Weis Markets Inc.

  • Poorly positioned regional supermarket in the hypercompetitive Northeast region that is a step behind in the megatrends pressuring the supermarket industry. Despite cutting prices, Weis is still not competitive across a basket of staple food products at price points 15% to 20% higher than peers
  • Credit card data and consumer insights from Earnest Research on 42,000 Weis customers shows that over the past three quarters, unique shoppers, average transactions per shopper and total transactions have declined YoY. Weis has mitigated these negative trends with an increase in average ticket price per shopper. However, in 2Q18 it posted the lowest YoY growth in recent quarters (3.5%). Tangible evidence that
    ultra low cost grocers, Aldi and Lidl, continue to gain Weis customers
  • Numerous violations by the Pennsylvania Bureau of Food Safety and the FDA for sanitary problems, including food contamination and pest control concerns
  • Recent financial results and stock performance being driven by aggressive accounting changes to cash flow, and a few one-time issues that made comparisons look easy in early 2018. These will become material headwinds in the coming quarters
  • Unreliable comparable store sales metrics as a result of vastly reduced disclosures, followed by three auditors since 2014. Recent Q2’18 metrics being qualified and bolstered by inclusion of estimated sales from July 4th. Underlying organic growth conservatively estimated to be down 2% and can no longer be masked by acquisitions from 2016
  • Negative unit store growth in 2018, including three undisclosed store closures. $101m capital spending plan announced in April 2018 necessary to drive maintenance and refurbishment to forestall market share loss and remain competitive
  • Poor governance and investor communications include no conference calls, deficient SEC disclosures in our opinion, no alignment of employees with shareholders, and beholden to the Weis family to act for the public shareholders’ best interest
  • Inflated valuation making Weis the most expensive supermarket in the United States for no obvious reason. Declining organic growth, gross margins, and poor returns on capital make Weis an unattractive target. It currently trades beyond any reasonable valuation multiple an acquirer would pay for the stock
  • Price target of $17.60 to $26.40, or 45% to 65% downside, on forecasted earnings of $1.47 per share, down 19% due to negative operating leverage, and a multiple range of 12x to 18x consistent with peer trading valuations and takeover multiples in the supermarket industry