Peter Rabover, CFA Artko Capital LP [email protected] 1

Peter Rabover, CFA
Artko Capital LP
[email protected]
Boring Is Beautiful: A Buy Recommendation on Village Super Market with a $55.00 Price Target
Thesis: Village Super Market is one of the industry’s highest ROIC grocery chains with an incredible
competitive advantage via its 13.4% ownership in a ShopRite Co-Op, Wakefern, a wholesale food
distributor. Despite having consistent double digit ROICs the stock is trading at its 10-year lows on Price
to Book (1.5x), EV to EBITDA (5.2x) and Price to Earnings (13.0x) as well as at a 40% discount to its worse
performing peers. We believe the current valuation, the 3.8% dividend yield and the ownership in
Wakefern create a significant margin of safety with less than 10% downside, while having a $55.00 3-year
base case price target providing over a 100% return potential and a 28% annual IRR. Other catalysts
include a decline in daily blind stock sales from the trust of one of the founders, an increase in the current
dividend, an announcement of a special dividend and a potential transaction involving Wakefern to unlock
its value.
We believe Village’s stake in Wakefern is worth MORE THAN the entire current enterprise value of Village
Supermarkets and a value unlocking transaction such as a tracking stock or a reverse merger by Wakefern
could unlock significant value. With a long trading history Village has consistently traded between 1.4x
and 2.3x book value, which is still significantly below its industry peers, and even a basic reversion to the
mean strategy over the next 3 to 5 year period should yield a high teen IRR to the investor at the current
price if no Wakefern transaction is to ever occur.
Our goal in this write up is to highlight VLGEA as one of the top quality grocery operators versus its peers
and that it deserves a higher valuation than being the lowest valued peer, as well as to highlight the true
value of its ownership of Wakefern as a strategic asset and a financial one. We believe that Village already
operates as a tracking stock for Wakefern and should trade appropriately.
Business Description: Village Super Market, Inc. operates a chain of supermarkets in the United States.
Its stores feature specialty departments, such as onsite bakery, an expanded delicatessen, natural and
organic foods, ethnic and international foods, prepared foods, and pharmacies. As of July 25, 2015, the
company operated 29 ShopRite supermarkets, including 18 in northern New Jersey, 8 in southern New
Jersey, 2 in Maryland, and 1 in northeastern Pennsylvania. Village Super Market, Inc. was founded in 1933
and is based in Springfield, New Jersey. Additionally a company holds a 13.4% stake in a ShopRite Co-op,
Wakefern.
The company’s founding family, the Sumas family, which is comprised of seven people, owns 35% of
outstanding shares and close to 70% of voting power. Their combined financial interest is over $130
million dollars. The estate of Perry Sumas, not affiliated with managing members, has been selling their
$20 million stake at approximately 5% of daily volume for the last year, however those sales are expected
to stop sometime in the next 12-18 months as the trust sells the last of their shares. Additionally, the
family’s controlling B shares are structured that they receive only 65% of the dividends of the A shares.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it
earns. If the business earns 6% on capital over 40 years, you’re not going to make much different than a
6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital
over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result. So the trick
is getting into better businesses. If you can find a fairly priced great company and buy it and sit, that tends
to work out very very well indeed.” – Charlie Munger, 1984
Background: In Charlie’s words we believe Village Super Market is that better business trading at a better
than “fairly priced” price! Village boasts some of the highest and consistent ROICs/ROEs in the fairly simple
grocery retail industry with an 8-year median and average return of 10.75% and a Free Cash Flow ROC
median of 9.3%. The company’s returns go into compounding its book value at a 6% CAGR and paying out
a $1.00 annual dividend with an average 2.5% to 5% dividend yield as well as occasional special dividends
of an additional $1.00 per share.
ROIC Comps
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Peter Rabover, CFA
Artko Capital LP
[email protected]
Village Markets is able to achieve these fantastic returns by boasting some of the industry’s highest sales
per gross square foot…
… as well as having NEGATIVE working capital, with a 10 year median of -2.2% of Total Revenues. That
means on average for every additional $1.00 in new revenues it generates, instead of investing working
capital it actually generates $0.022 of additional free cash flow to the shareholders! As a result, free cash
flow conversion is at an average of 3% of revenues or almost at 100% EBIT conversion and 165% of Net
Income.
