VLGEA - Village Super Market Is Gradually Expanding Its Real Estate Footprint
2023-11-17 11:36:19 ET
Summary
- Village Super Market operates 34 supermarkets, eight of them company-owned. It has recently added 2 new properties and increased its stake in a real estate partnership.
- Fiscal year 2023 has marked a new record in profitability thanks to a favorable environment and recent investments.
- Its recent surge in its financial results proves the company has a strong net cash position.
- The Sumas family, which controls the company through super-voting rights in Class B shares, has disclosed more stakes in Class A Shares.
- The current earnings discount and company profile are very attractive for long-term investors. Besides, it offers growth opportunities based on recent initiatives.
In our previous analysis about Village Super Market ( VLGEA ), we provided extensive coverage about its history and competitive position, including an assessment of its financial position and valuation. In this article, we continue updating the assessment with new data and context.
This is a small description of Village Super Market business recovered from the first analysis:
Village Super Market is a member of the Wakefern co-op, an organization responsible for logistic operations, brand development, promotions, financing and other activities for a large number of small retailers. The latter have delegated functions that require more scale and resources in Wakefern, while each member is focused on operating its stores, client attention, real estate strategies, etc.
Village Super Market currently operates 37 supermarkets that offer groceries, over the counter drugs, alcoholic beverages and other basic goods. Its activities are located in four states: New Jersey, Pennsylvania, Maryland and New York. It also owns 12.4% of Wakefern, but this ownership does not entitle them to the proportional vote rights in decision making or dividends.
Lessons From The Story Of Wakefern And Village Super Market - A Well-Capitalized Organization
After the close of fiscal year 2023, the number of supermarkets operated by the company has reduced to 34. However, it already shows the increase in properties of their own, after some recent real estate investments.
Added properties and capital expenditures
Village Super Market had disclosed six properties from 1994 until 2022. After two recent acquisitions in recent years, Galloway and Vineland store shopping centers, the company already shows eight properties and three real estate partnerships, one of which was signed in 2022 and is currently being developed.
This is an additional indication that Village Super Market is expanding its real estate assets. In 2023, the company executed capital expenditures of $52.3 million, and allotted an ambitious budget of $85 million for more investments in fiscal year 2024.
We have budgeted $85 million for capital expenditures in fiscal 2024. Planned expenditures include costs for construction of the Old Bridge replacement store scheduled to open in fiscal 2024 and two other replacement stores scheduled to open in fiscal 2025, potential real estate purchases, several smaller store remodels and merchandising initiatives and various technology, equipment and facility upgrades.
These investment figures are substantially higher than its annual depreciation, which means the company is reinvesting its earnings to expand its assets.
Village Super Market annual reports and own estimations
This is one of the most positive aspects for the bull thesis: a company with net cash, financial discipline and conservative owners finding attractive investment opportunities to reinvest its retained earnings. These investments are basically real estate assets and infrastructure upgrades for its stores, which fit perfectly in its traditional model and historical strategy.
It is relevant to highlight the expansion of banners and brands. Before 2020, Wakefern’s companies just operated one big banner, ShopRite, with the exception of PriceRite managed by Wakefern. In 2020, Village acquired five stores - not the properties - and incorporated two new banners: Fairway and Gourmet Garage.
On May 14, 2020, Village completed its acquisition of certain assets, including five supermarkets averaging 52,000 sq. ft. (30,000 selling sq. ft.), the PDC and the intellectual property of Fairway, including the names "Fairway" and "Fairway Markets." 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, NY. The acquisition was effectuated pursuant to the Asset Purchase Agreement (the "APA"), entered into on January 20, 2020, revised on March 25, 2020 and approved by the United States Bankruptcy Court for the Southern District of New York through a Sale Order entered on April 20, 2020. Village paid $73,622 for the Fairway assets, net of cash acquired, and assumed certain liabilities, consisting primarily of those arising from acquired leases.
It seems that the company is betting on Gourmet Garage, as it is already operating four stores under this banner but none under the Fairway banner. One Fairway store was transformed into a ShopRite one in 2022. At the moment, it is just operating the Fairway website and app.
2023 has been a record year for the company
All the profitability metrics have extremely improved in 2023. Net income has doubled to $49 million with no extraordinary items in the income statement, just the increase in interest income. Gross profit and operating income increased 6.3% and 68.2% respectively. Several factors may explain such a positive performance:
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Village Super Market acquired and reopened several stores between 2021 and 2022. Some of them may have reached their full potential in 2023. This would also explain the poor performance of the company in 2021.
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Real estate investments are starting to positively contribute to the income statement.
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The economic environment has been ideal for established supermarkets. Surge in prices have allowed an important improvement in operating income, as many of the costs are fixed - leases, real estate depreciation.
