IPO Report: Smart & Final Stores (SFS)

Francis Gaskins |

Smart & Final Stores (SFS) is a high-growth, value-oriented food retailer serving a diverse demographic of household and business customers through two complementary and highly productive store banners. It is headquartered in Commerce, CA.

Eightother companies are scheduled to IPO for the week of Sept. 22, 2014.  The full IPO calendar is available at IPOpremium.

Manager, Co-managers: Credit Suisse, Morgan Stanley, Deutsche Bank, Barclays, Citi, Piper Jaffray, Guggenheim Securities   

SFS scheduled a $175 million IPO with a market capitalization of $924 million at a price range midpoint of $13 for Wednesday, Sept. 24, 2014 on NYSE.  SEC filings

Smart & Final IPO Overview

SFS is a high-growth, value-oriented food retailer serving a diverse demographic of household and business customers through two complementary and highly productive store banners.

SFS believes that the U.S. market can support approximately 1,250 additional Extra! stores.

Today SFS operates 87 Extra! stores, of which 65 represent conversions or relocations of legacy Smart & Final stores and 22 represent new store openings.

Based on historical performance, SFS targets net sales of $12 million to $14 million during the first year after opening and pre-tax cash-on-cash returns of 25% within three years after opening.

Valuation
Glossary

           

 

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

annuallizing June 15 24wks

           

 

Smart & Final Stores (SFS)

$923

0.3

32.2

1.8

2.1

19%

 

             

 

Compare

           

 

Costco Wholesale (COST)

$55,280

0.5

29.6

4.7

4.7

 

 

 

 

 

 

 

 

 

 

Conclusion

Positive, expects new store openings to drive sales

Price to sales ratio is low, .3.  Costco's (COST) is .5.  SFS's gross margin, 15%

P/E ratio is 32.2, Costco's is 29.6.

Business

SFS is a high-growth, value-oriented food retailer serving a diverse demographic of household and business customers through two complementary and highly productive store banners.

SFS’s Smart & Final stores focus on both household and business customers, and its Cash & Carry stores focus primarily on business customers. SFS operates 250 convenient, non-membership, smaller-box, warehouse-style stores throughout the Western United States, with an additional 13 stores in Northwestern Mexico in a joint venture.

SFS has a differentiated merchandising strategy that emphasizes high quality perishables, a wide selection of private label products, products tailored to business and foodservice customers and products offered in a broad range of product sizes, all at "everyday low prices."

SFS believes its compelling value proposition has enabled SFS to achieve comparable store sales growth in 24 of its past 25 fiscal years.

SFS operates 198 Smart & Final stores in California, Arizona and Nevada, which offer extensive selections of fresh perishables and everyday grocery items, together with a targeted selection of foodservice, packaging and janitorial products, under both national and private label brands.

Customers can choose from a broad range of product sizes, including an assortment of standard-sized products typically found at conventional grocers, and a large selection of bulk-size offerings (including uniquely sized national brand products) more typical of larger-box warehouse clubs.

Pricing in SFS’s Smart & Final stores is targeted to be substantially lower than that of conventional grocers and competitive with that of large discount store operators and warehouse clubs.

SFS believes it offers higher quality produce at lower prices than large discounters. SFS also believes its Smart & Final stores provide a better everyday value to household and business customers than typical warehouse clubs by offering greater product selection at competitive prices, and with no membership fee requirement, in a convenient easy-to-shop format.

Extra Format

Five years ago, SFS launched a transformational initiative to convert its larger legacy Smart & Final stores to its Extra! format.

With a larger store footprint and an expanded merchandise selection, SFS’s Extra! format offers a one-stop shopping experience with approximately 14,500 SKUs, including an expansive selection of approximately 4,500 more SKUs than its legacy Smart & Final stores, with an emphasis on perishables and household items.

This initiative was facilitated, in part, by SFS’s acquisition of a dedicated perishables warehouse, and has been further supported by its continued investments in distribution capabilities and in-store merchandising.

Today SFS operates 87 Extra! stores, of which 65 represent conversions or relocations of legacy Smart & Final stores and 22 represent new store openings.

SFS’s store conversions and relocations to the Extra! format have typically resulted in significant increases in comparable store sales and gross margin.

The continued development of SFS’s Extra! store format, through additional new store openings and conversions and relocations of legacy Smart & Final stores, is the cornerstone of its growth strategy.

Extra growth plan

SFS's typical Extra! store requires an average cash investment of $3.2 million. For store development, such investment consists of store buildout (net of landlord contributions), inventory for store operation and development and cash pre-opening expenses.

On average, Extra! stores reach a mature sales growth rate in the third year after opening.

Based on historical performance, SFS targets net sales of $12 million to $14 million during the first year after opening and pre-tax cash-on-cash returns of 25% within three years after opening.

Extra! market potential

SFS believes that the U.S. market can support approximately 1,250 additional Extra! stores.

SFS believes it has significant growth opportunities in existing markets, as approximately 100 potential new stores are located in current U.S. markets (California, Nevada and Arizona).

SFS currently expects to open 13 new Extra! stores in fiscal year 2014, including ten which have already opened, and 20 in 2015. SFS plans to continue opening additional new stores for the foreseeable future.

Cash & Carry stores

SFS also operates 52 Cash & Carry stores focused primarily on restaurants, caterers and a wide range of other foodservice businesses such as food trucks and coffee houses.

SFS offers customers the opportunity to shop for their everyday foodservice needs in a convenient, no-frills warehouse shopping environment.

These stores are located in Washington, Oregon, Northern California, Idaho and Nevada. Pricing in SFS’s Cash & Carry stores is targeted to be substantially lower than that of its foodservice delivery competitors, with greater price transparency to customers and no minimum order size. Pricing is also competitive with typical warehouse clubs, with no membership fee requirement.

Cash & Carry growth plan

SFS also plans to opportunistically grow the Cash & Carry store base. SFS expects to open three new Cash & Carry stores through fiscal years 2014 and 2015, and continue opening additional new stores forthe foreseeable future.

The  typical new store requires an average cash investment of $1.5 million. On average, Cash & Carry stores reach a mature sales growth rate in the fourth year after opening. Based on historical performance, SFS targets net sales of $6 million to $8 million during the first year after opening and pre-tax cash-on-cash returns of 25% within four years after opening.

Competition

SFS’s principal competitors include conventional grocers such as Albertson's, Kroger and Safeway, discounters and warehouse clubs such as Costco, mass merchandisers such as Walmart and Target, foodservice delivery companies such as Sysco and US Foods, as well as online retailers and other specialty stores.

Each of these companies competes with SFS on one or more elements of price, product selection, product quality, convenience, customer service, store format and location, or any combination of these factors. Some of SFS’s competitors may have greater financial or marketing resources than SFS does and may be able to devote greater resources to sourcing, promoting and selling their products.

Also, some of SFS’s competitors do not have unionized work forces, which may result in lower labor and benefit costs.

5% shareholders pre-IPO

Ares Corporate Opportunities Fund III, L.P.  47.82 %

Ares Corporate Opportunities Fund IV, L.P.  47.82 %

Dividend Policy

No dividends are planned.

Use of proceeds

SFS intends to use the $158 million in proceeds from its IPO as follows:

to use $115.5 million of the net proceeds from this offering to repay borrowings under the Term Loan Facility. As of June 15, 2014, the interest rate on the Term Loan Facility, which is scheduled to mature on November 15, 2019, was 4.75%..

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SFS Smart & Final Stores Inc. 13.45 0.00 0.00 0

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