TURNAROUND STORIES STARRED ON WALL STREET

CHRISTINA VEIDERS

NEW YORK -- Investors bought turnaround stories in food-retailing stocks last year as the economy plunged into recession.

With hopes for an economic recovery beginning in the first or second quarter of this year, securities analysts told SN they don't expect last year's robust stock-performance pattern to be repeated anytime soon.

On a weekly basis, SN tracks prices and performance of the publicly traded food-retailing and wholesaler stocks. Performance compares the SN Composite Index, based on share price and number of shares outstanding of the listed stocks, with the Dow Jones Industrial average. The following is a year-end compilation of food-retailing stocks tracked on the SN Composite Index.

Of the 34 companies tracked on the SN Composite Index, which comprises traditional and alternative retailers in the United States and Canada as well as wholesaler companies, 27 posted gains. Many stocks closed the year with triple- and double-digit percentage increases in their prices.

This compares to 38 companies in 2000, 15 of which showed only modest gains and 23 posted losses.

The big surprise was in the solid and stable big capitalized names, namely Kroger and Safeway. They saw their price values dive as they lowered what some analysts considered too-high earnings expectations and talked about instituting aggressive promotions to drive top-line sales.

Investors challenged analysts' long-held view that in economic distress they flock to defensive, recession-resistant quality stocks such as Kroger or Safeway. To the contrary, it was in struggling companies that were attempting a turnaround where many investors put their money.

Gary Giblen, senior vice president, director of research for C L King Associates, described last year's market as "schizophrenic."

"You are looking at a single average but there are huge disparities. Usually the stocks move with uniformity. This is unusual were there is split performance and personality. Safeway and Kroger, which were the darlings of the group, became the dogs, and some of the dogs became the darlings."

Among the top gainers were: A&P, whose stock rose a whopping 239.7%; Nash Finch with a 166.1% increase; Foodarama, up 161.2%; and Wild Oats, up 133.6%.

Said Lisa Cartwright, director, Salomon Smith Barney, "Turnaround stories were clearly the winners in terms of stock-price performance last year. A&P, Albertson's, Fleming, as well as companies that offer better value at a time when the economy was floundering -- BJ's and Costco -- all did well." "There was investor transition," said San Francisco-based Jonathan Ziegler, managing director, Deutsche Banc Alex. Brown. "There was rotation from growth to value. The growth guys got out early in the year; the value guys came in during the year."

Deborah Weinswig, food and drug chains analyst, Bear Stearns, said, "There were so many forces at work in the economy. People were really price sensitive and watched what they spent on products. As a result, those companies that had a unique value proposition or did not have a lot of competition from Wal-Mart, they held up pretty well."

On the losing end were seven companies. Among them, Kroger was down 22.8%, Safeway was off 33.2% and Ahold USA dropped 9.6%. These three companies represented significant market share of the total $515 billion in total food sales last year. Meanwhile, Oklahoma City-based Homeland Stores struggled to stay on SN's list, registering the biggest declined of the group, a drop of 88%. It fell off the Nasdaq and filed for Chapter 11 reorganization.

Said Jack Murphy, vice president, Credit Suisse First Boston, "The performance of the group was actually mixed. There were a lot of companies that did real well and a lot that didn't. No single theme or driver moved all food stores up."

Mark Husson, first vice president, Merrill Lynch, said the market gravitated more toward higher-risk stocks. "What the market seemed to enjoy buying were companies that don't just produce stable or visible earnings but also those that have a story attached to them," he said.

Bankruptcies and acquisitions took its toll on several companies that fell off the SN composite. Grand Union and e-tailer Webvan went bankrupt while Harry's Farmers Market, Roswell, Ga., was acquired by Whole Foods and e-tailer Peapod merged with Ahold.

"At the beginning of last year there was this idea that the Internet would have a serious impact on physical grocery retailers and by the end of the year people weren't even thinking about it anymore," said Meredith Adler, senior vice president, Lehman Bros.

Natural food retailers -- Whole Foods and Wild Oats -- even rebounded in hard economic times. Said Greg Badishkanian, vice president, Salomon Smith Barney, "I believe these retailers are gaining share from supermarkets. I would have expected a higher-end retailer like Whole Foods to suffer more than a Safeway." However, the natural food retail sector was aided by consumers' concern over maintaining their health and their desire to eat healthier foods at home instead of going to restaurants last year, he said.

Overall, the SN Composite Index outpaced the market by being up 6.4%. This compares to the Dow Jones Index, which fell 6.8%, and Standard & Poor's 500, which dropped 13.3%.

Looking ahead, most analysts said they expect modest and lower growth rates in the food sector. As the economy turns upward, cyclical stocks (those stocks outside the food sector) will benefit from investor support, said Adler. "You'll see more modest performance [from food-retailing stocks]."

Also, the pressure will be on for all those turnaround companies to deliver on their promises and produce results. Investors' belief in those turnaround stories has to turn from hopes to fruition or they will quickly dump the stock, said analysts.

"You'll see dramatic moves within certain stocks. The turnarounds that don't deliver like Winn-Dixie become falling knives. Turnarounds that do deliver will continue to be sectionally strong like Pathmark. Safeway and Kroger will be mired in the mud for awhile," said Giblen.

Said Cartwright, "Supermarkets are caught between a rock and a hard place. You don't have the defensive names of yesterday. Food stocks are not cyclical and they won't benefit dramatically from an economic rebound because they don't have the exposure to general merchandise that a Wal-Mart does. Wal-Mart is the format of choice in a recession and in a recovery."

