such as SuperValu’s (SVU) Alberstons. They have loyal customers who are attracted to Gelson’s less from advertisements and more from store events. This is what explains their high margins. Many of their stores have things like gelato stands, coffee bars, and Wolfgang Puck pizza. This customer loyalty would make them an attractive take-over candidate along with their stellar balance sheet. It's unlikely Briskin would allow a sale to happen while he’s around, though.

I would be wary of buying into the Arden Group simply based on their income statement. Even with the stock price drop, their forward P/E seems to be higher than their competitors. That’s the case even if you back out their cash. A catalyst would be the full retirement of Bernard Briskin, and my guess is that when that happens, the company will put itself up for sale. Until that happens, though, it’s tough to justify current valuations while all major metrics including their impressive net margins are trending downward. If we look ahead a few years and take a guess at a takeout price, we may find that as earnings continue to drop, today’s price may be the ceiling.

Disclosure: Long SVU

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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Rating: 3.7/5 (13 votes)

Comments

john vitale
John vitale - 3 years ago
no comment at this time! thank you.

random_walker
Random_walker - 3 years ago
Have you considered the following:

1. The amount of short term investments

2. The history of returning good amounts of capital to shareholders via specials

3. The current value of some of the real estate (vs the carrying value) e.g. the Gelsons on Sunset Blvd

4. The quality of some of the board members e.g. Steven Romick of FPA is a Director

5. The cash & short term investment adjusted FCF yield and P/E

Please leave your comment:


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