Pic'N'Save's repurchase plan bolsters stock price.

Pic'N'Save's repurchase plan bolsters stock price

Discount retailer plans major expansion in Southeast

Los Angeles-based Pic'N'Save Corp. will buy back 5 million shares of its common stock, a "strong testimonial by the management" in the 190-store retail chain, one analyst said.

"The repurchase includes more than 14 percent of the company's outstanding stock (35.5 million shares), making this much more than a token move," said William Tichey, an analyst with New York-based Dean Witter Reynolds. "Given Pic'N'Save's expansion plans into the Southeast, which will also dramatically affect its balance sheet, the stock repurchase is a strong testimonial of management's confidence in the company's future."

Pic'N'Save's Southeast expansion, called "The Wow! Stores," in Louisiana, Georgia, Florida, and Texas, includes a 1990 rollout of 30 to 35 outlets at a cost of about $30 million during 1990.

To supply the stores, a $55 million Southeast distribution system, fed by a 1.1 million square-foot New Orleans warehouse, is under construction.

One analyst said the distribution system was "yet another major capital investment during a tough time for the retail industry."

"The company has a strong balance sheet," said William M. Jacobs Jr., senior vice president and chief financial officer of Pic'N'Save. "Even though we have a substantial committed capital-expenditure program, we still believe we have the financial resources to repurchase shares without undermining the credit of the company. We are very sensitive to maintaining a strong balance sheet and credit rating."

Pic'N'Save's year-end results for 1989 will be released March 16.

"We expect profits to continue to erode for the next year," said Thomas H. Tashjian, an analyst with Los Angeles-based Seidler Amdec Securities Inc. "The Southwest expansion and the stock repurchase are major capital expenditures. But, in order to grow, the company has to reach out of its mature California market -- as with any company growing pains will always affect profitability."

Pic'N'Save management has hired New York-based Goldman Sachs & Co. to act as its agent in the repurchase.

"Due to a negative perception of retail industry stocks now prevailing among stock analysts, the company has decided to institute an open market repurchase program," said Lewis B. Merrifield III, chief executive officer and president. "We believe that the company's common stock presents an attractive investment opportunity at current prices."

Pic'N'Save's stock rose to $10.50 a share after the repurchase announcement; it was trading around $10.75 late last week.

The stock's five-year low occured in January when it fell to $9.25. Three years ago Pic'N'Save stock sold for $30 a share.

According to Jacobs, the share repurchase was implemented to give liquidity to some of Pic'N'Save's major institutional investors.

"But those investors who stick with us will gain," said Jacobs. "Through the repurchase, we can positively impact earnings per share and therefore effect share value."

Pic'N'Save is reportedly looking to buy back its stock at or below the $10 mark.

"If Pic'N'Save's stock continues to languish, they could execute the repurchase program in six to 12 months," said Tichey. "I don't think anyone, including management, is expecting dramatic improvements in profit any time soon, so it should be relatively easy for them to complete the repurchase."

Tashjian estimated Pic'N'Save's earnings at about 95 cents for the year, down from $1.24 the year previous. In 1990, Tashjian predicts earnings from $1.15 to $1.20. He is not recommending the stock, calling it "a market performer at best."

Pic'N'Save's niche is close-out variety general merchandise.