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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers