This Grocery Company Pushes Forward Amid Persistent Challenges

Supervalu Inc. (SVU) is a U.S. leading grocery retailer and wholesale distributor. The company operates its retail business under multiple banners like Albertsons, Save-A-Lot, Shaw's Supermarkets, Jewel-Osco, Acme Markets, Shoppers Food & Pharmacy, Cub Foods, Farm Fresh, Lucky, Shop 'n Save, Scott's, Star Markets, Bristol Farms, bigg's, Hornbacher's and Sunflower Market. Its locations comprise three different formats, namely food stores, combination of food and pharmacy, and limited-assortment food stores. In a turnaround effort to cut costs and garner financial flexibility, the company sold out 877 underperforming units to an investment group led by Cerberus Capital, which will also invest in the firm's remaining businesses.

The New Supervalu

The company's sellout of its stores for $100 million in cash and $3.2 billion in debt represented a financial respite that provided the firm with significant debt reduction. Moreover, it lowered operating costs and also relieved the firm from the pressure set by the increasing decline of supermarkets.

As a result, the company boasts a new store count that comprises 1,332 Save-A-Lot hard discount small-format food locations, with 935 franchise-operated and 191 traditional supermarkets. Its independent business division continues to act as a wholesale and delivery distributor, providing service to roughly 2,700 independent grocery stores.

Further Initiatives

Following its store reduction, Supervalu has undertaken numerous initiatives in order to revamp its business. Along these lines, the company is expanding its private-brand portfolio through the launching of 250 new products under its Cub banner, and plans to launch another 135 before the end of fiscal 2014. Moreover, the company completed the remodeling of roughly 100 stores in fiscal 2013 and also realigned its stocks in order to enhance customers' in-store experience.

However, an aggressive competitive environment continues to jeopardize the firms' future. Giant Wal-Mart Stores Inc. (WMT)'s rollout of 700 to 800 small format stores annually adds to an increasing number of dollar stores subscribing to loss-leader strategies. In this context, the firm undertook a fair price plus promotion strategy in fiscal 2013. This initiative has lowered prices to a competitive position at the expense of margins, in the hope for market share gains in the long term.

Cost Cuts

Apart from underperforming stores sellout, Supervalu has undertaken additional cost reduction initiatives which are expected to lower administrative expenses by $250 million through fiscal 2014. The reduction of its store count, I turn, is expected to generate $80 million to $90 million in savings in the next three years.

Moving Forward

In the third quarter of fiscal 2013, the firm reported adjusted earnings of $0.13, a significant improvement compared to the negative $0.07 delivered the year before. Revenues, however, fell by $1.05 in relation to the prior year, due to negative comps in the retail segment, which have been declining for four consecutive years.

Further, the firm does not have any share buyback plans for fiscal 2014 and will not pay dividends to shareholders until March 2018.

Supervalu showcases a negative return on capital of -9.24% compared to the industry average of 20.02%. And its three-year average revenue growth delivered a dismal -25.1% compared to its peers' median of 1.0%.

Investment guru John Keeley (Trades, Portfolio) recently sold out his holding in the company, backing my feeling that despite the company's efforts, a good position in a highly competitive market will be hard to achieve.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:Vanina EgeaA fundamental analyst at Lone Tree Analytics

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