Published 6/16/24
Village(VLGEA) 2024 Annual Review
Every year I move through my current portfolio positions and evaluate them against the original thesis. I first brought Village back in Feb of 2022 back when it was struggling profitability wise. Since then net margin has expanded from .98% in 2021 to 2.34% in H1 2024. Though Villages fiscal year ends in July so technically there H1 2024 is actually H2 of 2023. The increase in profitability was primarily due to sales leverage. Other metrics such as GM, FCF margin, and SSS have done well since the time of purchasing as well.
| Fiscal Year | H1 2024 | 2023 | 2022 | 2021 | 2020 |
| Gross Margin | 28.4% | 28.45% | 28.12% | 27.83% | 28.07% |
| SG&A/Revenue | 24% | 23.85% | 24.63% | 24.57% | 24.65% |
| Net Income Margin | 2.34% | 2.29% | 1.30% | 0.98% | 1.38% |
| FCF Margin | 1.25% | 2.68% | 1.75% | 1.33% | 1.61% |
| AFCF Margin | 2.56% | 2.48% | 1.84% | 0.88% | 2.02% |
| Same Store Sales | 2.2% | 3.5% | 4.10% | 2.30% | 5.30% |
The original thesis was that the company was the cheapest in the sector due to its temporary decline in profitability and that the company would rerate once margins came back to industry standards. Now that margins have recovered, let’s see how valuation has done.
Village P/S ratio went from .16 times in Feb 2022 to .2 times as of now or about 9 times earnings. A P/S .2 times is actually about where Village traded pre covid and is closer to peers.
For example Albertsons, Kroger, Ingles Market, and Weis Markets trade at .14, .26, .24, .38 times sales. Weis has much higher margins though those are coming down. Village’s small size probably prevents it from gaining a much higher valuation from here.
When I calculated the expected return in my initial article I assumed the following for the base and best case
- 2% Same store sales growth
- 2-4% store growth
- 2-2.5% FCF Margins
- P/S ratio between .28-.35
Redoing this now I’d probably lower store growth to 1% as the company closed one of their Gourmet Garage branded stores probably because it was struggling. Gourmet Garage was a smaller form factor grocery store which the company said they would seek to expand. But it looks like maybe that concept isn’t as strong as they thought.
Recaluating a return assuming no multiple expansion would look like this
- 2-3% Same store sales growth
- .5%-1% Store Count Growth
- 3% Dividend Yield at current market prices
These assumptions give a 4-6% expected return for the next 5 years. Not very impressive considering that a treasury bill yields nearly 5%. Now if you do assume a .25 times price to sales ratio in 5 years then a 9-11% return could be expected. That’s better but it does assume profit margins can be maintained in the 2-2.5% which is on the high end of Villages prior decade.
To conclude I think Village is an okay hold but will look to sell once I find a better opportunity.
