SuperValu will not Rise against Wal-Mart, Target, Dollar General and Costco
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SuperValu (NYSE: SVU), the embattled grocery store chain, has jumped double digits in recent trading as a new chief executive officer has been brought on board to hopefully rally the company back against competition from Wal-Mart (NYSE: WMT), Target (NYSE: TGT), Dollar General Corporation (NYSE: DG) and Costco (NASDAQ: COST). Even with the new leadership, SuperValu is still looking at the same fate as Winn Dixie, which filed for Chapter 11 bankruptcy back in 2005.
It is difficult to see how SuperValu can rise meaningfully and sustain the share price gains from its present financial position and operating posture. The stock price trajectory, down 71.54% for 2012, has proven that it cannot compete against Wal-Mart, Dollar General, Costco and Target on cost of goods. Taking on $11.3 billion in debt to acquire the Albertson's stores in 2006 has resulted in a debt-to-equity ratio of 98.25. That means that it required $98.25 in borrowing to create every one dollar in shareholder equity for SuperValu. By contrast, Costco Wholesale Corporation has a debt-to-equity ratio of just 0.11.
The competition makes it virtually impossible for SuperValu to recover with such a burdensome debt load. According to a recent article in The Wall Street Journal, "Since the recession, SuperValu has been losing market share to lower priced competitors, including Kroger Co. and Safeway Inc. It faces growing competition from dollar stores, drug stores and club stores like Costco Wholesale Corp., which have started carrying more groceries in recent years.
This "growing competiton" can be seen by the low profit margins in the industry. Big Box Retailers such as Wal-Mart, Target and Costco can price groceries low and make up with the sale of other items with higher margins. Dollar General can select the best bargains and most profitable products for its shelves to enhance its returns.
Not so for SuperValu, which results in it having a negative profit margin 3.02. By comparison, Dollar General has a profit margin of 5.40%. Target has a profit margin of 4.15%. Wal-Mart has a profit margin of 3.68%.
Leading to this negative profit margin is plunging sales growth that is accelerating for SuperValu. Over the past five years, sales growth fell for SuperValu by 0.71%. In a very bearish trend, sales growth on a quarterly basis is now dropping by 4.71%, more than six times greater than the rate for the past five years.
It is the same downward spiral increasing in velocity for earnings-per-share growth too for SuperValu. Over the last five years, earnings-per-share growth declined by 21.41%. For this quarter, earnings-per-share growth is off by 44.85%. Next year, earnings-per-share growth is projected to plummet by another 5.19%. Over the next five years for SuperValu, earnings-per-share growth is expected to auger by 5%.
Many times when a stock plunges so much it results in a very attractive price-to-book ratio. Not so for SuperValu. With the share price trading at around $2.50 a share, the price-to-book ratio is 8.52. For Target, the price-to-book ratio is 2.53. Costco Wholesale Corporation has a price-to-book ratio of 3.13. The price-to-book ratio for Wal-Mart is 3.55. Dollar General has a price-to-book ratio of 3.69.
From this, SuperValu is selling at better than a 200% premium over Wal-Mart based on the price-to-book ratios: so much for the efficient market theory for that valuation.
It will be very difficult for SuperValu to rebound as it is losing money with falling sales growth, coupled with the overwhelming costs of a crushing debt load. The short float is towering at 47.09% (a short float of 5% is considered to be troubling for a company). Bonds and credit default swaps for SuperValu also have bearish pricing. To rebound, SuperValu will have to rise against Wal-Mart, Target, Dollar General and Costco Whole Corporation. Those are the very competitors that floored SuperValu, which makes a recovery very unlikely.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale and SUPERVALU INC. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.