SuperValu Redeems Itself by Delivering a Solid Quarter

Includes: SVU, WMT
by: Mark Krieger

A funny thing happened after SuperValu (NYSE:SVU) reported its third quarter results (see conference call transcript here). Its stock actually went up. Although the company missed analyst sales forecasts, it was able to beat earnings estimates rather easily, and the cherry on top: for the first time in several reporting periods, it was able to stand by its prior earnings guidance. Wall Street responded with a resounding vote of confidence by tacking on a 10% rise to the share price. It was indeed a redeeming quarter

A deeper look at the quarter: Even though sales came in less than expectations, and 10% below last year’s levels, the grocer was able to maintain its gross profit margin of 22.4% as well as experience only a modest increase in its SG&A costs from 18.9% to 19.2%. Finally, its interest expense was pared 8% from $143 million to $131 million due to reduced borrowings.

If you compare on a sequential basis, things really start to look better, as the retailer’s gross profit margin saw a 30 basis point expansion, while its SG&A costs dipped by the same amount. It is clear that a company’s operational initiatives are starting to gain traction when it is able to simultaneously increase its profit margin while reducing its overhead.

Plans to reduce inventory: SVU plans to reduce the number of items per store by 25%. The company’s logic for the change is "why have 22 different sizes of toilet paper on the shelf if you can’t even get a full case up on the shelf." It makes sense as many times “less is more”. The new CEO, Craig Herkert, who is a Wal-Mart (NYSE:WMT) protégé, is obviously trying to incorporate some of WMT’s winning ways into SVU’s turnaround efforts..

CEO buys shares: CEO Craig Herkert recently added a vote of confidence to the stock by putting his own hard earned money on the line when he reported purchasing 25,000 shares at $14.34 per share on 1/15/10.

More good news: Intense competition and food deflation have been thorns in the sides of supermarket operators lately, but the US Labor Dept recently announced some favorable news. It indicated that for December its retail “at home index” experienced a .3% gain ( measuring the cost of a retail basket of food) amounting to its largest increase in the last 15 months. Food deflation transitioning into food inflation certainly bodes well for improvement to the bottom line.

The future: SVU's large debt load makes it a riskier bet than its peers, but with more risk comes more reward and the chances of “hitting one out of the park” with this investment have certainly improved lately. Selling at a very skinny multiple of 7 times earnings while throwing off a generous 2.4% dividend yield makes SVU deserve another look. Who knows, maybe even WMT will look at SVU as a possible acquisition target!

Disclosure: Author holds long positions in both SVU and WMT