The grocery industry has never been more competitive, and after having repositioned itself over the past few years, SUPERVALU (NYSE:SVU) has reemerged as an important player in the grocery retail space. Yet coming into Wednesday morning's fiscal second-quarter financial report, SUPERVALU investors were nervous about whether the company's current strategy will pay off in the long run, especially as its CEO had recently announced plans to leave his post.
With rivals like Kroger (NYSE:KR) having seen considerable success in recent quarters, it was important for SUPERVALU to demonstrate its ability to keep up from a competitive standpoint. SUPERVALU's results didn't live up to what most of its investors had hoped to see, raising new questions about the long-term direction of the company going forward.
Let's look more closely at the latest from SUPERVALU and what investors should take away from its recent performance.
SUPERVALU slows to a near standstill
The fiscal second-quarter results for SUPERVALU continued a troubling past trend of decelerating growth. Revenue climbed just half a percent to $4.06 billion, falling short of the 2.5% growth rate that investors had expected to see. Net income from continuing operations actually fell from year-ago levels, and even after factoring in $6 million in costs related to the company's explorations of spinning off its Save-A-Lot network, adjusted earnings of $0.13 per share were a penny less than the consensus forecast among investors.
Looking more closely at SUPERVALU's segments, the chain faces some challenges throughout its business. The Save-A-Lot unit suffered negative same-store sales of 1.6%, and even its traditionally better-performing corporate-owned stores only managed a rise of 0.9% in comps. The retail food segment saw comps fall even more sharply, falling 3.3%, and total sales within the company's independent business segment also inched downward. Save-A-Lot's store expansions generated enough additional sales to outweigh falling revenue at the retail food segment, but the positive impact wasn't as strong as it had been in past quarters.
Where SUPERVALU managed some success was in cost containment. Lower logistics costs helped boost gross margins slightly, and apart from severance costs and expenses related to the potential spinoff, SUPERVALU largely managed to keep its overall overhead expenses in check.
CEO Sam Duncan tried to put a positive spin on SUPERVALU's results, citing "several operating headwinds" as holding back the company's growth during the quarter. As Duncan put it, "Our focus remains on driving sales across all three segments and finishing the year strong."
How will SUPERVALU fare in the future?
Once again, though, some uncertainties about SUPERVALU's future have colored its financial results. Earlier in October, Duncan told the company's board of directors that he intends to resign at the end of the current fiscal year in February 2016. In essence, he has acted as the restructuring expert, taking what remained of SUPERVALU's businesses following the sale of several of its most visible grocery chains to private equity buyers and seeking to squeeze as much value as possible from restructuring them. Now, a new leader will have the task of figuring out the next phase of SUPERVALU's development, and with so many options available to the company, investors can't really be sure of exactly what SUPERVALU will look like a year down the road.
Internal promotions suggest one possible direction for SUPERVALU. Former CFO Bruce Besanko was named chief operating officer, with broader responsibilities that suggest a possible transition to the CEO role in time. Susan Grafton took Besanko's place as CFO. Still, Board Chairman Jerry Storch said that the company will consider both internal and external candidates in its CEO search.
Still, notably absent were details on the potential Save-A-Lot spinoff. Proponents have argued that separating Save-A-Lot could boost its value on the market, but given the extent to which its traditional grocery chains have struggled, the remaining SUPERVALU could struggle for traction after a spinoff transaction was completed. Competition from bigger grocery players like Kroger could put a post-spinoff SUPERVALU at an even greater disadvantage.
SUPERVALU shareholders reacted negatively to the grocery chain's news, sending the stock down almost 6% in the first half-hour of pre-market trading following the announcement. Investors will want to see evidence of renewed growth potential both for Save-A-Lot and for the company's traditional grocery brands before they're ready to have new confidence in SUPERVALU's long-term prospects, especially with a leadership transition taking place.
Dan Caplinger 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.