Casey’s General Stores, Inc. (CASY), Safeway Inc. (SWY): Two Grocery Companies to Buy, One to Avoid

The company invested significantly in store remodeling in 2004, and additional remodeling is unnecessary for the next 10 years. Safeway Inc. (NYSE:SWY) spent $837 million in the U.S. in 2012, and allotted $900 million for 2013. However, reinvestment will be required to remodel its stores after such a long period. Safeway Inc. (NYSE:SWY) estimates spending will increase from its current level to maintain the quality of its 1,400 stores and to fight off competition due to entry of new stores and new competitive formats and technology. This will reflect in the company’s free cash flow; Safeway Inc. (NYSE:SWY)’s FCF will reduced to $517 million compared to $642 million last year.

Store expansion and improved margin

The Fresh Market Inc (NASDAQ:TFM) reported a 34.0% gross margin in 2012, an increase of around 4% in the last five years. Its contract with Burris logistics is scale based and provides lower per case cost as the volume levels grow. Store growth will generate lower sourcing costs with the increase in volume levels. Continued improvements in the inventory management system and processes will reduce the shrink rate to around 5% in next few years, which is around 8% currently. These factors will improve gross margins to 34.4% in 2013 and 34.6% in 2014.

Unit growth and margin improvement will drive EPS growth from $1.34 in 2012 to $1.60 in 2013 and $2.00 in 2014.

Conclusion

All three companies of these companies are using strategies like expansion, remodeling stores, or improving margins. Benefits of store remodeling and replacement along with increase in RIN value will increase Casey’s General Stores, Inc. (NASDAQ:CASY) free cash flow and gasoline margin. The Fresh Market Inc (NASDAQ:TFM) expects EPS growth because of its store development program and improving gross margin.

Therefore, I recommend buying both these stocks.

Safeway Inc. (NYSE:SWY) will offset spending and reduced FCF with the sale of its Canadian operations. Therefore, if you hold the stock, don’t dump it.

Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market. Shweta is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Two Grocery Companies to Buy, One to Avoid originally appeared on Fool.com is written by Shweta Dubey.

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