So how is Village Super Market able to do that?
Village Supermarkets belongs to and owns 13.4% of equity and debt of a ShopRite Cooperative, called
Wakefern. Wakefern is New Jersey’s largest employer with over 70,000 employees and owns the NorthEast’s largest trucking fleet. As a strategic asset to Village, Wakefern is irreplaceable:
*From the 10-k Filed 10.7.2015
“The principal benefits to the Company from its relationship with Wakefern are the use of the ShopRite
name and trademark, volume purchasing, ShopRite private label products, distribution and warehousing
economies of scale, ShopRite advertising and promotional programs (including the ShopRite Price Plus
card) and the development of advanced retail technology. The Company believes that the ShopRite name
is widely recognized by its customers and is a factor in their decisions about where to shop. ShopRite
private label products accounted for approximately 9.7% of sales in fiscal 2015 . Wakefern distributes as
a “patronage dividend” to each of its stockholders a share of substantially all of its earnings in proportion
to the dollar volume of purchases by the stockholder from Wakefern during each fiscal year.
While Wakefern has a substantial professional staff, it operates as a member owned cooperative.
Executives of most members make contributions of time to the business of Wakefern. Executives of the
Company spend a significant amount of their time working on various Wakefern committees, which
oversee and direct Wakefern purchasing, merchandising and other programs. Nicholas Sumas, the
Company’s Chief Marketing Officer, is a member of the Wakefern Board of Directors.
Most of the Company’s advertising is developed and placed by Wakefern’s professional advertising staff.
Wakefern is responsible for all television, radio and major newspaper advertisements. Wakefern bills its
members using various formulas which allocate advertising costs in accordance with the estimated
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Peter Rabover, CFA
Artko Capital LP
[email protected]
proportional benefits to each member from such advertising. The Company also places Wakefern
developed materials with local newspapers. In addition, Wakefern and its affiliates provide the Company
with other services including liability and property insurance, supplies, certain equipment purchasing,
coupon processing, certain financial accounting applications, and retail technology support, including
shoprite.com and the ShopRite smart phone app. The Company also has an investment of approximately
8.2% in Insure-Rite, Ltd., a Wakefern affiliated company that provides Village with liability and property
insurance coverage.”
Wakefern has 50 shareholder members, 323 stores, including 91 stores operated by Wakefern, and over
70,000 employees. As of September 25th, 2015, Wakefern won a $40 million bid for a package of 12
bankrupt A&P stores in the tristate area. Wakefern has a $15.7 billion in consolidated member revenue
in FY 2015, a 6.8% revenue growth from 2014 and 4.3% growth from 2013 (more in Valuation Section).
Wakefern is listed as a $26 million equity investment/asset on Village Marketplace’s balance sheet, with
approximately another $43 million of Wakefern’s proportional debt on the balance sheet. In return
Wakefern pays a “patronage dividend” that has grown at approximately at an 8.1% CAGR since 2008 as
well as approximately a $2mm annual payment on the notes. With a total on the book investment of $69
million dollars, a $30mm annual cash payment for a 43% cash on cash return is not bad at all. Of course
the true market value of this asset is significantly higher than the listed book value which we will explore
in the valuation section.
Wakefern Patronage Dividend (included in COGS)
7/31/08
7/31/09
7/31/10
7/31/11
7/31/12
7/31/13
7/31/14
7/31/15
$15.98
$16.78
$18.19
$17.72
$23.95
$24.78
$26.44
$27.56
The patronage dividend significantly increases Wakeferns ROE/ROIC (which are both equal due to
approximately zero net debt at VLGEA) by at least 5%. However, this does not take into account the
shared overhead costs, private label and advertising development as well as the negative working
capital investment which is likely to increase the difference to at least another 2% or 3%.
