This is one of the toughest businesses on the planet
There is little doubt that the grocery business is difficult. SUPERVALU INC. (NYSE:SVU) realized this when they made the deal to unload their Albertsons, Acme, Shaw’s, and other retail food stores. In theory, the company could concentrate on the Save-A-Lot business, which offers better margins. However, things are never that simple.
Save-A-Lot promises to offer “name brand and private label groceries you need at up to 40% lower prices than conventional grocery stores.” This promise would be terrific if only Save-A-Lot were competing against just traditional grocery stores. The problem is there are other companies in the grocery business, and apparently shoppers are starting to realize that they can get similar or better deals elsewhere.
Among Save-A-Lot’s competition are companies like The Kroger Co. (NYSE:KR), Safeway Inc. (NYSE:SWY), and Wal-Mart Stores, Inc. (NYSE:WMT). Each of these companies offers a different take on the grocery store concept. The Kroger Co. (NYSE:KR) offers mid-priced groceries, but the company is diversified into fuel stations, convenience stores, and jewelry stores as well. Safeway Inc. (NYSE:SWY) is a higher-end grocery store, but they offer discounts on gas from grocery purchases to their club members. Wal-Mart, as everyone knows is the king of low prices, and the company has been pushing hard to take more grocery market share. With competition like this, Save-A-Lot, needs to do everything right to grow their business.
If this is what’s left, I have one suggestion: Run!
The company’s sale of the majority of its retail food business was supposed to cure a lot of SUPERVALU INC. (NYSE:SVU)’s ills. However, retail food still makes up 28% of sales, and those sales were down 4.4%. The company said that same-store sales were down 4.1%, and this was partially due to “competitive price investment.” Best Buy Co., Inc. (NYSE:BBY) recently used this phrase to explain their troubles as well.
Here is some free advice to the CEOs of both companies: don’t ever quote an idiotic phrase like this again. Competitive price investment is like saying, We cut prices because our competitors were killing our sales. We hope by calling it an “investment” that we can delude our readers into thinking this is somehow a good thing. The bottom line is that SUPERVALU INC. (NYSE:SVU) had to cut prices, and they still sold 4.1% less in same-store sales.
If Save-A-Lot is supposed to be the future of the company, the future is dim indeed. Overall sales were down 1.5%, and same-store sales dipped by 2.6%. Again the company trotted out the line about sales being down due to “competitive price investment.” Considering that Wal-Mart reported same-store sales in the U.S were down 1.4%, Safeway reported an increase of 1.6%, and Kroger showed an increase of 3%, this “investment” didn’t pay off very well. Supervalu’s largest business is actually their Independent Business, which saw overall sales down 1.3%, so the news was bad across the board.
In addition to the company’s sales struggles, their margins are also terrible. Overall, SUPERVALU INC. (NYSE:SVU)’s gross margin was just 14.1% in the current quarter. By comparison, The Kroger Co. (NYSE:KR)’s gross margin was 20.92%, Wal-Mart Stores, Inc. (NYSE:WMT) came in at 24.66%, and Safeway managed 26.70%. As you can see, not only is Supervalu losing sales, but they also make less on the sales they get.
It Gets Worse
I don’t see a reason for investors to stick around to see if Supervalu can get moving in the right direction. The company pays no dividend, and they aren’t buying back shares. Considering that Kroger, Safeway Inc. (NYSE:SWY), and Wal-Mart Stores, Inc. (NYSE:WMT) all pay dividends, and they all retired at least 3% of their shares in the last year, they offer much better values to investors.
In addition, Supervalu’s transaction to sell its retail food companies could have led to a much better balance sheet. However, the company still carries nearly $2.9 billion in long-term debt, yet they have a market cap of just $1.6 billion.
Analysts also have the most negative opinion of Supervalu when it comes to earnings growth. The average analyst expects negative earnings growth from Supervalu versus 6.73% growth at Safeway, 7.3% growth at Kroger, and 9.29% growth at Wal-Mart.
With SUPERVALU INC. (NYSE:SVU), you get a company that is losing sales, has terrible margins, pays no yield, isn’t buying back shares, and has a boatload of long-term debt. Remind me again why anyone would consider owning this stock?
The article Remind Me Again, Why Would Anyone Own This Stock? originally appeared on Fool.com and is written by Chad Henage.
Chad Henage has no position in any stocks mentioned. The Motley Fool owns shares of Supervalu. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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