On Flawed Comparisons: SuperValu and Great Atlantic-Pacific Tea Co.

Includes: GAP, SVU
by: Dime Trader

Given Supervalu Inc’s (NYSE:SVU) earnings miss and lower FY 2011 guidance, there have been several comparisons with the Great Atlantic-Pacific Tea Co (GAP), which is currently in bankruptcy. Similar to the flawed comparisons being made between Research in Motion (RIMM) and Palm (PALM), I think the grocer comparison distorts the fundamental nature of the two companies. Here is a table showing the cumulative cash flow from operations generated by the two companies for the last four, eight and12 quarters.

Cumulative CFO in MM



Last 4 Qs



Last 8 Qs



Last 12 Qs



What we see is a radical difference in the cash flow generating capabilities of these companies. SVU has been splitting its cash flow between store renovations and debt repayment. GAP has been forced to fund its operations from other sources, namely asset sales and borrowings (it added $1.05 billion of long term debt over the last 12 quarters, while SVU reduced long term debt by $1.85 billion over the same period).

SVU’s business strategy is profitable (adjuting for one-time non-cash charges), but is constrained by a significant level of debt (interest payments this last quarter were 47% of adjusted EBITDA!). The company is chewing through the debt quickly. SVU’s average EBIT margin has been 3.1% over the last 12 quarters.

On the other hand, GAP’s business strategy is unprofitable, with COGS + SG&A being within a percent of revenue in five of the last eight quarters, leaving very little room for interest payments and restructuring. GAP’s average EBIT margin has been negative 1% over the last 12 quarters.

Though I am in favor of comparing companies in an industry to consider relative value, making misleading comparisons doesn’t help anyone.

As for my investment thesis on SVU, I believe the company’s long-term debt reduction and sale of non-core assets will pay off. Time is on the company’s side, as debt reduction continues to fund further increases in free cash flow, which can then be used to renovate (or expand its Save-A-Lot brand, which the company says is generating ROIC of 30%). Obviously I am not a fan of the margin contraction, though management says this is the result of poorly executed promotions and limited largely to the northeast. The company has made good progress over the last quarter in its turnaround plan (merging departments, cutting staff, shutting down underperforming stores, sellign assets, integrating IT solutions for better tracking and working with marketing consultants to improve margins), and I think the long-term investor will be rewarded.

Disclosure: Long SVU.