Supermarket chain SUPERVALU (NYSE:SVU) will report its Q3 2007 financial results on Jan. 9, and there's little consensus that it will be able to find its way out of a brown paper bag.

What analysts say:

  • Buy, sell, or waffle? Of the 10 analysts that cover SUPERVALU, 60% rate it a hold, three say buy, and one says bag it with a sell.
  • Revenues. Revenues for the quarter are expected to be up by more than 124% to $10.5 billion, reflecting the acquisition of Albertson's grocery chain.
  • Earnings. Profits, however, are forecast to be up a more modest 5.6% to $0.56 per share.

What management says:
It won't be easy to compare SUPERVALU's results to last year's, because of the acquisition of Albertson's. However, it's expected that the chain should experience some economies of scale, now that it has roughly 2,500 stores across the country, including more than 900 in-store pharmacies. The company has forecast that identical-store sales will be flat for the remainder of the year, though the Albertson's stores should see a slight uptick in traffic. The grocer is planning major renovations at dozens of its stores, and total capital expenditures for the year will be $950 million. That should seemingly eat into performance, though total sales are expected to be in the range of $35 billion to $37 billion.

What management does:
While the Albertson's chain helped to boost margins for SUPERVALU, and looks to be the main driver of growth for the company for the time being, there remain a lot of one-time charges the company will be accounting for that will eat up anywhere from $0.25 to $0.30 per share this year, let alone for the acquisition.

Margin %

09/05

12/05

03/06

06/06

09/06

Gross

14.7

14.7

14.5

14.4

18.0

Op.

3.2

3.2

2.6

2.7

3.1

Net

1.4

1.5

1.0

1.0

1.2
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Supermarkets are a difficult sector to invest in because of their thin profit margins. When they need to expand or update their stores, as SUPERVALU will have to do, expect those margins to get even tighter. The grocer has taken on a lot of debt (total debt-to-capital ratio jumped to 64.3% at the end of last quarter), and interest payments on the debt soared to $175 million in the last quarter. Cash, meanwhile, fell nearly by half, to $281 million, though the company did repurchase 4.7 million shares at an average price of $28.29 each. At least SUPERVALU's using its cash in a way Fools like to see. Still, you may want to wait for the inevitable sales before going shopping here.

Competitors:

  • Safeway (NYSE:SWY)
  • Kroger (NYSE:KR)
  • Great Atlantic & Pacific Tea (NYSE:GAP)
  • Wal-Mart (NYSE:WMT)
  • Target (NYSE:TGT)
  • Costco (NASDAQ:COST)

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.