Financial and Operating Metrics and Forecasts
Before we move on to a discussion of valuation we think it is important to note where Village stands in
the industry with respect to various metrics, in addition to the aforementioned outstanding ROIC and
Rev/PSQF.
Revenue/Same Store Sales
 Village has grown its revenues at a 7-year CAGR of 5% driven by expansion in feet of 1-2% via acquiring
4 net stores, as well as expanding the square footage of its existing store base.
 As importantly, Village averages a pretty strong annual 2.7% same store sales median number, which
as seen above is consistently above the industry medians/average. The last few years of revenues
have been hurt by the Atlantic City economy as well as a number of casinos closing however going
forward the company should be able to comp the low numbers higher as the New Jersey economic
picture continues to improve rapidly.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
 Since the annual numbers tend to be distorted by different fiscal year ends, we’ve analyzed the
industry same store sales from a quarterly perspective where Village beat the industry medians over
two thirds of the 30 quarters analyzed.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
 Over the long term we expect for Village to continue to grow revenues in the historical 4% to 5% CAGR
range. There are opportunities to expand more square footage from the current base as well as
opportunistic store acquisitions and to continue to grow with the New Jersey economy and the
industry. In the short term, the A&P bankruptcy and reorganization (stores bought by Acme Markets
and Wakefern) should provide an additional tailwind to growth in the near term as the company
grapples with restructuring.
Gross and EBITDA Margins
 Village Super Market earns above the industry median’s gross margins and below median’s EBITDA
margins, though we would note that Kroger’s successful strategy of investing in gross margin to drive
same store sales makes margin comparisons across companies somewhat misleading and we still
prefer ROIC as the ultimate arbiter of performance.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
 More important to note here is that the Wakefern patronage dividend adds over 170 basis points of
gross and EBITDA margins to Village Super Market’s operating performance. The Wakefern
partnership likely adds significantly more to EBITDA margins due to the lower overhead shared costs
for which Village pays a service fee to Wakefern.
 There is little reason to believe that the company won’t be able to keep up its average margins going
forward. There are a few levers that it can pull to continue to at least maintain its historical margins:
 The store conversions, such as those in Morristown and Union, offer the ability to sell much higher
margin products on pharmacies and Village Food Garden. The newly re-opened Morristown store
even has a gym on the premises.
 The looming higher wages are a potential threat, however, management noted that even with
the WalMart wage increase ShopRite still offers a more competitive wage and the New Jersey
economy is still above the national unemployment rate.
EBT, Taxes and EPS
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Peter Rabover, CFA
Artko Capital LP
[email protected]
 Village Super Market is one of the most underlevered public supermarket chains with its only debt
$44 million of capitalized leases on 25 stores (out of 29) versus a cash balance of $59 million. The
interest expense seems to be running at approximately 10% while the cash on deposit at Wakefern
earns an average of prime plus .75%. In the end, and excluding the occasional income from a few small
real estate LPs the company participates in, the net interest expense runs at approximately $1 to $2
million dollars. We should also note that Village has a $32 million PBO ($83 million in liabilities versus
$51 million in assets) that does not use aggressive assumptions with a ~4.0% discount rate and a 7.5%
assumption on ROR on plan assets.
 After having settled all matters in the New Jersey tax litigation, the company should continue to have
a 41% to 42% tax rate.
 As mentioned earlier, Village has two classes of shares. The B shares, of which there are 4.4 million
outstanding or 31% of the total, receive 65% of the EPS and dividends of the A shares (though same
economic benefits in a liquidation). Between 2011 and 2013 there was a conversion of 2 million
shares from B to A which created a headwind for A share EPS (among other headwinds). While the
company has a nominal $5 million share buyback outstanding we do anticipate an eventual conversion
of B shares to A shares by the Sumas family as the 2nd generation is replaced by the 3rd generation and
some of the family’s trusts (such as the Perry Sumas trust) could begin to liquidate on the public or
private markets. A full conversion would represent a 12% headwind to A share EPS.
