SuperValu: Super Stock Value

Today's story is not just about a really, really good value, it is about SuperValu (SVU) - a company with a 135 year history in the food business. They are the wholesale supply chain for over 5,000 retail stores around the country in addition to servicing their own network of another 2,500 stores, many with pharmacies.

Most of SuperValu stores, as the name suggests, cater to the penny pinchers, but the company is also no stranger to the mainstream and luxury food segments. People across the US will easily recognize their bigger and more national store brands: Albertson's and Save-a-lot. But they also own the extremely popular regional store brands like Shaw's, Acme, Shoppers and Cub's Foods and even the popular niche brands, like the exclusive Bristol Farms in southern California and the warehouse style bigg's (with a Wal-Mart (WMT) like selection of goods), around Cincinnati, Ohio.

As far as food goes, SuperValu covers the full range from private brands to wholesale distribution centers and store delivery to retail sales. Being able to control the entire supply chain gives SuperValu many of the same advantages that their #1 competitor in food sales - Wal-Mart enjoys. On the other hand, different concept stores and vastly different store sizes, across the company's store brand portfolio, allow them to tailor store offerings to specific regions and neighborhoods, as well as to place many stores closer to the consumer – a significant advantage in the densely populated urban areas.

I should also mention that not every Albertson’s out there is owned by SuperValu. In many markets, Colorado being one of them, SuperValu licenses the Albertson’s brand to Albertson’s LLC, which then runs and operates these stores. Many of the Save-a-lot stores are also not company owned, but are individually licensed. All in all, this is a smart business model, with SuperValu not only deriving revenue form licensing, but also further increasing their economies of scale. It also shows that the company can be flexible in adjusting their strategy to fit heir needs, which is of extreme importance during the tough economic times.

Another demonstration of management’s flexibility is SuperValu’s history of acquisitions (some more successful than others) always focused on expanding the enterprise, but not at the expense of corporate profitability. The few misplaced stores like Bigg’s in Colorado and Indiana were closed.

The difficult acquisition of the struggling Albertson’s Inc. almost three years ago by SuperValu, CVS/pharmacy, and Cerberus Capital Management was perhaps the best demonstration of management’s ingenuity. In the Albertson’s, Inc. acquisition, SuperValu management was able to carve out the right store locations for themselves and executed their acquisition as well as could have possibly been expected. Management also made two very smart moves:

1. The bringing back of the very well liked Lucky store brand in southern California.

2. The keeping of Albertson’s Boise headquarters operation intact during the three year transition period.

The first of these is self-explanatory, while the second can only ever be truly understood by people who have both been to Boise and gone through a similar sized acquisition. In any case, saving the Boise headquarters is what made this acquisition work, as it enabled continued logistics and automation technology development, prevented sabotage and saved lots of grief. However, next quarter I expect to see a large downsizing in Boise, which would help maintain corporate profitability.

Speaking of profitability, the company is extremely profitable at 3.2 x 2008 EBITDA. It also pays a nice 5.5% annualized quarterly dividend, though this quarter’s dividend has already been paid. Looking ahead, earnings outlook looks very solid. If the economy softens further, as I expect it will, SuperValu (with its major focus on super savers) will be much better positioned than the #2 food retailer, Kroger (KR) to keep its market share.

For this reason, I expect both Wal-Mart and SuperValu to make some inroads into Kroger’s loyal customer base over this and next quarter and for Kroger to respond by lowering prices, substantially impacting their margins. This makes Kroger current relative market valuations extremely optimistic and highly unlikely to persist going forward. The similarly richly valued Wal-Mart, may not be the stock to fall in love with right now, but at least it is much less likely to disappoint when management announces the next set of quarterly results around Valentine’s Day.

Of course, the reason SuperValu is trading at 1/3 the valuation of its competitors is that there are unique risk factors associated with this stock. Debt is one of them, but don’t you fear about that says Vitaliy Katsenelson of Contrarian Edge. In his words:

“Macy's (M) just announced that they were able to refinance their debt. Macy's has more debt than SVU, but its products are LOT more discretionary and their cash flows are less stable. We don’t believe, in light of Macyʼs news, that rolling over debt will be an issue for SVU. But even in the worst case, SVU should be alright. Here is why: SVU has $700mm of debt coming due next year. SVU has a credit line of $1.3b that it can use to pay it off, if they cannot rollover that debt. In 2010-2011 they have another $2b coming due. SVU generates about $1.6-$1.7b of operating cash flow a year. Maintenance CAPEX is about $330mm, the rest of CAPEX is semi-discretionary. Management indicated that it will push off remodeling and opening new stores if debt rollover becomes an issue.”

Vitaliy, I concur.

Another reason to worry is the potential tarnishing, diminishing and mismanagement of the Albertson’s brand name by Albertson’s LLC. Albertson’s LLC to this day is owned by Cerberus, which has made plenty of serious mistakes over the past couple of years, most infamously related to Chrysler. However, many of their actions have also had a direct effect on the ubiquity of the Albertson’s brand, as they quickly closed and sold hundreds of the acquired Albertson’s stores, including multiple closings in Texas, Colorado and Arizona, the sale of all 132 of northern California and northern Nevada locations to Save Mart, the sale of all 72 Albertson's Express fuel centers to Valero and most recently the sale of 49 Florida State Albertson’s to Publix. It is my contention that, while it would be painful for SuperValu to see Albertson’s LLC sell their remaining couple hundred Albertson’s branded stores to third parties, this would only minimally affect SVU’s profitability.

