Exploring the Disruptive Force of Retail M&A

Michael Johns
BMO Managing Director
Executive Summary
“Traditional” Grocery Adaptation Current Industry Tailwinds Stronger Than Headwinds

 U.S. consumer is aging and becoming more diverse  Only the strongest survive

 Health, wellness, and specialty trends  Alternate channel competition

 Omni-channel consumer  Structural resistance to online (so far)

 Improvements in the supply chain  Near term deflation – long term inflation

 Capital markets disruption

The Pace of Activity Has Picked Up The Future Is Uncertain

 Overall U.S. economic recovery  Long term impact of online

 Lesser threat from Walmart  “Fresh” supply chain and food safety

 Few scaled independents left  Access to capital

 Low cost of capital  Changing formats

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Current Themes in Retail
KEY FACTORS INFLUENCING RETAILERS

 The U.S. Consumer  Real Estate Values

 Commodity Costs  Increasing SG&A

 Strong Dollar  Increasing Labor Costs

 Near-term Growth Outlook  Shipping & Returns

KEY TRENDS IN RETAIL

 Omni-channel is the winning strategy  Changing consumer demographics

 Customer focus vs. channel focus  “Loyalty” program transformation

 Brick & Mortar as a brand building experience
 Retailers re-evaluating supply chain
 Increasing use of technology and “big data”

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Where Food Consumers Are Spending
FOOD AWAY FROM HOME VS. FOOD AT HOME

60% At Home Away from Home

50%
`

40%
1986 1998 2010 2022P

OVERALL SPENDING ON FOOD CONTINUES TO GROW

2014-2022P CAGR
Overall Food Expenditures 3.9%
At Home Away from Home 2022
Food At Home 3.2%
$1,950
Food Away from Home 4.6%
Gross Spending (in millions)

2014
$1,047,700
$1,300
$731,300

$650
$950,600
$727,800

$0
1986 1998 2010 2022P

Source: Willard Bishop June 2015 and June 2010 - The Future of Food Retailing and USDA
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Retailers Must Adapt to an Older and More Diverse American Consumer
INCREASINGLY DIVERSE U.S. CUSTOMER BASE

White Hispanic Asian Other

15.4% 15.7% 16.1% 16.4% 16.8% 17.2% 17.6% 18.1% 18.5% 18.9%
5.1% 5.5% 5.8% 6.2% 6.5% 6.8% 7.1% 7.4% 7.7% 7.9%
17.8% 19.1% 20.5% 21.9% 23.4% 25.0% 26.5% 28.0% 29.3% 30.6%

61.8% 59.7% 57.6% 55.5% 53.3% 51.0% 48.8% 46.6% 44.5% 42.6%

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
AGING U.S. POPULATION

Age 60+ Age 65+ Age 85+

30%

25% 25.5%

20% 20.2%

15%

10%

5% 4.3%

0%
1980 1990 2000 2010 2020P 2030P 2040P 2050P

Source: USDA, U.S. Administration on Aging

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Conventional Grocers Have Adapted

BIFURCATED SUPERMARKET LANDSCAPE SSSG – FY 2012 SSSG – LTM

TODAY

Specialty
-4.9%

3 YEARS
AGO

Conventional +1.0%

-0.2%
Value

Source: Company filings

5 Note: SSSG % reflects average quarterly same-store sales growth
Scarce Remaining Scaled, Independent Grocery Players
GROCERY RETAIL HAS UNDERGONE SEVERAL WAVES OF CONSOLIDATION

Apr-97 Jun-99 Jun-06 Mar-12 Mar-13 Jan-14 Jul-14 Oct-15

Safeway acquires Albertsons Supervalu BI-LO acquires Cerberus Kroger Kroger Fresh Market
Vons acquires acquires Winn-Dixie acquires New acquires acquires explores sale
American Stores Albertsons Albertsons Harris Teeter Vitacost