 While the company’s A shares on EPS basis have been relatively flat over the last few years hampered
by lower same store sales and Atlantic City economy, less operating margin leverage and the New
Jersey tax settlement, over the long term, and unlikely in a linear fashion, we expect the company to
grow its EPS in high single/low double digit CAGR rates as the company gets back to its historical
growth and margin rates.
 While we appreciate and share the concern of lack of underperformance in EPS, we are more
impressed with the high ROEs, Free Cash Flow generation and cash on cash returns by Village Super
Market. The cash has gone on to investing in growth square footage expansion, paying out a 3% to
5% dividend yield as well as paying out three special dividends since 2008.
Free Cash Flow and FCF Return on Capital
EBIT (1-t)
Depreciation
Maintanence CapEx
Changes in WC
Free Cash Flow
Free Cash Flow as % of Revenues
Free Cash Flow as % of EBIT
Free Cash Flow as % of NI
7/31/08
$22.52
$13.71
-$13.90
$8.24
$30.57
2.71%
78.89%
135.59%
7/31/09
$37.98
$15.32
-$15.67
-$14.66
$22.96
1.90%
48.28%
84.25%
7/31/10
$37.34
$16.90
-$16.85
$8.27
$45.67
3.62%
100.90%
179.92%
7/31/11
$34.24
$18.62
-$17.75
$19.09
$54.19
4.17%
141.43%
258.28%
7/31/12
$45.60
$19.76
-$18.62
-$15.96
$30.78
2.16%
55.41%
97.90%
7/31/13
$39.72
$20.35
-$19.83
-$16.30
$23.95
1.62%
54.21%
92.89%
7/31/14
$32.01
$22.27
-$22.18
$45.01
$77.12
5.08%
258.54%
304.04%
7/31/15
$40.52
$23.33
-$23.53
-$41.28
-$0.96
-0.06%
-2.21%
-3.97%
7/31/16
$42.67
$23.88
-$23.88
$17.84
$60.52
3.67%
123.35%
217.50%
7/31/17
$46.27
$24.84
-$24.84
$1.45
$47.72
2.79%
87.95%
154.91%
7/31/18
$50.12
$25.83
-$25.83
$1.51
$51.62
2.90%
86.27%
151.27%
7/31/19
$54.22
$26.87
-$26.87
$1.57
$55.79
3.01%
84.76%
148.27%
7/31/20
$58.60
$27.94
-$27.94
$1.63
$60.23
3.13%
83.39%
145.56%
WC
WC as % Revenues
Maintanence CapEx as % of Revenues
Gross PPE
Goodwill
Wakefern Equity Investment
Wakefern Debt Investment
Other Assets
-$34.22
-3.03%
-1.23%
$272.60
$10.61
$18.29
$31.12
$4.57
-$19.56
-1.62%
-1.30%
$307.29
$10.61
$19.67
$16.98
$4.73
-$27.83
-2.21%
-1.34%
$330.43
$10.61
$20.26
$18.20
$6.89
-$46.91
-3.61%
-1.37%
$348.13
$10.61
$22.46
$19.51
$6.75
-$30.96
-2.18%
-1.31%
$365.05
$12.06
$23.41
-$59.67
-3.93%
-1.46%
$434.91
$12.06
$25.01
$40.60
$10.24
-$18.39
-1.16%
-1.49%
$449.69
$12.06
$25.75
$41.42
$12.17
-$36.24
-2.2%
1.45%
-$37.69
-2.2%
1.45%
-$39.19
-2.2%
1.45%
-$40.76
-2.2%
1.45%
-$42.39
-2.2%
1.45%
$30.08
-$14.66
-0.99%
-1.34%
$388.76
$12.06
$24.36
$0.00
$8.66
Total Capital
Average Capital
$302.98
$289.73
$339.72
$321.35
$358.57
$349.14
$360.54
$359.55
$399.63
$380.08
$419.17
$409.40
$463.14
$441.15
$522.69
$492.92
FCF ROIC
10.55%
7.15%
13.08%
15.07%
8.10%
5.85%
17.48%
-0.19%
9.32%
<-- Median
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Peter Rabover, CFA
Artko Capital LP
[email protected]
Valuation – Price Target: $55.00
We hope we have sufficiently highlighted the quality operating performance by Village Super Market
relative to its peers to show that in our base case it at least deserves industry median valuations as a
combined VLGEA/Wakefern company and should revert back to its historical and industry multiples in the
intermediate future while paying out consistent dividends as well as special dividends. Additionally, our
goal here is to highlight the value of Village’s stake in Wakefern on a Sum of Parts valuation and to show
that realistically VLGEA should trade as a tracking stock for Wakefern with a small New Jersey retail
operation on the side.
