Village Super Market, Inc. (VLGEA) reported earnings last week and delivered a great quarter in terms of revenue and EPS. VLGEA reported revenue of $458.29 million, representing 15.9% y/y growth and Q3 GAAP EPS of $0.77 per share. Furthermore, VLGEA saw same-store sales increase 13.6% over the same 13-week period as last year.
In addition to seeing same-store sales increase, gross profit as a percentage of sales also increased to 28.34% from 27.97% over the same 13-week period from this year as compared to last year. A portion of this increase was due to decreased promotional spending; VLGEA was not in need of any advertisements and saw exceptional growth. Furthermore, cash flow was strong and cash from operating activities was $59.40 million, up from $39.76 million in the same period last year.
With restaurants having to shut down and people subject to stay-at-home orders, VLGEA has seen demand for its groceries jump significantly. Furthermore, I believe that once people begin to shift their behavioral habits away from takeout and towards cooking at home, there will be a long-term net benefit for grocery stores. Surely, there will be many individuals who quickly pivot back to take out and dining-in restaurants, but there will be a subset that will pick up cooking skills and realize the cost savings in cooking at home and will continue to frequent grocery stores at a more persistent rate than before the pandemic.
VLGEA fell with the rest of the market amid the height of the COVID-19 pandemic and has recovered a bit, but it is still trading below its trading range over the last few years despite its business being in better shape than ever and despite the fact that it is likely to benefit from future trends and investments. As you can see on the chart below, VLGEA has been steadily increasing the top line over the past few years while also growing cash flow from operations; I expect these trends to continue and accelerate a bit.
Investing in Safety and for the Future
VLGEA’s management prudently invested to keep its employees and customers safe and pivot with future trends. A testament to VLGEA’s business strength is that VLGEA invested $5.5 million in this quarter in certain measures and future technology and still was able to increase its net income 97% y/y, adjusted for special items. You can see all of those investments and safety measures here, but I believe the most salient investments were:
- Expanded partnerships with online grocery picking and delivery services to better support the customers’ increased demand for these services.
- Introduced the Essentials Box Program – providing a safe and convenient way to stock up on in-demand produce or cleaning products, pre-packaged and available for delivery.
- Expanded mobile scan to an additional 10 stores.
- Expanded digital capabilities, including four rapidly deployed “pop-up” ShopRite from Home stores, contactless pickup and prescription drug pickup and delivery.
It is also worth mentioning that VLGEA was being a good community steward and donated and supplied masks and meals to local hospitals and gave its employees a temporary wage premium of $2 per hour until June 13. Investing in building its brand and keeping employees happy shows that management is prudently focused on the long term and is not temporarily trying to boost profits in the near term, which may not be sustainable, as some companies do.
Fairway Acquisition Closed
Besides the quarterly report, the other major news since my last article on VLGEA on April 5 entitled “Village Super Market: A COVID-19 Safety Net” was that VLGEA closed on its acquisition of five supermarkets and a production facility from Fairway. Four of the supermarkets are in Manhattan, specifically the Upper West Side, Upper East Side, Kips Bay and Chelsea locations, and a fifth store is located in Pelham, New York. VLGEA also acquired the right to use the names Fairway and Fairway Markets so it is likely that those stores will not have their names changed. VLGEA paid a total of $73.2 million for these assets and VLGEA entered into a credit agreement with Wells Fargo (NYSE:WFC) to finance the acquisition.
Source: The Shelby Report
This acquisition will have numerous benefits to VLGEA. First, as I’ve outlined in my prior articles, VLGEA is not merely an independent operator of grocery stores, but is a member of Wakefern Food Corporation, which is the nation’s largest retailer-owned food cooperative. Being a member of the nation’s largest retailer-owned food cooperative provides economies of scale, meaning VLGEA will be able to have better margins on the goods it sells than Fairway was able to. Furthermore, Wakefern recently launched a new line of private label products that have been doing well so far, which will also expand margins. Those brands are Bowl & Basket and Paperbird. More than 100 newly branded items, including packaged salads, salty snacks, cooking oils, bottled water and paper goods, were introduced in early November. ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products through fiscal 2021.
Finally, Wakefern’s structure is essentially a pass-through entity that distributes profits to its members each year based on the sales the member had that year. By increasing its footprint, VLGEA, already the largest member, will be entitled to a higher percentage of such profits.
VLGEA’s business has been a net beneficiary of the COVID-19 pandemic and management has been deftly navigating this crisis and investing in the long term, but VLGEA still trades at quite an undervalued level despite offering a generous dividend in this low interest rate environment of roughly 4%. I believe VLGEA presents a prudent investing opportunity.
This article was originally published on my exclusive marketplace service, Invest with a Stacked Deck.
Disclosure: I am/we are long VLGEA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.