On Special: Smart & Final

There are deep discounts available these days at Smart & Final Inc.--for the company’s stock.

As the chain of warehouse-style grocery stores struggles to turn itself around, Smart & Final’s shares so far aren’t recovering from a disastrous slide in mid-1998, when they plunged 60% to less than $10 as problems mounted.

And since October, the stock has treaded water. It closed Friday at $11.81 a share, up 19 cents for the day, in New York Stock Exchange composite trading. That’s its highest price since last August. The daily average for the past few months has been just over $9.66 a share.

Not that the Commerce-based company isn’t striving to rebound. Smart & Final has new senior management that’s cutting costs, bolstering the chain’s debt-heavy balance sheet and trying new ways to market and promote its merchandise and food-service operations, which are boosting Smart & Final’s once-sagging sales. The chain also has been making acquisitions to diversify its growth.

And Smart & Final has its share of fans on Wall Street, who are convinced the company is poised to prosper.

“There have been tremendous changes within the business in the past six to nine months” under the guidance of Smart & Final’s new chief executive, Ross Roeder, said Ronald Baron, chairman of the Baron Funds mutual-fund family in New York. “They’ve got a chance to make a ton of money.”

Baron has good reason to tout the stock. His company has made a huge bet on Smart & Final that has yet to pay off. Baron is Smart & Final’s second-largest stockholder with a 23% stake, or about 5.3 million shares, currently worth $62.6 million.

The company’s largest investor is the U.S. unit of French retailer Casino Guichard-Perrachon, which controls Smart & Final with a 55% interest.

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Smart & Final and its 5,000 employees operate 216 stores in California, Oregon and five other states, along with food-service distribution companies in California and Florida. Sales last year totaled $1.7 billion.

The chain sells bulk-size groceries, paper products, cleaning supplies and other goods, primarily to restaurants, caterers, clubs and small businesses. But individuals can also shop there without membership fees, and Smart & Final is a popular spot for parents of Little Leaguers and soccer players when it’s their turn to provide team snacks.

Smart & Final--whose executives declined comment, citing a pending stock offering--has weathered its share of adversity before, because the chain’s roots date back to 1871.

Even so, Roeder said recently that while Smart & Final is starting to show improvement, its results “are clearly still not at an acceptable level.”

Smart & Final tries to stand apart by operating relatively small stores (average size: 16,700 square feet) that are easy to navigate quickly, offer competitive prices and are conveniently located. It also tries to maintain strong relationships with its institutional customers, especially food-service outfits.

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But it’s been rough sledding in recent years. Smart & Final’s “same-store” sales gains--that is, sales of stores open at least a year, which is retailing’s primary gauge of success--have been dropping for the last few years. In 1994, its same-store sales showed a 5.5% gain, but they grew only 2.7% in 1996 and fell 0.2% last year.

The company faces intense competition from other major warehouse-style chains, such as Wal-Mart Stores Inc.’s Sam’s Clubs and Costco Cos. Costco’s stock, by comparison, has been stellar over the last 12 months, soaring more than 45%.

Yet Smart & Final’s core operations in Southern California and elsewhere in the West are holding up fairly well, said analyst Andrew Speller of the investment firm A.G. Edwards & Sons Inc. in St. Louis.

The company’s main problem, he said, is in Florida.

Smart & Final has been building a food-service operation in southern Florida and opened about a dozen stores there, but the results had been disappointing. Distribution efficiencies between the food-service operation and the stores didn’t materialize and grocery sales didn’t reach expected levels. Worse, the company’s missteps alienated food-service customers in Florida, whose business will be hard to recapture, Speller said.

“They haven’t seen the return business that they once had,” he said.

Roeder is trying to change that. A former executive of Denny’s and Baskin-Robbins and a longtime Smart & Final director, “Roeder is taking an extremely disciplined approach to restoring [Smart & Final’s] former luster and positioning in the market,” analyst Jonathan Ziegler of Salomon Smith Barney said in a report last week.

Roeder and new management in Florida are improving the company’s service and retail operations there, and they’re also doing a better job of tailoring Smart & Final’s products to the Latino population living near its stores, which is boosting sales.

“The Florida stores are growing impressively,” with sizzling same-store sales gains of 25% or more over their previously depressed levels, Ziegler said. The strategy might lead to 40 additional stores in Florida, and it’s likely to be expanded to other Smart & Final locations in Arizona and Nevada, analysts said.

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For now, Smart & Final’s first-quarter earnings from operations--before interest costs and taxes--jumped to $4 million from $322,000 a year earlier, as sales climbed 19% to $398 million from $334 million.

But burdensome debt hangs over Smart & Final, which led to a net loss of $474,000 in the latest quarter and contributed to an $8.7-million loss for all of 1998.

That’s why Smart & Final also is preparing a $60-million rights offering in which its stockholders will be allowed to buy additional shares. As part of the deal, Casino will exchange all or part of a $55-million loan it made to Smart & Final for additional stock, which will slash the chain’s debt and its interest costs.

The offering is a major reason analysts expect Smart & Final to regain profitability this year, earning between 25 cents and 40 cents per diluted share.

Times staff writer James Peltz can be reached at james.peltz@latimes.com.

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Thinking Smarter

Led by new management, the Smart & Final chain of warehouse-style grocery stores is taking steps to bolster its sagging performance and stock price. Monthly closes and latest:

Tuesday: $10.56