1996 1997 1998 1999 2006 2012 2013 2014 2015 2016+

Aug-96 Oct-98 Sep-99 Jun-06 Nov-13 Mar-14 Nov-15

Ahold Ahold Safeway Cerberus Sobey’s Cerberus/Albertsons Kroger
acquires acquires acquires consortium acquires announces announces
Stop & Shop Giant Food Randall’s acquires non- Safeway acquisition of acquisition of
Food core Albertsons Canada Safeway Roundy’s
Markets stores

SELECTED EV/LTM EBITDA VALUATIONS HAVE TRENDED DOWN OVERALL, BUT STILL EXHIBIT PEAKS RELATED TO PERIODS OF HIGH M&A ACTIVITY

Avg. Avg. (Excl. SVU)

Albertson's American Stores Ahold Ingles Markets Kroger Safeway SuperValu ‘94-Today Average: 7.1x 7.3x
Today Average: 7.3x 7.9x
18.0x

13.0x

8.0x

3.0x
Jan-95 Jan-02 Jan-09 Jan-16

Source: Capital IQ
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Specialty Grocery Valuations Have Fallen

STOCK PRICE PERFORMANCE

National Grocer Index Regional Grocer Index N&O / Specialty Grocer Index S&P 500

115

97
93
90
92

65

54

40
Mar-15 Jul-15 Nov-15 Mar-16

EV / NTM EBITDA

National Grocer Index Regional Grocer Index N&O / Specialty Grocer Index

13.5x

11.0x

8.5x 8.5x
7.8x
7.0x
6.0x
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Source: Capital IQ; as of 3-Mar-2016

7 Note: National Grocers include Kroger, Ahold, and SuperValu, Regional Grocers include Ingles, SpartanNash, Smart & Final, and Weis Markets, N&O / Specialty
include Fairway Group, Whole Foods, The Fresh Market, Natural Grocers, and Sprouts Farmers Market.
Precedent Transactions Show Cyclical Upturn in Traditional Grocery Valuations
PERIOD: 2005 – 2007 PERIOD: 2008 – 2011 PERIOD: 2012 – 2015

Mean: 9.3x Mean: 6.4x Mean: 7.2x

Median: 10.0x Median: 6.7x Median: 7.0x

12.8x

11.3x
10.7x 10.7x
10.1x 9.9x
9.2x

7.6x 7.5x 7.8x

7.2x
6.8x 6.7x 6.8x
5.7x 5.7x 5.5x
5.0x 5.2x
4.2x
3.6x

VG's T&T New United

A&P Smart & Wild Oats Pathmark Tops A&P Grocery Winn- Safeway Harris Nash
Target Sobey's Food Super- Target A Target B Albert- Super- Gelson's Safeway Roundy's
Canada Final Markets Stores Markets Canada Outlet Dixie (Canada) Teeter Finch
Center market sons markets

Great
AB New
Whole Atlantic & Morgan Spartan Berkshire Acquirer Acquirer Spartan
Acquirer Metro Apollo Empire Loblaws Yucaipa BI-LO Acquisiti- Sobey's Kroger Albert- TPG Albertson's Kroger
Foods Pacific Stanley Stores Partners A B Stores
on son's
Tea

EV $1,524 $806 $664 $1,279 $1,060 $310 $102 $225 $400 $400 NA $464 $300 $3,300 $5,800 $2,469 $771 $385 $369 $9,067 $823

Year 2005 2007 2007 2007 2007 2007 2008 2009 2009 2009 2011 2012 2012 2013 2013 2013 2013 2013 2013 2014 2015

Traditional Food Retail Mean: 7.3x Specialty Food Retail Mean: 10.0x
Traditional Food Retail Median: 6.8x Specialty Food Retail Median: 10.1x

