SuperValu: The Poster Child for Supermarket Stocks’ Woes

by Dan Burrows | July 12, 2012 1:31 pm

The nation’s third-largest supermarket chain, SuperValu (NYSE:SVU[1]), has put itself up for sale, but it’s unlikely any rivals will be among the buyers.

After all, why would competitors like Kroger (NYSE:KR[2]) or Safeway (NYSE:SWY[3]) bother when they face the same price pressures and can pick up SuperValu’s market share for free?

SuperValu — which operates the Albertsons, Jewel-Osco, Shaw’s and Save-A-Lot nameplates — has been in the process of moving to lower prices across the board, but it’s not happening fast enough to arrest sliding sales and profits.

Now the company is doubling down on price cuts after a disastrous quarterly performance[4] — and doing everything it can, including suspending its dividend, to save cash.

Oh, and trying to find a buyer.

SuperValu is the poster child for the strains the supermarket business has been facing ever since the onslaught of the Great Recession. Cash-strapped consumers have made the grocery business tougher than ever. Cheaper generic and store brands are where it’s at, but those margin-busting low prices make it awfully hard to turn a decent profit.

Meanwhile, dollar stores like Dollar General (NYSE:DG[5]), Dollar Tree (NASDAQ:DLTR[6]) and Family Dollar (NYSE:FDO[7]) are making forays into the grocery business. That’s only adding to the pressure put on supermarkets for years by discounters Wal-Mart (NYSE:WMT[8]) and Target (NYSE:TGT[9]), as well as warehouse clubs like Costco (NASDAQ:COST[10]).

And so with SuperValu, it has come down to this: For the most recent quarter, the company said profit plunged 45% on a 4.7% slip in revenue. When earnings decline at a rate faster than sales, it means margins are getting slaughtered.

That caused SVU’s earnings per share to blow Wall Street’s estimate by a whopping 19 cents a share, according to data from Thomson Reuters. The stock plunged 45% in early trading, and is now down about 65% year-to-date.

There’s little reason to expect the stock to get a tailwind anytime soon. The latest terrible quarter led SuperValu to pull its guidance and suspend its dividend — always a huge red flag, as it indicates the company needs to conserve precious cash. (To that end, SuperValu also is slashing its capital spending this year to a range of $450 million to $500 million, down from a previous plan of $675 million.)

And given management’s strategy to increase traffic through more margin-pressuring price cuts, SVU is going to need every one of those pennies.

“It is essential that we move even more aggressively to lower prices, and anticipate and respond to competitor actions,” SuperValu CEO Craig Herkert said in a statement. “These are bold but necessary moves, which will position Supervalu for success in this increasingly competitive environment.”

Supervalu said bankruptcy is not on the table. But it sure doesn’t look to have much time to make the accelerated price strategy work, notes Guggenheim Securities analyst John Heinbockel in a note to clients.

“It is very difficult to fundamentally alter one’s price perception in any reasonable time period,” Heinbockel writes. “It took Kroger about five years to do so a decade ago, but the economy was stronger and the competitive environment less crowded.”

All supermarket stocks were hammered Thursday on the SuperValu news, and its hard to like them as a group in this brutal retail environment.

No, grocery stores aren’t going to just disappear. But running these businesses for growth at a time when shoppers demand ever-lower prices is making profitability harder and harder to come by.

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

Endnotes:
  1. SVU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SVU
  2. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  3. SWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWY
  4. disastrous quarterly performance: http://investorplace.com/2012/07/supervalu-shares-plunge-on-poor-q1-results/
  5. DG: http://studio-5.financialcontent.com/investplace/quote?Symbol=DG
  6. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR
  7. FDO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDO
  8. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  9. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  10. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST

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