One of the largest grocers in the U.S., SUPERVALU (NYSE: SVU), reported declining sales for a second consecutive year when it released its fourth-quarter and fiscal-year results last week. Yet the company's shares shot up 17%. What's the deal?

A look at the fundamentals
Let us take a look at what SUPERVALU was up to this past year.

Growth (or not): Year-over-year revenue fell for a second year, this time by 7.5% to $37.5 billion in 2011 from $40.6 billion in the previous year.

For retailers, falling revenue is clearly not a good sign. In part, the shortfall came from store closures and SUPERVALU's decision to revamp a number of its stores. But with same-store sales down 5%, the company can't blame everything on its restructuring efforts.

Margins: Although gross profit has fallen from $9.2 billion to $8.4 billion, profit margins have remained intact, which is also a good sign. Gross margins for the year remained quite high at 22.4%. In an inflationary environment, this suggests that the company has been able to pass off price increases to customers.

Less encouraging is the fact that SUPERVALU swung from net income of $393 million to a loss of $1.51 billion for the fiscal year that ended in February. Impairment charges amounted to $1.87 billion, accounting for all of the company's losses and then some.

Liquidity: Despite the company's losses, SUPERVALU's current ratio has remained unchanged at 0.9, suggesting that the company is more or less able to meet short-term credit obligations. This is an uncomfortably low level by most standards, but it doesn't portend outright disaster, either.

The company's interest coverage ratio stands at 3.3 its EBITDA, which means that it is doing well enough to service its debts.

Efficiency: As you'd expect, SUPERVALU's return on equity fell dramatically because of its net loss. Free cash flow fell 29% to $566 million. That's consistent with falling FCF at Safeway (NYSE: SWY), although Kroger (NYSE: KR) and Whole Foods (Nasdaq: WFMI) saw FCF grow last year.

Numbers don't lie, and looking at these figures, SUPERVALU didn't have such a great year. But because it wasn't quite as bad a year as some had feared -- and because it looks as if the future may be brighter for the company -- investors ended up liking what they saw.

The Foolish bottom lineĀ 
Even when things are bad, outperforming more pessimistic expectations is always a little silver lining on an otherwise tough quarter. With a few interesting projects in the works and a lot of tough news behind it, I'm relatively bullish about SUPERVALU's future prospects -- but the company still has to show it can react to turn things around.