After doubling off of its yearly lows and still 50% away from its 52-week high, volatility has been all over the place for grocery chain Supervalu Inc (SVU). In the past year, Supervalu has been struggling with a huge debt load that has drained cash with interest payments alone of $514 million in 2012. To put this into perspective, this interest payment represents approximately 60% of Supervalu's current market cap of $875.
Thankfully for shareholders, Supervalu's management has realized that it won't be able to satisfy its $11.85 billion in debts and obligations through sales and organic growth alone. For this, Supervalu's management recently announced that it would be selling its Albertsons, Acme, Jewel-Osco, Shaw's and Star Market stores to private equity fund AB Acquisition LLC, an affiliate of Cerebrus Capital Management who also owns Kimco Realty Corporation (KIM), for approximately $3.3 billion. $3.2 billion of which will be in the form of a much needed debt reduction.
In a filing yesterday, Supervalu announced changes to its management team in preparation of the change and reiterated that it would be left with 191 traditional retail stores that represent slightly more than 25% of the company's revenues. In addition to these, it will retain Save-A-Lot, consisting of 1300 stores, and its Independent business sales which together represent approximately 37.5% of revenues. This transaction is expected to close on March 18, 2013.
While this sale is a strong step in the right direction, it is going to be tough for Supervalu to turn around. Alleviating $3.3 billion only represents 28% of its debt outstanding, something that may leave shareholders wondering if this is a strong enough action when, in addition to the debt, sales and margins have been steadily declining over the past years.
Only time will tell if management can get this grocer rolling. Even with the dark forecasts made by Wal-mart (WMT) recently, stores like Safeway (SWY) and Whole Foods (WFM) have proven that companies in this industry can be successful. To survive in this oligopoly, Supervalu is going to need to find its niche and differentiate itself from the past. I however, would stay away from this stock until management can prove it has what it takes to turn around.