Supervalu: An Investment Is A Bet On Acquisition Action

Jul.12.12 | About: SUPERVALU Inc. (SVU)

Shares of supermarket chain Supervalu Inc. (SVU) fell over 25% in after-hours trading yesterday. The company reported a 45% decline in first quarter profits and surprised the market with a bombardment of bad news.

First Quarter Results

The country's third largest super market chain known from its Jewel-Osco brand, announced a first quarter profit of $41 million, or $0.19 per share. This compares to last year's earnings of $0.35 per share and comes in below analysts forecasts of $0.38 per share. Sales fell 4.7% to $10.59 billion, below analysts forecasts of $10.81 billion. Same store sales fell 3.7% on the year.

While the first quarter results came in far below expectations, the company announced much more bad news. Facing stiff competition, Supervalu will lower its prices and be more aggressive in cost cutting. Furthermore, the company is actively trying to lower its leverage by cutting capital expenditures and skipping its quarterly dividend.

CEO Herkert commented: "While our shift to a fair price plus promotion is right for our business, it is essential that we move even more aggressively to lower prices, and anticipate and respond to competitor actions."

More Bad News

Supervalu is taking aggressive measures to conserve its cash balances and maintain operational flexibility. The company took on a large debt position after acquiring rival Albertson in 2006 for $12.4 billion. Supervalu announced that it will skip its $0.09 quarterly dividend, a move that will save the company about $80 million per year. Furthermore, the company has been laying off employees and it cut its capital spending budget for the whole year from $675 million to a range of between $450 million and $500 million. The company aims to reduce its $6 billion net debt position by $450-$500 million for the entire year.

Supervalu also announced that it hired Goldman Sachs and boutique advisors Greenhill & Co for its strategic review. The company admits that parts, or the entire company might be for sale. Stiff competition, losing market share and a debt position of $6 billion, limit the company's options in today's competitive playing field. The company also withdraws its guidance for the full year, no longer anticipating flat sales and earnings per share growth.

Investment Thesis

Shares have lost 35% so far in 2012, excluding the 25% drop in after-hours trading. Shares hit new lows around $4 in after-hours trading, marking losses of 90% over the last five years. Shares peaked around $50 per share in 2007 after the company acquired rival Albertsons the year before. At the current share price of a mere $4 per share, the market capitalization of the company has fallen to merely $1 billion. Given the structural problems the company faces, shareholder value is entirely driven by merger and acquisition action. Competitors Kroger (KR) and Safeway (SWY) are often mentioned as consolidation partners.

Are competitors willing to pay a small premium for Supervalu, or will they simply let the company run into financial trouble in their attempt to gain more market share?

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