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Summary

  • Company focusing all efforts on improving operations and performance.
  • SVU overcoming tough industry conditions by working on expanding presence in market.
  • Company moving to expand top-line results by keeping cash flow strain under control.

Supervalu Inc. (NYSE:SVU) has been making efforts to improve its performance, as it is committed to improving EBITDA and invest in business growth. The company has made progress with store growth at its Save-A-Lot (SAL) retail chain, which remains its main growth driver, and will offset the weakness in supply sales. Also, due to the company's focused approach about cost reduction, margins are expected to scale up in the near future. Moreover, the company's future earnings will also get uplift from investments in revenue generating business segments, backed by the savings generated from cost cut initiatives.

Competition Pressure
In a highly saturated U.S. supermarket industry, traditional grocers and dozens of different types of retailers offer very intense competition. SVU, with its dedicated efforts to grow, occupies a promising position among the leading grocers in the U.S. The success of SVU's promotional and sales programs, its ability to respond to promotional and pricing practices of competitors, and its effective operations in both retail food and supply chain are continuously growing its sales base at a decent pace. The following table shows the decent future sales growth rate for SVU expected by analysts, as compared to its competitors, Safeway Inc (NYSE:SWY) and Metro Inc. (OTCPK:MTRAF).

Company

Estimated Future Sales Growth Rate

SVU

1.76%

SWY

1.24%

Metro Inc.

1.15%

Source: Bloomberg

Major Growth Driver = SAL

The company has long started the process of revamping its SAL stores, which offer growth. The efforts to grow these stores are finally paying off, as the company recently reported +3.5% year-on-year growths in its SAL sales. The current quarter's positive sales level for SAL gave an insight to the elevated confidence level of licensees in SAL's efforts, mainly due to the introduction of freshly cut meat and the penetration of private label brands. As the company remains highly committed to strengthening the performance of licensee stores and making its operations more successful, I believe future revenues from SAL will grow. Moreover, these heightened revenues will also portend well for the underlining EPS growth.

The company's SAL operation is poised for net store count growth this year, which is expected to accelerate thereafter. So far SVU has added 40 new SAL stores, and expects to open 65 new stores in FY15. Through the expansion of SAL stores, SVU will continue to push hard where it sees opportunities to strengthen its market position.

Retail Food Chain

Although there's a lot to be done in this segment, the company's retail food banners have been making significant efforts in the past few years with an improvement in promotional strategies. The heat of elevated promotional level continued to grow the sales base of the segment in the recently ended FY14. In addition, stocking of food by people due to a threat of adverse weather conditions also supported the recent quarter's revenue base of retail food chain. SVU's management has effectively planned to bring more improvement in its retail segment results for the coming years.

Also, SVU's plan of aggressively remodeling almost 40 retail stores will bring in more efficient results for the retail segment in the coming quarters. Moreover, the company is putting in a lot of efforts to re-merchandise and resize departments with great sales opportunities such as pet, baby and seasonal. I believe by re-merchandising and resizing these departments SVU's management is moving the retail segment in the right direction to optimize its sales in the long run.

Supply Chain
The recent quarter's -0.6% year-on-year decline in supply chain revenue was caused by the decline in military volume by government sequestrations and the loss of two large customers that decided to go in a different strategic direction. The volume loss will adversely affect the revenues of the segment in the near term. However, the company plans on offsetting this volume loss by strengthening the supply chain segment in numerous ways, including making investments in the supply chain segment to make it more productive. Moreover, SVU will utilize its supply chain expertise and professional services offerings more efficiently in a bid to prosper. I believe in the long term the company will be able to mitigate the effect of the recently lost volume.

Cost cuts and Investments

SVU's management is very optimistic about lowering its cost structure. By the end of FY14, much has been done to get a leaner cost structure. The recent quarter's 6.4% year-on-year decrease in SG&A expenses as a percentage of sales was achieved as part of its cost reduction initiatives. Also, the company continues to benefit from cost reduction efforts in FY15.

There has long been speculation among investors about the possible strain on the company's cash flow base due to its plan of expansion through investments in all segments. Perhaps, the savings through the ongoing cost reductions will help in the successful implementation of SVU's plan of future investments, lowering the strain on its cash flow base. Moreover, these large scale investments will help SVU in monetizing its assets, generating more in cash and portraying a promising long-term picture of SVU's cash flows.

Conclusion

The company has been working to improve its operations and performance. The recent quarter's results show that performance has started to improve. In a highly intense U.S. Supermarket Industry, the company is making the correct strategic decision to expand its presence in the market. Also, a combination of savings through cost cuts and investments undertaken to expand indicate that SVU is moving in the right direction to grow its top-line results by keeping the cash flow strain under control.

Source: Supervalu - Headed In Right Direction To Overcome Challenges