Can Supervalu Survive Its Gigantic Debt Load?

| About: SUPERVALU Inc. (SVU)

By Siraj Sarwar

Supervalu Inc. (NYSE:SVU) is one of the oldest retailers in the country. Established in 1871, the company operates in two segments: retail grocery stores and independent services. The corporation's grocery stores account for around three fourths of sales and operating income. The main formats in retail are conventional supermarkets that function under 12 distinct banner names and low-price Save-A-Lot grocery stores.

Recent Financials

Net sales for the Q1 of financial year 2013 were $10,590 million in comparison with $11,113 million in the previous year. Sales dropped primarily due to reduced performance in the retail food segment. Retail food sales were 64.4 percent of total sales. Save-A-Lot sales were 12.2 percent of total sales for the Q1 of financial 2013 and 11.5 percent in the previous year. Independent business sales were 23.4 percent of total sales for the Q1 of fiscal 2013.

Gross profit for the Q1 of financial 2013 was $2.3 billion, in comparison with $2.4 billion in the previous year. Gross profit was reduced by $134 million, of which $122 million was within the retail food section. The cut down in gross profit was mainly due to a decrease in the corporation's retail food sales. Gross profit for the Q1 of financial 2013 decreased 10 basis points to 22.0 percent in the Q1 of financial 2013. Net sales increased 30 basis points to 29.3 percent in the Q1 of financial 2013.

Store Closures

Supervalu recently announced a program to close 60 underperforming stores. Closure will produce $35 million in cash earnings in the next 12 months and $90 million in the following three years. It is worth to state that the corporation has one-third of these outlets, which will "in fact" produce cash. While this is a small essential step, the long term success is still in question.

Liquidity Position

Net cash presented by operating activities was $227 million for the Q1 of financial 2013 in comparison with $245 million in the previous year. The drop mainly reflects a $43 million raise in pension and other postretirement programs. This reduced Q1 financial 2012 contributions and cost a $33 million cut down in net earnings.

Net cash used in investing activities was $206 million for the Q1 of financial 2013 in comparison with $133 million in the previous year. The raise reflects greater cash payments for expenditures on property, plant and equipment. Net cash used in financing activities was $27 million in the Q1 of financial 2013. The drop in cash used in financing activities is primarily due to capital lease and net debt enhancements of $12 million. During the first quarter of fiscal 2012 net payments on debt and capital lease obligations were $67 million.

Management is expecting that the corporation will keep on renewing operating assets and paying down debt commitments with internally generated funds. There can be no guarantee that the company's business can keep generating cash flow at existing levels. Supervalu might need to obtain short term or long term funding from its credit facilities.

Dividend and Refinancing

Supervalu lately suspended its quarterly dividend of $0.0875. This shift will save the corporation about $75 million. The company will use this cash to repay its higher interest debts and for basic corporate requirements. In addition, Supervalu closed on a new five year $1.65 billion asset-based revolving credit facility. This asset-based revolving credit facility supported by receivables and a new six year $850 million loan. The new credit facility and loan will substitute debt that had more limited covenants. Overall, SVU is expected to pay down about $400 million of debt yearly. The dividend suspension and refinancing will provide SVU with further financial versatility in implementing its earnings and cost savings strategy.

Supervalu vs. Kroger (NYSE:KR) vs. Safeway (NYSE:SWY)

Supervalu has been struggling since it acquired Albertsons Inc. in 2006. It is clear that the amount of debt raised the interest cost. Supervalu stores have also produced a weak reputation with respect to pricing. However, Kroger and Safeway had been more ambitious with respect to pricing initiatives. In the most recent conference call and the annual meeting, SVU declared that it was speeding up its price initiatives to meet with competitors.

One more reason Supervalu has greater finance costs than Safeway and Kruger is that the company was not executed as well as Safeway and Kruger. SVU's credit rating is well below that of its peers, because SVU had taken $6.8B in asset impairment charges on its ill-fated Albertsons purchase. The outcome of these impairments has left a balance sheet which is in worse position than that of Safeway and Kruger. SVU has average annual cost of debt of 8 percent. This is substantially higher than the debt cost of Safeway (4.7%) or Kroger (5.6%).


In the previous two months, SVU has carried out two debt financing transactions of $2.5 billion. This has aided the corporation to flip over some of its short term debt. With only $151 million in liquid assets, decreasing operating cash flow since 2009, and close to $9 billion long term debt, the corporation has a long way to go for a recovery. Dividend suspension and closure of 60 underperforming store will give Supervalu some financial versatility. I think a wait-and-see strategy is all that makes secure at this stage. I am hoping to see a reliable solid performance from the new CEO.

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

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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