Supervalu Inc. (SVU) Sinks to a 32-Year Low

On Wednesday, shares of Supervalu (SVU: Charts, News), the third largest grocery chain in America, plunged 44% in its largest one day drop since 1980, after the company announced that it was reviewing "strategic alternatives" for the business and suspended its dividend. The stock is now down 67% since the beginning of the year.

Supervalu is also the parent company of grocery chains Albertsons, Shaw's, Jewel-Osco and Save-A-Lot. The Eden Prairie, Minnesota-based company has failed to produce an annual profit for three consecutive years, as it has rapidly ceded market share to rivals Wal-Mart WMT and Kroger KR. Last month, Supervalu announced layoffs at its Albertsons stores in California and Nevada. In the first quarter, the company's earnings slid 45% to $31 million, or 19 cents per share, from 35 cents the prior year quarter. Revenue declined 4.7%. The company missed on both the top and bottom lines. Daily Chart
Supervalu plans to reduce costs by $250 million over the next two years by slimming down its business. It is also struggling to keep competitive by lowering its prices. In 2012, Supervalu has already reduced prices by up to 20% on over 200 produce items, cutting deeply into its margins. As part of its "fair price plus" promotion strategy, Supervalu matches the price of any competitor, as part of an initiative to regain lost market share. Gross margin slid 10 basis points to 22% in the first quarter due to higher advertising expenses and changes in its business segment combinations. It eked out a slim 2% operating margin, compared to 2.5% in the prior year quarter. Goldman Sachs (GS: Charts, News) and Greenhill & Co. are currently assisting the troubled grocer in reviewing its options to attract potential takeover suitors. The company has a target to reduce its debt to a range between $450 million to $500 million by the end of fiscal 2012. It also plans to pay off $400 million in debt annually after stabilizing its balance sheet. The company will need an estimated $2.5 billion in loans to refinance its debt. Looking ahead, the company also plans to complete the remodeling of approximately 40 stores, and increase its Save-A-Lot chain's store count to 40 stores. Analysts have been blunt regarding Supervalu's prospects. "Supervalu could become the next casualty in the troubled supermarket space, as its fundamentals have finally begun to show real signs of distress after years of steady underperformance," stated Credit Suisse analyst Edward Kelly. Unsurprisingly, the company suspended its quarterly dividend, which was once 8.75 cents per share, to preserve capital. The company will also stop including EPS and same-store sales forecasts in its quarterly reports. Supervalu once had a market capitalization of over $10 billion. However, the financial crisis of 2008 wiped out over two-thirds of its market value. Wal-Mart (WMT: Charts, News) took advantage of the recessionary environment by buying up smaller bankrupt chains at a steep discount, further marginalizing Supervalu's clout. Low-end dollar stores such as Dollar General (DF: Charts, News) and Family Dollar Stores (FDO: Charts, News) also emerged from the recession stronger, attracting cash-strapped consumers and denting Supervalu's lower-income market share. If Supervalu continues its slide, then the possibility of a buyout becomes highly probable. Barclays analyst Meredith Adler claims that a buyer could pay up to a 50% acquisition premium for Supervalu and still earn an annual revenue return exceeding 40%. Fundamentally, the stock is undervalued, trading a 2.2 times forward earnings with a 5-year PEG ratio of 0.35. However, its price-to-book ratio of 53.4 signifies dark times ahead if it doesn't sort out its finances first. Other News About SVU Poor 1Q For Supervalu Supervalu disappoints, loses nearly half its market cap. Supervalu Sinks on Strategic Review, Dividend Suspension Supervalu sinks as analysts doubt the company's survival. Other Stocks in the News Boeing Wins 14.7 billion jet order from United Clear skies ahead for Boeing. Caribou Coffee hires another executive from Yum! Brands Caribou is apparently betting on Yum's talent for growth. Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Jul 13, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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