Expanded produce retail and distribution is one area SUPERVALU is trying to grow. Image source: Getty Images.

SUPERVALU INC. (NYSE:SVU) reported financial results for its first quarter on July 27, and just as it did when the company last announced earnings in April, reported declining revenue and profits in a highly competitive industry. The 4% sales dip, though, wasn't a surprise, particularly with many of the products it sells and distributes, such as eggs, milk, and ground beef costing less this year. However, the 26% drop in earnings per share was a bit unexpected, as reflected in the nearly 13% decrease in the company's share price following the earnings release.

Let's take a closer look at SUPERVALU's first-quarter earnings.

The keys to SUPERVALU's financial results

MetricQ1 2017Q1 2016Change
Revenue  $5,196.0  $5,407.0 (3.9%)
Net income  $46.0  $61.0 (24.6%)
Earnings per share  $0.17  $0.23 (26.1%)

Revenue and net income in millions. Data source: SUPERVALU.

Net income fell 25%, but it's worth noting that SUPERVALU's gross profit margin remained the same, at 15% in the quarter. However, SG&A expense was only down about 1%. In other words, the company wasn't able to gain any additional operating leverage just because revenue fell in the quarter, leaving the company with a $25 million decline in operating income. 

Here's a breakdown of sales results by segment:

  • Wholesale: Revenue fell 7.6% to $2.46 billion, due to lost customers and lower sales to existing customers. 
  • Save-A-Lot: Revenue at the 1,300-plus retail operation was up 1.7% to $1.43 billion, driven by new store openings. Identical store sales (commonly called comps) -- both company-owned and licensee -- fell 1.4%.
  • Retail: Sales at the company's non-Save-A-Lot retail stores of $1.43 billion, a 2.9% decline from last year. Identical store sales fell 4.5% in the quarter. 

The impact of lower prices played a pretty significant role in the company's sales decline. According to Save-A-Lot CEO Eric Claus, the Save-A-Lot corporate stores would have had positive comps in the quarter, if the negative price impact of ground beef, eggs, and milk were taken out of the mix. However, it was the impact of lost customers at the wholesale level that had the biggest impact on SUPERVALU's revenue decline. 

The biggest culprit in lower profits, however, appeared to be the retail segment, which reported a $25 million decline in operating income. That was equal to the operating income decline in the Wholesale and Save-A-Lot segments combined. 

More on the Save-A-Lot spinoff

In the quarter, SUPERVALU took several steps that moved it closer to being able to make a move with Save-A-Lot. SUPERVALU CEO Mark Gross said that the company had filed an amended SEC filing related to the potential spinoff in June, and that he expected to have updated separate financials for the Save-A-Lot business soon. COO and CFO Bruce Besanko said that the company also amended its term loan to allow for certain transactions necessary to spin off Save-A-Lot. 

In other words, the operating business may have taken a step or two back, but they moved the ball down the field when it comes to moving forward with Save-A-Lot as a separate business. 

Bonus update: On Aug. 3, SUPERVALU issued a press release related to the Save-A-Lot separation, announcing that it continues to pursue its plan to partly spin off the business as a separate company while retaining partial interest, but that it was "prepared to consider other alternatives to improve stockholder value, and in this regard is also evaluating a possible sale of Save-A-Lot."

It's probably too soon to read anything into this announcement, but after nearly one year since the company first announced its plans to separate Save-A-Lot from the rest of the company, something's gotta give. Eventually. 

Moving forward

SUPERVALU's plans for Save-A-Lot are still up in the air, but at some point the company will move forward with a plan that management thinks will generate the most long-term value. For nearly a year the thought has been that a spinoff with the company retaining some ownership would be the direction, but a potential sale would give the company a lot of cash that it could use to reduce debt, pay a special dividend, other strategic purposes such as acquisitions in better growth opportunities, or (this seems likely) some combination of those. The "when" remains unknown, though the latest announcement would indicate it could be sooner rather than later. 

At the same time, the company continues to operate in an exceedingly competitive business that doesn't have huge growth prospects. The company acquired 22 grocery stores in the quarter, while also reaching a long-term supply agreement with Marsh Supermarkets to supply 70 of its stores in two states. Moving forward, much of its growth will be drive by taking market share from competitors and acquisitions, though opening new retail stores will continue to play a role as well. 

For now, the company has work to do to make up for lost ground in recent quarters, especially in its wholesale business, where the impact of lost customers is weighing heavily on the bottom line. No matter the end-result of the Save-A-Lot separation, retaining and growing its customer base in its wholesale business is going to be critically important to the company's long-term success and profits. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.