Consolidation has driven up traditional grocery multiples in recent years;

scarcity of scaled, independent assets likely to drive continuation of recent trends
Source: BMO Capital Markets, Capital IQ, and Company filings and press releases
8 Note: Omitted information reflects proprietary BMO Capital Markets knowledge.
Preparing for an Acquisition Diligence and Post-Integration Considerations
 Develop a clear M&A strategy  Financial leverage

 Broad internal buy-in  Owned vs. leased stores

 Human Resources  Ability to capture “synergies”

 Optimize the Balance Sheet  Unions / labor

 External Communications  Executing a “go to market” strategy

 Supply Chain Management  Systems integration

 Relationships with vendors

 Choosing a private label program

 Combining loyalty programs

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Capital Markets Volatility Is a Near-Term Headwind
 Equity Capital Markets EQUITY MARKET VOLATILITY

 The VIX has subsided after hitting nearly 4 year CBOE Market Volatility Index (VIX)
highs in late 2015 45

 Debt Capital Markets 40

 Pricing, terms, and availability are being impacted 35

by: 30
– Global growth and geopolitical concerns 25
– Challenging commodity environment 20
– Overall investment sentiment (outflows) 15
– Sector specific issues (Retail, Energy, etc.) 10
– Robust M&A environment 5
Mar-14 Nov-14 Jul-15 Mar-16

LEVERAGED LOAN MARKET HIGH YIELD BOND MARKET

Average Bid Price BB Index B Index

101.0 11% BB 10-Year Average B 10-Year Average
Average Bid Price

10%
99.0 9%
97.0 (46)
Yield

8% bps
97.0
7%
87
95.0 6% bps
5%
93.0 4%
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16

Source: FactSet, AMG Data, Bloomberg, High Yield Prospect News, Standard & Poor’s Leveraged Commentary and Data, AdvantageData
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Volatility in the Capital Markets Is Impacting Retail Balance Sheets
ALBERTSONS’ IPO POSTPONED NEIMAN MARCUS IPO POSTPONED

 ~$2 billion October 2015 IPO delayed following disappointing  Delayed due to “jitters in the stock market”
Walmart outlook
 Bond prices have declined by over 30%
 Not expected to price until markets improve

BELK OFFERS SIGNIFICANT TLB DISCOUNT KKR SELF-ISSUES FOR RETAIL DEAL

 Widened discount to 89 cents on proposed $1.5 billion first-  KKR unable to find bank financing for LBO of Mills Fleet Farm
lien term loan to finance Sycamore’s ~$3 billion buyout
 Issued and underwrote over $700 million of debt, and used its
own capital markets desk to syndicate the debt
 One of the biggest discounts of the year

Source: Public websites

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The Debt of Major Grocers Has Traded Down
TLB TRADING PRICES – LAST 2 YEARS

SVU TL 2019 ABS TL due 2019 ABS TL due 2019 ABS TL due 2021 ABS TL due 2022
104

102
Bid Price

100

98

96

94
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

HIGH YIELD BOND TRADING YIELDS – LAST 2 YEARS

SVU 6.75% due 2021 SVU 7.75% due 2022 ABS 7.75% due 2022 ABS 7.75% due 2026
ABS 6.625% due 2028 ABS 7.45% due 2029 ABS 8.70% due 2030 ABS 8.00% due 2031
15.0%

13.0%
Yield-To-Worst

11.0%

9.0%

7.0%

5.0%
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Source: Bloomberg, AdvantageData

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 APPENDIX

Appendix

13
 APPENDIX

Grocery Retail – Trading Performance

Grocery Retail – Multiples and Trading Performance
National Grocers 8.5x EV / 2016E EBITDA EV / 2017P EBITDA
8.1x 7.8x 7.4x

5.0x 4.8x

8.2x
Regional Grocers 7.3x 6.9x 6.8x 6.6x 6.4x

n.a. n.a.

