TLDR at bottom
Market Cap: $325.74MM
Share Price: $22.52
VLGE.A is a regional player located in New Jersey that operates 38 stores consisting of: 30 grocery stores, 5 Fairway Markets, and 3 Gourmet Garage Specialty Markets.
Its stores feature specialty departments, such as an on-site bakery, an expanded delicatessen, various natural and organic foods, ethnic and international foods, prepared foods, and pharmacies. This allows it to have a good brand connection and sense of local connection in its relatively high population density area of Northern New Jersey which gives it a competitive advantage to Walmarts not only because of its larger offering such as bakeries and restaurants making it half-mall, half-supermarket, but also a really strong brand image.
It is not the fastest to expand and is actually under-leveraged, even as a small player in the industry and the region, though it did announce a 15-20 million dollar project for a retail center in which it will retain a 30% interest with a Village store also.
I have been talking a little much about the business since it is fairly simple, but lets get to the financials:
Revenues have been 2.07B in the LTM with operating margins of 1.8% lower than the 2.1% average pre-COVID, though higher than the 1.6-1.7% levels from April of 2020 to July of 2021.
FCF margin for the LTM is at 1.2% though that is primarily due to seasonality and the average hovers around 1.4% - 1.7%, with the FCF in dollar amount being $24.2MM.
Though a 7.5% TTM FCF yield is in itself pretty good, we can not simply look at that in isolation and we have to acknowledge that though Food and Staples Retail has been particularly volatile in the last 6 months due to supply chain issues, inflation, and other macro challenges resulting in problems, especially INVENTORY MISMANAGEMENT.
Well lucky for us, inventory turnover ratio has been increasing 3% annually for the last 6 years for VLGE.A, even through post-COVID macro challenges and inventory itself has risen at a steady and reasonable rate with gross margins actually increasing, compensating inflation challenges.
Moving onto to the balance sheet, being under-leveraged means that ROA & ROE are slightly lower than industry averages with ROA of 2.6% and industry of 3.5-4% and ROE of 6.6% and industry of 17.4%. But the upside to this is that stocks like Village trade closer to their equity value and in this case, TBV is 337.39 or P/TBV of 0.97 and BV of 361.58 and P/BV of 0.9.
Though I won’t go deep in their balance sheet, they have 120M in cash, 44M in LT investments, 560MM in NET PP&E
On the assets side and 70M in LT debt and 300M in leases on the liability side. Though all of this already looks pretty great, what I love most about their balance sheet is that they have 225M in current assets and 153M in current liabilities or a current ratio of almost 1.5x with half of current assets being in cash which is good for any company, amazing for a food and staples retail company where the industry average is 1.1x and the big players hover around 0.8x-1x.
Going onto the valuation, though they are under-leveraged, they love to expand and invest in themselves through capital expenditure which has resulted in average equity annual growth of 5.3% over 15 years and revenue CAGR of of 4.2% over that time with GDP being 3.5%.
Did i forget to mention that they have been paying a 1 dollar per share dividend annually for the last 15 year. Now yes, i understand a no growth dividend isn’t the best but it is a yield of 4.44% with the BBB bond effective yield being 4.85% with likely not as strong equity value for those triple B companies.
Along with this they repurchased 1% of shares in the last quarter. and have an authorization to repurchase 1.66% of shares more.
Just to note, insider ownership is at a good 12.8% and 7% of shares being owned by ones of the directors and founders.
I believe that it should be trading at least above $30. I think a 1.5x TBV would be a fair valuation at a price of $35 or a 5% FCF yield considering its incredibly risk—averse and stable business. Also, i did a DCF model with a TGR of 2% and DR of 10% giving a $33 intrinsic value though i believe that is very Conservative given they have been able to grow 4.2% and have a WACC of 3.084% and have a weighted average interest rate on LLT debt of of roughly 2.4%.
I also think this is a great stock for anyone who needs the dividend income considering the history of payout and the low beta of 0.17.
TLDR: stable food and staple retailer with strong regional brand value that is under leveraged and has continuously invested Into the business through expansion, Acquisition, and returning value to shareholders through dividends and buybacks and has a large margin of safety/discount to intrinsic value.
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