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Edited By Kate Boehme

Supervalu Inc. (NYSE:SVU) is one of the oldest retailers in the U.S. Established in 1871; the company serves its customers through a network of 4,400 stores spread across the country. Supervalu operates in two main sectors: grocery retail and independent services. The corporation's grocery outlets account for around three fourths of its sales and operating income. Supervalu chiefly operates conventional supermarkets, which work under one of twelve different banner titles, and low-price Save-A-Lot markets.

Supervalu has been struggling with enormous debts. At the moment, the debt situation is pretty poor, particularly when compared to the industry average. In the last month, the company managed to complete two debt financing transactions, totaling $2.5 billion. This effort will give Supervalu better financial versatility, helping it to roll off existing debts. Therefore, despite recent difficulties, Supervalu is taking positive measures to rectify the situation.

Cash Flows

Figures in $ million

2012

2011

2010

2009

Operating cash flow

1056

1163

1474

1534

Capital expenditure

661

597

681

1186

Free cash flow

395

566

793

348

The cash flow table above shows the position of the company in regard to its free cash flows. I have used the three most recent years for evaluation. It is obvious from the table that Supervalu does not have a stable cash flow position, especially since its operating cash flow has continually fallen since 2009. However, a new $2.5 billion debt will help this company to generate revenues and roll off existing debts.

Supervalu is reviewing strategic alternatives in order to create value for its shareholders. In particular, Supervalu is instituting a new five-year, asset-based, revolving credit facility, valued at $1.65 billion and secured by company inventory, credit card receivables and other assets. The company will bear interest at the rate of LIBOR + 1.75 percent to LIBOR + 2.25 percent (depending on utilization). Furthermore, Supervalu real estate and equipment sectors have received a secured loan of $850 million, which will mature in six years. The company will carry interest at the rate of LIBOR + 6.75 percent, while also containing a floor on LIBOR set at 1.25 percent. I believe these obligations replace Supervalu's senior secured credit facilities, which constituted a $1.5 billion revolving credit facility, scheduled to mature in April 2015.

Financial Highlights

Supervalu reported a first quarter 2012 income of $0.19 per share. Total sales dropped 4.5 percent from the previous year's quarter sales. This drop may be primarily attributed to lower store sales and the corporate disposal of various fuel centers. Gross and operating profits are also both contracted, on account of increased advertising expenses, as well as adjustments in the business sector. Even so, the company has launched numerous initiatives that will guide it toward sustainable financial flexibility. Chief amongst these is the institution of fair prices for products on par with the company's main competitors, as well as minimizing costs in the latest fiscal. However, unless these efforts show favorable results in the near future, I will opt to maintain a neutral stance on this stock. I am particularly hesitant given concerns over the worldwide economic recession, as well as the increasing restraints placed by the FDA on health and food standards.

Competitor's analysis

Figure in Million

Net Income

Dividend yield %

D/E

Operating Margin %

financial leverage %

Supervalu

-1073

14.5

94.2

-1.66

1.27

Kroger

609

2.0

1.7

1.43

2.71

Wall-Mart

16257

2.1

0.6

5.94

5.90

Safeway

541

3.7

2.3

2.44

4.42

Supervalu main competitors are Kroger co (NYSE:KR), Safeway Inc (NYSE:SWY) and Wal-Mart (NYSE:WMT). Supervalu produced a stable gross margin of 22.21 percent in 2012 and 22.41 percent in 2011. However, the company is a loss-maker, and reported negative earnings in the last year. Kroger, Safeway and Wal-Mart produced gross margins of 1.43 percent, 2.44 percent and 5.94 percent, respectively. It is obvious from these gross margin figures that the grocery industry has very thin operating margins on sales.

It also appears that Supervalu is suffering insufficient growth in its operating activities; the company reported negative 1.44 percent growth in operating income for 2012 and negative 2.60 percent in 2011. In addition, Supervalu has a sensitive financial leverage, as it took on a new $2.5 billion of debt in the last month. The company is expecting to invest this money in revenue generation, and also in writing off existing debt.

Summary

Supervalu has been working hard to reinforce its balance sheet by monetizing non-core assets, developing capital and decreasing its debt. Supervalu possesses high amounts of debt, which attract a huge amount of interest and which is significantly impacting net earnings. However, the management paid off $530 million of this debt in the fiscal year 2012. Interest expenses subsequently came down $5 million from the previous year, reflecting this debt reduction. The company is hoping to write off $1.5 billion in old debt through the adoption of the new $2.5 billion. Supervalu will also use this amount to write-off $574 million in term loans (B2) and $446 million in term loans (B3). This new debt will also help Supervalu to invest in revenue generation in order to create value for its shareholders. Overall, Supervalu has sensible financial management plans in place and I believe it will improve its position in the near future.

Source: Can Supervalu Survive Its Debt?