Base Case Valuation 1: Historical growth, reversion to historical and industry medians – 3 year PT: $55.00
 In our base case, as highlighted in the financial forecasts above, we expect the following results for
the calendar year* 2016, 2017, and 2018 based on below historical revenue CAGR of 4%, revenue
growth of 4% (driven by guided SSS of 1-3% and square footage growth from recently completed
conversions) and continued historical margin performance as well as an 8.1% growth from Wakefern:
o EPS of $2.28, $2.50 and $2.76
o EBITDA of $76.0, $82.4 and $89.2 million
o Book Value Per Share of $19.16, 20.15 and $21.82
*we chose calendar years to make results more comparable to peers as VLGEA’s FYE is typically
the end of July
 Over the last 8 years, or via the last economic cycle, Village has traded over 18.0x TTM EPS 5 times
and over 2.2x Book Value 7 times. We believe that in the next 3 years Village Supermarkets should
revert to its historical fundamental valuation ranges for a 2018 P/E Based Price of ~$50.00 and a 2018
P/BV based price of $48.00 at 18.0x and 2.2x times. This does not include 3 years’ worth of dividends
at $3.60 (not linear) as well as well as a potential special dividend for another $1.50 due to VLGEA
having currently over $4.00 per share of cash on its balance sheet. We expect an announcement after
the upcoming December 2015 Board of Directors Meeting.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
 As we did with the operating metrics we compiled an industry comp table. As we noted earlier, VLGEA
is the lowest valued member of the group despite having many superior metrics and the cleanest
balance sheet when compared to the non-specialty grocery group. However, we would caution that
the Enterprise Values, while adjusted for Pension Liabilities are not adjusted for Operating Leases.
Village’s $32 million pension liability is added to its EV.
 We can see that on almost all metrics VLGEA is the lowest valued peer even when compared to such strong
underperformers like Roundys (bought out by Kroger on November 10th), Ingles Markets, SuperValu and
Fairway Group Holdings despite having almost no leverage.
 We will acknowledge that having strong management ownership is a double edged sword with strong
incentives to create value as well as a habit not to “rock the boat” via accretive but risky transactions and
VLGEA should not be immune to having a slight minority shareholder discount. However we will note that,
VLGEA trades below even Weis Markets, a family controlled North-East supermarket chain, that hasn’t even
been able to file its annual report due to material weakness and high uncertainty surrounding the recent death
of its founder.
 Other deal multiple considerations: Roundy’s was bought out by Kroger at approximately 7.0x TTM EBITDA
with negative growth EBITDA and having 80% leverage. The Safeway deal was 6.5x TTM declining EBITDA with
at least 30% Debt.
 While it’s not easy to justify 2018 multiples based on today’s prices, we can clearly see that VLGEA is
undervalued relative to its non-specialty peers despite having a superior balance sheet and returns and we
are ok with using 2015 multiples on 2018 for a 3 year price target as we hope with a time frame that long the
market should recognize Village Super Market’s superior performance and adjust accordingly.
