SUPERVALU (NYSE:SVU) is a grocery wholesaler and retailer in the United States. It's a diversified operation with 1,900 independent stores, 1,334 Save-A-Lot stores (hard-discount stores where consumers can save up to 40% versus conventional grocery stores), and 191 traditional retail stores.
Earlier this year, SUPERVALU sold Albertson's, Acme, Jewel/Osco, Shaw's, and Star Market. SUPERVALU now expects $17 billion in annual sales, less than half of what it averaged prior to fiscal year 2013. The company is now focusing on its highest-potential operations. This game plan has potential, but it's not going to be enough to get investors excited. There are two better options in the space. But let's take a look at SUPERVALU first.
In the second quarter, SUPERVALU's total independent business segment sales dropped 1.6% to $1.84 billion due to lower sales to existing customers. Save-A-Lot sales fell 0.1% to $972 million, primarily due to a comps decline of 0.3%. Comps are very important because new stores aren't included, so comps indicate whether or not a store is attracting repeat/loyal customers. Retail food segment sales also fell, by 1.1% to $1.07 billion, mostly due to a comps decline of 0.9%.
The solution may present a problem
SUPERVALU isn't in denial. It knows that it has a lot of work to do, and management is focused on strengthening the company quarter by quarter. For instance, there was a continued reduction in the rate of sales decline in the Save-A-Lot and retail food segments in the second quarter.
It's somewhat disappointing that Save-A-Lot isn't performing better. I have no positions, but after researching one company after the next in consumer goods, it has become clearly evident that high-discount retailers are outperforming traditional retailers by wide margins, regardless of what's being sold. SUPERVALU is aware of the trend and it plans on expanding the Save-A-Lot footprint. However, it's going to run into a lot of competition from dollar stores, Wal-Mart (NYSE:WMT), Kroger (NYSE:KR), and others, so there are no guarantees.
SUPERVALU vs. Wal-Mart and Kroger
SUPERVALU has a market cap of $1.91 billion, which makes it much smaller than Wal-Mart (market cap of $247.14 billion) and Kroger (market cap of $22.35 billion). Therefore, SUPERVALU doesn't have nearly as much marketing power as its competition. And while the dollar stores might not be as big as Wal-Mart or Kroger, they don't need as much marketing power. They attracted millions of consumers during The Great Recession who now remain loyal to them. SUPERVALU, on the other hand, isn't offering a new and unique concept that will attract and retain new customers.
SUPERVALU also isn't very good at turning revenue into profit. It sports a net margin of negative 7.43%, whereas Kroger is in positive territory at 1.60% and Wal-Mart is stronger at 3.61%. Furthermore, SUPERVALU doesn't offer any yield. This is understandably so, but the facts are the facts, and they're all that matter. Kroger yields 1.60%, and Wal-Mart is once again more impressive, yielding 2.50%.
Additionally, Wal-Mart is launching its small-box stores early next year. While the purpose of this is to steal market share from the dollar stores (or attempt to annihilate them), this may also have a negative impact on SUPERVALU. If you happen to be interested in an investment in Wal-Mart, you should also know that it plans on opening 110 new stores in China over the next three years while closing 20 to 25 underperforming Chinese locations by the end of the first quarter of next year. This is being done to increase profitability.
Kroger is also a threat to SUPERVALU, especially after purchasing Harris Teeter. This acquisition makes Kroger more of a force in the Southeast, and it should attract high-end consumers (based on locations) and bargain hunters (based on consistent promotions and a popular loyalty program).
While Wal-Mart might be the most impressive company of the three on a fundamental basis, Kroger has high expectations for the future, which include full-year comps growth of 3% to 3.5% (from 2.5% to 3.5%). Kroger has delivered 39 consecutive quarters of comps growth.
The bottom line
If you're going to invest in grocery stores (or big-box stores now highly focused on groceries), it makes little sense to gamble on SUPERVALU when Kroger and Wal-Mart are available options. Wal-Mart's growth might not be rampant, but it's still growing and that 2.50% yield is enticing. Kroger might only yield 1.60%, but its Harris Teeter acquisition gives it strong growth potential and its consistent comps growth indicates that shoppers are highly satisfied.
Fool contributor Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.