With gas prices rising, many consumers today are trading down, choosing less expensive options for themselves and their families. Los Angeles-area residents who might have gone out for dinner two or three times a week last year, are now picking up prepared dinners at their local grocery store to save money. One company ideally positioned to handle this change in consumerism is Gelson's Markets, an upscale 18-store chain scattered throughout the greater Los Angeles area. Prepared foods, catering, you name it, Gelson's has it. They even have cooking classes if you're so inclined.
Never Heard of It?
Unless you live in L.A., you've likely never heard of Gelson's. Its media relations budget is probably less than what it spends on sugar at its coffee bar. The holding company that operates of Gelson's is called Arden Group (Nasdaq:ARDNA). It is run by long-time CEO Bernie Briskin. Arden Farms began as a small dairy in 1933 in Los Angeles, adding retail to the mix seven years later. In October 1964, the company bought Mayfair Markets, a Los Angeles-area supermarket chain. With that acquisition, it changed its name to Arden-Mayfair Inc.
A short time later, it acquired Gelson Brothers, a small chain started by Eugene and Bernard Gelson in 1951 in Burbank, California. Since that expansion, the holding company has gone through a host of legal problems before righting the ship in the 1990s. It's been smooth sailing ever since. Briskin joined the company in 1970 and owns 59.6% of the stock. He handles the big picture while Gelson President Bob Stiles looks after the day-to-day running of the stores. It's an arrangement that seems to work. This year the company is on track to make a profit of more than $10 per share.
Turning Dimes Into Dollars
It takes frugal to a new level. In 2002, its revenue was $401.4 million with an EBITDA profit of $38.75 million. This means it allocated 10.4 cents in capital expenditures for every $1 in EBITDA. Fast forward to 2007; this past year its revenue was $487 million with an EBITDA profit of $58.48 million, allocating 6.5 cents in capital expenditures for every $1 in EBITDA.
While same-store sales were only up 0.6%, its net income is booming. At $29.21 million in 2007, it beat a company best by at least $6 million. It reminds me of Buckle (NYSE:BKE), the teen retailer, in that it seems to be able to make money even when it's not growing.
Twenty Dollar Dividend?
Well, it's actually more like a $1, but Arden did pay a special dividend of $20 in 2004. All shareholders of record on Nov. 15, 2004 received a $20-per-share payment one month later. In addition to the dividend payment, Bernie Briskin converted 100% of his Class B stock into Class A shares, reducing the class of shares to one. The total dividend payment came to $67.7 million. This sounds like a lot until you consider how much cash it generates each year.
In 2007, cash from operations was $30.2 million. With an annual dividend payout of $3.16 million, you're looking at a little more than 10% of the cash potentially available. Astonishingly, the company only started paying a regular quarterly dividend of 25 cents on October 15, 2003. Since then, it has paid a total of $4.75 in regular dividends plus the $20 special dividend. With $87.7 million in cash at the end of its first quarter, it's quite possible another special dividend will soon come shareholder's way.
Five Good Reasons To Own This Stock
- You'll have absolutely nobody to impress at the next cocktail party because they won't have a clue about the company.
- The stock trades so infrequently you won't need to be glued to your computer screen.
- In the past five years it outperformed the two largest supermarket chains, Kroger (NYSE:KR) and Safeway (NYSE:SWY), more than doubling their investment returns.
- It's very consistent. Between 1996 and 2007, it increased earnings per share 10 out of 11 years, growing from 89 cents to $9.24. That's 23.7% annually.
- Lastly, as mentioned earlier, it understands belt tightening. In the first quarter, to make up for lower gross margins, it reduced SG&A by 160 basis points to 29.6%. In this scenario, everyone wins.