SUPERVALU's (NYSE:SVU) acquisition of grocery store rival Albertson's appears to be on track; on Tuesday, it released solid earnings results and raised guidance, sending the stock up almost 5% to a recent $32.50. So what's in store for the grocer going forward?
First, some details on the company's second quarter. Revenue came in at $10.7 billion, up from $4.6 billion for the same quarter last year. Same-store sales fell 1% at SUPERVALU for the quarter, while Albertson's comps were listed as up 30 basis points. Combining both results as if Albertson's were in the same-store calculations (stores have to be open more than a year to be counted in comps), the company stated that comps were flat for the quarter.
Diluted earnings came in at $0.61 per share, also up big from last year and due to the acquisition that makes SUPERVALU a retailing giant with 2,500 grocery stores and 928 in-store drugstores across the country. For the entire fiscal year 2007, the company just upped guidance and now expects diluted earnings of $2.18-$2.41, up from $2.11-$2.36 previously.
As a result of acquiring Albertson's, total debt to capital was listed by the company at 64.3%, up from 36.7% during its last fiscal year ended Feb. 25, 2006. SUPERVALU generates stable and substantial amounts of operating cash flow to pay interest expenses, but it would be nice to see debt paid down as rapidly as possible, leaving more cash flow for dividends, share buybacks, and other more shareholder-friendly initiatives.
In any case, I'm not so sure the grocery industry is the best place to invest these days. The industry is mature and faced with intense competition as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) have been increasingly looking to groceries to keep growth chugging along. And nobody wants to have to face Wal-Mart, with its prowess in reducing costs through purchasing power and supply- chain efficiency. To illustrate, SUPERVALU's sales have grown only about 1% over the past three years with little -- only about 5% --operating cash flow growth over that time frame.
Competitor Kroger (NYSE:KR) is a very efficient operator and worth considering as an investment should Fools be interested in the grocery retail space. Also look for more details from Safeway (NYSE:SWY), as it is set to report earnings Thursday. SUPERVALU should be able to wring significant costs out of bringing Albertsons into the corporate fold, but beyond that, I don't see many opportunities for long-term top-line expansion.
Wal-Mart and Target aren't growing as fast as they used to, but they are projected to grow faster than Kroger and SUPERVALU, and the former's earnings multiples aren't that much higher. Whole Foods (NASDAQ:WFMI) is outgrowing all firms in the space, but be careful of its lofty P/E, unless, of course, you think it can keep growing at a breakneck pace. In other words, SUPERVALU may have some upside as it integrates Alberstons, but I'd prefer to keep shopping.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further.The Fool has an ironclad disclosure policy.
