When it comes to supermarket stocks to sell, heavily indebted British supermarket chain Asda Group would be at the top of the list were it a public company. It’s not.
The Issa brothers, who own EG Group, one of the world’s largest gas station and convenience store operators, bought Walmart’s (NYSE:WMT) majority stake in Asda with UK private equity firm TDR Capital in February 2021.
The purchase valued Asda at $8.5 billion. Like many leveraged buyouts, the brothers and TDR Capital put 200 million British pounds ($252 million) into the deal, with the rest of the purchase funded by bond debt and a loan from the Issa brothers’ EG Group.
To complicate matters further, Asda bought EG Group’s UK business for 2.27 billion British pounds ($2.86 billion), with most of it funded through new debt, further cash contributions from the trio of partners, and the sale and leaseback of Asda supermarkets.
To do this situation justice would take more words than I’ve got. It’s that big of a mess.
While supermarkets on this side of the Atlantic might not face nearly as much gossip as Asda, regular investors shouldn’t hold some chains.
Here are three to sell should you find yourself holding them.
United Natural Foods (UNFI)
United Natural Foods (NASDAQ:UNFI) is the first of the three supermarket stocks to sell. Although the largest publicly traded wholesale distributor of healthy food options in the U.S. and Canada, it does have a small grocery store business.
The company’s retail operations include 79 grocery stores, 54 Cub Foods owned by the company, and 25 Shoppers Food Warehouse stores. In addition, it supplies 26 other Cub Foods stores owned by its wholesale customers. It also has pharmacies and liquor stores within these stores.
In Q1 2024, its retail sales were $606 million, accounting for 8.0% of its $7.55 billion in revenue. The biggest percentage of sales were to grocery store chains—defined as 10 stores in operation or more—with 42% of its revenue.
The remaining segments are Supernatural (20%), which provides natural products to Whole Foods, Independent Retailers (24%), and Other (6%), which includes Canada, foodservice, eCommerce, and military bases.
In Q1 2024, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $117 million, 43.5% lower than a year earlier. That’s an EBITDA margin of less than 2%. Kroger’s (NYSE:KR) is more than 4.5%.
Over the past year, UNFI stock has lost 61% of its value. This is not a stock you want to own for the long haul. It really should be a private business.
Grocery Outlet Holding (GO)
Grocery Outlet Holding (NASDAQ:GO) is a California-based value retailer that sells brand-name consumables through independent operators (IOs) that live in the communities where their stores are located.
Founded in 1946 by Jim Read, the company has expanded its store base from 128 stores in 2006 to 455. The third generation of the Read family continues to run the business.
In November, Grocery Outlet opened a store with at least one store in Boardman, Ohio, the company’s ninth state.
Earlier in November, Grocery Outlet announced its Q3 2023 results. They included a same-store sales increase of 6.4%, net sales of $1.0 billion, and adjusted EBITDA of $68.1 million, 20.0% higher than a year earlier.
So, you’re probably wondering why I suggest you sell GO stock when it’s growing its business.
Grocery Outlet went public in June 2019 at $22 per share. If you’d invested in its IPO shares, you’d have a cumulative return of 18.9%, about one-quarter the return of the S&P 500.
It’s a great story but one that’s best left for the history books.
Empire Company (EMLAF)
My last suggestion is bound to be controversial in Nova Scotia, where I live. It’s the home of Empire Company (OTCMKTS:EMLAF), the operator of Sobeys, one of Canada’s three largest grocery store chains.
In business since 1907, you either love or hate Sobeys, depending on whether you shop or work there. Canadians have gotten fed up with the record profits of our three major grocery store chains—the others are Metro (OTCMKTS:MTRAF) and Loblaw Companies (OTCMKTS:LBLCF).
The Centre for Future Work recently reported that Canadian grocers are expected to generate more than 6 billion Canadian dollars ($4.42 billion) in profits in 2023, 8% higher than in 2022. Even better, these retailers have doubled their profits from pre-pandemic numbers.
I blame suppliers for much of the higher prices issue. But it’s easy to see that grocery retailers in Canada have cut corners regarding staffing and service levels. Try to get someone to bag groceries today. It’s not going to happen.
I liken investing in Canadian grocery store chains to investing in slumlord real estate. It might make you money, but you’ll want to take a shower after you do.
Seriously, though, Empire had net debt of 6.95 billion ($5.12 billion) Canadian dollars as of Q1 2024. That’s 2.9x its adjusted EBITDA. By comparison, Metro’s is 2.2x and Loblaw’s is 2.4x.
Empire has made some snazzy acquisitions in recent years—Farm Boy in 2018 for 800 million Canadian dollars ($590 million) and 51% of Longo’s in 2021 for 357 million Canadian dollars ($263 million). But has done little to pay down the debt.
Record profits be damned.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
