Investors cheered SUPERVALU's
Shares of the grocery chain traded up more than 16%, even as the company reported a decrease in sales and profit, continuing a troubling margin crunch. Same-store sales declined 5%. On the conference call, though, management was extremely upbeat. The stock owes its rally to management's 2012 earnings expectation of $1.20-$1.40, which far surpasses what the Street had expected.
Those predictions seem somewhat lofty, with sales still declining, margins shrinking, and inflation pushing costs higher. Additionally, SUPERVALU management doesn't exactly have a strong reputation for meeting its own guidance. Over the past year, executives have cut financial estimates for the company three times, so their estimate shouldn't necessarily inspire much confidence this time around. While investors have punished the stock over the last year, I saw little the report to persuade me that a significant recovery awaits SUPERVALU or its stock price.
If SUPERVALU management had noted a large improvement in shopper spending or same-store sales, I could perhaps get more excited about the stock, but obviously, that's not the case. While the grocer has successfully cutting costs by closing underperforming stores and trimming corporate staff, these cost savings have not improved margins. Instead, fierce competition with Safeway
A company can only cut so many costs, especially in the grocery business, where margins are razor-thin to begin with. Gasoline prices, as well as higher food and packaging costs, also continue to eat into profits. I don't share management's confidence that revenue will start rising soon enough to compensate.
The stock's one-day pop certainly relieved any investors who have suffered alongside SUPERVALU's shares over the last couple of years. Alas, I don't believe the fundamentals of the industry or the company have changed enough to sound the "all clear" just yet.
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Fool contributor Andrew Bond owns no shares in the companies listed. Motley Fool Options has recommended buying calls on SUPERVALU. Wal-Mart is a Motley Fool Global Gains choice. Wal-Mart is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of SUPERVALU and Wal-Mart. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.