o On 2018 EPS of $2.76 the Price Target is $~50.00 using an 18.0x multiple
o On 2018 EV/EBITDA multiple of 7.6x the Price Target is $46.50
o On 2018 P/BV multiple of 2.5x the Price Target is $54.50
Using the industry and historical comparisons our CYE 2018 blended Price Target is $55.00 using an average price
of $50.00 and an additional $5.00 in dividends during the forecasted investment period
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Peter Rabover, CFA
Artko Capital LP
[email protected]
Base Case Valuation 2: Sum of Parts
Caveats: This is a purely hypothetical exercise to highlight the value of Wakefern. A) It’s probably unwise
to expect any transactions in the intermediate future. While not impossible, it’s improbable. B) The
valuation is based on limited public information: Revenues reported by Wakefern and patronage
dividends reported by Village and their ownership interest. C) The two entities are synergetic in that one’s
value is dependent on the other so it may not be wise to consider them as standalone entities. D) This
entire process is more art than science and there may not be a correct way to value Wakefern and its
value on the VLGEA balance sheet
 As we’ve seen in the Financials section, by adjusting the operating performance of Village Super
Market for ex-Wakefern’s dividend, the company’s margins and ROEs are significantly lowered to midsingle digits and the bottom of the industry performance metrics. This analysis also does not take into
the account the reduced purchasing power and higher overhead that Village would incur if it were not
part of the Co-Op.
 While this is a purely hypothetical analysis, a book value that doesn’t grow and may even decline at
~$10.00 and EPS at ~$.80 are likely to deserve very low multiples, on par with SuperValu. A 10x P/E
and a .8x BV would result in an $8.00 per share valuation of VLGEA ex Wakefern’s contribution.
 On the other hand Wakefern is a $15.7 billion revenue firm with $200 million in earnings growing at
6% and 10% CAGRs, respectively. Wakefern has a Wholesale and Retail business of serving 232
members including Village’s 29 locations and Gristede’s 31 locations in Westchester County, NY and
New York City, as well as operating 91 retail stores. Additionally, Wakefern just purchased 12 more
retail stores in the A&P bankruptcy sale.
*Wakefern has ambiguous language when putting out revenue numbers. For example: “The company reported a record retail sales level of $15.7 billion for the 53week fiscal year ending October 3, 2015, a 6.7 percent increase from the prior year, and $12.8 billion in Wakefern wholesale sales.” We do not interpret those to mean
as two separate streams as it would be hard to believe Wakefern’s 91 retail locations generated $15.7 in retail sales. However, this does show the additional difficulty
of using this information to value Wakefern.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
 There are not a lot perfect public wholesale food distributors but we’ve identified 5 which we think
are at least somewhat comparable to Wakefern: United Natural Foods, Spartan Nash, Performance
Group Holding, Core-Mark Holding and Amcon Distributing. Of the five we believe that Spartan Nash
and United Natural Foods are the likeliest comparables given their profile of also having a
wholesale/retail operational mix, size in ~$8 billion in revenues, comparable Net Income margins and
mid-single digit Revenue CAGRs.
 We also do not know the capital structure of Wakefern but a guestimate of Wakefern’s proportional
debt of $43 million on Village’s balance sheet at 13.4% can get us to approximately $300 million in
debt.
 Looking at the comps below and in the Base Case 1 we came up with 2 scenarios: Low and High:
 In the Low scenario, VLGEA is valued at $8.00 with 0.8x B/V and 10x Earnings. Wakefern is valued at
0.2x Revenues, 12.0x Earnings or 6% dividend yield (since it does not reinvest the earnings back into
the company). The average price for Wakefern is $27.00 and the Low Case Sum of Parts Valuation for
the entire VLGEA is $35.00 or 35% above today’s price.
 In the High scenario, VLGEA is valued at $13.00 with 1.3x Book Value and 13.0x Earnings based values.
Wakefern is valued closer to retail peers and United Natural Foods at 0.4x Revenue, 18.0x Earnings or
a 2% dividend yield. The average price for Wakefern is $61.50 and the High Case Sum of Parts
Valuation for the entire VLGEA is $74.50 or almost 200% above today’s price.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
The likely Sum of Parts Valuation is somewhere between those two sides around $55.00. And while a
value unlocking transaction may never happen this exercise serves two purposes: To show that VLGEA
should actually be viewed as a tracking stock for Wakefern as it is the more valuable asset in the company
and to show that Village’s ownership of Wakefern provides a significant Margin of Safety.
