Seeking Alpha: Natural Grocers Needs Some Growth Hormones For Store Traffic

Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") may not have the same image issues as Whole Foods (NASDAQ:WFM) (aka "Whole Paycheck") or cause the same consternation with the crunchiest of organic food shoppers - Whole Foods, Sprouts (NASDAQ:SFM), and Fresh Market (NASDAQ:TFM) do all sell some conventional products - but it does have its challenges. In a market where organic/natural food is becoming more and more mainstream, alternative destinations like Trader Joe's, Kroger (NYSE:KR), and Target (NYSE:TGT) continue to represent ongoing threats to Natural Grocers' traffic and growth plans.

These share are down another 20% from where I last left them, which isn't too good next to Sprouts or Whole Foods, but isn't too awful next to Fresh Market or United Natural Foods (NASDAQ:UNFI) (a wholesaler and distributor of organic and natural foods). Unfortunately, weak comps remain a key issue with the company and the stock, as sub-5% comps just don't get the job done in terms of long-term sales per store and margin leverage.

At these levels, I'm getting more interested in the shares. I do believe the disappointing comp traffic growth is a serious threat to the long-term bullish argument, but I also think that Natural Grocers has an attractive and defensible business plan that can still work.

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Natural Grocers Needs Some Growth Hormones For Store Traffic

Seeking Alpha: In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Back in February, I had concerns that Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") shares were running a little ahead of themselves on hopes that the company was past the competitive pressures of new store entries into key markets. The shares have fallen 18% since then, as the company's respectable same-store sales growth has continued to come in a little lower than sell-side expectations and concerns about the economy and competition won't go away.

I believe there is a credible argument to be made that Natural Grocers shares are undervalued, but there is a lot of risk attached to the calculation. The company will very likely continue to generate negative free cash flow for three to four years, and the big improvements in free cash flow are well down the line. Add to that the intense competition in the natural/organic food space (arguably getting worse), and this is not exactly a can't-miss prospect.

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In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Seeking Alpha: Ingles Markets An Okay Supermarket, Sweetened With Real Estate

On the whole, food retailing is not a particularly attractive business in developed markets like the U.S.. Same-store sales growth is typically lackluster, competition is fierce, and margins are thin. New concepts can certainly distinguish themselves, but it is all in all a tough business in which to earn strong returns on capital.

Ingles Markets (IMKTA) is not exactly a tremendous exception. While the company's sales per square foot and margins hold up pretty well relative to the likes Harris Teeter, they definite lag those of Kroger (KR) (which now owns Harris Teeter) or Safeway (SWY), same-store sales growth has been sluggish, and the company's free cash flow generation is not all that impressive. Add in the value of the company's real estate, though, and the picture brightens. The shares currently trade above my "base case" value estimate, but there is upside if commercial real estate prices improve further and/or another supermarket chain looks at Ingles as an incremental growth opportunity.

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Ingles Markets An Okay Supermarket, Sweetened With Real Estate

Seeking Alpha: Magnit Has Some Attractive Qualities

Emerging market investing isn't for everybody, but the rewards can be pretty appealing. Even in a relatively unexciting area like food retailing, CBD (CBD) and FEMSA (FMX) have done considerably better than the S&P 500 over the past five years, returning 242% and 277%, respectively, against about 139% for the U.S. index. Granted, FEMSA is not purely a retailer and not all retailers have done so well - Wal-Mart de Mexico (OTCQX:WMMVY) is up about 104% over that same stretch, while Turkey's BIM is up only 14% and South Africa's Shoprite is down around 23%.

That brings me to Russia and Magnit (OTC:MGJCL), Russia's largest food retailer by store count and sales volume. Right off the bat, I'll warn readers that this is a stock that will require a little extra effort - there is no trading U.S. ADR that I aware of, though there is a highly liquid GDR in London (MGNT) that should be accessible if your broker allows you to trade foreign stocks (many, if not most, brokers now have systems in place to handle online foreign stock trades).

