Acquisitions Of Fresh Encounter And Markham Enterprises Will Expand Retail Footprint

Key Takeaways

• Expanding the retail footprint and transformational initiatives are set to enhance revenue growth, profitability, and operational efficiencies.
  
• Strategic focus on military channels and store synergies is expected to boost revenue potential and improve margins.
  
• Slower market growth, increased expenses, and higher leverage may hinder SpartanNash's revenue and earnings, with continued challenges in partnerships and market volatility impacting future performance.

Catalysts

Distributes and retails grocery products in the United States of America.

• The acquisition of Fresh Encounter and Markham Enterprises is expected to expand SpartanNash's retail footprint while also contributing additional revenue and EBITDA, positively impacting overall revenue growth and margins.
  
• The company's transformational initiatives, including shrink reduction and nonproduct procurement, are projected to yield cost savings and enhanced operational efficiencies, which are likely to improve net margins and EBITDA.
  
• The strategic focus on military and wholesale channels is noted as a bright spot, with consistent sales growth in the military channel boosting revenue potential and supporting stable earnings.
  
• Investments in margin-enhancing programs and initiatives that are performing ahead of schedule are anticipated to drive improvements in profitability, impacting net margins and EBITDA positively.
  
• SpartanNash is focusing on the synergy between their supermarket and convenience store locations, including loyalty programs which could attract more customers and increase revenue and margins through cross-selling opportunities.

SpartanNash Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SpartanNash's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 0.8% in 3 years time.
• Analysts expect earnings to reach $74.3 million (and earnings per share of $2.24) by about December 2027, up from $45.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2027 earnings, down from 14.3x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

SpartanNash Future Earnings Per Share Growth

Risks

• The slower market growth in SpartanNash's operational geographies compared to the overall U.S. grocery market could continuously weigh on both the retail and wholesale segments, potentially impacting revenue growth.
  
• Declines in volume within the Wholesale segment, particularly a 2.9% headwind from the Amazon business, have affected overall sales, and continued instability in this partnership may further impact earnings.
  
• Operating expenses increased due to higher restructuring charges and retail store labor and healthcare costs, which could pressure net margins.
  
• The leverage ratio has increased, which could indicate higher financial risk and might affect the company's ability to invest in growth opportunities, impacting earnings.
  
• The narrow guidance for adjusted EBITDA and EPS reflects ongoing market volatility and lower-than-expected economic conditions, which could impact future earnings performance relative to previous targets.

Valuation

• The analysts have a consensus price target of $23.0 for SpartanNash based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.9 billion, earnings will come to $74.3 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of $19.41, the analyst's price target of $23.0 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.