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Food Retail Chains Could Provide Good Returns

June 26, 2014 | About:
shash63

shash63

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World food retail market performance will grow at an estimated CAGR of 5.5% for the period of 2011-2016, a slight decline from 5.7% for the period 2007-2011. Grocery stores are facing stiff competition and price wars. Companies are battling these obstacles with strategies like expansion and store remodeling.

Two grocery stores are currently working on these strategies, which will improve their margins as well as profitability.

Casey's General Stores(CASY) is focused on growth with strategic initiatives. The company plans to convert 100 stores to a 24-hour format, remodel 25 stores, replace 20 stores, and add pizza delivery services to 107 stores in fiscal year 2014. The remodeled stores are also equipped with larger coffee and fountain offerings, and made-to-order sandwich programs. This plan will help increase free cash flow as the replacement of stores generates about a 50% boost in fuel, grocery, and general merchandise sales and about 80% boost in prepared-food sales. The company will generate free cash flow of $19.4 million in fiscal year 2014 and $28.2 million in fiscal year 2015 as compared to free cash outflow of $19.0 million in fiscal year 2013. In 2015, the Company targets to increase same store grocery & other merchandise sales by 5.3% with an average margin of 32.1%. It also plans to build or acquire 72 to 108 stores and replace 25 existing locations.

The Company’s annual goal for fiscal 2014 is to increase same-store gallons sold by 1.5% with an average margin of $0.15 per gallon. This margin is mainly due to recent surge in Renewable Identification Number, or RIN, value above $1. The Company sold 12.1 million renewable fuel credits for $5.7 million in the fourth quarter. Annual same-store gallons sold were up 3.1% with an average margin of 16.8 cents per gallon. Casey buys gasoline and ethanol separately and then blends them. After blending, Casey receives RIN that is a 38-character number assigned by the Environmental Protection Agency, or EPA, to each gallon of renewable fuel.

For fiscal 2014, total gallons sold were up 8.5% to 1.7 billion, while gross profit Dollars rose 20% to $280.1 million. In 2015, the Company aims to increase same store fuel gallons sold by 1% with an average margin of 15.3% per gallon.

Safeway (SWY) announced the sale of its Canadian operations. It agreed to sell Canada Safeway Ltd., or CSL, to Sobeys for $5.64 billion in cash. Now it can focus more on its core operations in the U.S. CSL generated earnings of $260.71 million in fiscal year 2013. This sale will lower near-term earnings but will contribute to the growth of the core business. Safeway will invest some of these proceeds into its core business operations. Additionally, the company will likely pay down $2 billion of debt and will buy back some of its shares in order to improve shareholders’ value.

The company invested significantly in store remodeling in 2004, and additional remodeling is unnecessary for the next 10 years. Safeway spent $837 million in the U.S. in 2012, and allotted $900 million for 2013. However, reinvestment will be required to remodel its stores after such a long period. Safeway estimates spending will increase from its current level to maintain the quality of its 1,400 stores and to fight off competition due to entry of new stores and new competitive formats and technology. This will reflect in the company’s free cash flow; Safeway’s FCF reduced to $503 million compared to $642 million last year.

Conclusion

Both these companies are using strategies like expansion, remodeling stores, or improving margins. Benefits of store remodeling and replacement along with increase in RIN value will increase Casey’s free cash flow and gasoline margin. Safeway is also staying focused with its core business and this can yield good results in future.

I would recommend both, Casey and safeway as a buy for long term returns.


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