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Should you buy SuperValu in their sales slump?

|Includes: JCP, SUPERVALU Inc. (SVU)
SuperValu SVU

  • Market Cap: 1.6 Billion 
  • PE Ratio: -2.9
  • 1 year Change: -6.1%
  • Dividend Yield: 4.97%

SuperValu, a large scale grocery operator, reported third quarter losses of $750 million. This loss was partially do to good will accounting changes, but is an indication of the companies inability to turnaround in the midst of rising competitionSVU has had 16 quarters of declining sales.

What came as a surprise to the market was that a price tag of roughly $907 million would be attributed to Craig Herkert's attempt to turn around the depressed retailer. His actions to minimize costs within distribution, invest in strong formats like Save-A-Lot, deal with extremely high costs attributed to debt levels, and give individual retail stores more buying power has resulted in losses beyond what analysts where expecting. Sherry Smith, the companies CFO commented that the "efforts will help to improve customer perceptions of the relative value offered by our traditional stores." Though this may have a level of validity, retailers like Target, Wal Mart, and Whole Foods are far ahead of SuperValu in nearly every aspect of their business

If other retailers are any indication of the difficulty SuperValu will face, they are in for a bumpy and downhill path. JCPenny and A&P, two companies that were thriving ten years ago, face similar challenges to SuperValu. They have both been unable to turn around the customer perception that Sherry Smith speaks of.

illustrates a central point about investing in retail turnaround stocks: they are painful and in many cases impossible due to customer perceptions and the level of debt incurred from poor sales in a "penny industry." Supervalu is on a current trajectory to continued sales declines unless Craig Herkert knows something we don't. I do not believe this is a risk worth taking

Conclusion: Do not invest in SVU until a turnaround is underway.
This will be indication by several quarters of sales growth

Three years of Constant Decay

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