Turn-around efforts are the common theme of 2013; we are seeing a number of companies trying to recover from losses and regain their old market positions. Supervalu (NYSE:SVU) is one of these companies that is working towards reorganization. The company has suffered heavily over the past three years due to poor global economic conditions. As a result, revenues have fallen consistently over the past three years. Furthermore, the company has suffered due to heavy debt burden. Over the past year, Supervalu stock has lost substantial value.
However, as a result of restructuring efforts, the company has been able to restore investor confidence to some extent. Over the past six months, the stock has gained over 94%, and further serious efforts towards restructuring are giving a lot of encouragement to investors. Let's look at the challenges faced by the company, and how Supervalu is looking to tackle those challenges.
Falling Revenue, Massive Debt and Non-existent Profitability
Supervalu revenue has been falling consistently since 2009, and the company has been unable to stop the decline in revenue. A decline in revenue has been caused by more than one factor, and poor economic conditions, high inflation, decline in purchasing power and low discretionary spending are some of these reasons. Supervalu is a hard discount store, and the company needs to have volumes to cover its costs; if the volumes are low, margins are going to suffer. The company has not been able to charge higher prices for products that have increased in cost. As a result, margins of the company have suffered heavily. Supervalu has reported losses in each of the last three years, and it is clear that the company will not be able to reverse these losses without radical changes.
We have analyzed financial performance of the company briefly; let's now look at the financial position and analyze the balance sheet in a few lines. High debt is the biggest concern for Supervalu at the moment. At the end of the last quarter, the company reported long-term debt and lease obligations at just above $6 billion. Since the start of 2012, Supervalu's long-term debt and lease obligations increased by $312 million. For a company in continuous decline, an increase in debt and lease obligations is not a welcome sign. Furthermore, cash position also weakened by $2 million and inventories also increased. However, an increase in inventories can be due to the company's preparations for the festive period. Nonetheless, an increase in long-term obligations, along with a decline in cash reserves, was a negative sign.
Restructuring Efforts and Assets Sale
Supervalu is in a situation where most of the market factors are out of its control; however, there are some steps which companies in these situations can take. Restructuring and shedding less productive assets is one of the few steps a company can take. Supervalu recently sold five of its super market chains for a combined $3.3 billion. Cerberus, the buying party, will pay $100 million and assume $3.2 billion in debt. As a result of this sale, Supervalu will be able to decrease its debt by half, which should allow the company to have better financial flexibility.
In addition, a decrease in debt will also help the company decrease its interest expense, resulting in improving profit margin. Furthermore, Supervalu's efforts to decrease product prices to make them more competitive should result in high volumes in sales. The recent sale of these five chains will result in reducing the revenue of the company by almost 50%. After the sale of these assets, Supervalu will have about $17 billion in annual sales.
It is always risky to bet on the turn-around candidates. However, Supervalu looks to be taking all the right steps to return the company back to profitability. There are no guarantees yet, but there is enough for investors to be optimistic about the future. Selling assets will allow the company to narrow its focus and increase the operational efficiency. Furthermore, it will be easier for the company to manage costs. And finally, a little help from the recovering economy may well result in Supervalu becoming a solid company. Signs are good for Supervalu; however, caution should be taken while considering an investment in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.