SUPERVALU (NYSE:SVU) shares are down a brutal 50% in the past year, as the food market chain endured falling customer traffic and declining profitability. Last quarter, comparable-store sales slumped by 3% at its Save-A-Lot shops, which suggests the company is losing market share to rivals in the grocery and discount retailing space.
Incoming CEO Mark Gross and his management team hope to engineer a rebound in the business, though, that could spark a significant rebound in the stock. Here are three reasons why that recovery could happen.
Sales growth returns
The first step in any rebound would be getting back to sales growth, and the good news here is that SUPERVALU's latest revenue drop has more to do with industrywide issues rather than simply a lack of execution on the company's part.
Supermarket titan Kroger (NYSE:KR), for example, recently posted its weakest comps growth in years, partly because a few grocery products, particularly beef, are going through significant price deflation. Kroger's meat department suffered a 5% revenue drop even as its volume of sales rose last quarter. That's actually good news for the business, the company explained, since it "has allowed retail prices to return to levels where more customers can reenter the category or increase their purchases in the department," Similarly, SUPERVALU's management described pricing as a huge challenge. "We haven't experienced these kinds of swings in the past 40 years," Duncan told investors in January.
Store brands succeed
While it doesn't have control over commodity prices, SUPERVALU can work to get customers returning to its stores more often while spending more during each trip. The most promising shopper-traffic initiative is its Wild Harvest store brand that aims to capitalize on strong demand for organic and natural foods. The retailer has introduced over 200 products under that brand this year, which helped sales in the organic food category spike higher by 15% in fiscal Q3.
As strong as that growth seems, it's really just a taste of what's possible. Kroger's Simple Truth brand launched less than three years ago and is now worth well over $1 billion in annual sales -- with more than 3,000 products in its lineup. SUPERVALU's clearest path to market-thumping revenue growth requires that it enjoy comparable success with its Wild Harvest brand.
SUPERVALU's profitability outlook isn't strong, at least over the short term. In fact, the retailer is on pace to post zero growth in adjusted earnings this year, and over the last nine months its net profit margin has slipped to 0.9% of sales from 1.1%.
Management hasn't forecast a quick rebound on that score, either. Over the next few quarters "we intend to be more aggressive on price and promotion," Duncan told investors in SUPERVALU's third-quarter conference call, which suggests its gross profit margin could slip further below 15% (Kroger's margin is 22% of sales).
Ideally, the price investments will help SUPERVALU fill its aisles with more shoppers and power an eventual rebound in profitability. Meanwhile, the company can continue its successful strategy of trimming costs out of its operations. Adjusted annual earnings are up 50% since 2011 thanks in part to lower expenses on things like supply chain logistics and administrative costs.
Yet cost cuts will only take the company so far. For SUPERVALU to reach "the next level" that executives have targeted, it will need to produce market-beating sales and profit growth without getting too distracted by non-operating issues like the possible spin-off of its Save-A-Lot retailing business.
Demitrios Kalogeropoulos 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.
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