Dismissing the above concerns as being overblown, I bit the bullet and purchased SVU shares at $12.46 on Tuesday, December 23, 2008.

Comments

[Joyful Alte...:]

I bought it at a higher price and expect it to rise again. In the meantime, I'll collect my dividends.

2008 Dec 24 11:41 AM

[CalItalian:]

Lucky was brought back in Southern California as their value stores. That is not what Lucky was. It was a full service supermarket. They only have a few locations under that name and they're only in poor areas. Nobody cares. This company is poorly run and their stores run third or lower in most areas of Southern California.


On Dec 24 11:41 AM Joyful Alternative wrote:

> I bought it at a higher price and expect it to rise again. In the
> meantime, I'll collect my dividends.

2008 Dec 31 03:46 AM

[Jake Berzon:]

Thanks for your comments on SuperValu. It is nice to see people who are passionate and knowledgeable about their grocery stores.

In the good old times of the heyday of Luckys, I quite enjoyed shopping at my neighborhood Sunnyvale, CA store and was quite disappointed when Albertsons Inc. took it over. Years later, while living in LA's Mar Vista neighborhood, I had many nostalgic chances to shop the nearby revived Lucky in the Beverly Hills area. I found it to fully answer the needs of my discerning and semi-sophisticated pallet.

In conclusion, I would like to reemphasize that I bought SuperValu because of its incredibly low valuation, which can only go up. Had I had an opportunity to acquire WMT or KR stock at a similar discount, I would have surely opted to go for these sure bet equities instead. Alas, that is not possible and they were trading at at almost 3 times the relative valuations of SVU. Thereby my verdict: SVU had to go up, while its competitors would edge down. So far this is exactly what has happened.

2008 Dec 31 10:34 AM

[Jake Berzon:]

On Wednesday, December 31, 2008 I sold my entire WMT position at $55.27/share. I believe that Walmart's wining position in a recessionary market has now been fully priced and that Walmart's stock price will not go anywhere over the next several quarters. I have also recently added SuperValu to my portfolio. I consider my position in SVU entered into at $12.46/share last week to be a much better value and it was intended as a replacement to WMT position in my portfolio. Today's sale of my WMT position completes this portfolio replacement. Accounting for dividends and ignoring commissions, my gain on WMT shares, since I purchased them on August 23, 2007 was 29%.

2008 Dec 31 11:28 AM

[CalItalian:]

I'd like to know where that Beverly Hills area "revived" Lucky was. Lucky never had a store in BH. They briefly had a store in the late 90's on 3rd & Fairfax (was a Ralphs then Lucky now Whole Foods) and in Westwood in the 80's (was a Smiths, then Lucky now Ross Dress For Less). If you lived in Mar Vista, the former Lucky stores, now Albertsons, are in Santa Monica (2) and Culver City (2). No Lucky stores have existed anywhere near West Los Angeles since Albertsons bought them.

Albertsons needs to do a much better job of marketing themselves against Vons (Safeway) and Ralphs (Kroger). They could instantly steal customers from them with a good double coupon promotion since both Ralphs and Vons have cut their programs back drastically in a time when coupon usage is up and Southern California is the #1 area in the United States for coupon redemption.

Jan 02 03:44 PM

[Jake Berzon:]

On Jan 02 03:44 PM CalItalian wrote:

> I'd like to know where that Beverly Hills area "revived" Lucky was.
> Lucky never had a store in BH. They briefly had a store in the late
> 90's on 3rd & Fairfax (was a Ralphs then Lucky now Whole Foods)
> and in Westwood in the 80's (was a Smiths, then Lucky now Ross Dress
> For Less). If you lived in Mar Vista, the former Lucky stores, now
> Albertsons, are in Santa Monica (2) and Culver City (2). No Lucky
> stores have existed anywhere near West Los Angeles since Albertsons
> bought them.
>
> Albertsons needs to do a much better job of marketing themselves
> against Vons (Safeway) and Ralphs (Kroger). They could instantly
> steal customers from them with a good double coupon promotion since
> both Ralphs and Vons have cut their programs back drastically in
> a time when coupon usage is up and Southern California is the #1
> area in the United States for coupon redemption.

Lots of people have downgraded to store brands and increased their coupon usage already. So, SuperValu stores could win business from competitors by doing "right" things, like aggressive promotions in their Save-a-lot stores and double coupons at Albertson's. Kroger, especially, is a tough competitor and it's not gong to be easy, but still very doable. It would be much tougher for Kroger to win SuperValu customers under current economic conditions, though. This is exactly why, while I recognize that Kroger's stock price demands a premium over SuperValu's, that premium should not be 200%!

I couldn't find the specific store I mentioned in my reply to you. I do see a Ralph's right around the area where I expected to find that Lucky. Perhaps that was the store that I recall. I have also been to the several Albertson's in the area and know the Ross store you are talking about in Westwood. But, most of the time, I actually went grocery shopping at one of the small stores closest to home.

Jan 04 03:13 AM

[Jake Berzon:]

On Thursday, December 8, 2009, I sold my entire SuperValu (SVU) position at $17.88 / share for a gain of 43.5% (excluding commissions) in just 15 days. My cursory analysis at the time of purchase showed SVU's fair value to be significantly north of $18. However, I took the quick ascend of SVU shares along with today's drop in Walmart (WMT) shares as a solid indication that time was ripe for an opportunistic exit.

Jan 09 12:22 AM