SUPERVALU (NYSE:SVU) has achieved a remarkable turnaround in the last few months. Its shares are up 60% in the last year, and its recently reported third-quarter results show that cost-cutting strategies are working in its favor. Save-A-Lot performed very well and contributed to SUPERVALU's solid performance. With peer Safeway (NYSE: SWY) also struggling and closing stores, SUPERVALU could make the most of its rival's woes.

However, SUPERVALU has a huge debt load, and some of its units were still running on debt. As a result, the company is undergoing a debt restructuring to increase profitability. This should add to SUPERVALU's earnings going forward and help it extend its solid third-quarter performance when net earnings nearly doubled to $31 million from $16 million last year. However, due to a sluggish economy and lower demand from military customers, revenue declined marginally to approximately $4 billion.

SUPERVALU, led by CEO Sam Duncan, has turned its business around. Duncan said, "Although we still have work to do to improve our sales trajectory, I am pleased with the accomplishments we made within our operations this quarter." After a heavy loss last year, SUPERVALU is indeed performing well this fiscal year.

Getting more efficient
The company has been undergoing a debt restructuring for quite some time. Currently, SUPERVALU has debt of $3 billion. It is now looking to lower the interest rate on its $1.5 billion term loan to further reduce expenses. Additionally, with a large number of underperforming stores adding to its existing debt burden, it decided to sell 900 stores last year. That move resulted in impressive earnings this quarter. Apart from this, SUPERVALU is also adopting various cost-saving initiatives.

The introduction of 35 semi-trailer trucks, powered by CNG, or compressed natural gas, should help the company decrease costs. As compared to traditional trucks, the new CNG fleet will decrease oil consumption by 1 million gallons per year. These strategies will help SUPERVALU to gain an advantage in a sluggish economy by reducing costs and freeing up money to invest in growth initiatives.

Expansion ahead
SUPERVALU faces tough competition from retail giants like Wal-Mart. In addition, lower demand from military customers and cuts in U.S. food stamp benefits are of concern for the retailer.

But management is ready to meet the challenges and is taking various measures to tackle the situation. The company is planning to add two new categories, namely pets and baby products, to its existing lineup. Gradually, it will add 25-50 new items in the coming months. 

SUPERVALU operates under various brands. Of them, the Save-A-Lot retail chain tops the list. Save-A-Lot is benefiting from the fresh-cut meat program that it has rolled out in corporate stores. As a part of its expansion strategy, SUPERVALU will be adding new dry-warehouse facilities, which will enable it to expand into new markets. 

As mentioned earlier, Safeway's store closures could help SUPERVALU's prospects. Safeway has been forced to exit markets such as Chicago due to competition from peers. Moreover, Safeway's financial results suggest that the company is on the decline.

Safeway's net earnings dropped to $100 million ($0.35 per share) in the fourth quarter of 2013 from $170.7 million (or $0.71 per share) last year. Safeway is now considering other options, such as selling out to potential buyers, opening up an opportunity for SUPERVALU to increase its market share. 

But SUPERVALU should beware of Kroger (NYSE:KR), which has been expanding through acquisitions. Kroger recently announced the acquisition of YOU Technology, a leading provider of digital coupons and promotions. This acquisition should enable Kroger to improve its technology and serve customers better by improving their experience. According to Kroger, "(YOU is a) retailer-centric, cloud-based platform (that) bridges the gap between online engagement and in-store purchases." This should help Kroger's digital initiatives gain momentum and complement its brick-and-mortar expansion.

The bottom line
SUPERVALU has learned from its mistakes and is carrying out a debt restructuring in order to reduce costs further. In addition, it is also planning to launch new items in the coming months to expand the business in profitable areas, while expansion into new markets by setting up new facilities is another positive.

Thus, SUPERVALU is efficiently executing its turnaround plan, and its shares should continue moving north as the company rebounds. Also, with a forward P/E ratio of just 9.4, SUPERVALU is inexpensive. Investors looking for a turnaround story should definitely take a look at this stock.

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