Accordingly, it would be a mistake to consider all of this improvement as structural. In our opinion, net income will gradually increase from the 2016 - 2021 figures as new investments contribute positively, but it would not be a surprise that fiscal years 2024 and 2025 show a decrease in profits compared to 2023.
For the following years, excluding net interest, we expect an annual net income around $30 million. This figure is obtained after subtracting $7 million interest income and adjusting the $42 million current net income excluding net interest downwards.
The financial result proves the company has a net cash position
In our previous analysis , an objection was raised about the financial position of the company. It was argued that the company did not have a net cash position, after considering its operating leases as debt. However, this is a consequence of an accounting change in 2019, which forces companies to disclose those operating leases as liabilities.
Nevertheless, the payments of these operating leases are accounted as operating costs in the income statement and as operating outflows in the cash flow statement - Note 7 2023 Annual Report. Therefore, if we consider those operating leases as debt, we should adjust the company’s operating and net income upwards, as if those fixed costs were debt payments.
The proof that the company has a huge net cash position is its interest income. Interest expense has remained very low in recent years - around $4 million- , while interest income has increased from $4 to $11 million in 2023. The company is earning more interest income than its interest cost, a clear sign that the rise in interest rates is benefiting the company because it possesses net cash - considering its financial assets.
As of July 29, 2023, Village shows:
+ $140.9 million in cash and equivalents
+ $94.1 million in notes receivable from Wakefern
- $102.9 million in finance lease obligations and debt
= $132.1 million net cash
This amount is consistent with the $7 million net interest income that the company earned in fiscal year 2023.
The Sumas family has disclosed more share stakes
The Sumas family controlled the company through its 79% stake of class B shares, which carry higher voting rights. Notwithstanding, the Sumas family also controlled an important class A share percentage. This class A share ownership had maintained between 7 and 8% for the 2018-2021 period.
At the end of fiscal year 2022, a DEF 14A Sec Filing disclosed that the real class A share stake of the Sumas family was actually 30%, after including indirect stakes through different trustees. In our opinion, they did not increase their stake from 7.6 to 30%: the company just elaborated a more detailed disclosure including more trustees in the estimation.
In total, the Sumas family owned directly or indirectly 50.3% of total shares at the end of fiscal year 2023, including class A and class B shares.
It is interesting to highlight that the family members maintain an important stake in shares that carry fewer voting rights, in spite of their total control through class B shares. This means that they consider these class A shares are attractive from a pure financial perspective.
Let’s also remember that some of the Sumas family members provide personal guarantees for the company’s obligations, as required in the Wakefern bylaws:
As required by the Wakefern bylaws, the Company’s investment in Wakefern is pledged to Wakefern to secure the Company’s obligations to Wakefern. In addition, four members of the Sumas family have guaranteed the Company’s obligations to Wakefern. These personal guarantees are required of any 5% shareholder of the Company who is active in the operation of the Company. Wakefern does not own any securities of the Company or its subsidiaries. The Company’s investment in Wakefern entitles the Company to enough votes to elect one member to the Wakefern Board of Directors due to cumulative voting rights.
As it was explained in our first analysis , it is important to adjust the number of total shares when calculating the company market capitalization. Class A shares represent more economic rights, receiving dividends 54% higher in comparison with Class B shares. There are 10.65 million Class A and 4.2 million Class B shares at the close of fiscal year 2023. However, this number of Class B shares is equivalent to 2.73 million Class A shares. In total, there are currently 13.38 million Class A shares, in economic terms.
As a result, the current market capitalization as of November 15, 2023 is $329 million, instead of $364 million, as some financial platforms disclose.
Assessment
Considering $132.1 million net cash, $329 million market capitalization and $30 million adjusted net income, the earnings yield is 15.2%. This is a very attractive earnings yield taking into account the trajectory and qualities of the company. In addition, financial metrics have improved in recent years and Village’s financial position is becoming stronger.
Management has planned to maintain the current $1 per share dividend distribution for the year. They may not increase the dividend this year because the budget for capital expenditures is ambitious; nevertheless, it is likely it will increase at some point as net cash and profits are growing.
Conclusion
Village Super Market is gradually increasing its real estate assets, as it is investing more than its current asset depreciation. Its financial performance has significantly improved in fiscal year 2023, with a historic record in profits. The company is benefiting from a rise in interest rates, as it enjoys a strong net cash position. The Sumas family has disclosed more stakes in the company, and its total share ownership is currently around 50% of total shares. At the current share price, the stock offers a very high earnings yield, considering all the previous aspects and qualities of the company.
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Village Super Market Is Gradually Expanding Its Real Estate Footprint