Market Downtrend Offers Opportunity in Supervalu

Over the past 3 weeks the general direction of the market has been downward. There has been 1 or 2 huge down days each week that has offset any advances that the market is making. I don’t think the market will crash as it did last fall but it does appear to be drifting lower. I am finally starting to see buying opportunities again. I picked up some shares of Supervalu (SVU) between $12.70 and $13. The grocery chain owns Save-A-Lot, Shoppers, Shop n Save, Acme, Bristol Farm, Farm Fresh, Hornbacher’s, Jewel, Osco, Sav-On, Shaw’s, Bigg’s, Star Markets, Cub,and Lucky. Supervalu owns over 2400 stores nationwide including Albertson’s.

The stock is way down because of a recent profit warning due to heavy promotional advertising and lowered prices to stay competitive with competitors. The negative about the company is the huge $9 billion debt burden that Supervalu took on when the company purchased Albertson’s.

Supervalu has been working hard to reduce its debt level and become a more efficient grocery store operator. This is important in the retail grocery business where profit margins are especially thin.

At a time when companies are diluting shares, Supervalu is rewarding owners by buying back shares. This is a sign that even management believes the shares are undervalued. Supervalu generates significant free cash flow and expects to pay down over 1 billion dollars in debt over the next few years. The company recently raised it’s dividend and is currently yielding a hefty 5.30%.

I like the grocery store business because it is pretty reliable even during periods of economic contraction. People may trade higher end groceries for lower end ones but they still have to buy groceries.

Comments

[Theta Guy:]

Sure, everyone needs groceries but they still don't have to spend their money with Supervalu. Walmart is running romper stomper all over the business of some of these tired chains. SVU margins are taking a hit due to that as well as the spending behavior changes brought on by the recession. Consumers are trading down and in many cases that is to lower margin brands. In addition, non-food items sold by these stores are high margin yet can be considered non-essential for the most part. SVU's warning is real. Their business is being seriously impacted and it's reflected in the shares. The shares merely represent current fair market value. The company needs to turn things around before there is too much upside in the share price.

Jul 05 10:45 PM

[Ted Hurlbut:]

In this market, I'd be very cautious of any retailer in any sector with anything less than superlative fundamentals and solid operations, whether I was considering buying stock or bonds. Retail has already cut their costs to the bone, and they remain under serious margin pressures. The weak will continue to weaken until the top line begins to turn.

Jul 06 10:22 AM