N&O / Specialty Grocers 13.9x

11.9x

8.1x 8.1x 7.6x

6.8x 7.3x
6.0x 5.7x 5.4x

Source: Capital IQ, Company filings, Reuters consensus estimates; as of 03-Mar-16

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 APPENDIX

Per-Store Traditional Grocery Performance Metrics

SALES PER STORE SALES PER SQUARE FOOT

Safeway Kroger SuperValu Roundy's Ingles

Safeway Kroger SuperValu Roundy's Ingles
$12 $350
$300
$9 $250
$200
$6
$150

$3 $100
$50
$0 $0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

SAME-STORE SALES INDEXED STORE COUNT GROWTH

Safeway Kroger SuperValu Roundy's Ingles Safeway Kroger SuperValu Roundy's Ingles
6.0% 130.0%
4.0%
110.0%
2.0%
0.0% 90.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-2.0% 70.0%
-4.0%
50.0%
-6.0%
-8.0% 30.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

Source: Capital IQ, company filings, equity research, FactSet; as of Q4 2015

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 APPENDIX

Per-Store Specialty Grocery Performance Metrics

SALES PER STORE SALES PER SQUARE FOOT

Whole Foods Vitamin Cottage Sprouts Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market
$18 $350 Fairway The Fresh Market

$15 $300

$12 $250
$200
$9
$150
$6
$100
$3
$50
$0 $0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

SAME-STORE SALES INDEXED STORE COUNT GROWTH

Whole Foods Vitamin Cottage Sprouts Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market Fairway The Fresh Market
15.0% 200.0%

10.0% 170.0%

5.0% 140.0%

0.0% 110.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-5.0% 80.0%

-10.0% 50.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

Source: Capital IQ, company filings, equity research, FactSet; as of Q4 2015

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 APPENDIX

Traditional Grocery Historical Operating Performance

QUARTERLY EBITDA MARGIN QUARTERLY CASH FLOW MARGIN(1)

Safeway Kroger SuperValu Roundy's Ingles Safeway Kroger SuperValu Roundy's Ingles
7.0% 5.0%
6.0% 4.0%
5.0%
3.0%
4.0%
2.0%
3.0%
1.0%
2.0%
1.0% 0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0.0% -1.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

QUARTERLY ROIC(2) QUARTERLY GROSS MARGIN ROI(3)

Safeway Kroger SuperValu Roundy's Ingles Safeway Kroger SuperValu Roundy's Ingles
6.0% 1.8x
1.6x
5.0% 1.4x
4.0% 1.2x
1.0x
3.0% 0.8x
0.6x
2.0%
0.4x
1.0% 0.2x
0.0x
0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

Source: Capital IQ, company filings, equity research, FactSet; as of Q4 2015

17 1. Calculated as (EBITDA – CapEx) / Sales.
2. Calculated as (Tax-Affected EBIT) / (Average of Invested Capital).
3. Calculated as Gross Profit / Average Inventory Balance.
 APPENDIX

Specialty Grocery Historical Operating Performance

QUARTERLY EBITDA MARGIN QUARTERLY CASH FLOW MARGIN(1)

Whole Foods Vitamin Cottage Sprouts Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market Fairway The Fresh Market
15.0% 10.0%

10.0% 5.0%

5.0% 0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0.0% -5.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-5.0% -10.0%

-10.0% -15.0%

CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

QUARTERLY ROIC(2) QUARTERLY GROSS MARGIN ROI(3)

Whole Foods Vitamin Cottage Sprouts
Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market
Fairway The Fresh Market 4.0x
15.0%
3.5x
10.0% 3.0x
2.5x
5.0% 2.0x
1.5x
0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1.0x
-5.0% 0.5x
0.0x
-10.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015

Source: Capital IQ, company filings, equity research, FactSet; as of Q4 2015

18 1. Calculated as (EBITDA – CapEx) / Sales.
2. Calculated as (Tax-Affected EBIT) / (Average of Invested Capital)
3. Calculated as Gross Profit / Average Inventory Balance.
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