Growth Initiatives Paying Off And Bright Future Earn Supervalu A Bullish Thesis

| About: SUPERVALU Inc. (SVU)


Consistent improvements in SAL and retail chain segment are driving top-line growth.

Cost reduction initiatives are supporting margins and bottom-line growth.

SVU taking right steps to expand stores and market presence.

I reiterate my bullish stance on Supervalu Inc. (NYSE:SVU). The company's ongoing improvement in operational performance through Save-A-Lot (SAL) and the retail chain segment are supporting its top-line results. Moreover, SVU's efforts to improve its cost structure are helping lower the cost burden and expand the EBITDA margin. Also, as the company's earnings grew due to better sales and cost savings, SVU's 1QFY15 EPS once again outpaced analyst estimates. I believe the company's strong growth investments in both SAL and retail chain segment will portend well for the company's long-term success.

Save-A-Lot + Retail Chain = Top-line Success

The company's SAL and retail chain segment have been adding well to its top-line success story. Although, the company increased its price discount offers to meet the competitive pricing discounts offered by retail chain giant Wal-Mart (NYSE:WMT), and Safeway (NYSE:SWY), but the company's SAL and retail chain segment continued to grow its top line.

SVU enjoyed a net sales increase of 6.5% year-on-year for its SAL segment. Also, as the company worked assertively to improve its SAL segment's performance, the segment witnessed more customer traffic in the recent quarter. For 1QFY15, SVU's network IDs were up 5.6%, while company-owned IDs increased by 7.2%, primarily driven by the 6.1% improvement in consumer traffic and also due to a 1.1% increase in basket size. The company's focused approach of improving the quality of store services and offerings drove better store traffic. Also, the fresh-cut meat program, which SVU started in the previous quarter, did well to grow the sales of SVU's company-owned stores in 1QFY15. I believe that as the company remains focused on delivering fresh products, its SAL store sales will benefit further in the coming quarters.

Furthermore, SVU is committed towards increasing its market presence by continuously increasing its SAL store numbers. In this regard, the company did well by opening 45 new SAL stores by the end of FY14. For FY15, the company expects to ramp up its store openings; SVU will be opening more than 65 new SAL stores during FY15. I believe the consistent increase in store count is an initiative, which will fuel its top-line growth and strengthen its market position.

As far as the retail food segment is concerned, the company's ongoing promotional activities and investments are positively affecting the segment's performance. For 1QFY15, the same store sales for the retail segment were up 0.6%, year-over-year. Furthermore, the store remodeling efforts to remodel 40 stores stay on track. I believe that through store remodeling, the company will ensure favorable product offerings by assigning better space across different departments, which will portend well for revenue generation of the retail segment in the long run.

Cost Reduction Efforts

The company's efforts to get a leaner cost structure are well on track. So far, with these consistent cost control efforts, SVU has effectively lowered SG&A expenses. For 1QFY15, SVU's SG&A expenses as a percentage of sales were down 70bps year-over-year. The cost reduction efforts and healthy top-line numbers helped SVU expand its EBITDA margin; SVU reported an EBITDA margin of 4.5% in 1QFY15, up from an EBITDA margin of 3.5% in the same quarter the previous year. I believe the company's ongoing cost reduction efforts will continue to expand its EBITDA margin in coming quarters.

In addition, these cost reduction initiatives also grew SVU's earnings. The company was able to post an earnings beat of 5.90% in 1QFY14. Also, based on SVU's strong growth potentials, analysts have anticipated a healthy next five years earnings growth rate of 5.25%.

The Data Hack Issue

Many companies in retail chain have been victimized by cyber-crimes like data hack issues. A few months back, Target Company (NYSE:TGT) suffered a huge customer confidence loss when its payment system got hacked and almost 40 million credit card numbers were stolen, despite the malware security system. SVU also faced a similar situation recently, when a hacker got access to customer information in almost 180 stores.

The company has been taking steps to restore customer confidence and improve its security system. SVU has initiated investigations with a third party to find out the extent of the breach and its possible impacts. Also, the company has plans of introducing consumer identity protection services via ALLClear ID for the victims of the data breach. Despite the measures taken by the company to make its payment system secure, significant time will be needed before consumer confidence is restored.


SVU's consistent improvements in SAL and the retail chain segment are driving its top-line growth. As the company's growth initiatives remain on track, it's SAL and retail chain segment will continue to deliver top- and bottom-line growth in the coming quarters. Furthermore, the cost reduction initiatives are supporting its margins and bottom-line growth. Moreover, SVU is taking the right steps to expand its stores and presence in the market, which will portend well for its market position. Due to the aforementioned factors, I am bullish on the company.

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