Are SUPERVALU's Problems Superficial?

Shares of SUPERVALU (NYSE: SVU  ) are down nearly 50% today after the grocery store chain posted disappointing earnings for its first quarter. Still, a closer look reveals there's much more at risk here than one bad quarter. For starters, shareholders who were once interested in the stock for its rich dividend yield now must look elsewhere.

Management announced yesterday it would bench its dividend and enforce strict price cuts in an effort to turn operations around at the embattled company. The country's third-largest supermarket behind Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) has struggled to keep up with its rivals.

Reality check
SUPERVALU delivered disastrous quarterly earnings of $0.35 on revenue of $10.5 billion. For comparison, analysts were looking for $0.38 per share and revenue of $10.8 billion for the period. Unfortunately, the bad news doesn't end there. The company faces increased competition from big-box retailers like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) .

Last year, Target followed in Wal-Mart's footsteps when it expanded to include fresh and packaged food products in its superstores. While perishables carry a lower profit margin, everyday items like groceries position stores like Wal-Mart and Target as one-stop-shops. The idea is that once you're in the store, you are more likely to make other, higher-margin purchases as well.

Let's see how these food-retailing rivals compare to SUPERVALU in terms of price performance.

Source: YCharts.

SUPERVALU CEO Craig Herkert said the company is committed to offering the lowest prices in order to curb competition in the space. In addition to losing customers to discounters, SUPERVALU is deeply in debt. Management plans to rein in costs by cutting operating expenses by $250 million over the next two years. But is it enough to save the drowning company?

What the future holds
Fellow Fool and retail analyst Austin Smith is confident that a turnaround is in the cards for SUPERVALU. Nevertheless, a rebound in the stock is unlikely -- at least in the near-term -- while the company tries to restructure its heavy debt load. There's a lot of uncertainty surrounding SUPERVALU, which is why more conservative investors may wish to sit this one out for now.

In the meantime, take a look at this special free report outlining "The Real Cash Kings Changing the Face of Retail" and be sure to add these companies to MyWatchlist -- the Motley Fool's free tool that lets you track and monitor your favorite stocks. Simply click the links below next to the stocks you'd like to follow.

Foolish contributor Tamara Rutter owns shares of Target. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services have recommended buying calls on SUPERVALU. Motley Fool newsletter services have recommended creating a bull call spread position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2012, at 2:28 PM, midnightmoney wrote:

    How'd that song go...?

    "Evisceraaaaation, move me brightly,

    like the song with sense and color,

    all the way despair..."

  • Report this Comment On July 12, 2012, at 2:44 PM, eblastman01 wrote:

    $.35 eps WRONG! it was $.19 get your facts right.

  • Report this Comment On July 12, 2012, at 3:06 PM, JesseJamesFinn wrote:

    SVU is heading the way of "PennTraffic", Bruno's and other stores that lost touch with their customer base. SVU stores in California are slow, prices are exorbitant and customer service is very sad. The debt load is going to destroy this company, who is going to refinance this company on the verge of BK?

    I would not loan my worst enemy's money to service this company's debt. The "cockroach theory"

    tells the investor, if you see one "roach, you know there are more where that came from". I don't think management is telling investors everything, Wall Street has lost confidence with SVU, good luck at making money with this stock, it's too risky now!

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