Is Supervalu On The Right Path?

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 |  About: SUPERVALU Inc. (SVU)
by: IAEResearch

Supervalu (NYSE:SVU) is among the largest grocery retailers in the U.S. with roughly $17 billion in annual sales. The company was suffering due to falling sales and profits recently. However, a change in the strategy has brought Supervalu back to life. The focus has been on cost reductions and selling off its underperforming assets. The strategy has paid off well and the market has warmed to the idea of a leaner Supervalu. As a result, the stock price has gone up by more than 80% during the last twelve months. We are likely to see even greater benefit over the next two years as the management continues its impressive strategy to decrease costs and focus on lucrative segments.

SVU Chart

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Increasing Efficiency

Recently, the company announced that it is shutting down its distribution center in Milton, W. Va. The Milton operations will now be handled by the company's other distribution center located in New Stanton, Pittsburgh, Pa. The New Stanton distribution center had an excess capacity of 771,000 square feet which would be set up for Milton operations. This is a brilliant move in terms of increasing efficiency. Further, the fleets can be shared through better planning allowing the company to improve its logistics capabilities and reducing the fuel costs. Also, the company will have a fewer number of employees in this shared facility further reducing the cost.

Significant Decrease in Fuel Costs

Supervalu recently purchased 35 Class 8 Volvo trucks which operate on compressed natural gas (CNG). To operate this new fleet, Trillium CNG, one of the leading providers of natural gas fuel, has a fast-fill CNG station at the Mechanicsville distribution center of Supervalu. This fleet conversion will reduce the annual fuel consumption of the company by 1 million gallons. The company has 20 distribution centers in the U.S., including the one in Milton with roughly 400 trucks. This is excluding Save-A-Lot's fleet, which operates separately. Additionally, there are 105 tractors at the Mechanicsville distribution center. The company has plans to convert 65% of its fleet by the end of 2015.

There is a lot of difference in the mileage of CNG and diesel which may vary upon the quality of gas compression. Transportation cost is a major cost for any business involving logistics. This conversion would reduce the company's operating costs considerably. In general, trucks can run on CNG for half as much fuel costs as taken by diesel. Since the company intends to convert 65% of its fleet by 2015, it should decrease the company's transportation cost by 32.5%.

A Look at the Financials

As reported in the last earnings call, although the revenues of the company fell short of the analysts' expectations by $40 million dollars i.e. 1%, Supervalu still managed to double its net profit. The earnings mainly grew due to the impressive performance of Save-A-Lot and cost cutting measures. Net cash flow from operations has increased by 27.58% to -$42 million as compared to the same period last year. Compared to the same period last year, the adjusted earnings per share increased from $0.03 to $0.13, showing remarkable growth. Over the course of three years, the company has let go of its long-term debts. Since 2011, the long-term debt of the company has come down by more than 40%.

Conclusion

Supervalu has significantly improved its efficiency over the last year. This was mainly possible for the company due to its closure of several underperforming stores and making efficient use of its assets. The management has been able to bring down the debt by more than 40% in the past two years - the sales have started to stabilize and the costs continue to go down. As I mentioned above, further efforts to bring down costs should enhance the profit margins over the next two years. We are likely to see a two-fold effect due to the growth in revenues and a decline in costs. We are seeing a great example of a change in strategy and the execution of a well thought out plan. I expect the stock to grow considerably over the next two years, and believe the risk-reward profile of the stock is attractive at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.