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When a company sells a huge chunk of its business for billions, investors should rightly expect big improvements. When SUPERVALU (NYSE: SVU ) decided to rid itself of the majority of its traditional supermarket business , this should have meant a fresh start. However, all investors are being left with is three slow growing businesses, and some serious questions that need answers.
Massive earnings growth doesn't matter
It sounds crazy to suggest that a huge improvement in earnings may not matter. If SUPERVALU investors look at the big picture, the company's net income is the last thing they should worry about.
Okay, maybe it's not the last thing, but there are several numbers that suggest real earnings growth isn't coming anytime soon. First, the company reported adjusted earnings of $33 million which compares to a $20 million loss last year. Just because a company moves from a loss to a profit doesn't mean it is out of the woods.
Several articles noted that SUPERVALU owed much of this earnings improvement to lower operating costs. In fact, one of the key reasons the company reported a profit has to do with its level of SG&A expenses.
Normally a low level of SG&A spending is a positive sign. However, in SUPERVALU's case, investors should question whether the company can maintain this level going forward. In the most recent quarter, SUPERVALU reported its SG&A expenses came in at about 12% of sales . To put this into context, this was significantly lower than competitors Kroger (NYSE: KR ) at about 16 %, and Safeway (NYSE: SWY ) at over 24 %.
When you combine this low level of expenses with the fact that SUPERVALU has one of the lowest gross margins in the industry at 14.6%, investors should be skeptical. Both Kroger and Safeway sport gross margins north of 20%. The bottom line is that SUPERVALU might be able to increase its gross margin, but its SG&A expenses are likely to rise over time as well.
3 divisions and none look good
If SUPERVALU investors are looking for some positive news to hold onto, they need to look at a different company. Kroger reported total sales were up 4.6% year over year and same-store sales increased by 3.3%. Safeway did report that overall sales fell by 1.6%, but same-store sales increased by 1.2%.
By comparison, SUPERVALU reported sales declines at all three of its divisions. Same-store sales were down as well. The worst part is that the company's Retail Food division is still dragging the company down. Selling Albertsons, Shaw's, and the company's traditional grocery businesses was supposed to allow management to focus on Save-A-Lot and its independent business division.
However, with more than 27% of the company's sales coming from its retail food division, this terrible business with anemic margins is still creating problems. Even if Save-A-Lot is the growth driver for the company going forward, this division only represents about 24% of sales and its sales are declining as well.
The truth is, the biggest driver for SUPERVALU is its independent business division at just under 47% of total sales. Unfortunately for the company, this division reported the worst decline in sales growth of the three. Unless SUPERVALU can find a way to continue its exit from the retail food business, I'm not sure how this story gets better.
Expectations have risen and so has the risk
One of the hardest parts of the SUPERVALU story to swallow is that the average analyst has significantly raised their earnings projections for 2013 and 2014. In the last 60 days, the company's average earnings estimate has increased by 39% for this year, and nearly 15% for next year.
What is ironic is that depending on what estimates you use, SUPERVALU either just beat or missed estimates in the most recent quarter. Reuters reported that SUPERVALU reported an adjusted $0.13 of EPS , "topping analysts' expectations by two cents." However, Yahoo! Finance pegged the average estimate at $0.14, which would indicate a miss of a penny.
For a company that missed estimates by a total of $0.24 over the last four quarters , a two cent beat or a one cent miss doesn't scream celebration time.
The bottom line is that SUPERVALU's stock has climbed from under $3 in the last year to over $7 today. For a company with no dividend and questionable growth, investors should consider taking profits. The company's stock sells for a forward P/E ratio that is just slightly lower than Kroger. The latter offers a yield of about 1.6%, a better gross margin, and nearly the same expected growth rate.
Sorry SUPERVALU fans, but your company's performance isn't exactly super. Given the alternatives, the stock doesn't look like a great value either.
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