2023-09-08 02:47:58 ET
Summary
- SpartanNash Company announces supply chain transformation and capital expenditures for potential FCF margin growth.
- Recent decreases in net leverage offer flexibility for investments in brand design and product development.
- Inflation and integration of operating segments may have a beneficial impact on future FCF growth.
SpartanNash Company ( SPTN ) recently announced further supply chain transformation and capital expenditures, which may have a beneficial effect on future FCF margin growth. I am quite optimistic about recent decreases in net leverage, which may offer the company certain flexibility for new investments in brand design and product development. Additionally, I would also expect certain benefits from inflation as we saw in the most recent quarter. There are some risks from emerging supply chain disruptions, failed new brand launches, or FCF margin erosion from competitors, however SPTN could be a bit more expensive.
SpartanNash
SpartanNash Company is a food solutions company. Its broad business includes the distribution of grocery products to independent retailers and chains, the operation of corporate-owned retail stores, and the supply to police stations and military exchanges in the United States and various countries.
In addition, SpartanNash operates a high-quality fresh products distribution network, and carries its private brand, namely Our Family. With 147 supermarkets to its credit, the company uses its operating experience to drive solutions for its food retail customers. Through its differentiated business model, SpartanNash leverages core capabilities in people, operational excellence, and insight to deliver an unmatched experience. Its vision is to be indispensable to its clients, providing the necessary ingredients for a better life.
SpartanNash operates in the wholesale and retail segments. In the wholesale segment, it distributes national and private label products to independent retailers, national accounts, food service distributors, and corporate retail stores.
In addition, it has contracts to supply military commissaries in the United States and around the world. With an extensive network of distribution centers, SpartanNash offers a diverse selection of grocery products and support services to help independent retailers to be more competitive.
In the retail segment, the company operates proprietary grocery stores with a focus on convenience and community, complemented by e-commerce options. Through its differentiated business model, SpartanNash drives growth and efficiencies in both segments, providing quality food solutions to its customers.
Net Leverage Reported By SpartanNash Declined
As of July 15, 2023, the company reported cash and cash equivalents worth $16 million, with accounts and notes receivable worth $426 million and inventories of about $576 million. Total current assets stood at $1.085 billion, and the current ratio is equal to more than 1x, so I do not think that we have a liquidity issue here.
The long list of assets included property and equipment of about $609 million, with goodwill close to $182 million, intangible assets worth $103 million, and total assets of about $2326 million. The asset/liability ratio stands at more than 2x. Hence, I think that the balance sheet stands quite solid.
Source: 10-Q
With regard to the list of liabilities, I would not be worried about SpartanNash. The most remarkable liabilities are accounts payable worth $500 million, accrued payroll and benefits of about $61 million, current portion of long-term debt and finance lease liabilities of close to $7 million, and operating lease liabilities worth $235 million. Total long-term debt and finance lease liabilities stood at $545 million, and total long-term liabilities would be close to $890 million.
Source: 10-Q
It is also worth noting that management successfully reduced the financial debt/EBITDA ratio from close to 5x in 2020 to about 2.7x in 2022. If management continues to reduce the total amount of debt even further, I believe that more investors will most likely have a look at SpartanNash. The demand for the stock may increase.
Source: Ycharts
Review Of Contractual Obligations And Debt
The total amount of leverage may not seem small for certain investors, so I studied carefully the recent development with regards to the debt obligations. At the end of 2022, the Company's long-term debt and finance lease liabilities increased to $503.6 million as compared to $405.7 million at the beginning of the year. As of July 15, 2023, the company reported an increase in the total amount of debt. This growth is due to additional loans obtained through the senior credit facility to finance various purposes, such as changes in working capital, acquisitions, purchases of property and equipment, and share repurchases.
Total debt, including finance lease liabilities, was $553.5 million and $503.6 million as of July 15, 2023 and December 31, 2022, respectively. The increase in total debt was due to additional net borrowings on the senior credit facility to fund working capital changes, purchases of property, plant and equipment and share repurchases. Source: 10-Q
It is also worth noting that through an amendment to the Loan and Guarantee Agreement, the SpartanNash could extend the maturity date of the loans, adjust interest rates, and have the possibility of increasing the amount loaned, supporting its financial and strategic needs. In addition, the obligations are backed by the majority of the company's assets, and payment flexibility is maintained without penalties. In my view, with debt holders trusting the business model, equity investors would most likely be willing to have a look at SpartanNash.
FCF Catalyst: Further Development Of Customer Engagement
The company's retail growth strategy focuses on generating engagement in physical stores and the digital environment, with the goal of personalizing offers and highlighting local assortment, while improving customer satisfaction through quality, service, and convenience. The aim is to improve customer perception of prices, and expand the variety of products. In my opinion, this strategy will most likely bring revenue growth. It worked for many years, so I do not see why it would not work in the near future.
The New Premium Brand Fresh & Finest May Accelerate Net Sales
The company has successfully launched a new premium brand, Fresh & Finest. Likewise, a marketing transformation has begun that focuses on improving category management, implementing a new cost policy and more effective promotion planning. This initiative used advanced analytics to deliver promotions and category planning specifically targeted to corporate and independent grocery retail customers. I believe that the new brand and further development of promotions could accelerate net sales growth.
The Integration Of The Food Distribution and Military Operating Segments Into One Operating Segment Could Enhance The FCF Margin
I think that the recent announcement about the new Wholesale operating segment could have beneficial effects from 2023. The company made this modification in Q3 2022, so we may not really know the beneficial effects that this initiative could have in Q4 2023 and beyond.
