This Grocer's Comeback Is on Track

ANUP is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wholesale distributor and independent retailer SUPERVALU (NYSE: SVU) recently released its quarterly earnings. The results were better than expected as the company was easily able to beat consensus estimates. 

If you think that investment in a grocer is not a potentially good use of your money, I think you should reconsider because, according to me, if the company sticks to its plans, it should deliver good returns.

Let’s take a look at the reasons which helped the company beat analysts’ estimates along with its plans for the future.

Business analysis           

SUPERVALU met expectations on revenue and beat expectations on earnings per share in the quarter. Total sales for the first quarter were $5.2 billion, down 1.5% from the year ago period. This drop was a result of a drop in customer transactions and tight economic conditions. However, the company managed to surpass the consensus estimate of $5.14 billion.

Sales in all its three segments declined, which was a direct outcome of the company’s incremental price investments and aggressive pricing actions by its competitors. This may not sound good, but the rate of decline in sales has been coming down.

The company recently sold nearly 900 supermarkets in a $3.3 billion deal as a part of a restructuring exercise. SUPERVALU sold its Albertsons, Acme, Jewel-Osco, Shaw's, and Star Market stores, along with Osco and Sav-on in-store pharmacies, earlier in the year to an investor group led by Cerberus Capital Management. This has resulted in lower infrastructure costs and enables the company to focus on a leaner business. The company’s lowered cost structure and simplified business model, which was a result of its decentralization, also helped it revive its margins.

Moving forward

SUPERVALU recognizes the important role the independent retailers play in its business. Keeping this in consideration, the company hosted the first meeting of National Retail Advisory Group in Minneapolis in June. The company is also focused on bringing in new customers and retaining existing ones. SUPERVALU is focusing on better advertisements, better merchandising, and more effective product displays, decentralizing its operations and the decision making process.

Moreover, better store management and controlling shrink by creating model stores in all five districts should lead to further efficiencies. The company is focusing on arranging its merchandise in a better manner so that sales improve. It is also trying other strategies to improve sales, such as weekly newspaper inserts that advertise new merchandise and are visually good to look at. So, SUPERVALU is looking to become leaner and at the same time focus on the products that it sells. This is a good strategy in my opinion and should help SUPERVALU drive better performance in the future.

Strong competition

While SUPERVALU is no doubt focused on bringing more customers by its various strategies, the company also faces strong competition. Kroger (NYSE: KR) has also been following a good strategy to increase its presence and sales. Its plans include addition of 75 fresh items to its merchandise portfolio and has also taken the inorganic route to grow its business by acquiring Harris Teeter, a grocery chain. The company's strategies have yielded results so far as seen through same-store sale growth of 2.9% in the previous quarter. Also, its low pricing is another reason why SUPERVALU might find the going difficult in the future. 

Then there are dollar stores such as Family Dollar (NYSE: FDO) with their own strategies as far as selling groceries is concerned. Family Dollar offers products at low prices and it has struck a chord with shoppers. As this shopper said, grocery items at Family Dollar have improved over time and shopping at the dollar store helps save money. Even Family Dollar sends out circulars to residents in the area where it has stores and they seem to be having a good effect. The fact that certain items are present at half the price and quality is close to expensive offerings is a major reason why Family Dollar is a threat to SUPERVALU's resurgence.

But, Family Dollar’s recent results were not as good as expected. Although the company saw a good improvement in its revenue, sales, and comparable store-sales, its profit fell from $124.5 million to $120.9 million. Family Dollar was unable to post a profit because a huge chunk of that revenue was generated from the sale of low margin consumables. But these low margin consumables are the reason why SUPERVALU needs to beware Family Dollar.

Conclusion

SUPERVALU is now going back to its roots of being a wholesale operator. The company is gaining confidence among its old wholesale customers and focusing on better operations. This phase is very important for the company to prove itself. And if it is able to execute as per plan, SUPERVALU should show good returns.

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ANUP SINGH has no position in any stocks mentioned. The Motley Fool owns shares of Supervalu. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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