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.
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.
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