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Oppenheimer reiterated a Perform rating on Smart & Final Stores (NYSE: SFS) after meeting with management. Oppenheimer walked away with a view of a stable consumer, competitive, and economic backdrop for the chain in the western geographies where it operates. SFS has already built in a 2%-ish deflation rate for the back half of the year. This is consistent with the August reading of the CPI data. Also, commentary suggests plans to continue targeting a 10% unit growth rate for the Smart & Final banner along with a handful of Cash & Carry locations annually.
Analyst Rupesh Parikh commented, "Over the past few days, we spent time with senior management of SFS including CFO Rick Phegley. The company does not comment on business trends intra-quarter. The tone of management still remains very constructive on both the Haggen store acquisition and the longer term growth opportunity. Similar to our other grocery names, the N-T deflationary backdrop remains quite challenging. SFS is a bit more levered to deflationary pressures vs. peers given relatively higher exposure to certain categories such as beef, cheese, and dairy. However, on the positive side, our sense is that the promotional environment is more stable across SFS markets vs. more downbeat commentary in some cases from other players lately. We continue to see a longer term opportunity for the business, and believe the name should be on the radar for investors. Unlike some of our other chains, we see relatively lower risk to the margin structure. With the lapping of Haggen cannibalization headwinds and likely return of food inflation at some point next year, we think the back half of FY17 and FY18 could look much better. On our FY17 EBITDA forecasts, shares currently trade at a multiple of just 7x, which we view as a discount to the company's longer term prospects. For shorter term investors, we would continue to steer clear of the entire grocery space."
Shares of Smart & Final Stores closed at $12.70 yesterday.
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