Previous analysis on Village Supermarket (NASDAQ:VLGEA), provided extensive coverage of its history and competitive position, including an assessment of its financial condition and valuation. We will keep updating new ratings in this article. Data and context.
This is a brief description of Village Supermarket’s business from our initial analysis.
Village Super Market is a member of Wakefern Cooperative, an organization responsible for the logistics operations, brand development, promotions, financing and other activities of numerous small retailers. The latter has delegated functions at Wakefern that require more scale and resources, with each member focusing on store operations, customer care, real estate strategy, and more.
Village Supermarket currently operates 37 supermarkets offering groceries, over-the-counter medicines, alcoholic beverages, and other basic products.Its activities are divided into four parts States: New Jersey, Pennsylvania, Maryland, New York. The company also owns 12.4% of Wakefern’s stock, but this ownership does not give it a proportionate vote in decisions or dividends.
Lessons learned from the Wakefern and Village Supermarket stories – well-capitalized organizations
Since the end of fiscal year 2023, the number of supermarket stores operated by the company has decreased to 34. However, after recent real estate investments, we are already seeing an increase in the number of our own properties.
Added properties and capital expenditures
Village Super Market had six properties listed from 1994 to 2022. In recent years, after two recent acquisitions: Galloway Store Shopping Center and Vineland Store Shopping Center, the company has already put eight properties and three real estate partnerships public, one of which is due in 2022. He was signed in 2016 and is currently under contract. developed.
This is a further sign that Village Super Market is expanding its real estate assets. The company carried out his $52.3 million capital investment in 2023 and allocated an ambitious budget of $85 million for further investments in fiscal year 2024.
We have budgeted $85 million in capital expenditures for fiscal year 2024. Planned expenditures include construction costs for the Old Bridge replacement store scheduled to open in fiscal year 2024 and two other replacement stores scheduled to open in fiscal year 2025, potential real estate purchases and multiple smaller stores. renovation and commercialization efforts and various technology, equipment and facility upgrades;
2023 Village Supermarket Annual Report
These investments significantly exceed annual depreciation costs, meaning the company is reinvesting profits to grow its assets.
This is one of the most positive aspects for the bullish thesis. That is, companies with net cash, financial discipline, and conservative owners who find attractive investment opportunities to reinvest retained earnings. These investments are essentially real estate assets and store infrastructure upgrades, which fit perfectly into our traditional model and historical strategy.
It is important to emphasize banners and brand extensions. Before 2020, Wakefern companies operated just one large banner, ShopRite, with the exception of PriceRite, which is managed by Wakefern. In 2020, Village acquired five stores, not real estate, and incorporated two new banners: Fairway and Gourmet Garage.
On May 14, 2020, the Village acquired five supermarkets averaging 52,000 square feet (30,000 square feet of sales area), a PDC, and certain assets including Fairway’s intellectual property, including the names “Fairway” and “Fairway.” completed the acquisition. market. ” Four of the supermarkets are located in Manhattan, specifically on the Upper West Side, Upper East Side, Kips Bay, and Chelsea, with a fifth located in Pelham, New York. The acquisition is effective pursuant to an Asset Purchase Agreement (“APA”) entered into on January 20, 2020, as amended on March 25, 2020, and approved by the United States Bankruptcy Court for the Southern District of New York through an order of sale. did. The Village paid $73,622, excluding cash acquired, for the Fairway property and assumed certain liabilities primarily arising from acquired leases.
Village Supermarket 2021 Annual Report
The company appears to be betting on Gourmet Garage, which already operates four stores under this banner, but none under the Fairway banner. One of his stores in Fairway was converted into his ShopRite store in 2022. For now, we just operate the Fairway website and app.
2023 was a record year for the company.
All profitability indicators improved significantly in 2023. Net income doubled to $49 million. There are no special items in the income statement, only an increase in interest income. Gross profit increased by 6.3% and operating profit by 68.2%. Such good performance may be explained by several factors.
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Village Super Market acquired and reopened multiple stores from 2021 to 2022. Some of them may have reached their full potential in 2023. This may also explain the company’s poor performance in 2021.
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Real estate investments are starting to contribute positively to the income statement.
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The economic environment was ideal for existing supermarkets. Since much of the cost is fixed lease payments and real estate depreciation, the higher prices have significantly improved operating income.