It stands to reason that a stock that requires extra effort to own had better offer something worthwhile. I believe Magnit does. Magnit is growing at an exceptionally fast pace, but still has a large market share growth opportunity, not to mention free cash flow leverage from above-average margins. Many readers won't even consider investing in Russian stocks, but I believe Magnit is worth a closer look from more aggressive and risk-tolerant investors.

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Magnit Has Some Attractive Qualities

Investopedia: Kroger Leverages Its Strength To Get Even Stronger

National supermarket chain Kroger (NYSE:KR) appears to be running off the playbook that says strong companies should leverage that strength to put even more distance between them and their rivals. In buying Harris Teeter (Nasdaq:HTSI), Kroger is not only buying a growing, high-quality grocery chain in the Mid-Atlantic, but also positioning itself to take advantage of even more leverage in purchasing, distribution, and logistics. Provided Kroger doesn't interfere with what made Harris Teeter stand out from the crowd, this looks like a deal with good long-term return prospects.

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Investopedia: Strong Growth Can Help United Natural Foods Grow Into Its Multiple

United Natural Foods (Nasdaq:UNFI) offers an interesting test-case for two conflicting realities of Wall Street. On one hand, investors frequently pay up for above-average growth stories, and particularly those with strong market share and/or barriers to entry. On the other hand, margins are an under-appreciated driver of investment performance and investors seldom pay high multiples for weak margin stories. While these shares have underperformed in a hot market for packaged food stocks, the market continues to assign a pretty rich value to this natural foods distribution company.

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Investopedia: The Fresh Market Facing Its First Real Challenge

Every company has growing pains, and what separates the long-term winners from the flash-in-the-pans is how management responds to those challenges. The Fresh Market (NYSE:TFM) continues to post very strong returns on capital and has a sound business plan that looks to exploit more affluent shoppers' desire for high-quality produce that they cannot find in conventional supermarkets. For now, though, the company's comps growth appears to have stalled and a renewed emphasis on produce from major competitors threatens the company's value proposition to the customer.

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Investopedia: A Few Hiccups Aren't Going To Derail Costco

As one of the strongest retailers in the United States (not to mentioned one of the best-liked), Costco (Nasdaq:COST) already has a lot going for it. Not only is Costco already an exceptionally efficient retailer in terms of generating sales per square foot, the company still has ample organic expansion potential in the U.S. and abroad. The down-side to this story is not too surprising - Costco's success and popularity are well-known among investors, and the stock doesn't offer a compelling bargain relative to expected above-average growth rates.

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Investopedia: Kroger Makes The Best Of Tough Environment

For those who think supermarket operators can't produce worthwhile capital gains, Kroger's (NYSE:KR) roughly 18% move up over the past three months is a good counter-argument. What's more, while food retailing continues to be a tough business, made even more difficult by price competition from entities like Walmart (NYSE:WMT) and dollar stores and economic pressures on shoppers, Kroger continues to execute at a high level. Although this stock still does not look all that cheap on a cash flow basis, investors should never be quick to abandon well-run companies.

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Investopedia: Whole Foods Still Not Cheap, But It's A Reliable Grower

Investors can look across the various sectors and industries in the stock market and find many examples of stocks that enjoy seemingly outsized valuation premiums, largely because of the consistent growth that the companies offer. Whole Foods Market (Nasdaq:WFM) belongs on that list, as this high-end food retailer continues to deliver excellent growth but also sports a pretty hefty valuation. Although I wouldn't be in any great rush to sell these shares today, investors will almost certainly have to face an eventual valuation adjustment, and that will likely be a painful process.

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Investopedia: Kroger Has The Quality, But Value Is Less Certain

Nobody seems to have much love for supermarkets these days. With the assumption being that superstores like Walmart (NYSE:WMT) and Target (NYSE:TGT), as well as more specialized stores like Aldi, will pressure the mass-market end while players like Whole Foods (Nasdaq:WFM) and The Fresh Market (Nasdaq:TFM) take the high end, mainline supermarkets like Kroger (NYSE:KR) have largely been left behind by the market. Although this company is an exceptionally well-run player in its industry, management needs to figure out how to generate more cash from its assets for the stock to be more attractive.

