Grocery retailer SUPERVALU (NYSE:SVU) has gone through a huge transformation over the past couple of years, breaking off many of its most popular store chains and making moves with its capital structure to strengthen its balance sheet. With this morning's fiscal second-quarter results, SUPERVALU investors can see that the company has made substantial progress, but there's more to do before the grocer can declare that it has fully turned things around.
How SUPERVALU did
Overall, SUPERVALU's results included some promising figures that in some cases were better than investors had expected . On the revenue front, net sales came in at $4.02 billion, up 1.8% from last year's fiscal second quarter and better than the flat year-over-year performance that shareholders were looking to see. Net earnings of $31 million translated to $0.11 per share when you exclude discontinued operations, which was in line with expectations.
Yet the news wasn't entirely good for SUPERVALU. The company's net income figures represented a more than 20% decline from year-ago levels, and it came largely as a result of a further slimming of the company's profit margin. Margins fell to just 0.8% from 1% last year, and even in the traditionally thin-margin grocery business, SUPERVALU's showing was subpar. Even among traditional grocery chains, Kroger (NYSE:KR) has profit margins nearly double that level at 1.5%, and higher-end Whole Foods Market (NASDAQ: WFM) weighs in with margins above 4%.
When you look deeper at the numbers, though, you can see a big split between two of SUPERVALU's remaining segments. The Save-A-Lot network of discount stores saw huge sales growth, with comparable store sales climbing 6.5% across the network and 8.2% looking solely at its corporate-owned Save-A-Lot stores. For the retail food segment, however, which includes chains like Cub Foods, Shoppers Food, and Farm Fresh Food, comps came in with just a 0.4% gain. Interestingly, the two segments saw much different conditions in terms of profitability, with Save-A-Lot seeing decreased operating earnings due to lower prices and higher advertising costs and shrink-related losses from theft and waste while the retail food segment enjoyed lower shrink-related losses and promotional spending.
In addition, SUPERVALU got less revenue from its independent supply business, in which the company distributes food to locations that it doesn't own. Sales fell 1.1% to $1.82 billion, as one of its former Albertson's stores left its customer ranks and the company saw lower military sales.
What's coming for SUPERVALU?
SUPERVALU CEO Sam Duncan was upbeat about the company's progress during its transformation. Duncan said, "The investments we have made at Save-A-Lot continue to drive sales and our Retail Food stores recorded their third consecutive quarter of positive identical store sales." Duncan also plugged the company's role in leading a group of grocers to buy 18 Rainbow Foods stores in the Minneapolis-St. Paul area, for which SUPERVALU paid $35 million plus the value of acquired inventory. Most of the stores will have their names changed to Cub Foods, showing SUPERVALU's commitment to its own store brands.
Nevertheless, it's clear that the company looks a lot different than it did before the Cerberus Capital Management deal that involved selling the Albertson's, Shaw's, Star Market, Acme, and Jewel-Osco chains. Save-A-Lot has become a much more important part of SUPERVALU's potential recovery, and the discount chain will need to keep growing in order to help pull the entire business back toward a more stable growth trajectory.
Overall, SUPERVALU needs to establish not only that it can keep revenue growing but also that profitability will improve. As long as margins keep declining, many would-be investors in SUPERVALU will remain on the sidelines. If the company can succeed in driving enough sales growth to regain some of its pricing power and get margins closer to what Kroger sees, then patient shareholders could finally get the gains they've been waiting to see.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. 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.