Grocery chain SUPERVALU (NYSE:SVU) has undergone some massive changes in recent years, jettisoning a large number of its former grocery chains and relying on a slimmed-down business model to help it recover from having overextended itself during better times. On Wednesday morning, SUPERVALU gave investors some good news in its fiscal third-quarter financial report, with solid gains throughout its remaining divisions.
Yet as competitors like Kroger (NYSE:KR) and Whole Foods (NASDAQ:WFM) aim to grab a bigger portion of the industry's customers, SUPERVALU will have to continue finding ways to appeal to its customer base in order to sustain its growth. Let's take a closer look at SUPERVALU's quarterly results and what they mean for the company's long-term turnaround.
SUPERVALU: Growth is back
SUPERVALU's results were generally encouraging across the board. The grocery company posted revenue of $4.2 billion, up 4.8% from the year-ago quarter, and well ahead of the $4.09 billion that investors had expected. Moreover, adjusted earnings per share from continuing operations came in at $0.18, which was $0.04 per share above expectations after adjusting for a pension settlement and other one-time charges.
Looking more closely at its three main units, SUPERVALU enjoyed revenue gains in all of them for the first time in a while. The company's Save-A-Lot discount chain remained its fastest-growing segment, with revenue climbing 8.9% on a gain in same-store sales of 6.9%. Corporate-owned Save-A-Lot locations saw same-store sales rise an even more impressive 8.5%.
Meanwhile, the Independent Business division, which is SUPERVALU's largest, had more modest gains of 2.4%. The unit suffered from the loss of one of its former Albertson's customers, but it managed to overcome that loss by raising sales to its remaining independent business clients. The Retail Food unit boosted its revenue by almost 6% on same-store sales growth of 2.3%.
SUPERVALU still has some work to do, though. Operating margins at Save-A-Lot fell almost a full percentage point from year-ago levels, partially offsetting margin gains from elsewhere in the business. But SUPERVALU touted the fact that Save-A-Lot's margins improved sequentially compared to the fiscal second quarter, highlighting the efforts it has made to keep costs in line and boost profitability wherever possible.
Interestingly, the impact of SUPERVALU's divestiture of well-known grocery chains Albertson's, Acme, Jewel-Osco, Shaw's, and Star Market hasn't fully played out. One item in SUPERVALU's report noted that the company expects to get a tax refund of around $69 million in connection with the sale of the Albertson's banner; but one outstanding question is how it will apportion any money it gets back from the IRS between itself and the Albertson's entities. Given the thin margins that prevail in the grocery business, that windfall is substantial, and the more that SUPERVALU can keep, the better off shareholders will be.
Can SUPERVALU sustain its success?
CEO Sam Duncan was pleased with SUPERVALU's results. As he sees it, "The third quarter provided many positives for us to build on during the final quarter of our fiscal year," and the positive performance of the Independent Business segment was particularly encouraging.
Yet, even though SUPERVALU has started moving in the right direction, it still faces competitive pressures in a cutthroat industry environment. Whole Foods has bounced back from sluggish sales early last year, with its new marketing push as "America's Healthiest Grocery Store" seeking to enhance its reputation for the premium-quality offerings that shoppers increasingly want. At the same time, Kroger produced far better stock returns than Whole Foods or SUPERVALU in 2014, jumping on the natural-foods bandwagon while also making margin-boosting moves, like emphasizing its store brands.
In order to compete, SUPERVALU will have to keep putting its own house in order at the same time that it explores new strategies to take advantage of shifting customer demand. Tapping into the discount potential of Save-A-Lot will be an important component of SUPERVALU's future, but its remaining retail store chains will also have to start pulling a lot more of their own weight if SUPERVALU wants to achieve its full potential.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Whole Foods Market. 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.