Supervalu Inc. (SVU), one of the largest grocery chains in the United States, delivered higher-than-expected second quarter 2012 earnings on October 19, 2011. The quarterly earnings of 28 cents a share shot up 104.0% compared to a loss of $6.94 posted in the year-ago period. The quarterly earnings surpassed the Zacks Consensus Estimate of 20 cents.
Consequently, Supervalu updated its full-year 2012 earnings guidance. The company now expects fiscal 2012 adjusted earnings to be in the range of $1.20 to $1.30 per share. The Zacks Consensus Estimate of $1.21 lies atthe lower end of the guidance range providedby the company.
Revenues and Margins
Supervalu’s total sales dipped 2.62% to $8,429 million in the quarter, compared with $8,656 million in the prior-year period. The reported revenue whiskered past the Zacks Consensus Estimate of $8,351 million.
For fiscal 2012, the company anticipates net sales of $36.5 billion compared with prior estimates of $37 billion. Identical store sales growth, excluding fuel, is projected to be in the range of anegative 2.0 % to 2.5 %.
Supervalu’s reported operating earnings increased to $216 million during the quarter,compared to a loss of $1.397 billion in the previous-year quarter. Gross margin contracted 10 basis points to 22.2% on account of a higher LIFO charge, the impact of higher fuel sales, partially offset by the benefits of promotional effectiveness and reduced shrink, which more than fully funded price investments in the quarter.
Segment Details
Net sales at Retail Food (78.1% of the total sales in the quarter) slipped 1.7% to $6,580 million in the quarter, compared with$6,693 million in the prior-year quarter. Results followed a 1.8% decline in the same-stores sales and adverse impacts of market exits.
Retail square footage dipped 2.1% year over year in the quarter. However, excluding the impact of market exits and store closures, retail square footage grew marginally by 1.8% in the quarter.
Net sales at Supply Chain Services (21.9% of the total sales in the quarter) slipped marginally to $1,849 million in the quarter compared with $1,963 million in the prior-year quarter.
Other Financial Update
Supervalu exited the quarter with cash and cash equivalents of $215 million, and long-term debt and capital lease obligations of $6,046 million,with a shareholders’ equity of $1,498 million. The company plans to reduce debt by $525 million to $550 million in fiscal 2012.
The company’s cash flow from operations was $580 million year-to-date, compared with $754 million in the prior year, demonstrating changes in working capital on the back of higher forward-buy inventory levels.
Supervalu spent $203 million in the quarter on investing activities,versus $211 million in the prior year.
The company forecasted capital expenditure of $700 million to $725 million for fiscal 2012, which includes 80 to 90 primary store remodels and 80 to 90 Save-A-Lot stores, including licensed locations.
Recommendation
Supervalu operates in a highly competitive market. Moreover, labor unions pose inherent risks for the company and potential labor related issues remain a concern. Supervalu faces stiff competition from Wal-Mart Stores Inc. (WMT), The Kroger Co. (KR) and Safeway Inc. (SWY).
Currently, we prefer to rate the stock as Hold. Further, Supervalu holds the Zacks #3 Rank, which translates into a short-term Hold rating.
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