After a Good Quarter, Is the Transformation Taking Root at SUPERVALU?

Regional grocer SUPERVALU impressed Mr. Market with its latest financial update, a better-than- expected report that led to a subsequent pop in its share price. Is it time to bet on the company?

Jun 6, 2014 at 9:30AM

Regional grocer SUPERVALU (NYSE:SVU) took its tough medicine last year, agreeing to offload most of its traditional grocery store banners to private equity firm Cerberus, a deal that allowed it to eliminate a big chunk of its debt load. While the company's results have been up and down since then, SUPERVALU seems to be on the right track, even going so far as to troll for potential acquisitions, as it tries to compete with larger sector players, like Wal-Mart Stores (NYSE:WMT).

SUPERVALU's latest financial update was another positive data point, as it reported better-than-expected profitability, leading to a subsequent pop in its share price. So, at current levels, is SUPERVALU a good bet?

What's the value?
SUPERVALU is one of the nation's leading grocers, operating a retail network of roughly 1,500 stores, mostly under its value-oriented Save-A-Lot brand. It also has a major presence in the grocery wholesale business, distributing products to more than 1,800 independent stores in 42 states. While the wholesale segment has notoriously razor-thin margins, it piggybacks off of SUPERVALU's existing distribution network infrastructure, theoretically allowing the company to enhance its overall profitability.

In its latest fiscal year, SUPERVALU posted improved financial results, highlighted by a 21.6% increase in adjusted operating income. Despite an underwhelming top-line gain, up just 0.1%, SUPERVALU's core Save-A-Lot segment seemed to anecdotally turn the corner, reporting a positive comparable-store sales performance for the period. More importantly, SUPERVALU remained net cash flow positive, providing the solid financial foundation necessary to pursue its long-term growth ambitions.

Out of the infirmary, into the frying pan
Now that SUPERVALU is out of the infirmary, the question is whether it can continue finding its way to higher profit growth. Unfortunately, accomplishing that task seems like it is going to be a tough slog, given the like-minded growth ambitions of its competitors.

Ironically, one of those major competitors is Cerberus, the aforementioned buyer of SUPERVALU's non-core grocery banners last year. That deal, though, was just a prelude to Cerberus' latest gambit, the acquisition of regional grocery chain Safeway (NYSE:SWY), a transaction that more than doubled its store network, adding a significant presence in the Western U.S.

In addition, Cerberus gained control of Safeway's manufacturing network through the transaction, including 20 plants in the U.S., which should allow Cerberus' grocery banners to upgrade their product offerings in the private-label arena.

Of course, SUPERVALU's biggest competitive threat is undoubtedly Wal-Mart, the nation's largest grocer with an unrivaled base of more than 4,800 stores in the U.S. Despite a lackluster year in 2013, evidenced by declines in comparable- store sales and operating profit, the company is ramping up its capital spending in the current year, with plans to increase the footprint of its Neighborhood Market brand. 

More importantly, Wal-Mart's prodigious operating cash flow, $23 billion in its latest fiscal year compared to $120 million for SUPERVALU, gives it the freedom to engage in so-called price investment, making life more difficult for smaller competitors that are aiming to compete in the value-price arena.

The bottom line
SUPERVALU has a new lease on life, thanks to management's decision to sell its underperforming grocery units, a wise move that vastly improved its balance sheet. That being said, the company's rightsizing transformation has it focusing on a value-conscious customer base in its retail operations, via its Save-A-Lot brand, a tough place to play, given the size and strength of its primary competitors.

Indeed, after a lackluster year, Wal-Mart is upping its planned capital expenditures, especially in its small-format Neighborhood Market segment, a strategy that is certain to increase the competitive pressure on everyone else, given Wal-Mart's stated desire to be the low-cost provider in each of its markets. As such, investors should be watching the story unfolding at SUPERVALU, but they should probably do so at a distance.

Warren Buffett just bought more Wal-Mart. Here's another company he's loading up on
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!


Robert Hanley owns shares of Supervalu and Safeway. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information