In an act of urgency, Supervalu (NYSE:SVU) fired its CEO Craig Herkert July 30 and replaced the former Wal-Mart (NYSE:WMT) executive with Chairman Wayne Sales. Many will see this as a last ditch effort to avoid bankruptcy. However, those willing to look beyond the obvious flaws of its business will find a speculative investment worthy of consideration.

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Micro Cap

It's not often that you'll read about a micro-cap stock at Investopedia, but this situation is different. Supervalu had fiscal 2012 revenues of approximately $36.1 billion employing 130,000 people. It's no tiny company. As recently as 2008 it had $44 billion in revenue and $1.7 billion in operating profits. Its operating margin in 2008 was 3.8%, 50 basis points (BPS) higher than Kroger (NYSE:KR) and just 40 BPS less than Safeway (NYSE:SWY). Once upon a time (2007) it was holding its own in the ultra-competitive grocery business with a market cap of $7.9 billion. Then the wheels fell off. It's Wayne Sales' job to right the ship and while it's a Herculean task, he knows what he's doing.

SEE: Becoming A CEO

Different Pedigree

While Herkert spent five years at the upper echelon of Walmart management, his hiring as CEO of Supervalu in May 2009 was a homecoming of sorts, having spent 23 years prior to that working for American Stores and Albertsons. He seemed to have the right stuff. Unfortunately, he wasn't able to cut prices and costs quickly enough to remain relevant to consumers. Wayne Sales has been chairman since 2006, so in many respects he's also been responsible for what's transpired. However, as CEO he gets the operational reins he didn't have up to this point. Hopefully, he can work fast because Supervalu doesn't have a lot of time. When he took over as CEO of Canadian Tire (OTC:CDNAF) in 2000, its shares were suffering. Taking the existing strategy and emphasizing execution, Sales was able to significantly improve its profitability. As a result the share price increased 400% in his six-year tenure, and Canadian Business magazine named him CEO of the Year in 2005, his last full year at the helm. Sales' reputation as a team player will make the task at hand that much easier to accomplish. I'm sure he didn't want to step back into the day-to-day operations at age 62 but circumstances require that he do so. By this time next year we should know if it was worth it.

Smaller Footprint

In a brief statement, Sales indicated that it will focus on its smaller (15,000 square feet versus 50,000) Save-A-Lot format that caters to urban and rural areas that are underserved by grocery stores. It owns 397 stores with another 935 locations licensed to independent operators. Its top metro areas include Cleveland, Nashville and Tampa. Most of the products it sells are private labels which help customers save money. In its first quarter ended June 16, Save-A-Lot contributed just 12.2% of sales, yet its operating earnings accounted for 26.5% of its total operating profit while stores like Albertsons in its retail food segment generated 64.4% of revenues but only 44.4% of operating earnings. Save-A-Lot's operating margin in the first quarter was 310 BPS higher than the retail food segment at 4.6%. It's hard to know if it could unload its retail food segment to other grocery retailers at this point, but Sales obviously sees the potential of Save-A-Lot despite year-over-year operating margins declining by 80 BPS. Any way you slice it it's not going to be easy.

The Bottom Line

Five short years ago, Supervalu was solidly in the mid-cap category trading at slightly more than $43 a share. Today, it's trading at $2.58. If you've got money you can afford to lose - not your kid's education fund - this is a very interesting speculative investment. I'm not saying it's going to work out but Wayne Sales has a history of getting things done. That means a lot when it comes to turnarounds.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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