Downside Case – Price Target $23.32 with VLGEA price of $20.25 and $3.07 in dividends; loss -12.5%
 In our downside case the book value barely grows over 3 years on low revenue growth, declining
margins and the company essentially trading at a flat 5% dividend yield. We are of the opinion that
in underperforming case scenarios stocks trade on their book and asset values rather than earnings
and VLGEA’s lowest book value comp in the last 10 years has been 1.1x. The last time the company
dropped below 1.0x book value was in September 2000. We are comfortable assigning a 1.1x multiple
on an essentially flat book value and taking the risk of permanent capital loss in low double digits.
Upside Case – Price Target $90.00 with VLGEA price of $85.00 and $5.00 in dividends; return -240.00%
 In our upside case the earnings per share grow at high teen rates over 3 years on 6% revenue growth,
expanding EBITDA margins and the company’s multiples adjusting to the high growth specialty grocery
comps. The probability of this scenario happening is low, but growing square footage via an
acquisition, getting a few years of high same store sales and leveraging the fixed cost SG&A while the
Wakefern dividend grows at 10% is not out of the realm of possibilities.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
LBO Analysis - Price Target of $45.00/70% Buyout Premium from today’s price
 As a final valuation exercise we ran an LBO analysis to see what a Private Equity or a strategic buyer
could get for the company if the family ever decided to sell (the least likely scenario). At an 8.5x
unadjusted EBITDA multiple/$45.00 price and a 70% premium, an LBO buyer should be able to achieve
30-40% IRRs/4.0x Multiple on Invested Capital at a 75/25 Debt/Equity Mix. Additionally, this analysis
also includes an assumption of a $50 million run rate of SG&A cuts/synergies.
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Peter Rabover, CFA
Artko Capital LP
[email protected]
Risks/Concerns
 One of the biggest risks with this investment is the added degree of uncertainty due to low disclosure.
The company has very little shareholder communication and doesn’t hold earnings calls. Additionally,
with the changing of management from the 2nd generation of the Sumas family to the 3rd generation
adds more uncertainty to the firm’s future as the management has not communicated to the
shareholders their intentions. Finally, with so much of the value dependent on Wakefern, it is slightly
disconcerting about having such little information about that asset. Having said that, the low valuation
and the family’s history of successfully growing the firm over decades gives an added degree of
comfort. Most family members it seems have worked in the company their whole lives and their
significant stake of over $130 million dollars surely creates a powerful incentive to grow the firm and
concentrate on preservation of capital.
 The industry is facing some headwinds in the form of labor wage growth and food deflation. Village
Supermarkets is heavily concentrated in New Jersey which ranked 46th in GSP growth in 2014 with
only a 0.4% growth, hampered by the economic troubles in Atlantic City and casino closures. Having
said that, New Jersey’s unemployment rate closed 90 basis points to 5.6% in the last 6 months and
the lower energy prices are creating some tailwinds for the shopper. Additionally, New Jersey ranks
5th in having the lowest poverty rate (10.8%) and 3rd highest in having disposable income at $46,778
creating a strong addressable market for higher priced products.
 Competition, competition, competition – It comes in all forms from Wal-Mart, Target, dining out,
Amazon Fresh, and other growing food delivery options. This is a risk we are likely to be watching
closely as technology has a way of disrupting even the most stable of businesses. Village Supermarkets
is not standing idly by and has the “Shop At Home” option at 14 out of 29 of its stores representing
slightly less than 5% of the revenues. Additionally, we did an informal survey of approximately 20
people (not solid enough to put in the thesis but solid enough to give comfort in risk assessments)
where the average assessment of the New Jersey ShopRite experience was 9 out of 10 and price
satisfaction was 7.3 out 10.
 The microcap stock has round tripped over the last 5 years (though the return was still positive given
the special dividends) and the price has generally been unpredictable. The uncertainty factor is high,
and while the low valuation and dividends will likely limit any capital losses. Irrational price volatility
and low liquidity factors should be carefully considered prior to investment.
 Final Disclosure: We are shareholders of Village Supermarket and are obviously incentivized to
highlight the positives of the stock and the company.
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