Case Study: Lettuce & Tomatoes (L&T)

Lettuce & Tomatoes (L&T) is a chain of grocery stores headquartered in Minneapolis (Minnesota). It is privately held and its management has focused on the State of Minnesota. They own and operate 50 stores and compete against larger national chains like Whole Foods, which offers quality products at a higher price, and discounters like WalMart or Target. They do not try to be the cheapest but, instead, focus on fresh products and quality service. In their segment, they also compete with other chains.

Their financial results in the last 5 years were as follows:

FISCAL YEAR

REVENUES ($ billion)

NET INCOME ($ million)

2019

1.63

3

2018

1.80

-25

2017

1.75

35

2016

1.90

42

2015

2.20

- 123

Their main bank is Minnesota Union Bank (MUB) which has been working with L&T for more than 20 years. They provide L&T with cash management, credit card processing and also an unsecured revolving credit facility of $400 million. Over the years, L&T has gradually increased its draw as the following table shows:

END FISCAL YEAR

DRAWN AMOUNT ($ million)

2019

350

2018

230

2017

230

2016

175

2015

120

Bob, head of Credit Risk Management of MUB is monitoring closely L&T's financial performance as it is by far the largest exposure of the bank. Bob is a Minnesota native and has been shopping at L&T for decades. Lately, he tends to go less often though as he noticed that Whole Foods has better products and Target better prices. Whenever he goes to a L&T store, he notices that the parking lot looks empty and that some products are way past their expiration dates.

Bob has frequent contacts with L&T's senior managers who always reassure him. He knows that L&T owns a lot of undeveloped real estate that they purchased for future development and he already hinted that MUB may want to get some collateral when the loan comes up for renewal.

Bob recently met Lisa Denver, CFO of L&T. They meet at least quarterly and Bob calls her from time to time to receive updates on L&T's business. Bob was particularly interested in this meeting as he had to

Sylvain Bouteille - 2020

finish up his report for MUB's credit committee which would discuss the renewal of the $400 million credit line. Bob tried to listen as much as he can and did not take a lot of notes during his meetings with Lisa. He just wrote a few bullet points:

• -Business is not improving as consumers' disposable income have been at best flat in recent months. The announcement of the closure of a manufacturing plant of one of the largest employers in the region did not help.
• -WalMart and Target are competing hard in the region and their prices keep going down.
• -L&T's CEO does not like to own so much undeveloped pieces of real estate and hired
• engineering firms to start developing two sites and open two stores for the first time in years. He recently mentioned that L&T should aim at opening three stores a year in the next five years.
• -One of L&T's biggest competitors' owners will retire in a few months and the chain might be for sale. L&T's CEO started discussing with them about an acquisition.
• -To improve customers' experience, L&T is considering investing in technology allowing customers self-check out. They will also invest in their IT systems which has not been upgraded for years and could be vulnerable to cyber attacks.
• Back in his office, Bob feels that this year's renewal needs more attention than usual. He is concerned by the evolution of L&T's financial performance and business plan. He definitely wants to strengthen the loan. Covenants have historically been light, time has come to strengthen them.
• If you were Bob, what type of covenants would you consider? What else would you recommend to the credit committee?