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SuperValu — or Super-Value Trap?

Lost in this week's optimism-fueled rally are several red flags

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… You’re Going the Wrong Direction

Yes, one could argue the unveiling of the next stage of the turnaround plan could be the overarching reason for the rally. The company intends to ramp up its local-market focus. Fair enough. After five years of progressively weaker results, though, the initiative feels desperate and gimmicky, rather than savvy.

Of all the red flags that still are waving, though, perhaps the one everybody is glossing over is the one we should be most worried about.

The company reported more foot traffic and higher unit volume sales for last quarter. That’s good. However, it had to discount those goods — a lot — to drive that traffic and sales. One example cited by the company was slashing the price on 200 items in its produce section, with some of them being discounted up to 20%. CEO Craig Herkert said the company saw an immediate jump in sales, and further added that SuperValu would be doing more of the same going forward.

Kudos to the company for being willing to take action. Make no mistake though… the strategy is apt to hurt more than it helps.

Operating margins (not net, but operating) in the grocery business already are paper-thin, at an average of 4.23%. SuperValu’s operating margins are even thinner for the past 12 months, at 2.75%. So, there actually might not be any room for price slashing at this point. Nevertheless, lower prices are the core strategy for the future, so don’t be surprised if the grocer finds there’s practically nothing left over to put on the bottom line.

Bottom Line

It might be too harsh to say SuperValu is a value trap. Its business model is essentially functional, and despite GAAP losses, it’s at least turning some kind of profit. But an earnest rebound in business seems distant with its current turnaround plan.

Most companies don’t need four years to fix things. The fact that SuperValu hasn’t even made a dent in four years should leave investors wondering if the current components of the turnaround plan are any better than the ones that have been failing. After all, they’re being implemented by the same management team.

The bottom line is, the rebound strategy feels good in a superficial way, which is why the stock has soared this week. The forward-looking P/E of 4.9 is juicy, too. The underlying, fundamental problems haven’t been fixed, though, which means the gains this week are going to have a tough time staying justified, as the company is likely to find it can’t meet those profit expectations by lowering prices across the board.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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