NASDAQ:SPTN SpartanNash Co

Sector financial performance:

This company, who primarily distributes grocery and perishable food to retailers and as well owns retail stores, has been grouped into Grocery Distributor& Retailer sector in food industry.

Existing stores sales, as indicated by comparable stores sales of companies in this sector and by demand from existing stores of those companies’ customers, have had a downward trend in the past several years ( down by 3-4% between 2015 and 2017 and down by 1% in 2018). However, at the same time our data indicates there is a generally increasing demand for distribution of grocery, especially food, from retailers (for example, we data indicated an average 7% growth in wholesale of those companies in this sector in 2017). Those growths seem to be coming mostly from outside those companies’ traditional retail chain and as well from new opened stores of their existing customers.  We think demographic changes should be playing a role supporting growth in grocery and food retail industry, It should be changes in consumers’ preference/shopping habits to explain the difference in performance between wholesale and retail of companies in this sector. Facing changes in retail stores, wholesalers have higher flexibility in adopting those new changes. And we also see increasingly intensive competitions among retailers.

In fact, because the wholesale segment has better performance in sales growth and as sales of wholesale of companies in this sector have gradually weighed more in companies in this sector compared with their retail sales, their operating efficiency and margin have been significantly changed ( down due to lower margin in wholesale).  

Our 12 months trailing data indicates that companies in this sector usually have an average of 11%, SG&A% of 11% and about 1% operating margins. And, while their wholesales increased, they have been losing cash flow from their retail stores.

According our analysis, companies’ enterprise price/adjusted EBI is around 30 with interest/EBI ratio of 40-130%. 

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Company performance:

It seems the demand from retailers for food distribution of this company has been increasing in the past several years as indicated by organic increase in sales to its new and existing retail customers (4-5% growth annually). However, the comparable store sales from its own retail stores seem to continue to go down while the trend is slowing (2-3% annually). The contrary can probably be explained by the difference between the products that its stores sell and the products that it distributes for new opened stores. 

For the first 40 weeks of fiscal 2018 compared with same period of 2017(ended 20181006)

Sales increased 1.5%.

Organic food distribution sales increased 4.1%.

Comparable stores sales decreased 2%.

For fiscal 2017 compared with 2016

Sales increased 5.1%.

Organic food distribution sales increased 3.7%.

Comparable stores sales decreased 2.4%.

For fiscal 2016 compared with 2015

Sales increased 1.1%.

Organic food distribution sales increased 4.5%.

Comparable stores sales decreased 2.4%.

For fiscal 2015 compared with 2014

Sales decreased 3.3%.

Organic food distribution sales increased 1.7%.

Comparable stores sales decreased 2.9%.

This company’ gross margins and operating margin as percentage of sales basically have small changes around 14% and 1.5% respectively.

This company’s operating margin as percentage of sales for distribution segment went up from 1.6% of 2014 to 2.5% of 2016 and then down to 1% in 2018 and its operating margin for retail segment went down from 1.6% of 2014 to 0.5% of 2016 and down to 0% in 2018.   

Stock price

This stock currently has an enterprise price/EBI ratio of 18, which we think, is relatively undervalued compared with its peers considering that its potential in increasing its sales in distribution segment to take advantage its high margin in that segment.  

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