So what: SUPERVALU stock was in the red for most of July, and actually gained more than 22 percentage points in the last four days of the month to record its 14% gain:
The steep climb over the last four trading days was prompted by the announcement, on the day of its earnings release, that SUPERVALU is considering spinning off its hard discount supermarket chain Save-A-Lot. Save-A-Lot is comprised of 400 corporate locations and 900 licensed stores.
In discussing the proposed spin-off during the company's earnings call on July 28, CEO Sam Duncan pointed out that the company had spent the last two years focusing on better merchandising in the Save-A-Lot business, as well as improving the brand's perception by introducing fresh meat and groceries to its offerings.
Duncan suggested that separating the discount retail brand from SUPERVALU would allow both companies to maintain a higher strategic focus on growth opportunities, and make more rational capital allocation decisions. He also pointed out that Save-A-Lot could better position its branding if it were independent of its parent.
The prospect of shearing off Save-A-Lot into a separate equity holding was received enthusiastically by investors. The discount brand is a significant part of SUPERVALU's current business: In the current quarter, Save-A-Lot accounted for 26% of the company's total $5.4 billion in sales, and nearly a third of its operating profit of $158 million.
Operating as one of three major SUPERVALU business segments, the chain achieved a noteworthy annual identical store sales increase in its prior fiscal year of 5.8%. The portion of corporate stores owned by SUPERVALU performed even better, etching in a 7.6% increase. The current quarter proved a bit disappointing, however, as Save-A-Lot's identical sales grew only 0.6%.
Given its own dedicated management and initial capital via a spin-off, it's conceivable that Save-A-Lot could scale its growth through even higher comparable-store sales increases and a faster pace of new store openings.
Now what: Earlier this year, I discussed in an unrelated article how corporate spin-offs can be beneficial to both the parent and the newly public entity; you can read this analysis here. In many cases, stock of the parent company also sees an appreciable rise after a beneficial spin-off. Investors should look to the next earnings report for an update on a possible time frame and details of the proposed transaction -- for now, SUPERVALU management hasn't given an absolute green light to this intriguing possibility.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends SUPERVALU. 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.