No. of Recommendations: 15
It's pretty easy to see why the shares are down $30, to $94. Same store sales were up 0.5%, despite 2.5% inflation, so falling behind in real terms. Shift to lower margin food continues. Theft getting worse, not better. Projected full year EPS of $5.50 to $6.20, compared to its previous expectation of $6.80 to $7.55. Even at $93/share, if they hit the midpoint of their 2024 target, $5.85, that represents 16 times earnings. You have to really believe that Vasos is going to be able to turn things around to want this investment, even at the new, lower price, and I don't see any reason to believe that. Give me some reason to believe, or a price more like 10 times earnings ($60?) and I would think about it. But I am closer to dealraker's pessimistic view, too close to Walmart, and that will get worse as they keep (for some reason?) expanding their store count.
To me it's all about looking past the current rough spot. After first assessing whether the rough spot has an end, or partial end, at all.
It's about profitability.
Their worst year 2014-2021 amounted to a net profit margin of 5.2%, and that was in 2017 with a tax rate of 35.6%, so pre-tax profit margin 8.1%.
The midpoint of their sales growth and EPS forecasts for this FY amount to 3.03% net profit margin at an assumed tax rate of 23%, so pre-tax margin 3.9%, total operational profitability down by slightly more than half.
So, is that entire drop by half permanent? Where will the number settle in future?
They have relatively modest operational deterioration in a relatively large number of separate areas at the moment. They cited four factors in the 1.1% fall in gross profit, and another four in the 0.6% rise in SG&A, plus of course as you note SSS didn't keep up with inflation as a ninth factor. So it is hard to see how any quick fix will turn it around. Maybe the business model is permanently broken and 3% is the new normal for net margins, but as an optimist I suspect they can do at least a bit better than that as an average in the next decade.
For example, imagine they managed something like 4-5% net margin on average after they fix a few squeaks and slap on a fresh coat of paint. (not a forecast, just a math example). That's worse than the worst year in the cited pre-pandemic stretch, so it's not outlandish if they manage some degree of normalization. 4.5% would be the equivalent of cyclically adjusted EPS of about $8.90 next year. The current price $86.77 is about 9.75 times that as I type, less than the 10x multiple you mention. So an optimist would reason.
On the other hand, if something material doesn't improve then it's not a buy at this price. A broken business model, like a broken cup, has limited usefulness.
I'm not particularly happy, mainly because I don't have any idea how many of those factors might get better or when, but I'm not selling. Nor buying. Just sittin'. As a first optimistic guess, I still think I'll do fine, but it might be a considerably longer wait.
Jim
