Management is halfway through a three-year plan to revamp its merchandising system to combine the two stores' operations. The change is critical, and the integration of the two retail platforms will now extend into a fourth year.
In the meantime, SUPERVALU should benefit from rising inflation in retail food prices, which hit 4.7% year over year ending in November. But unlike other grocers, SUPERVALU hasn't managed to ride that wave.
Earlier this year, analysts worried that SUPERVALU and rival grocers, such as Safeway
In fact, Safeway reported a 3.9% rise in sales and a 12% boost in profits after raising prices. Likewise, Kroger told analysts in December it had boosted prices on staples such as milk, eggs, and bread, passing along the 3% rise it paid suppliers, according to an Associated Press report. Despite the increases, customers kept spending, helping Kroger to higher sales and a jump in profits of 18%.
SUPERVALU said on Tuesday's conference call that it, too, has passed on higher prices to consumers, but declining consumer confidence had reduced store traffic and caused customers to trade down to lower-priced products. Same-store sales rose just 0.5% in the quarter, unchanged from the previous quarter and below the company's expectation of around 1%. This, combined with a quarter that was one week shorter this year than last, produced sales of $10.2 billion, down from $10.7 billion a year ago.
SUPERVALU did manage to chop nearly $200 million out of its selling, general, and administrative expenses, and another $19 million from its interest expense, which boosted pre-tax income by more than 25%.
Longer-term, the acquisition of Albertsons could pay off if the company can succeed with the integration. The company could achieve more savings by the time the integration is complete, and it estimates that combined operations will ultimately total $150 million to $175 million. The prime real estate that came with the Albertsons deal, with an extensive store-remodeling program, could pay dividends over the long haul.
But the market seems wary of current operations. The stock has dropped nearly 25% of its value since the earnings releases. If you're looking for a long-term buy, I'd wait to see more progress on this acquisition, mainly in the form of improved same-store sales.
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