We recently reiterated our Neutral recommendation on Nash Finch Co. (NAFC), a wholesale food distributor in the United States.
Earnings of 47 cents a share in first quarter 2012 missed both the Zacks Consensus Estimate as well as the year-ago quarter results by 14.5% and 33.8%, respectively. total sales in the first quarter 2012 were $1.06 billion, down 3.7% from $1.10 billion in the prior-year quarter. Total comparable sales of Nash Finch shed 3.1% year over year in the reported quarter, excluding the impact of lower sales due to closure and disposition of six retail stores during the quarter. Adjusted Earnings Before Interest Tax Depriciation and Amortization (EBITDA) in the first quarter of 2012 was$23.9 million, or 2.3% of sales as compared with $30.8 million, or 2.8% of sales in the prior-year quarter.
Considering, the company is well on track to achieve its long-term targets to achieve organic revenue growth of 2%, consolidated EBITDA of 4% and total leverage ratio in the range of 2.5 to 3.0x. Although the company has not yet achieved its revenue growth target, its EBITDA improved from 2.2% in 2006 to 2.9% in 2011 and debt leverage ratio improved from 3.11x to 2.14x during the same period.
Further, Nash Finch is geared up to build long term relationships with local players through which it can gain market share and establish a leading position Nebraska region. In May 2012,the company entered into an agreement to supply food to more than 80 Dollar General Stores, which will provide an important additional channel for the products of Nash Finch to reach consumers. The company has been strategically moving ahead to acquire major operating units before Walmart steps in. As a part of this strategy it acquired ‘Bag n Save’ supermarkets and ‘No Frills’ supermarket in May 2012, which will help it to spread its business in the Nebraska region.
Moreover, the company commands a large distribution network to military commissaries. As many as 660 distribution contract wins from DeCA (Defense Commissary Agency) and distribution to 179 commissaries and 300 exchange locations have catapulted the company to a leading position in the market. The network covers a large portion of East Coast, West Coast and Southern coastal region of the U.S. It is also expanding further into the East Coast of the U.S. Further, the company is strategically focusing on its military food distribution business and has taken steps to expand it.
Although military segment is very important to the company in terms of revenue, it faces pressure from close competitors like Supervalu Inc. (SVU), as the latter provides special services to the commissaries like employing military business consultants to ensure efficient and accurate delivery of products. It also has facilities like eMerch Military, which is a web portal for manufacturers and brokers to monitor their products to include purchase orders, inventory and sales.These exclusive efforts of Supervalu will prove to be a challenge to Nash Finch’s military segment and may hurt future contracts.
Moreover, Nash Finch is vulnerable to a weak U.S. economy and declining consumer spending in the U.S. markets, because the company has no stores outside the U.S. and does not have an international presence to serve as a shield to fluctuations in the U.S. economy. The company’s peer group like Wal-Mart Stores (WMT) has strong international presence.
Currently, Nash Finch carries a Zacks #4 Rank (short term Sell rating).
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