Vons is Value--at Least for Its Shareholders
In a stock market starving for good earnings news, Vons Cos. served up a blockbuster report on Tuesday.
The Southland supermarket chain said it earned $22.7 million, or 51 cents a share in the second quarter, up 57% from $14.5 million, or 33 cents a year earlier. Sales rose 11% to $1.26 billion.
The quarter’s results were far above analysts’ consensus estimate of 42 cents a share, according to earnings-tracker Zacks Investment Research. Wall Street responded by pushing Vons shares up $1.875 to $36.875 on the Big Board, even as the broad market slumped.
What’s more, in contrast to so many other companies’ warnings about slower earnings gains ahead, Vons Chief Executive Lawrence Del Santo said the retailer is “still in the early stages of realizing the potential of our growth plan.”
Vons’ report, and archrival Ralphs Grocery’s quarterly sales report last week, both suggest that the rebound of the Southern California economy is gathering speed. Vons said its same-store sales--sales at stores open at least one year--jumped 7.1% in the quarter. Privately held Ralphs’ rose 2.4%.
Those numbers indicate that people are spending more freely again at the stores they are in most frequently: their neighborhood grocer. “There is a recovery in Southern California--we’re on a lot of corners, and we can sure feel it,” Del Santo said.
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The early-1990s were lean years for Vons. Slammed by the region’s recession, the 1992 riots and the natural disasters that continually gnawed at the local economy’s health, Vons saw its annual sales plunge from nearly $5.6 billion in 1992 to just under $5 billion in 1994. Operating earnings per share sank from $1.89 in ’92 to $1.06 in ’94.
Vons’ recovery began last year, spurred not only by the region’s economic rebound but also by the decline of weaker competitors, such as Smith’s Food & Drug, which pulled out of the Southland.
But analysts also credit Del Santo with making the right moves to reinvigorate the Vons franchise. “Management is doing a sensational job,” says George Thompson, analyst at Prudential Securities in New York. A 1994 restructuring closed weaker stores and significantly trimmed headquarters staff. The continued emphasis on higher productivity showed in second-quarter results, as selling and administrative expenses fell slightly as a percentage of total sales. Debt is declining.
Meanwhile, the jump in same-store sales suggests that the productivity gains aren’t coming at the expense of customer satisfaction. People evidently are finding more to buy at Vons, and more reasons to keep going back.
Indeed, although the company’s “Vons is Value” advertising campaign represents the core marketing program, analysts say Vons has been most impressive in its efforts to boost sales at the margin. Jonathan Ziegler, analyst at Salomon Bros. in San Francisco, says Vons has used its frequent-shopper program effectively, is successfully steering more buyers to private-label products, and makes good use of its store-by-store sales database “to give customers what [they] want.”
Vons is quick to cash in on trends, Ziegler points out. One example: The chain now sells high-priced cigars in some of its upscale stores.
Even though Vons already operates 325 stores under the Vons and Pavilions names in Southern California and southern Nevada (making it an investment “pure play” on the region’s fortunes), Del Santo says the company has ample room to expand in the region, especially via upgrades of existing stores. The chain’s latest big move is into San Diego with new upscale Pavilions stores.
Del Santo says Vons is capable of 15% annual earnings growth over the next few years. Most analysts boosted their 1996 and 1997 earnings estimates after Tuesday’s report. Gary Giblen, a Smith Barney analyst who has been aggressively recommending Vons stock, thinks the firm can earn $2.15 a share this year and $2.50 next year.
If he’s right about the numbers, Vons stock now is priced at about 15 times 1997 earnings--not a particularly expensive level for a company with such apparently solid growth prospects.
A looming question is whether investment firm Kohlberg Kravis Roberts, which owns about 33% of Vons stock, will decide to sell soon. But given the size of the stake, KKR couldn’t unload unless it’s to an eager market--which is what Vons is rapidly developing with its turnaround.
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Green Grocer
Vons Cos. stock is hitting new highs as earnings rebound after a troubled period from 1992 through early 1994. Quarterly closes and latest on the NYSE:
Tuesday: $36.88
Source: Bloomberg Business News
