SUPERVALU Inc.'s (SVU) third-quarter fiscal 2015 earnings per share of 18 cents beat the Zacks Consensus Estimate of 14 cents by 28.6%. Earnings also surpassed year-ago results of 13 cents by 38.5%, backed by a higher top line. Adjusted earnings exclude an after-tax charge of $1 million.
Revenues and Margins
SUPERVALU’s total sales increased 4.7% year over year to $4.20 billion, backed by positive identical store sales in the Save-A-Lot network and retail food segment as well as the Independent business. Sales surpassed the Zacks Consensus Estimate of $4.05 billion by 3.7%.
Gross profit increased 4% to $593.0 million from the year-ago quarter. However, gross margin shrank 20 basis points (bps) to 14.1%. The decline resulted from lower fees earned under the TSA, predominantly related to the one-year transition fee earned under the TSA in fiscal 2014.
Despite cost reduction initiatives, operating earnings declined 47.1% to $56 million and operating margin shrank 130 bps to 1.3% mainly due to higher employee related costs and selling, general and administrative expenses.
Segment Details
Net sales at Retail Food increased 5.7% from the prior-year quarter at $1.12 billion contributed by the newly acquired stores and higher comps. Same-store sales recorded a gain of 2.3% compared with a gain of 0.4% in the previous quarter. Strong store traffic improved same-store sales. Operating margin in the segment inflated 20 bps to 2.5% due to lower depreciation, occupancy and employee-related costs.
Net sales at the Save-A-Lot stores increased 9% from the year-ago quarter to $1.08 billion backed by 6.9% positive same-store sales across the network. Same-store sales for corporate stores within the Save-A-Lot network were 8.5%. Save-A-Lot's operating margin shrank 90 bps to 3.2% due to incremental investment in fair price promotion strategy as well as higher advertising, employee and occupancy costs.
Save-A-Lot’s results continued to reflect the benefits from the fresh cut meat program started in the previous quarter.
Net sales at the Independent business gained 2.6% year over year to $1.96 billion. Higher sales to existing customers, including military drove sales higher. The Independent business’ operating margin gained 10 bps to 3% of sales.
Corporate
During the third quarter, SUPERVALU received $43 million under the TSA compared with $48 million a year ago, due to higher number of stores and distribution centers covered under the agreement.
Other Financial Update
Cash and cash equivalents of SUPERVALU totaled $418.0 million as of Nov 29, 2014, versus $88.0 million as of Sep 6, 2014. Long-term debt and capital lease obligations were $2.6 billion as of Nov 29, 2014 compared with $2.3 billion as of Sep 6, 2014.
Our Take
Save-A-Lot stores, which are being revamped, remain the major growth driver for SUPERVALU.The company is focusing on the ‘fresh from farm’ department at these stores as it historically reported decent sales. The fresh saw-cut meat program organized at all the Save-A-Lot stores also aided comps growth in the first half of fiscal 2015.
The company embarked on a fair price promotion strategy (lowering prices to a competitive level) in fiscal 2013. Although the strategy has been quite well received and we expect the program to help the company gain market share over the long term, we are concerned that it may put margins under pressure in the near term.
Other Stocks to Consider
SUPERVALU currently sports a Zacks Rank #1 (Strong Buy). Other stocks to consider in the consumer staples sector include Aramark Holdings (ARMK) and United Natural Foods Inc. (UNFI) and Keurig Green Mountain Inc. (GMCR). While Aramark has the same rank as SUPERVALU, United Foods and Keurig carries a Zacks Rank #2 (Buy).
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