At the beginning of the third quarter of 2022, the Company combined the previous Food Distribution and Military operating segments into one operating segment: Wholesale. As a result, the Company now operates two reportable segments: Wholesale and Retail. Segment financial information for the comparative prior year periods within this quarterly report has been recast to reflect this update. Source: 10-Q
Supply Chain Transformation Could Also Have Beneficial Impact On Future FCF Growth
In the most recent report, management noted new initiatives tied to its long-term plan, including the supply chain transformation, which will most likely have beneficial effects on future net sales growth. SpartanNash appears to anticipate additional capex and increased borrowings to support programs. I believe that these initiatives will most likely lead to FCF growth and FCF margin improvement.
Inflation May Have A Beneficial Effect As It Had In The Last Quarter
SpartanNash could also benefit from inflation pressures as customers seem to accept price increases very well. A clear example of net sales increase driven by inflation was indicated in the most recent quarterly report. Management noted that Wholesale and Retail segments benefited from inflation trends.
Net sales for the year-to-date period ended July 15, 2023 increased $182.2 million, or 3.6%, to $5.22 billion from $5.04 billion in the year-to-date period ended July 16, 2022 . The increases reflected sales growth in both the Wholesale and Retail segments, which were favorably impacted by inflation trends. Source: 10-Q
Competitors, And Risks
The grocery industry is highly competitive, and the company's wholesale and retail segments face a wide range of competitors. These include regional and national grocery distributors, large chain stores that have integrated wholesale and retail operations, mass merchandisers, e-commerce providers, deep discount retailers, limited assortment stores, and wholesale membership clubs. Many of these competitors have greater financial resources than the company, and can compete more effectively in the marketplace.
The most significant risk is the heavy reliance on its customer base, including some large and growing customers. The Company's success is linked to the ability of its clients to maintain and expand their businesses. If major customers decide to use alternative sources of products, or stop offering certain products, the Company's financial condition and profitability could be adversely affected. Sales to one of the Company's customers represented a significant percentage of net sales in recent years. Maintaining strong and mutually beneficial relationships with major customers is critical to the Company's continued growth and profitability.
Expectations From Other Analysts, My Expectations, And Valuation
Analysts are expecting small, but consistent sales growth with positive net margin and FCF/sales. Forecasts include 2025 net sales close to $10.362 billion, with net sales growth of 2.42%, 2025 EBITDA close to $278 million, and 2025 net income worth $85 million. Besides, with 2025 free cash flow close to $70 million, FCF/sales would stand at 0.53%. I assumed some of these expectations and forecasts in my DCF model, so I believe that readers may want to have a look at the figures of other analysts.
Source: Market Screener
My numbers include net sales growth of close to 2% for the next ten years along with an average sales growth of 2.6%. I also assumed net income/net sales close to 0.9%, which is pretty much a conservative figure observed in the past. My numbers also included 2033 net sales close to $12.151 billion and 2033 net earnings of about $109 million.
Adjustments to reconcile net earnings to net cash provided by operating activities included no non-cash restructuring, asset impairment, or loss on disposals of assets. However, I did forecast depreciation and amortization close to $116 million, LIFO expense of about $377 million, and stock-based compensation expense worth $20 million.
Besides, changes in operating assets and liabilities included accounts receivable of about -$218 million, changes in inventories worth $269 million, and prepaid expenses and other assets worth $105 million.
Finally, with changes in accounts payable of -$55 million, changes in accrued payroll and benefits worth -$109 million, and other accrued expenses and other liabilities of -$127 million, 2033 CFO would be about $447 million. With capex of about -$268 million, 2033 FCF would be $180 million.
I think that my figures with regard to FCF/sales and FCF growth are close to the numbers reported in the past. Note that my FCF figures are close to -0.26% and 1.48% of annual revenues. In the last 20 years, management reported FCF of about 0.14% and 2.7% of annual revenues.
Source: Ycharts Source: Ycharts
Considering the previous cash flow statement assumptions, my DCF model resulted in 2033 FCF worth $180 million, target equity valuation of $1.211 billion, forecast price close to $34 per share, and internal rate of return of 6.6652%. Note that I assumed EV/FCF of 16x, with terminal FCF of $2882 million and a weighted average cost of capital of 7%. I also added cash and cash equivalents worth $16 million, and subtracted the current portion of long-term debt of $7 million and long-term debt and finance lease liabilities worth $545 million.
Sensitivity Analysis
With A WACC of 5%-9% and terminal EV/FCF of 11x-18x, the forecasted price target would range $16-$31 per share. Hence, I believe that the current stock price appears undervalued.
Source: My DCF Model
With the previous variations of cost of capital and EV/FCF, the internal rate of return obtained from 2023 to 2033 would also range between -2.46% and 14.78%.
Source: My DCF Model
Conclusion
I believe that further supply chain transformation and the integration of the food distribution and military operating segments into one will most likely have a beneficial impact on future FCF growth. I also think that recent decreases in the net leverage will offer significant financial flexibility to make meaningful capital expenditures investments and new brand design. Besides, I would be expecting further beneficial impact from inflation pressures as we saw in the most recent quarter. Yes, there are some risks from the total amount of debt, failed brand launches, or competitors. With that, I believe that SpartanNash appears quite undervalued.
For further details see:
SpartanNash: Inflation May Benefit This Food Solutions Company