Toss a Coin : Ralphs Plans a Stock Offering
Normally, you’d never get Ralphs Grocery executives to admit there’s anything about arch-rival Vons worth copying. But when Ralphs tries to sell stock to the public in a few weeks, the Compton-based supermarket giant will no doubt hope to take a page from Vons’ book.
Ralphs, emerging from the shadow of its defunct parent Campeau Corp., plans to sell 6 million shares in an initial public offering aimed at cutting interest expenses.
The stock sale is just one element of a major financial restructuring planned by the heavily indebted Southland grocer. In addition to seeking $80 million by selling stock, Ralphs will refinance $400 million in junk bonds with new bonds and bank debt at substantially lower interest rates.
That’s exactly the path Vons has taken in recent years, and the bottom-line results have been exceptional: Vons turned a loss of 65 cents a share in 1989 into a profit of $1.56 a share last year. Vons stock, meanwhile, has leaped from $8 in mid-1988 to $28 today, a 250% gain; in contrast, the Dow Jones industrial average is up 68% in that period.
Unfortunately for Ralphs, the company’s timing isn’t so hot. Wall Street has been overwhelmed with new stock issues in recent months, and many investors’ interest in such offerings has waned.
Ralphs also could be hurt by the tainted image of Los Angeles in the wake of last week’s deadly riots, even though only one of the company’s 156 stores was looted. Ralphs wants to sell 1.2 million of the 6-million-share offering overseas, yet foreign investors in particular may have reservations about buying into an L.A.-area retailer now.
Perhaps most important, many investors will question Ralphs’ long-term prospects given its total dependence on Southern California--an economy no longer viewed bullishly by Wall Street. For retailers, “the growth just ain’t there anymore,” argues one New York-based brokerage analyst who asked to remain anonymous.
Ralphs’ executives cannot address most of these issues publicly because Securities and Exchange Commission rules forbid a company from discussing future prospects before new stock is sold. But from Ralphs’ financial documents, and conversations with analysts, here’s a look at some of the key issues in the stock offering from investors’ viewpoint:
* The price looks fair. Ralphs hopes to price the stock at $16 a share. There will be 30.6 million shares outstanding after the sale--6 million in the hands of the public and 24.6 million shares remaining with parent Campeau Corp.’s creditors, who got control of the retailer via its bankruptcy. The biggest creditor, and controlling shareholder of Ralphs, is Ohio developer Edward DeBartolo. Of the 6 million shares to be sold, 5 million are by Ralphs and 1 million are DeBartolo’s; his stake will be reduced to 50.6% after the sale.
Figuring in Ralphs’ remaining debt and the market value of its stock after the offering, analysts figure that the company will be valued at six to 6.5 times its annual cash flow (which is considered the best measure of a debt-heavy company’s financial health). Because competitor Vons now is valued at approximately the same multiple of cash flow, many analysts say $16 would be a reasonable price for Ralphs’ stock.
* Management is well-respected. Sheila O’Connell, analyst at Duff & Phelps in Chicago, notes that Campeau’s problems had nothing to do with Ralphs, a fixture in Southern California for 119 years. The grocery chain’s executives have been “fabulous” managers, she says.
Ralphs wins high praise for its state-of-the-art warehouse and distribution system and its computerized inventory and checkout systems. Also, the company has invested heavily in remodeling and enlarging stores in recent years.
That investment has helped keep Ralphs tied for No. 1 in market share with Vons and Lucky stores in L.A. County, according to analysts, even though Ralphs’ dearth of stores in outlying counties keeps it No. 3 in share for all of Southern California.
* The company should be profitable this year. By refinancing debt, Ralphs will cut its annual interest expense to $104 million from $130 million, the company says--that is, provided market interest rates don’t begin to rise again.
Though Ralphs lost $41 million last year on sales of $2.9 billion, if the debt-refinancing plan had already been in place, Ralphs’ loss would have been cut to $1.3 million. And excluding one-time charges, such as $12 million allocated for routine store closings, Ralphs would have actually been in the black last year by a small amount.
Still, the big question is whether Ralphs will be able to produce substantial annual profit growth over the next few years in a tough Southland economy, and with a still heavy debt burden of $922 million. Because the stock won’t pay dividends, its performance will be totally dependent on Ralphs’ ability to wow Wall Street with healthy earnings.
Last year, Ralphs admits, its same-store sales dipped 0.7%, a factor of the recession.
Even so, Ralphs managed to boost operating earnings 9% last year on a mere 3.2% rise in total sales. That’s one measure of management’s commitment to control costs and promote sales of higher-margined items, analysts say.
And while some analysts feared that a supermarket price war would break out as new competitor Smith’s Food & Drug entered Southern California, analyst Charles Cerankosky at Kemper Securities says there’s no sign of suicidal pricing, and he doesn’t expect it (unfortunately for consumers). What’s more, Ralphs probably will pick up some new business in L.A. until riot-ravaged competitors rebuild.
As with many new stock issues, Ralphs looks like a coin toss: There’s no question the company is a strong survivor, but the stock’s potential depends largely on the Southland economy--and what happens there is anyone’s guess.
Ralphs, By the Numbers
Ralphs Grocery has lost money in recent years because of heavy debt, but the company’s plan to sell stock to the public will substantially improve its finances. A look at recent results:
In millions of dollars, except per-share and store data:
1990 1991 1992 Sales $2,556 $2,799 $2,889 Gross profit 505 574 614 SG&A; expenses* 391 436 457 Operating earnings* 189 207 226 Interest expense 131 129 130 Net profit or loss -70 -51 -41 Profit/loss per share -2.72 -2.01 -1.61 Stockholders equity 35 -16 -57 Stores open 142 150 158
* SG&A; is selling, general and admininstrative expenses; operating earnings are earnings before interest, taxes, depreciation, amortization and one-time items.
Data for years ended approximately Feb. 1.
Source: Ralphs Supermarkets
