SuperValu — or Super-Value Trap?

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After a five-year selloff, is SuperValu (NYSE:SVU) finally ready to recover? The 27% rally over the past three days is the most progress we’ve seen in weeks, after all, and the move is backed up by a forecast for the first earnings growth we’ve seen in years.

Or is this week’s bounce from SVU just another sucker’s rally, with dwindling revenue and shrinking income in the cards for this grocer?

As it turns out, things truly might be different now. First things first, though — the ugly (and progressively uglier) background.

A Glimmer of Hope?

On a non-GAAP basis, every year since 2008 has been less profitable than the last for SuperValu. And we’re talking some major declines. From 2008’s per-share operating income of $2.85 to $1.93 the next year to $1.39 the next year to a profit of only $1.25 last year, the bottom line has been backed up to early 2000 levels.

Revenue has fared no better. The grocery chain’s 2008 (fiscal 2009) top line of $44.5 billion has been whittled down every year since, to only $36.1 billion last year. Ugly.

Given the trend that’s in place, it forces one to question how in the world the stock mustered the 27% gain it has this week, even if it was dramatically oversold thanks to a selling effort that kicked off at the beginning of the year. (As of the end of last week, SVU was down by 37% for the year.)

The answer to that question is simple … there’s finally hope. The grocery store chain has a turnaround strategy, and analysts say next year’s income will be higher than this year’s — for the first time in years — reaching $1.32 per share.

All well and good, though there’s a problem with a bullish prompt like that: The road to the poorhouse is paved with hope. If SuperValu really is on the mend, it better be backing up that hope with something that’s actually got fiscal teeth. That’s where things start to get shaky again.

Better Numbers, But…

Not that one quarter makes or breaks a trend, but all big trends start out as small ones. That’s why SuperValu’s fourth-quarter numbers were at least the foundation of hope. Rather than earning the expected 35 cents per share, the grocer took home 38 cents per share, on an operating basis. Revenue beat estimates as well.

Unfortunately, that’s where the good news starts and ends.

While it topped earnings and revenue estimates, the bottom line still trailed last year’s Q4 profit of 44 cents per share, and the top line still was shy of the sales total for the same quarter a year earlier. Translation: No actual progress yet.

… 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, https://investorplace.com/2012/04/supervalu-or-super-value-trap-svu/.

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