SUPERVALU: The Price of Embiggening

SUPERVALU (NYSE: SVU  ) reported third-quarter earnings today, and they met management's guidance. The results are rather jumbled, though, and will remain that way until at least a year's worth of results from the $11.3 billion acquisition of Albertson's are included. One thing is for certain: Despite record sales and increased size, increased capital spending is evidence that economic profits for this grocery chain are still a pipe dream.

First, a look at the results. Since detailing yearly comparisons at this point is moot, let's focus on a few highlights. For the quarter, the company earned $113 million, or $0.54 per diluted share, on $10.7 billion in sales. Consolidated comparable same-store sales were up 60 basis points, helped by the Albertson's store base. There are one-time transactions related to the Albertson's acquisition that, when backed out, would raise earnings, but let's get real -- SUPERVALU has been taking restructuring charges since 2000. It's one of those recurring non-recurring situations. I recommend leaving it in.

Another recurring theme is lots of capital expenditures. Management announced it plans to spend $1.2 billion in capital outlays for fiscal 2008, which is up from fiscal 2007's estimated $1 billion budget (when including Albertson's spending before being acquired). The increased spending will undoubtedly help the company remain competitive against other major grocery chains like Kroger (NYSE: KR  ) , Safeway (NYSE: SWY  ) , and Wal-Mart (NYSE: WMT  ) . However, that doesn't guarantee SUPERVALU will be able to expand its margins enough to generate profits above its cost of capital.

Much like Kroger, SUPERVALU (with or without Albertson's) is an X company at best. SUPERVALU's current $16.4 billion enterprise value confirms this. Using ballpark figures until the next 10-K comes out, I calculate SUPERVALU's invested capital north of $17 billion, including goodwill and capitalized operating leases. Because the market is valuing SUPERVALU at or below its invested capital, I think it's safe to bet that the market doesn't expect any economic profits moving forward.

Or, as Fool contributor Stephen Simpson succinctly put it back in April:

"Let's see whether this makes sense. Take a management team that apparently hasn't ever produced a return on capital in excess of the cost of that capital, and give them even more assets. Good plan, huh?"

We'll see.

For related Foolishness:

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Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy.


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