Following the first quarter 2012 earnings, Supervalu Inc. (SVU) has been upgraded to Neutral from Underperform.
Supervalu posted higher-than-expected earnings of 35 cents per share in the first quarter of fiscal 2012, which exceeded the Zacks Consensus Estimate of 33 cents. However, earnings declined 18.6% year over year owing to high inflation and price increases in several fresh categories.
A slight improvement in customer traffic at the company’s stores fueled Supervalu’s sales sequentially. Besides, the company’s revenue from the retail food segment contributed to growth. Supervalu is also making efforts to develop its retail operations primarily through new store development, adding merchandise to the existing stores and increasing the number of replacement food distribution centers.
During the first quarter of 2012, Supervalu completed 11 traditional store remodels and opened 18 Save-A-Lot locations. The company also plans to complete 55 to 75 store remodels and 160 ‘Save-A-Lot’ stores in fiscal 2012.
Further, the ‘8 Plays To Win’ strategy undertaken by the company in the fourth quarter 2011 also impacted the company’s top-line results. The plan will in turn aim to reduce prices relative to its competitors and develop a more sustainable and competitive pricing architecture. The new ‘Essential Everyday’ launched under this scheme in the quarter replaced the banner brands of the company, which will help private brand sales penetration to shoot by 100 basis points in the coming three years.
Besides, several initiatives such as improved space allocation and product management, making stores to cater to local needs, ‘nutrition iQ’ program, increasing funding support from its suppliers, have been taken up by the retailer to improve its top-line results.
However, Supervalu competes with traditional grocery retailers, including regional and national chains and independent food store operators and non-traditional retailers in the Retail food segment. The retailer’s close competitor The Kroger Company (KR) has acquired eight Schnucks stores recently to provide value added services to its customers and make their shopping experience pleasant and easier. Another competitor Safeway Inc. (SWY) has the capacity to generate 2.1% cash from operations, while Supervalu lags far behind in this measure at 1.3%.
In addition, The Food and Drug Administration (FDA) is increasingly becoming more and more vigilant regarding food and health standards. Adverse publicity regarding food and drugs is affecting consumer confidence and preventing them from buying the company’s products resulting in product and delivery disruptions.
Nevertheless, the company remains well positioned and has been working hard to strengthen its balance sheet by monetizing non-core assets, creating capital and reducing its debt. The management is slightly positive about the reduction in debt by $65.0 million and expects further reduction in the range of $500 to $550 million by year-end 2012, and also plans to amend its senior credit facilities.
Moreover, with the sale of 107 fuel centers located in the Midwest, Intermountain West and West Coast regions, the company can utilize the proceeds to further strengthen its business.
However, rising commodity costs and higher fuel prices coupled with negative customer count induce us to rate the stock neutral.
KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
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