Business Description:
$140 billion potential market with currently $27 billion market and $38 billion existing customer opportunity
Major Competitors: SpartanNash (NASDAQ:SPTN), C&S Wholesales Groger and Kehe
Minor competitors (serves mostly to restaurants, schools and other small units): Sysco (NYSE:SYY) and US Food Holdings (NYSE:USFD)
Over 60 distribution centers (total 28.8 million sq ft) vs 19 for SPTN (8.2 million sq ft)
Diversified with moat in fast growing natural and organic
Customers:
Chains
Independent retailers
supernatural
retail
Largest customer: Whole Foods with about 18% of revenues in 2020
6 product categories:
Grocery and general merchandise
Produce
Perishables and frozen foods
Nutritional supplements and sports nutrition
Bulk and food service products
Personal care items
2 business segments
Wholesale
Retail
Catalysts:
Changing consumer habits into natural and organic
Deal with Amazon extended till 2027
Inflation is a tailwind
Risks:
Took high debt for Supervalu acquisition with high-interest payments
Depends on derivatives to handle debt repayments at lower interest rates
Unionized workers and high pension expenses
Not going through with divestitures of retail business
New CEO yet to prove himself
Financial Analysis:
Valuations
My personal Biases:
Bullish on industry
Expecting high inflation in the coming years with economic expansion
Belief in ability to repay debt
Second largest position of my portfolio at 8.5%
Assumptions for base case:
Use Discounted Owner’s earnings to calculate intrinsic value
Revenue growth of 4% per year (as per forecast)
Earnings Growth of 10% per year (Less than forecast of 16%)
Depreciations of $300 million per year and Capex of $300 million per year
Look at extreme case scenario to see if the company can repay its debts
All of owner’s earnings used to repay debt
Discount Rate of 13% till 2026
Terminal Growth rate of 3%
Bull case with extra 10% extra Owner’s earnings in 2026 compared to base
Bear case with 10% less owner’s earning in 2026 compared to base
No change in shares outstanding
Conclusion
Undervalued with margin of safety
18% expected returns per year
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