Supervalu: Third Quarter Results Deliver the Groceries

SUPERVALU (SVU) was long overdue for some good news, and to say third quarter results "pleased" the street is an understatement, as a more accurate description would be they "thrilled" the Street. The company generated earnings of 62 cents, eclipsing estimates by two pennies. A beat by two cents normally isn't noteworthy, but to do it in one of the worst economic climates in history is especially impressive.

The stock has been on fire since the release, climbing more than 16%, on four times average daily volume. SVU's share performance is especially striking, when you factor in the "drubbing" the DJIA has sustained in the last two sessions. Moody's apparently was also impressed, as it raised its ratings on SVU's senior unsecured debt, from B1 to Ba3, with an outlook of stable. Look for additional upgrades in the near future.

Gross margin and SG&A: The company was able to increase its gross margin 20 basis points from 22.40% from 22.60%, despite a $40 million decrease in revenues from $10.21 to $10.17 billion. Unfortunately, SVU's SG&A costs went the wrong way, increasing 60 basis points from 18.3% to 18.9% of sales. However, the grocer was successful in cutting its interest expense 13% from $164 million to $143 million.

Strategic initiatives: management is taking action to improve operations. SVU's CEO, Jeff Noodle emphasized today's cautious consumer is becoming more price conscious, and SVU must improve its price perception to draw more customers, as price is more frequently becoming a key criteria for choosing where to shop. The company plans to increase traffic and basket size by utilizing targeted mailings, emphasizing low prices, ultimately creating more "value" for its customers. SVU also plans to close 50 underperforming locations in the fourth quarter in addition to remodeling 60 to 80 stores.

Cap Ex reductions: SVU intends to reduce its capital expenditures in fiscal 2010 by about a one third from $1.2 billion to $800 million and utilize part of the savings to reduce debt levels. The company plans on increasing its debt reduction objective 50%, from $400 million to $600 million.

Earnings Guidance: The company declined to offer 2010 earnings guidance during its conference call, but did stress current analyst estimates of $2.69, would be at the low end of its eventual forecasted range.

Bottom line: Although the shares have already more than doubled in the last two months alone, there is still ample upside left, as the stock is still selling at a multiple of only about one half its peers. A probable short squeeze event could add further momentum to the rise, as nervous holders of short positions are forced to buy to cover. I wouldn't be surprised to see the stock reach the $20 mark by the end of the month, and $30 by the close of the year.

Disclosure: Long SVU.