CAPScall of the Week: Roundy's

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Roundy's (NAS: RNDY) .

What Roundy's does
Roundy's operates as a grocery in the Midwest under five chains: Pick 'n Save, Rainbow, Copps, Metro Market, and Mariano's Fresh Market. In its latest quarterly results, Roundy's reported a 2.4% increase in sales; however, comparable-store sales fell 2.1% from the year earlier. Overall profit came in at $0.06 versus the $0.29 it reported in the year-ago period due to an early extinguishment of debt and the Green Bay Packers' early exit from the playoffs, according to management.

Who it competes against
Traditional grocers haven't had an easy go of things in recent years. Locations like Roundy's, Safeway (NYS: SWY) and SUPERVALU (NYS: SVU) have suffered from rising commodity costs, weaker consumer spending, and general macroeconomic slowdown.

Worse yet, these traditional grocers have fallen prey to attacks from each end of the economic spectrum. Dollar stores like Dollar Tree (NAS: DLTR) are drawing deal-seeking, cost-conscious consumers away from traditional grocers and providing them a similar selection of goods at a much simpler price tier (everything is $1 or less). On the flip side, organic and premium health-food grocers like Whole Foods Market (NYS: WFM) are capitalizing on the trend toward healthier living and consumers' willingness to pay for premium organic products in order to achieve that goal.

With few avenues to growth, grocers like Safeway and SUPERVALU have had to be innovative to keep customers coming back and to keep shareholders happy. Safeway has been adding fuel stations in the hopes that its stores will become a one-stop shop for consumers. SUPERVALU has turned to store remodels and making greater strides to pay down its debt to appease its shareholders and get consumers back into its grocery stores.

Roundy's is a completely different beast. It's attempting to lure investors by dangling a carrot in front of their face in the form of a $0.23 quarterly dividend. If you're scoring at home, that is indeed a 9.1% annual yield. Numbers like that are sure to turn a few heads -- especially since the company remains committed to its dividend payout despite more than $700 million in debt on its books.

The call
After reviewing the prospects for Roundy's, I've decided to enter a CAPScall of underperform on this Midwestern grocer.

Roundy's dividend is very enticing, but that's about the only aspect of the company that appears redeemable. In its latest quarterly report, outside of its ridiculous finger-pointing at the Packers for its weaker results, the company cautioned that same-store sales for the remainder of the year would fall by 0.5% to 1.5%. Increasing competition from Wal-Mart, dollar stores, and premium markets is beginning to take a bite out of Roundy's already small pie. While not as bad as SUPERVALU's, Roundy's large debt load is also a concern. It makes little sense to return $0.92 annually to shareholders when it has loans and payments coming due in 2017 and 2019. Until it can wave its magic wand and figure out a way to grow its existing locations, it will remain an underperform call in my CAPS portfolio.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of SUPERVALU and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Whole Foods Market, as well as purchasing calls on SUPERVALU and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always the right price: free!

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