Is Supervalu super value?
The company is the fourth largest U.S. grocery chain with annual sales of approximately $38 billion and a network of 4,294 stores composed of 1,114 traditional retail stores, 1,280 hard-discount stores and 1,900 independent stores serviced primarily by the company's traditional food distribution business.
Craig Herkert became CEO in May 2009 after the company reported losses of $2.9bn and following the departure of Jeff Noddle who had overseen the disastrous acquisition of New Albertsons Inc in May 2006 and consequent increase in the company’s debt from $1 billion to $7.9 billion. Herkert, who has thirty years of experience gained originally at Albertsons and then Wal-Mart, has based his strategy on cutting costs and prices and has focussed increasingly on the Save-A-Lot branded stores which are now the largest U.S. hard discount store by revenues. However, in what was a difficult year for the company, net sales fell by 7.5% in the financial year to February 2011 while expenses only reduced 5.8% and the company reported bottom line losses of $1.51 billion (losses per share of $7.13).
The company helpfully publishes figures that strip out the non-cash impairment charges ($1.74 billion) and other once off restructuring charges (approximately $63 million) to report adjusted full-year net earnings of $296 million, or $1.39 per share and the stock price reacted positively after the company forecast fiscal 2012 earnings per share within a range of $1.20 to $1.40. However, an adjusted profit of $296mm compared to $393 million the previous year with no forecast improvement for the current year is an indicator of just how difficult it is proving to turn the company around. Additionally, previous guidance figures have typically over promised or been revised downwards with initial 2011 guidance for a per share profit of $1.75 - $1.95, subsequently adjusted to a loss of $5.74 - $5.94 and compared to an actual loss of $7.13 per share. Similarly, in 2010 actual earnings per share of $1.86 compare poorly to guidance of $1.95 - $2.15.
Of perhaps more concern are the terms of Supervalu’s credit facilities. Under the credit agreement the company has to maintain a leverage ratio of less than 4.25 until Dec 31, 2011 reducing to 4.0 the year after. The company calculated its year end leverage ratio to be 3.5 which is uncomfortably tight and implies that a further loss of around $300 million or more could result in an acceleration of the facilities and a restructuring that could wipe out existing shareholders.
However such a negative outcome remains unlikely and, trading at around 8.5 times forecast 2011/2012 earnings, an improving economy could mean that 2011 is the turning point for Supervalu’s performance that may be accompanied by a higher valuation multiple. Consequently, buying stock at these levels appears to be a fairly risky bet on a wider economic recovery rather than an endorsement of management. I doubt that Mr Buffett will be buying in soon.
Disclosure: The author has no long or short positions in Supervalu Inc.