Ruddick Sheds Its Threads; Analysts Cheer

MARK HAMSTRA

CHARLOTTE — Ruddick Corp., parent of the Harris Teeter chain, has finally sold its American & Efird industrial thread division, a move analysts said would provide better visibility of the publicly held supermarket operator's performance.

“While A&E had more recently made significant progress in improving its profitability, we believe this transaction is an extremely positive development, and has been eagerly anticipated for many, many years,” said Karen Short, a New York-based analyst with BMO Capital Markets.

She said the move was “a positive catalyst” for several reasons, including the fact that the $180 million in proceeds could be used to help expand Harris Teeter's store base.

In addition, she said the move should attract more investors to the company because it will allow them to more easily compare the company's performance with that of its peers.

“We believe investors will finally value the standalone grocer at a respectable premium to the peer group given the higher returns, better unit growth, superior store productivity metrics and strong balance sheet,” she said.

Ruddick said it completed the sale of the thread division to affiliates of KPS Capital partners last week.

Thomas W. Dickson, chairman, president and chief executive officer of Ruddick, said the sale “allows the management team and their associates at A&E to continue to pursue their strategic plan of transforming A&E into a more Asian-centric enterprise, which has been years in the making.

“This transaction enhances the strategic plan for Ruddick and Harris Teeter as the cash proceeds from the sale can be utilized for numerous purposes, including the acceleration of new store growth and the repayment of debt,” he added.

One-time impairment charges related to the sale contributed to the loss of $8.9 million that Ruddick reported for the fiscal fourth quarter.

Analysts said they expect the sale will quickly transform into a positive for the company, however.

Over the past 10 years, Harris Teeter has shown stronger growth in both sales and operating profit than its former sister division, noted Andrew Wolf, a Richmond, Va.-based analyst with BB&T Capital Markets.

“We anticipate that Ruddick's secular annual [earnings per share] growth rate should accelerate from our current forecast of 12% to a range of 14% to 16% depending upon how opportunistic Harris Teeter can be in accelerating store growth,” he wrote in a research note on the sale.

Harris Teeter has grown its sales an average of 6% per year for the last 10 years, he noted, compared with 4.6% for the company as a whole, including American & Efird. Operating profits at Harris Teeter have risen an average of 10.2% per year during that time, vs. 6.8% for Ruddick on a consolidated basis.

American & Efird operates manufacturing facilities in the U.S. and has operations in about 15 other countries around the world. It makes and distributes industrial sewing thread, embroidery thread and technical textiles for use in apparel, automotive materials, home furnishings, medical supplies and footwear. Its 2010 sales accounted for 7% of Ruddick's consolidated sales of $4 billion.

MARGIN SQUEEZE

Meanwhile, Ruddick said fourth-quarter comparable-store sales rose 5% at Harris Teeter, but margins came under pressure from increased promotional activity.

Gross margins declined 59 basis points for the 13-week quarter, which ended Oct. 2, compared with the 14-week quarter of a year ago.

Operating profit at Harris Teeter was $45 million, down from $49.1 million, which the company attributed primarily to the extra week in the year-ago period. Sales were down slightly to $1.1 billion, vs. $1.11 billion a year ago.

Sales for the 52 weeks of fiscal 2011 increased by 4.5% to $4.29 billion, vs. the 53-week fiscal 2010, and operating profit for Harris Teeter increased 5.2% to $191.1 million for the year.

“Our goal for the quarter and the year was to drive units and transactions. Therefore, we invested in additional promotional activities, which included two promotional coupon events that were well received by our customers and were redeemed at higher than historical trends,” the company said in a prepared release.

The company said the cost of the promotions was mitigated by the higher sales and greater vendor participation, but still resulted in the decline in gross margin.

Short of BMO Capital Markets pointed out that the stronger-than-expected response to the coupon promotions “suggests a still-struggling consumer,” although the most recent sales trends appear more positive than they had during the summer.

“We continue to believe the company is gaining share,” she said, noting that both customer counts and basket sizes increased in the quarter.

Ruddick did not disclose specific percentage increases for transaction counts and basket sizes.

Wolf of BB&T downgraded his outlook on Ruddick to “hold” from “buy,” however, saying the shares were already fairly valued.

“The stock normally trades at a premium to the mature conventional supermarkets and at a discount to the growth-oriented specialty grocers,” he said.

Based on the EBITDA forecast for 2012, he noted that Ruddick has an enterprise value to EBITDA ratio of 6.3 times, compared with conventional operator Safeway at 4.8 times and fast-growing natural-food specialist Whole Foods Market at 11.6 times.

He noted that his outlook for the company could improve if it is able to accelerate store growth either through acquisition or organically.

During fiscal 2011, Harris Teeter opened seven new stores (including one replacement store) and closed two stores, for a net addition of five stores. The chain operated 204 stores at the end of fiscal 2011.

The company said it plans to open another seven new stores in fiscal 2012, again including one replacement store, and to complete major remodels on 12 stores. Short of BMO Capital Markets said she expects unit growth to accelerate in 2013 as a result of the A&E divestiture.

Capital expenditures for fiscal 2012 are planned to total approximately $215 million, up from $153.9 million in 2011. The increase reflects higher remodeling costs and an acceleration of planned 2013 openings to earlier in the year, the company said.

Ruddick Corp Q4 Results