As we predicted several months ago, grocer SuperValu (SVU) announced on Wednesday that it will suspend its dividend in an effort to better allocate capital and start to reduce its enormous debt load. The company also reported that it plans to replace its current senior credit facility with one that will be backed by the company's assets, thus allowing for increased flexibility and less stringent financial covenants. We applaud both moves as efforts to deleverage the firm's balance sheet and ensure the firm's long-term survival. The Valuentum Dividend Cushion predicted the dividend cut months ago (click here to read our warning about the imminent cut in an article we published in late March). We know of no other dividend-cut predictor than has been as successful as the Dividend Cushion.
In addition to introducing new liquidity initiatives, the company also reported results for its fiscal year 2013 first quarter. Earnings per share fell to $0.19, a decrease of 46% compared to a year ago and far short of the consensus estimate of $0.38. Same-store sales for the firm's retail operation fell 3.7%. Even same-store sales for its Save-A-Lot business, which had been outpacing retail operations, fell 3.4% compared to the same quarter last year.
The company continues to face fierce competition, and it announced plans to expand discounting programs at its Jewel-Osco stores (mostly in the Chicago area). In previous notes we've recognized Jewel's poor market position in the Chicago market. Essentially, the stores look as though the firm is a discounter, but yet its stores charge higher prices than Dominick's (SWY), Walmart (WMT) and Mariano's (RNDY). The combination of higher prices and a poor shopping experience have soured local shoppers. On one hand we think it's an incremental positive that the company will implement competitive pricing. However, Jewel's reputation is already impaired, and the company's announcement that it will slash $150 million in capital expenditures means several stores will not receive the makeover they need.
While we applaud the firm's willingness to cut costs and become more competitive, we think underinvesting in capital expenditures often leads to underperformance in the business. For years, Sears (SHLD) has refused to invest much in its Kmart and Sears stores, and sales have plummeted. SuperValu has underinvested in its stores relative to its peers, like Safeway and Kroger (KR), and its same-store sales growth has subsequently underperformed its peers.
Management also announced that it has hired Goldman Sachs (GS) to perform a strategic review of the company in order to generate value for shareholders. We suspect the company may explore divesting its profitable food distribution segment to pay down debt. The firm still generates positive operating cash flow ($227 million in Q1), but it needs to focus on cleaning up its balance sheet in order to reinvest in its store base. It will take near-flawless execution to return SuperValu to robust profitability.
We maintain the firm is not that attractive as it registers a 3 on our Valuentum Buying Index (our stock-selection methodology). However, with technical improvement, SuperValu could make an interesting, speculative investment. The grocery store business runs on razor-thin margins, but it isn't likely to go away anytime soon. Still, our biggest question is whether the firm will be able to maintain sufficient levels of profitability in order to properly reinvest in its store base before bankruptcy becomes the more probable outcome. We remain on the sidelines.