Zacks Investment Research upgraded Supervalu Inc (SVU) to a Zacks Rank #1 (Strong Buy) on Oct 15. The company’s turnaround initiatives pulled the company out from persistent weakness and thereby helped it to deliver healthy first quarter fiscal 2014 results. We expect another good quarter from Supervalu as it is scheduled to report its second quarter results today.
Why the Upgrade?
Supervalu has undertaken many initiatives to help reverse four successive years of negative identical store sales and to re-position the company for growth. The initiatives include developing its retail operations, revamping its store models, fair price plus promotion strategy and cost reduction initiatives. These have helped the company post better comps and improve sequentially during the first quarter of fiscal 2014. We expect these initiatives to drive fiscal second quarter 2014 results as well.
The company is in the process of revamping its stores and is focusing on the ‘fresh from farm’ department in Save-A-Lot stores as the category has reported decent sales in the past. The fresh saw cut meat program, organized in all the Save-a-Lot stores, also helped the company post better comps during the first quarter of fiscal 2014.
The company’s fair price plus promotion strategy started in fiscal 2013 has been quite well received and aims to lower the pricing of its products. We expect the program to help the company gain market share in the longer term.
As part of the broad-based strategic alternatives, Supervalu sold its Albertson's, Jewel-Osco, Acme, Shaw's and Star Market chains in order to reduce loss in the coming quarters as well as streamline its operations in order to focus on Save-A-Lot discount stores and its smaller regional chains. The sale of non-performing assets is expected to unlock the value of the company’s stock and increase focus on its core distribution business.
The company also focuses on cost reduction initiatives that are expected to lower administrative and operational expense by $250 million through fiscal 2014. In Mar 2013, the company reduced 1100 positions in order to right-size the organization. In Sep 2012, Supervalu closed 60 of its underperforming stores, which is expected to generate $80 million-$90 million in savings over three years.
Estimates have mostly increased since the company reported its first quarter fiscal 2014 results on Jul 18. The Zacks Consensus Estimate increased 66.7% to 10 cents per share for the second quarter of fiscal 2014, while it advanced 50.0% to 48 cents per share for fiscal 2014 over the past 90 days.
Other Stocks to Consider
Other stocks in the retail sector worth considering include Kirkland Inc (KIRK), hhgregg Inc (HGG) and Best Buy Inc. (BBY). While Kirkland and hhgregg hold a Zacks Rank #1, Best Buy carries a Zacks Rank #2 (Buy).
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