Finding Super Value In Grocery Stores -- Not That One

Coming from the world of retail, I'm happy for someone to market to me when that marketing is good. The unexpected purchase that comes along only because a good sales person really gets me fired up is a purchase that I love to make. But sometimes what the company thinks is exciting strikes me as odd. In its last earnings release, as one of a mere five lead points, SUPERVALU (NYSE: SVU  ) highlighted that sales fell less quickly this quarter. Huzzah!

Now, in the company's defense, it also called out a drop in admin costs and a nice bit of debt refinancing, but the overall message was mediocre. SUPERVALU had a drop in revenue, a fall in comparable-store sales, and a decline in operating income.

All the hope that's fit to print
On its earnings call, SUPERVALU CEO Sam Duncan summed up the company's current position nicely. He said, "We still have a great deal of work ahead of us but the management team and I are laying the foundational pieces that have to be in place for us to attract more retail accounts through our distribution businesses, more licensees to our Save-a-Lot format and more customers to all of our retail stores." In short, the company is at the beginning of a long road.

Investors in SUPERVALU bought into the hope on the day of the announcement, and the company's shares had jumped up 22% at one point in the day. Then, waking in the cold, bright sunshine of the following day, everyone peeled their eyes back and realized that maybe it wasn't that great and the stock pulled back. It's still up 8% from before the earnings release, but some of the hype has faded.

The reason investors were willing to dial back so quickly is twofold. First, the company has a substantial short position held against it and there may have been a squeeze on the day of the announcement as losers sold off to cut their losses. More importantly, investors may have reconsidered how SUPERVALU was positioned against its competitors.

The land's lay
With its falling sales, negative operational income, and lackluster brands, SUPERVALU isn't going to win a beauty contest anytime soon. The line of better choices is long, and investors are quick to move to the new hot thing in the sector. Right now, Kroger (NYSE: KR  ) and Whole Foods (NASDAQ: WFM  ) both represent more interesting ways to make some money in the grocery store business.

Each has its specific perk, but all three are winning in ways that SUPERVALU is losing. Kroger recently acquired Harris Teeter, a regional grocer with higher margins on the East Coast. It also posted a 3.3% year-over-year gain in comparable-store sales last quarter along with a 2.9% operating margin. The stock has been on a run recently due to acquisition news and strong results. Kroger is up 50% year to date, though that's nowhere near the 196% gain that SUPERVALU has seen as speculation about its future has run rampant.

Whole Foods has played the very opposite end of the grocery spectrum, but it's done so in a consistent manner. The company keeps putting up strong sales growth figures, with year-over-year comparable sales rising about 7% in both of its most recent quarters. Operating margin is where Whole Foods sees the biggest distinction, and last quarter it rose to 7.5%, putting other grocers to shame. The stock price reflects that strength, and Whole Foods trades at a costly P/E of 40 compared to Kroger's P/E of 13 -- SUPERVALU doesn't have an 'E', and thus no P/E, either.

In the long run, I trust the strength at Kroger and Whole Foods much more than the speculation and hope that seem to be fueling SUPERVALU, right now. That's not to say that the company won't be able to turn it around -- just that there's a lot riding on a plan.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today -- just click here to read more.


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  • Report this Comment On July 22, 2013, at 11:35 PM, PEDawg wrote:

    Andrew...assuming that SVU could realize profit ex-items of, say, 20 cents per quarter or this fiscal year, their "comeback" beginning, what would you then value the stock ?

  • Report this Comment On July 23, 2013, at 7:52 AM, TMFRedRam wrote:

    I'm not sure that gives enough data for a meaningful valuation. But given that comparable competitors run P/E's in the low teens, I'd say something like $9.

    Again, take that with a grain of salt.

    Cheers, Andrew

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