SUPERVALU – The Irony of a Name
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SUPERVALU ) has created havoc on the Street. After surprising investors every quarter by registering lackluster results, the company went one step further by giving investors cardiac arrest. SUPERVALU was once valued highly by investors, but no more now. It posted a 45% drop in earnings, missed analysts’ expectations and shaved one-fourth off investors’ wealth after releasing earnings.
Everything is a Mess…
As the top line shrunk 4.7% to $10.6 billion in the quarter, the bottom line plunged to $41 million from $74 million a year ago. The reason was quite obvious. In the prevailing tough environment, it is impossible for a company to survive without giving any discounts or price slash. It gets worse when industry peers continue to do so. This is what exactly happened with SUPERVALU. Competitors such as Wal-Mart ) and Kroger (NYSE: KR) have been experiencing good times because of their price reduction strategies and discounts, which have driven customers to their stores. This has gone a long way toward strengthening their market share each time. A probable reason for their performance is low dependence on food products for their income. SUPERVALU, on the other hand, is dependent on food products only. Not a great idea if you aren’t diversifying your business.
Another important pullback faced by the grocer was disposition of fuel operations, which had a negative impact on revenue. The quarter became uglier with the decline in same store sales of 3.7%, which is not the first time for the company. It has been witnessing negative same store sales for a long time now, which is a definite red flag for any retailer.
With all the segments in a soup, a small ray of hope was provided by “Save-A-Lot” revenue and earnings, which just managed to go green. This segment directly competes with Kroger’s Food-4-Less brand. Though it was the best performing, its results have been below expectations.
The woes of the giant do not end here. It has been finding it difficult to pay off its debt, which stands at a huge $6 billion. The burden was undertaken in a move to acquire its competitor Albertson five years ago. Moreover, the retail chain has declared that it will skip its quarterly dividends in order to save on some costs.
Some Measures Taken
SUPERVALU is surely sitting on a heap of problems but it offers hope of a better future. The value chain has declared its plans to expand its Essential Everyday brands’ offering to 2,700 items by the end of the year from the 1,500 offerings it currently offers. It’s one of its newest brands with great response from customers since it focuses on working women who find it difficult to juggle their work life and home life.
It has also decided to cut costs aggressively in the coming time by laying off employees and lowering its capital expenditures. This is done to provide customers with lower prices at par with its peers. Also, it is planning to reduce its debt by $500 million.
Though this seems like a difficult task since price reductions will further shrink margins and affect income, it may help push the top line, which is the most important thing right now for this sinking ship. It will also help SUPERVALU gain some market share. A similar turnaround strategy had helped Kroger recover in 5 years’ time.
But we cannot ignore the current weak market conditions that are making every weak retailer’s life miserable. With the slowdown in the consumers’ demand and losing credentials, coming into the green seems like a mammoth task at present. In fact the company is also at the verge of selling its parts. Hence, it’s better to watch it from the sidelines till it shows signs of a genuine turnaround.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of SUPERVALU INC. 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.