Roundy's Makes a Game-Changing Announcement
If ever there were a Jekyll-and-Hyde grocer, it would be Midwest-based Roundy's .
The company's traditional chains operating in Minnesota and Wisconsin have seen same-store sales slip almost every quarter since going public, and the worst worst employee reviews in the industry. At the same time, a new fresh/organic-themed chain -- Mariano's Fresh Market, operating only in Chicago and comprising just 7% of all Roundy's stores -- has been growing like gangbusters, achieving $1 million per week in sales last quarter.
For many, the weight of Roundy's floundering legacy business was enough to make them stay away from the stock, even though Mariano's was doing well, and the company was sporting a 5.7% dividend yield. But as of yesterday, the company completely changed the game.
Here's what happened
Back in October, Safeway announced that it would be exiting the Chicago market, and selling off its Dominick's-brand stores. Just after that announcement, I opined that this could represent a rare opportunity for Roundy's, as it could accelerate the openings of its Mariano's chain by taking over some of Safeway's old stores.
After the market closed yesterday, Roundy's announced that it had done just that. Previously, the company had 11 total Mariano locations, saw its ideal number of Chicago stores as 30, and planned on opening up five per year until it reached that point.
Now, the picture is much different. Two more stores opened this quarter, and next year -- instead of opening just five new stores as planned -- the store's footprint will more than double. That's because Roundy's purchased 11 prime Safeway locations for roughly $36 million that will be converted to Mariano's Fresh Markets over the next year. By the end of 2014, there should be 29 locations in the greater Chicago area.
What investors need to know
Making such a bold move isn't easy, and Roundy's shareholders will be taking on additional risks as a result. The company will be funding the Safeway purchase through a debt financing transaction, and will have to rework some of its credit agreements.
More immediate for investors, Roundy's large 5.7% dividend yield is no more. As the company announced in its press release: "Roundy's will suspend its quarterly dividend so that it can use that cash to grow the Mariano's business."
Is Roundy's a buy?
I've been to Roundy's Mariano's Fresh Market locations, and can attest to the heavy traffic and excellent food selection. With this acceleration in store buildout, Mariano's will be making up a much more significant part of the Chicago grocery landscape.
Its primary competition will come from Whole Foods, which has just 19 locations in the greater Chicago area. It will be very interesting to see how sales figures work out for these two as they continue to divvy up more of the organic market in the nation's third largest metropolitan area.
Does all of this mean Roundy's is a buy?
Being a native Wisconsonite and seeing how the company's Pick 'n Save stores have so vastly underperformed their peers -- and knowing how much angst is built up among Roundy's employees toward CEO Bob Mariano -- I'm loath to say that Roundy's is a good investment.
But I also know that there's potential now. And I wouldn't be shocked to see the company sell off its non-Mariano's businesses and focus solely on this new chain. Roundy's has changed the game with this announcement. So while I'm certainly not buying shares of the company anytime soon, I've also closed my bearish CAPScall on the company.
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The article Roundy's Makes a Game-Changing Announcement originally appeared on Fool.com.John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Fool contributor Brian Stoffel owns shares of Whole Foods Market. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.