Wall Street stock analysts say they like Vons' prices.

Wall Street stock analysts say they like Vons' prices

In the conservative aisles of grocery retailing, Arcadia-based The Vons Cos. Inc. has been a maverick in recent years, acquiring and integrating 162 Safeway stores, launching an ambitious electronic marketing program, testing such outrageous concepts as drive-through deli service and increasing capital spending to $72.5 million in 1990 - a lofty $11.4 million increase since 1988.

Wall Street analysts are high on Vons, saying that its future looks good because of its posture in the conservative grocery industry.

"My conservative estimate of Vons' 1991 earnings is over $1 a share," said Douglas A. Christopher, a supermarket analyst with Los Angeles-based Crowell Weedon & Co. "They've got one of the leading and most aggressive upper-level management teams in the business." Last year the company lost 65 cents a share; in 1988 it lost 77 cents a share.

The ninth-largest grocer in the United States, the $3 billion (1989 revenues) Vons operation is comprised of 293 Vons stores, 27 Pavilions and eight Tianguis stores in Southern California.

"They've built three successful formats in recent years - Tianguis, Pavilions and Vons." Christopher said. "No other chain has been able to successfully run a multi-format chain that targets different demographic groups. Vons has definitely taken the lead as an innovative grocery retailer."

While its Vons outlets are run-of-the-mill grocery stores, its Pavilions stores cater to upscale consumers and its Tianguis stores cater to the culinary tastes of Southern California's Hispanic population.

"This multiple store format gives us the flexibility to operate different stores of different sizes with different mixes for the diverse customer based that we serve," said Roger E. Stangeland, chairman and chief executive officer of Vons.

Vons has 27 percent of the Southern California market, outpacing all other competitors, including Lucky Food Centers with an 18 percent market share and Ralphs Grocery Co. with a 14 percent market share.

It became the No. 1 local grocer after the acquisition of 162 Southland Safeway supermarkets in 1988. The Vons Cos. paid $294 million and 11.7 percent of Vons common for the Southern California stores. Immediately after the acquisition, Vons attempted an ambitious integration program and suffered because of it, losing $23.9 million (77 cents a share) in 1988 and $25.1 million (65 cents a share) in 1989.

"We recognized the disruption of running Vons and Safeway side-by-side," said Mary McAboy, director of corporate communications and investor relations at Vons.

With a supermarket merger blocked by the state attorney general earlier this year, Vons may have swallowed up the southland Safeway stores at the right time, analysts said.

"We certainly think that the timing of the merger was appropriate," said McAboy.

In 1988 Vons was able to reach a confidential agreement with the state attorney general, allowing Vons' acquisition of the Safeway stores to be completed.

By contrast, Attorney General John Van de Kamp launched an anti-trust challenge to a merger between Alpha Beta supermarkets and Lucky that was upheld by the U.S. Supreme Court on April 30 of this year. In a recent settlement with the attorney general, Lucky's won a hard-fought right to acquire about 20 profitable Alpha Beta stores in Southern California. But it will be forced to sell another 150 Alpha Beta stores within five years, squashing any hope that Lucky had to grow significantly in coming years.

Where Vons succeeded, Lucky did not, said one analyst.

"Vons was lucky in that they decided not to litigate and wanted to get the acquisition done as soon as possible," said Sheila M. O'Connell, supermarket analyst with Chicago-based Duff & Phelps Inc. "There is really no chance right now for any other grocer to acquire a large chain of stores in the Southern California. It puts Vons in a good position."

Vons reported net income of $3 million (8 cents a share) on revenues of $1.2 billion in the fourth quarter ended Dec. 31, 1989, compared with a net loss of $16.2 million (42 cents a share) and revenues of $1.2 billion in fourth-quarter 1988.

"You could see that Vons had basically integrated Safeway into its system at the end of 1989," said Crowell Weedon's Christopher. "But the first quarter of 1990 was stronger than expected by everyone on Wall Street. That's where the success became dramatic."

In the first quarter of 1990, Von's reported net income of $15.2 million (21 cents a share) on revenues of $1.2 billion, compared with a net loss of $13.4 million (35 cents a share) on revenues of $1.2 billion in 1989. Operating income was 3.3 percent in the first quarter of 1990, compared with 0.8 percent in the first quarter of 1989.

Keynoting the improved earnings were the 162 converted Safeway properties, which showed dramatic improvement under the Vons management. According to a recent disclosure, sales per selling square foot at the Safeway stores were $447 before Vons acquired the properties. They improved to $564 per selling square foot in 1989 and $598 per selling square foot in the first quarter of 1990. Vons averages about $711 per square selling foot at its original stores.

Vons took on significant debt in the acquisition. At the end of the first quarter, it stood at $875 million. Earlier this month, Stangeland told investors that "consistent reductions in leverage each year" will be the goal at Vons. By 1995, the target is to have its debt down to 60 percent of a debt-to-capital ratio, compared to its current 81 percent level, one analyst said.