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SUPERVALU's Efficient Turnaround Makes It a Good Investment

May 01, 2014 | About:
kcpl

kcpl

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SUPERVALU (SVU) is having a good time. It outperformed with good figures. The company had struggled with its performance in the past but has strongly turned around with its shares up by 60% in the last one year. SUPERVALU's recently released results were impressive, indicating that its cost cutting strategy is on the right track. Save-A-Lot also performed very well and contributed to the company's fantastic results. Due to prevailing stiff market conditions, where its peers like Safeway (SWY) are also struggling, SUPERVALU has great chances of improving its business.

Turning Around Nicely

Due to prevailing backlogs and debts, some of SUPERVALU's units are still under pressure. As a result of this, the company is undergoing debt restructuring to improve its profitability. This is expected to add more value to SUPERVALU's earnings and help it to gain market share in the future. However, due to a sluggish economy and lower demand from military customers, SUPERVALU's revenue declined in the last quarter.

SUPERVALU has been able to turn around its business efficiently. Its CEO said, “Although we still have work to do to improve our sales trajectory, I am pleased with the accomplishments we made within our operations this quarter.” After a heavy loss last year, SUPERVALU is indeed performing well this fiscal.

Currently, SUPERVALU is carrying a sizable debt of $3 billion. To reduce the debt, the company has undertaken a debt recovery strategy. It is looking to reduce expenses by reducing the rate on its $1.49 billion term loan. Due to the increase in non-performing stores, SUPERVALU closed down around 900 stores to reduce its debt. This has resulted in an impressive earnings performance. Apart from this, SUPERVALU is also adopting various other cost-saving initiatives.

SUPERVALU is also making alterations in its transport system to reduce costs. It has introduced 35 semi-trailer trucks which run on CNG. With these trucks, the company can reduce oil consumption by up to 1 million gallons a year. With such moves, SUPERVALU is looking to take advantage of the sluggish economy by freeing money to invest in other growth initiatives.

SUPERVALU faces tough competition from retail giants like Wal-Mart. In addition, lower demand from military customers and a cut in U.S. food stamp benefits are concerns for the retailer. But, management is on the front foot and is determined to fight the weakness by taking various measures to handle the situation. SUPERVALU is bringing in two new categories, namely pet and baby products, to the present product mix. Moreover, the company is bringing 25 to 50 new products to its product portfolio.

Competition

One of SUPERVALU's competitors is Safeway. Safeway is seeing a bad phase in its business. Due to strong competition from peers, it has been forced to shut down its operations in Chicago. Safeway’s financials also indicate its weak position. Safeway’s net earnings dropped to $100 million ($0.35 per share) in the fourth quarter of 2013 from $170.7 million (or $0.71 per share) last year. Safeway is now considering other options such as selling out to potential buyers, providing an opportunity to SUPERVALU to increase its market share.

Despite having a competitive advantage over Safeway, SUPERVALU should be alert to Kroger (KR), which is aggressively making acquisitions. Kroger recently announced the acquisition of You Technology, a provider of digital coupons and promotions. This acquisition should help Kroger to improve its technology and serve customers better. According to Kroger, “(YOU is a) retailer-centric, cloud-based platform (that) bridges the gap between online engagement and in-store purchases.” This should help Kroger’s digital initiatives gain ground in the future, and support its expansion in the traditional brick and mortar segment.

Conclusion

SUPERVALU is looking well-positioned for strong growth in the future and it has learned from its mistakes. It is also carrying out a debt restructuring program to reduce its debt, thereby improving its earnings. On the other hand, there are many new products in its pipeline. Thus, SUPERVALU is efficiently executing its turnaround plan. So, the stock could continue moving north as the company rebounds.


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