Let's see whether this makes sense. Take a management team that apparently hasn't ever produced a return on capital in excess of the cost of that capital, and give them even more assets. Good plan, huh?
Well, that's what's going on with SUPERVALU (NYSE: SVU). I didn't like this company much before, and now, with the acquisition of some of Albertson's, there'll be a larger company for me to dislike.
Financial performance this quarter was nothing to write home about. Sales were up a whopping 1%, with a slight decline in the retail food business and a slight increase in the distribution business. On the retail side of things, comp-store sales were down 1.1%. I'm not sure I can recall a circumstance where declining comps were good news.
Likewise, profitability was no great shakes. While charges muddy the straight comparisons, earnings in the retail business were down slightly, and earnings in the distribution business were down by almost 30%. All told, adjusted earnings were down by a low-teens percent, and given the contributions from lower corporate expenses and lower interest expense, I think you can raise a little yellow flag with earnings quality (though that might be one of the most subjective concepts in finance and investing).
The company didn't offer up a cash flow statement with the earnings, nor did it reveal the number on the conference call, either. Whatever the number proves to be, though, I don't doubt the company will be faced with investing a fair bit more into capital expenditures over the next couple of years. You know, I had the sense that Albertson's had been underinvesting in its store base..
This stock certainly looks cheap, but then, that might be deservedly so. We're not talking about another Whole Foods (Nasdaq: WFMI) here, or even a Kroger (NYSE: KR). I also find it interesting that there's a fairly large short position on this stock, and I don't normally think of supermarkets as traditional bear bait.
Maybe this is as bad as it gets. Maybe the stock is now priced at such a pessimistic level that the odds favor a recovery. But I have a hard enough time investing in turnarounds in highly competitive sectors (Wal-Mart (NYSE: WMT), anyone?) as it is. Lacking faith in management makes it all the harder. Let's see how this story plays out. In the meantime, I'll be waiting to read this year's proxy and see what sort of bonus the board awarded this management team.
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