Therefore, it would be a mistake to think of this improvement as entirely structural. In our view, the net income will increase gradually from the 2016-2021 figures as new investments will contribute positively, but the net income will increase gradually from the 2016-2021 figures, but the difference between FY 2024 and FY 2025 compared to FY 2023 is It is not surprising that profits would decline.
For the next few years, we expect annual net income, excluding net interest, to be approximately $30 million. This figure comes after subtracting $7 million in interest income and adjusting downwardly the $42 million net income excluding net interest.
Financial results prove that the company has a net cash position
A previous analysis raised disputes about the company’s financial position. It was argued that the company had no net cash position because it considered operating leases to be a liability. However, this is a result of accounting changes in 2019 that require companies to disclose operating leases as liabilities.
Nevertheless, these operating lease payments are accounted for as operating expenses in the income statement and as operating expenses in the statement of cash flows – Note 7 2023 Annual Report. Therefore, if these operating leases are considered debt, the company’s operating income and net income must be adjusted upward as if those fixed costs were debt payments.
Evidence that the company has a large net cash position is its interest income. Interest expenses have remained at a very low level in recent years (about $ 4 million), while interest income has increased from $ 4 to $ 11 million in 2023. The company earns more interest income than its interest costs, and rising interest rates are a clear sign. Considering its financial assets, it has net cash, which provides profit for the company.
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 in net cash
This amount is consistent with the company’s net interest income of $7 million in fiscal year 2023.
Sumas family reveals even more stock holdings
The Sumas family controlled the company through a 79% stake in Class B shares, which have higher voting rights. Nevertheless, the Sumas family also controlled a significant percentage of the Class A shares. Ownership of this Class A stock remained between 7% and 8% from 2018 to 2021.
At the end of fiscal year 2022, the DEF 14A Sec Filing revealed that the Sumas family’s effective Class A stock stake was actually 30% after including indirect stakes through various trustees. In our opinion, they did not increase the stake from 7.6% to 30%, they simply refined more detailed disclosures, such as increasing the number of trustees in the estimate.
At the end of fiscal year 2023, the Sumas family owned, directly or indirectly, 50.3% of the total stock, including Class A and Class B shares.
What is interesting is that despite complete control by Class B shares, the family retains a significant stake in shares with low voting rights. This means they think these Class A shares are attractive from a pure financial perspective.
Also, keep in mind that some members of the Sumas family have provided personal guarantees against the company’s obligations, as required by Wakefern’s articles of incorporation.
As required by Wakefern’s Articles of Incorporation, our investment in Wakefern is pledged to Wakefern to secure our obligations to Wakefern. In addition, four members of the Sumas family guaranteed the company’s obligations to Wakefern. These personal guarantees are required of our 5% shareholders who are actively involved in the management of our company. Wakefern does not own any securities of the Company or its subsidiaries. Our investment in Wakefern provides us with cumulative voting rights sufficient to elect one member of the Wakefern Board of Directors.
2023 Village Supermarket Annual Report
As explained in the first analysis, it is important to adjust for the total number of shares when calculating a company’s market capitalization. Class A shares represent more economic rights and receive 54% higher dividends compared to Class B shares. At the end of fiscal year 2023, there were 10.65 million Class A shares and 4.2 million Class B shares. However, this class B stock is equivalent to 2.73 million shares. Currently, economically speaking, there are a total of 13.38 million Class A shares.
As a result, the market capitalization as of November 15, 2023 will be $329 million instead of $364 million as disclosed by some financial platforms.
evaluation
Considering net cash of $132.1 million, market capitalization of $329 million, and adjusted net income of $30 million, the earnings yield is 15.2%. This is a very attractive return considering the company’s trajectory and qualifications. Additionally, financial indicators have improved in recent years, and the Village’s financial position is stronger.
Management plans to maintain the current annual dividend of $1 per share. Given its ambitious capital spending budget, it may not increase its dividend this year. Nevertheless, it is likely to increase at some point as net cash and profits are increasing.
conclusion
Village Supermarket has invested more than its current asset depreciation and is gradually increasing its real estate assets. Financial performance in 2023 improved significantly, with profits achieving historic records. The company enjoys a strong net cash position and thus benefits from rising interest rates. The Sumas family has announced that they will hold additional shares in the company, and their total shareholding currently stands at approximately 50% of the company’s total stock. At the current share price, this stock has a very high return considering all the company’s previous aspects and qualities.