Investor infatuation with Rami Levi begins to fade
Retailer's shares are down 25% since February.
The darling of the stock market since taking his discount supermarket chain public in 2007, Rami Levi seems to have lost his luster lately among investors.
Shares in Rami Levi Hashikma Marketing have fallen 25% from their peak in early February, after consistently outperforming stock indices and the shares of rival chains almost since the day the company was floated.
The retail impresario is a marketing whiz, admit all connected with the industry - some with a grimace. His cash registers rang up sales of NIS 19,500 per square meter in the first quarter, 3.8 times the figure at Super-Sol and 4.5 times those at Mega (Alon Holdings Blue Square ).
But the company's shares are down 10% since the beginning of the year and have trailed its comparative index, the Tel Aviv Stock Exchange's TA-75, for the past month. The stock's price-earnings ratio, 18.5 a year ago, has now fallen to 11.7.
The slide in Rami Levi's share price results from two simultaneous processes: deterioration in the retail food market and a changing market perception of the company's future - particularly the growing risk associated with its rapid growth.
The food retailing sector performed poorly over the past year and is widely considered out of balance - as indicated by various mergers and acquisitions being hatched in the industry. A combination of adverse factors has been depressing retail share prices.
Chains generated their growth over the years by raising shelf prices, explains DS Brokerage analyst Meir Slater, but this stalled due to the cost-of-living protests and, although prices have risen since the beginning of the year, the increases have yet to catch up to the level reached in the first half of 2011.
The other side of the coin, as explained by Excellence Nessuah analyst Liat Glazer, is that cost increases far outstripped price hikes in the first six months of the year.
Rami Levi registered a remarkable 11.4% increase in identical store sales in the first quarter against the same quarter last year, besting rivals which grew at a much slower pace - if at all. The chain's operating margin, however, shrunk to 5% in the first quarter compared to 6.4% in the parallel period in 2011.
Slater points out that the surplus retail floor space is sparking fierce price competition, such as a price war in Ma'aleh Adumim between Rami Levi and Super-Sol that has hammered prices into loss territory: Potatoes at NIS 0.15 per kilo and chicken at NIS 1.30 per kilo ("I'm being slaughtered," says Levi ).
The cutthroat competition in Ma'aleh Adumim follows similar instances in Be'er Sheva and Beit Shemesh - three store locations comprising a combined 11,700 square meters, 35% of the Rami Levi chain's overall retail space as of the first quarter.
"We expect Rami Levi to continue presenting positive growth in same-store sales, although perhaps not on the double-digit scale of the first quarter," says Glazer.
"Nonetheless, the market is keeping an eye on the head-to-head competition with Super-Sol and is concerned over Super-Sol having more breathing room and, due to its size and abundance of stores, being more resilient to individual locations taking a beating than Rami Levi," he said.
The supermarket mogul has also been dragged into a price war of another sort: Virtual cellphone network Rami Levi Communications, operating through a transmission infrastructure provided by Pelephone, was launched in December - but in May was forced to change its modus operandi when Golan Telecom and HOT Mobile entered the market and offered customers unlimited calling time for just NIS 89 per month.
The revised deal that the company closed with Pelephone earlier this month is expected to allow it to offer unlimited packages at competitive rates, while keeping it in the black and maintaining an operating margin of up to 4%.
But the public relations blow sustained from the launch of its two new price-undercutting rivals, as well as Levi's excess preoccupation with this area of activity, generated static that contributed to the softening of the company's stock price.
"Beyond that, there is worry that Levi's span of control [the number of direct subordinates] will seriously test him considering his expansion plans," comments Slater regarding Levi's negotiations for the purchase of 43 Mega Bool branches from the Blue Square chain.
"Closing the deal would be a great challenge for Levi as this would triple the number of stores in his chain. The company would need to upgrade its head office and could sustain sales cannibalization at some locations," says Slater.
"The market watches Rami Levi - his gung-ho approach and meteoric success - and asks how things will turn out five years from now," says Tamir Ben Shahar, partner and CEO at Czamanski Ben Shahar and Co., which specializes in consulting to commercial centers and retail chains.
"Today Levi's functions in the chain range from chairman and CEO to chief bottle washer, and this can't hold up. Rami Levi has no span of control - something that can endure only on a day-to-day basis."