I may engage in hyperbole from time to time, but I'm always a bit wary when I spot it in quarterly earnings releases. Shouldn't the numbers speak for themselves? Warren Buffett and Bill Gates seem to think so; earnings releases from Berkshire Hathaway and Microsoft are usually replete with how the company could have done better. Modesty is a virtue.
Alas, SUPERVALU (NYSE:SVU) doesn't seem to agree. The fourth-quarter press release it issued yesterday was full of phrases like "powerful new business model," "transformational acquisition," "poised for continued success," and the like. Being proud of your business is OK -- that kind of passion is a key driver of success. But maybe the company should consider toning it down a little bit.
SUPERVALU more than doubled its size by acquiring Albertsons in June 2006, so it's a bit tricky to compare quarter-over-quarter results. There are huge differences in the scale of the numbers, significant unusual items from both quarters, massively higher interest expense, a big change in the tax rate, and a lot more shares outstanding. In light of this, I've analyze the income statements from two perspectives:
|
(Millions) |
Q4 '07 $ |
Q4 '07 |
Q4 '06 $ |
Q4 '06 |
% Change |
|---|---|---|---|---|---|
|
Total Sales |
10,301 | N/A |
4,640 | N/A |
122.0% |
|
EBT Excl Unusuals |
269 |
2.6% |
148 |
3.2% |
81.4% |
|
EPS Excl Unusuals |
$0.76 | N/A |
$0.56 | N/A |
35.7% |
First, I looked at sales and pre-tax earnings dollars, grossing up the unusuals to a pre-tax basis to arrive at earnings before taxes (EBT) excluding unusual items. On this basis, sales were up 122%, and EBT before unusuals was up 81%. The company earned $0.026 for every dollar of sales, compared to $0.032 last year. That's not so impressive to me, but I'll give the company a break -- swallowing a larger rival isn't an easy proposition, and overhead surely hasn't fallen as far as the company would like.
Next, we'll look at EPS, again excluding unusual items. On this measure, results look better, up 35% including the additional interest expense and higher share count. I should mention that SUPERVALU's tax rate fell to 41.9% this year from 47.5% last year, cutting into this accretion growth rate a bit. The lower tax rate won't continue to benefit the firm going forward, since last year's number was inflated by the Cub Foods and Scott's Food & Pharmacy divestitures. But I'll still give SUPERVALU credit for an accretive quarter. Accretion is good -- some acquisitions never even get to this point.
Am I ready to buy?
The Street loved the numbers. Shares rose more than 7% on the day, as EPS before unusuals beat analyst expectations by $0.05. I'm ready to give SUPERVALU the benefit of good numbers on a massively difficult integration task. I believe there are major unrealized synergies remaining in buying, distribution, and expense rationalization.
But I can't ignore that Kroger (NYSE:KR) delivered 5% comps growth this quarter, compared to SUPERVALU's 1.4%. Safeway (NYSE:SWY) announces its own results next Thursday. All three companies sport forward P/E ratios of 16. Shares of grocery stores are not my cup of tea, but for the entertainment value of the hyperbole alone, SUPERVALU is worth watching.
Shopping for grocers?
Berkshire and Microsoft are both Motley Fool Inside Value recommendations.
Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.