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Investopedia: SuperValu May Be Too Far Gone To Save

Food retailing has never been an easy business, particularly since large discounters like Walmart (NYSE:WMT) and Target (NYSE:TGT) got into the game in a big way. While there has been room for companies with differentiated models (often built around premium products or intense merchandising skill), SuperValu (NYSE:SVU) has been struggling to differentiate itself and compete effectively in the mainline supermarket space. With this major earnings disappointment in hand, it's worth asking if even deep-value turnaround investors ought to bother with this name.

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Investopedia: The Fresh Market Needs To Be Whole Foods 2.0

It's rare enough to find a retailer that trades at an enterprise value-to-revenue ratio of even 1.0, let alone the 2.17 times of The Fresh Market (NYSE:TFM). Clearly, then, investors are putting a premium on what is one of the few exciting growth stories in food retailing today. While there's a lot to like about this story, including a massively under-penetrated market, accelerating comps and good margins, the bulls seem to have this story well ahead of itself. At these prices, The Fresh Market pretty much has to be the next Whole Foods (NYSE:WFM) to support the implied valuation.

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Investopedia: Wal-Mart Rolls On

A company as immense as Wal-Mart (NYSE:WMT) is not going to show a great deal of turbulence from quarter to quarter, but there's nothing wrong with steady growth and stepwise execution of a solid business plan. To that end, Wal-Mart shareholders have little to worry about, as management continues to balance an overseas growth strategy with a domestic operating efficiency plan. Although Wal-Mart is not especially cheap, it likely remains a reasonably good conservative play on consumer spending in the United States, tinged with some international growth.


Basically Solid Fiscal Fourth Quarter Results
Wal-Mart didn't deliver too many surprises in its fiscal fourth quarter, and investors basically have to go to the right of the decimal points to find much deviation from expectation.


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Investopedia: Winn-Dixie Gets An Early Gift

With only six days left 'til Christmas, BI-LO decided to finish its shopping list in a big way, announcing Monday that it was acquiring Winn-Dixie (Nasdaq:WINN) in an all-cash deal. Although some shareholders may lament that BI-LO's acquisition sells short Winn-Dixie's ability to turn itself around, the fact is that getting 85% or 90% of a company's possible value in straight-up, no-risk cash is not such a bad deal.

The Deal  
Winn-Dixie announced Monday morning that it had accepted an offer from privately held BI-LO to sell itself for $560 million or $9.50 per share in cash. That price represents a 75% premium to Friday's close, but only tiny premiums on the basis of EV/revenue or EV/EBITDA multiples. (For related reading, see Value Investing Using The Enterprise Multiple.)

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http://stocks.investopedia.com/stock-analysis/2011/Winn-Dixie-Gets-An-Early-Gift-WINN-WFM-TGT-WMT-KR-RDS.A-RDS.B1222.aspx

Investopedia: The Fresh Market Is A Breath Of Fresh Growth

It's almost traditional (if not quite cliché) to take Wal-Mart (NYSE:WMT) to task for ruining that pastoral ideal that was the American Main Street shopping experience. More recently, neo-hippies have done battle over whether Whole Foods (Nasdaq:WFM) has "gone corporate" by forcing many smaller organic specialty stores out of business, and catering every bit as much to the Audi and soccer mom set as the patchouli and hemp-shirt set.

With that backdrop, it may seem daft to try to enter the market with yet another food market concept. Even with a market already full of choices, companies like Aldi, Trader Joe's and The Fresh Market (Nasdaq:TFM) are showing that customers still aren't completely satisfied with the retail landscape. While The Fresh Market is going to have to prove that it can manage its growth (and make it a profitable growth), this is one of the most interesting retail growth stories going on today.