Factors that may impact food-retailing stocks this year will continue to be consolidation and pricing pressures put on supermarkets from alternative formats, said analysts.

"There is concern right now whether there will be price wars in the industry because Kroger, Safeway and Albertson's all have talked about becoming more aggressive on price and promotion. That will affect people's willingness to invest," said Adler.

"You'll see more buyouts because organic growth is difficult. Pathmark could get bought out. Wild Oats is stabilized under a talented turnaround management. It could be bought out by a supermarket chain or Whole Foods. Marsh Supermarkets or Weis Markets could go at any time," said Giblen.

The following is a brief summary of some of the retailers and wholesalers that reported big swings in their stock prices last year and the performance of some of the alternative retailers that are pressuring the conventional supermarkets.

Wal-Mart Stores, Bentonville, Ark., was up 8.3% and continued to expand its supercenter format and gain market share at the expense of food retailers. "Wal-Mart is amazing," said Weinswig. "They introduced the first supercenter in 1988 and didn't really start rolling out the concept until 1995, and now they are the largest food retailer."

Said Husson, "Wal-Mart's whole business model became more defensive in nature. It's not the kind of retailer anymore that goes boom when the market goes boom nor neither does it collapse when the market collapses because just so much of its sales now is supermarket-type merchandise.

Albertson's, Boise, Idaho, was up 18.8% and became a star performer due to a new management team for analysts that follow big-cap retailers. Investors liked the new management with Larry Johnston from General Electric joining the company last year as chairman and CEO. The direction of the new management was to improve returns, divest underperforming operations, and streamline the company to improve returns on capital.

At Albertson's, "Larry Johnston is the premium," said Weinsig. "He's done everything he said he was going to do and investors got comfortable with what he was saying."

"Albertson's has gone up on sheer hope and 2002 has to be the year that hope becomes reality," said Giblen.

The big question for Albertson's is "can they deliver that 2% plus same-store performance as they cycle more difficult comparisons?" asks Cartwright.

A&P, Montvale, N.J., was up 239.7%, the biggest gainer of the food-retailing group. The company benefited from restructuring its management team early in the year. Beth Thornton, a former Nabisco executive, joined the company as executive vice president and COO. A&P began to implement discipline into its operations and continued to pursue its Great Renewal strategy. "They got new management and people really started to believe they could get their act together. That is a real turnaround story," said Adler.

BJ's Wholesale Club, Natick, Mass., was up 14.9% and has been a consistent niche performer offering grocery shoppers another low-cost alternative, according to analysts. Weinswig said BJ's benefited from shoppers seeking value last year. "BJ's continued to improve its product mix through top brand names such as Sony Vega TVs and Timberland clothing, and continued to increase its value proposition to consumers."

Fleming Cos., Dallas, was up 56.6%, but experienced big swings in its stock prices based upon its contract with Kmart. "The stock had a nice run up, but when Kmart fell out of favor the stock imploded. Fleming was selling as kind of a derivative of Kmart because Kmart represents a good chunk of Fleming's business," said Ziegler.

Kroger, Cincinnati, was down 22.8%, and startled the investment community with its underperformance coming later in the year. "The biggest event was when Kroger lowered its earnings growth rate and said they would drive sales through dropping their margins," said Murphy.

Husson said it was "a disappointing reaction from the market" in light of strong earnings growth during the year. But with a goal to drive top-line sales 2% to 3% over inflation, investors saw a deceleration in Kroger's earnings per share growth and they didn't see or believe in increased sales, said Husson. "It's a show-me situation," he said.

Safeway, Pleasanton, Calif., was down 33.2% by missing its sales guidance and having to lower its long-term growth rates. According to Adler, growth stock fund managers owned some Safeway stock and when growth rates were downgraded those managers headed for the hills.

There was a fear, according to Murphy, that Safeway wouldn't continue to have high teen earnings-per-share growth rates because sales were coming in too light.

"Safeway, like Kroger, has strong market share, strong management but they are priced too high in the middle of store. They were blindsided. They have more overlap with Costco, and Costco is taking share from them," said Cartwright.

Supervalu, Minneapolis, was up 59.4% despite its Kmart business going to Fleming. New management under Jeff Noddle, who was promoted to CEO when Mike Wright retired last year, led investors to believe the company was poised for growth, said analysts. Ziegler and Husson said Supervalu's Save-A-Lot format provides the company with a strong growth vehicle.

Wild Oats, Boulder, Colo., was up 133.6%, illustrating another turnaround. With Perry Odak, formerly with Ben & Jerry's Homemade, coming to the helm, investors saw sales start to rise and believed a turnaround was pending. "Wild Oats turned around sales declines but spent huge amounts of gross profit dollars to do it," said Husson. The Street is now waiting for a turnaround in earnings, he said.

The company also was particularly helped by the strong performance of the natural food industry, noted Badishkanian.

Winn-Dixie Stores, Jacksonville, Fla., was down 26.4%, which was no surprise to analysts after the company cut its dividend, turned in disappointing earnings and lowered its guidance. "Here we had a rotation of investors," said Ziegler. "Those that bought Winn-Dixie for income and yield rotated out."

Nash Finch, Minneapolis, was up 166.1%, due to a phase-one turnaround program put in place by Ron Marshall, chairman, president and CEO. Giblen said Nash Finch has been a solid turnaround, but as a middle-of-the-road company it becomes increasingly more difficult to achieve gains.

Pathmark, Carteret, N.J., was up 49.4% and continued to solidify its position in New York-metro markets. Said Murphy, "Pathmark demonstrated it can substantially improve operations coming out of bankruptcy and have enough financial flexibility to invest in the business and put up good numbers."