It doesn't look like the grocery business got any easier in the second quarter of this year. Not only did Supervalu (NYSE:SVU) offer up rotten guidance on Tuesday, but Albertsons' (NYSE:ABS) earnings report on Wednesday wasn't exactly the stuff of gourmet dreams either.
Sales were flat for the period, as ongoing price competition mostly negated any store traffic improvements. Gross margins eased off a bit, as did operating margins, and operating profit declined more than 8%. Looking at earnings from continuing operations, Albertsons posted a 12% drop over last year and missed the mean analyst estimate by a similar amount.
As W.D. Crotty covered last week, Albertsons is now pondering some strategic options. The company continues efforts to be more price-competitive while improving stores with enhancements like pharmacies and Office Depot (NYSE:ODP) departments. What's more, it owns about 60% of its stores and is considering selling some of the underperforming real estate. Of course, there's also the possibility that the company will sell the whole kit 'n' kaboodle to someone else.
From a strategic standpoint, it might make more sense to pair up with another grocery chain. Perhaps the combined entity could wield some power in its own right and come closer to fighting off Wal-Mart. But who? Walgreen (NYSE:WAG) and Whole Foods (NASDAQ:WFMI) both could do it, but why would they want to?
The answer could be Kroger (NYSE:KR). There is certainly overlap in states like California and Texas, but the combined entity could sell redundant stores to help defray the cost of the deal. Will this actually happen? I have no idea.
It'll be interesting to see who (if anyone) comes forward to make a serious offer to buy Albertsons. My hunch is that the ultimate buyer will be a private equity group, but how much would you pay for the privilege of having Wal-Mart and Target smash you in the mouth every day?
Albertsons stock doesn't look expensive relative to peer grocers, but that's kinda like being the tallest Oompa Loompa in the land -- it just doesn't mean all that much. True, there's a nice yield here, but not much in the way of growth or return on capital. I'm happy to hear that management is considering all alternatives for delivering value to shareholders, though. That might be investors' best shot at seeing a strong return from Albertsons' stock.
For more Foolish food for thought:
- Albertsons on the Auction Block?
- United Natural Foods: Healthy Eating, Healthy Stock?
- Kroger Crows About Its Quarter
- Is Albertsons Fighting the Inevitable?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
