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I wrote off Supervalu (NYSE: SVU) back in 2012, when the stock price was $2 and there was no hope in sight. However, Supervalu stock roared up to $12 as a turnaround plan seemed to be taking hold. By a year ago, its Save-A-Lot subsidiary saw terrific same-store sales comps, and this was translating into real revenue growth.
Now? That’s all out the window.
The Supervalu earnings report for its fiscal third quarter was awful. Yes, it earned 16 cents per share, but that was an 11% decrease over the prior year. This came on a 2.6% decline in sales, with negative comps across the entire company. It always amazes me that a company can sell $4.11 billion worth of product yet barely make any money (that’s a decline from last year’s $4.23 billion).
Supervalu Earnings: Sad Same-Store Sales
As for those store comps, the Supervalu’s independent business segment saw a 3.5% decline. The retail food segment saw negative comps of 2.6%. Over at Save-A-Lot, the negative comps came to 3.4%.
It has to be frustrating for management, because the Save-A-Lot turnaround has really been doing quite well. It’s the other segments that have been dragging the company down. Perhaps that’s why the company has filed to spin off Save-A-Lot. That might be good for shareholders, except it leaves two rotten cores for shareholders to hold onto.
The company is faltering internally. What we learned in the conference call is that management is going to keep pushing coupons and discounts, and that can only lead to smaller margins. It also makes me wonder whether Supervalu is going to be able to compete without offering those incentives.
Supervalue’s Lousy Balance Sheet
In the Supervalu earnings report, the income statement shows rise in selling, general and administrative expenses. That’s all well and good if it is generating significant increases in revenue. It isn’t. In fact, as mentioned, same store sales are declining and so is revenue.
Meanwhile, I see a lousy balance sheet. $134 million in cash is offset by $2.28 billion in debt. That debt is kind of expensive, at around 6.5%. That’s $150 million in annual interest expense being sucked off Supervalu’s bottom line. Operating cash flow is decent at $251 million for the full year, but free cash flow is only $82 million.
I suppose there’s some good news in the Supervalu earnings report in that the company redeemed $278 million of its 8% senior notes, retiring that tranche of debt.
Investors are stuck when it comes to grocers. Organic growth in the sector is pretty sluggish. Most of the grocers are doing rather well from a balance sheet and cash flow perspective. Heck, Safeway was taken private exactly for the reason that it had robust cash flow. The problem is that grocers are a bit of a go-to “safety stock” which I think is misguided. They are overvalued, as is much of the market.
One’s only choice, then, is to try and find value plays in the sector. Supervalu just isn’t it. The business is really faltering. It’s more likely a money pit and value trap than a true undervalued play.
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