What Do Earnings Signal for SUPERVALU?

The American retail market is getting flooded with more and more retailers. Surprisingly under such intense competition, SUPERVALU (NYSE: SVU  )  posted earnings that were far better than last year's results. Does this make SUPERVALU a buy? Let's take a look at the company and compare it with other retail players Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) .

Third-quarter earnings
SUPERVALU's earnings for the latest quarter witnessed a jump of 50% from the comparable quarter of last year. The company reported earnings per share of $0.12 compared to per-share earnings of $0.08 in the year-ago quarter. However, the company's revenue dipped slightly to $4.01 billion.

In 2013, SUPERVALU sold more than 900 stores to a private equity firm Cerberus for $3.3 billion. Since then, SUPERVALU's sales have dwindled slightly, though the company has been able to lower its expenses to a great extent. This has resulted in a healthier operating margin, hence more profits for the company.

Segment analysis
SUPERVALU's supermarket chain, Save-A-Lot, once again remained strong and contributed largely toward the company's growth. Its net sales rose 2.6% to $991 million, up from $966 million last year. Same-store sales grew by 1.7%.

During the quarter, Save-A-Lot lowered its prices on dairy products, which helped it gain a strong foothold in the market, increasing identical-store sales and overall revenue. The operating margin was also slightly higher due to cost-cutting initiatives taken by the company.

Retail food saw a decline in same-store sales, which was a direct result of intense competition in the retail market. In comparison to the previous year, net sales declined 2.6% while same-store sales dipped by 1.9%. However, the segment's operating margin increased by 1.5 percentage points.

Sales in the independent business segment were lower by 3.7% due primarily to the loss of two large customers and relatively weak sales to existing customers, including the military. There was a minor improvement in the segment's operating income thanks to strong expense management and enhanced professional-services income.

Future outlook
Big players like Kroger and Wal-Mart have been continuously expanding their grocery and food business in the last few years, which has put companies such as SUPERVALU and Safeway under mounting pressure. In such challenging circumstances, SUPERVALU's decision to abandon highly competitive regions to fully focus on limited segments has certainly proved to be a wise one. It has helped to reduce operating costs, which is why the company is finally posting profits instead of losses. Moreover, lower operating costs will continue to boost earnings in the future as well.

However, SUPERVALU will have to keep a check on its prices, as it's not only facing big companies but also new entrants like Aldi, a German-based discount chain, which will open 650 stores in the US by 2018. This means that the margins can only be increased by reducing operating expenses rather than by increasing prices.

Safeway has also become a victim of intense competition created by retail giants Wal-Mart and Kroger. For this reason, it is closing down its operations in one of the most competitive markets, Chicago. Safeway's latest quarterly performance wasn't up to the mark, as earnings fell by 58% to $0.27 per share. Nevertheless, revenue grew by 1.1%, spurred by comparable sales growth of 1.6%.

In 2013, Safeway also sold its Canadian business; the proceeds from the deal will be used to pay off debt and repurchase shares. The company has narrowed its vision, so there are no substantial growth plans ahead. Instead, the company will keep on concentrating on its established market.

Leading supermarket chain Kroger recently acquired Harris Teeter for $2.5 billion, which will strengthen Kroger's position in the grocery market even more. The company's latest quarterly performance remained strong as well. Earnings per share stood at $0.53, which represents a 15% increase from the last year's comparable quarter. The quarterly result also marked the 40th consecutive quarter of positive identical sales for the company. Long-term growth rates are sound and healthy, indicating that the company will continue to perform well in the future.

 Final thoughts
SUPERVALU's third-quarter earnings almost doubled this year. The decision to shut down operations in highly competitive markets proved fruitful, as the company was able to decrease its operating costs. As the market gets inundated with more companies, price hikes won't be seen in the coming years. Therefore, the retailers will have to reduce their costs to enhance their margins. SUPERVALU has done exactly what was required under these testing conditions. Though the company seems to be on the right track, whether or not it can keep reducing costs remains to be seen. Considering this, I remain neutral on SUPERVALU at this point in time.

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