Description

Village Supermarkets is a well-established supermarket chain that, at
13 7/8, sells for just 5.1 times earnings and half of book.

The company owns 22 ShopRite stores in New Jersey and eastern Pennsylvania.
More than 90% of their square footage is in super stores, which average
58,000 square feet. A conventional supermarket has 30,000 square feet.
Sales per square foot were $859 in the latest fiscal year, ended July 2000.

In fiscal 2000, Village Supermarkets earned $8.1 million before special
items, or $2.66 per share, up 29% from a year earlier. Most of the gain was
thanks to their success in expanding margins. There was a 28 basis-point
improvement in the operating margin, to 2.07%. Twenty-eight bp may not
sound like much, but it amounts to a not-insignificant 16% improvement
over the previous year. (The F99 operating margin, in turn, was up 24% from
the previous year.)

Revenue in fiscal 2000 was up 5% to $803 million. Same-store sales were up
2.9%.

In the six months ended January 27, 2001, EPS were up 5%, to $1.57 per
share. Revenues were up 4%, to $411 million. Same-store sales were up 3%.
Operating income was actually down 1%; net income was up because of lower
interest expense and a lower tax rate.

Trailing twelve month earnings are $2.73 per share. So the shares trade for
just 5.1 times earnings. The book value is $80 million. Add in the LIFO
reserve of $8.8 million to reflect inventory at replacement cost and the
adjusted book value per share comes to $29.60 per share. So the stock is
selling for 47% of adjusted book.

Return on assets, as measured by operating profits over assets excluding
cash and other nonoperating assets, is respectable at 14% in fiscal 2000.

The latest balance sheet shows $29 million of cash and $43 million of debt,
$41m of which is long term. Interest coverage is adequate, at 4.2 times for
fiscal 2000.

Two prominent value firms, Tweedy Browne and Franklin Resources, own stakes
in the firm greater than 5%. The Franklin owners are either Franklin Mutual
Shares or Franklin Templeton, I'm not sure which.

Village Supermarkets has 3 million shares outstanding, split into 1.4
million Class A shares with one vote apiece and 1.6 million Class B shares
with 10 votes apiece. Members of the Sumas family own half of the shares
outstanding and have two-thirds of the votes. Perry Sumas is the CEO. With
that much ownership, the family obviously has strong incentives to build
shareholder value in line with the interests of the stockholders.

The CEO is 85 years old. When he retires, there should be a strong impetus
to sell the chain if there is a big estate tax bill or if no one in the
succeeding generation wants to run the company. A likely buyer would be
one of the bigger supermarket complexes like Kroger or Royal Ahold. This
has certainly been the pattern that I've seen when a founder dies.

Catalyst

Catalyst: CEO and controlling shareholder is 85. His successors will have a
strong incentive to sell the company.