SuperValu Returns To Profitability

By Greg Sushinsky | January 25, 2010 AAA

Grocery chain Supervalu (NYSE:SVU) turned a profit in its recent third quarter, largely driven by cost cutting as it seeks to reverse its fortunes from poor performances throughout this recession. Sales were still off by 9%, down to $9.22 billion this quarter compared with last year's third quarter, and same store sales were down 6.5%. That said, the company's net income was $109 million - 51 cents a share, or 46 cents excluding a one-time gain. Last year's third quarter featured a $13.95 per share loss, or a loss of $2.94 billion, mainly due to charges of $3.1 billion leading to a $14.57 per share write-down. Supervalu's new CEO, Craig Herket, commented, "Supervalu is running its business better." We'll look at whether or not there is real value left in Supervalu and the other grocers. (Retail grocers are no longer a homogeneous group selling products in the same manner. Find out how to evaluate these companies in Evaluating Grocery Store Stocks.)

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Tough Times In The Grocery Aisles
Grocers had their fair share of difficulties during this recession because consumers have traded down on price and have gone after value with a vengeance. Supervalu did not get in front of this trend fast enough and has been forced to play catch up. Other chains, such as Kroger (NYSE:KR), Safeway (NYSE:SWY) and Winn-Dixie (Nasdaq:WINN) did better at discounting, while Supervalu and Great Atlantic & Pacific Tea (NYSE:GAP) struggled.

Atlantic & Pacific, known for its A&P stores, had another unpleasant quarter as it lost $559.6 million. Last year's same quarter featured a loss of $14.4 million, while this year's quarter also featured lower sales of $1.96 billion, down from $2.12 billion - an 8% drop. Same store sales were off by 5.8%. Great Atlantic & Pacific's CEO, Eric Claus, is leaving due to this poor performance. The company has also announced a new pricing strategy to recapture value shoppers.

Recession, Compression And The Future
The severity of the economic downturn damaged the earnings and prospects of what traditionally has been a resilient sector during lean times. Although the many grocers were hurt, some of the grocers handled this better than others. Kroger's last earnings report, in December, plus its forward outlook, highlights this. Safeway has fared similarly, and was cited as an example of a dividend stock which may deliver surprising appreciation.

Winn-Dixie may be the most intriguing name in the group. It emerged from Chapter 11 bankruptcy three years ago, went public, and was recently trading at roughly the same price as three years ago - despite increasing income from $28 million to $40 million. The company does $7.3 billion in annual sales, has almost no debt, and currently trades under book value.

Are Supervalu And The Other Grocers A Super Value?
Supervalu's balance sheet is not quite like Winn-Dixie's, as Supervalu has a long-term debt-to-equity ratio of 2.84. It does, however, currently trade at around book value, and its stock, along with the others, hasn't participated in the market run up in the second half of 2009. Still, some caveats remain: the economic compression which has affected this group may have some lasting effects that may be baked into both the stock price and essentially flat earnings estimates. Additionally, the consumer shift to extreme value for food, driving them to deep discounters, drug stores, and the large wholesaler, Costco (Nasdaq:COST). This trend isn't likely to reverse easily.

The Bottom Line
The grocers group isn't monolithic. Keep in mind that, while Supervalu seems to be on the road to straightening itself out, A&P has been mentioned more as a takeover target. Each of these companies is different, subtly or otherwise. Still, the grocers stocks individually bear watching, particularly by long-term value investors. Supervalu is one to watch to see if it can make its turnaround stick. (For more related material, check out 22 Ways To Fight Rising Food Prices.)

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