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Investopedia: UNFI - Everything Is Right But The Price

Investors often look to food stocks for their safety and perceived resistance to tough times; even though consumers are pinching pennies, companies like McDonald's (NYSE:MCD), Sysco (NYSE:SYY) and Whole Foods Market (NYSE:WFM) are still selling food. So, when you find a company that offers a growth kicker to what is often a staid industry, it's no surprise that investors take notice. Still, so much is already expected from United Natural Foods (Nasdaq:UNFI) that it seems hard to imagine how the stock will deliver above-average gains, to long-term investors. 


Business is Still Good 
As UNFI's fiscal first quarter results show the company is still delivering good growth. Revenue rose almost 16% on reported basis, with organic growth of just a little under 14%. Food inflation was below 4%; an interesting result, given the numbers reported by Sysco about a month ago, and granting that they operate quite different businesses.


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Investopedia: Does The Fresh Market Have A Real Chance

It may be hard to imagine that America really needs another food retailing concept. There are traditional supermarkets like Kroger (NYSE:KR) and Safeway (NYSE:SWY), organic-focused stores like Whole Foods (NYSE:WFM) and Earth Fare, value options like Aldi, and emerging concepts like Trader Joe's and Lowe's. And that's hardly the end of the list - major discount retails like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) long ago moved into food retailing, and deep-value "dollar stores" and pharmacies like Walgreen (NYSE:WAG) have added more and more perishable food to their shelves. 

But wait, there's more. A renewed interest in eating food that hasn't sat on a truck for a week has sparked more interest in farmer's markets and community-supported agriculture programs. So this is the market that The Fresh Market (NYSE:TFM) is facing. While this company has been around for a while now (it started in North Carolina in 1982), it is relatively new as a public company and has just begun to build a significant presence outside of the southern U.S.

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Investopedia: Winn-Dixie Needs An Identity

Since emerging from its bankruptcy of 2005, Winn-Dixie (Nasdaq:WINN) has struggled to really work as a stock or as a food retailing concept. Not really a value-focused player like Wal-Mart (NYSE:WMT) or Aldi, nor a top service provider like Publix or Ruddick's (NYSE:RDK) Harris Teeter, Winn-Dixie seems to be foundering a bit as it tries to rebuild its business and its market cap. With fiscal fourth quarter earnings and 2012 guidance in hand, it is hard to see where this stock really fits.

Fourth Quarter Results as Expected  
Given the Winn-Dixie preannounced some of its fourth quarter results a little while ago, there was not a lot of drama in the numbers that the company did report. Reported sales fell almost 4%, while identical-store sales rose more than 3% despite a decline in store traffic.
 
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Investopedia: Optimism Already Built Into United Natural Foods

There is nothing new about the organic food industry anymore, and investors are already well-attuned to the big names like Whole Foods (Nasdaq:WFM) and leading distributor United Natural Foods (Nasdaq:UNFI). The question, though, is whether there is still enough runway in front of UNFI to make the stock a worthwhile addition or holding for growth-oriented portfolios. While it is true that many major supermarkets like Kroger (NYSE:KR) and warehouses like Costco (Nasdaq:COST) could go even further in stocking more organic products, much of this seems to already be factored into UNFI's stock price. 

A Good Third Quarter, But With a Few Spots 

For the most part, United Natural Foods had a solid fiscal third quarter. Reported revenue rose more than 22%, while revenue rose more than 12% on a like-for-like basis. While better than 10% growth from major customer Whole Foods was a bit below average, UNFI did see nearly 20% like-for-like sales growth in the conventional supermarket category. (For more insight, see Organic Food For Thought.)

Unfortunately, that supermarket growth comes at a bit of a cost, because it is not as profitable as UNFI's more traditional channels (smaller organic-focused chains with much less bargaining power). Gross margin slipped about 30 basis points as a result. UNFI made some of this up through operations, though, and 15% operating income growth mitigated the operating margin erosion to about 20 basis points. 

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