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Change can be painful. It can also be enlightening if you open your eyes to new opportunities.
I recently moved to Pennsylvania after living 32 years in Colorado. Yes, the move was painful, though it has opened my eyes to new opportunities. It certainly opened them to a new investment opportunity.
Weis Markets (NYSE: WMK) has flickered on and off my radar for the past 15 years. Respectable growth, consistently strong margins, high inventory turnover ratios backed by a rock-solid financial structure would periodically draw my attention.
Pennsylvania is the stronghold. The state is home to 125 of the 204 Weis Markets stores. Maryland, New Jersey, Delaware, Virginia, and West Virginia house the rest. Now that I live in Pennsylvania, the opportunity arose to check out the joint. I liked what I saw, but I wasn’t surprised by what I saw.
My first visit to a Weis store, located in Lancaster, occurred on a Saturday. The store was invitingly new from the outside. From the inside, the space was immaculate: The shelves were amply and painstakingly stocked. Everything was in order. Prices were competitive. As for selection, I couldn’t ask for more. Employees were cheerful and approachable.
Of course, this an example of one, but I suspect the manager and employee attitudes, the business processes, the business culture, are replicated across the other 203 Weis Markets stores. The time-series analysis on margins and earnings supports my supposition.
Weis Markets Boosts Locations
Grocery stores are hardly growth animals, but it’s worth noting that Weis’ revenue and earnings moved to a higher plane in 2016. Weis Markets increased its store footprint by 23% when it bought 38 Food Lion stores last year. Weis Markets paid a bargain $29.4 million.
Operating and net margins were dinged initially on costs related to incorporating the Food Lion stores. Both are on track again; both trend higher.
More impressive, the inventory turnover ratio trends higher. The inventory turnover ratio measures operating efficiency. Retailers generate earnings by continually selling (turning over) the inventory. The faster inventory is sold, the greater the earnings.
Most of what you want trending in the right direction trends in the right direction. Weis Markets earned $3.24 per share last year, which was 46% more than it earned in 2015. I expect Weis Markets to earn $3.25 this year and $3.50 in 2018.
So if everything is trending right, why has Weis Markets stock trended mostly wrong for 2017?
The answer is as obvious as a pulsating white-capped carbuncle at the tip of a W.C Fields-sized nose: The Amazon (NASDAQ: AMZN) v. Wal-Mart Stores (NYSE: WMT) battle. The perception is that by battling for market share, Amazon and Wal-Mart will leave a scorched retailing sector in their wake.
The narrative fails to resonate with yours truly.
Whole Foods struggles to compete on price in many of its markets. Even after Amazon “slashed” prices at Whole Foods, most grocers can still easily compete with Whole Foods slashed prices.
The Home Delivery Question
But what about Amazon.com and home delivery?
Think of what people buy at the grocery store: produce, meats, deli, artisan cheeses, seafood, bakery, beer and wine, prescription drugs. By all means, deliver the toilet paper and Tide; it’s hands-on when it comes to the king crabs and croissants.
As for Wal-Mart, it can compete on price with anyone. But shopping is more than price: It’s service, it’s product selection, it’s product display, it’s store ambiance. Competing with Wal-Mart on price alone is a fool’s errand. Competing with Wal-Mart on the other variables isn’t.
I’m convinced that Weis Markets can compete, though its shares are priced otherwise. I see no reason that Weis shares shouldn’t be trading at the five-year average earnings multiple of 18. In other words, they should be trading closer to $58 a share than to $45.