Can Supervalu Survive?

Tickers: SWY, SVU, KR, WFM


By Dr. Osman Gulseven - The Motley Fool

December 27, 2012


Supervalu (NYSE: SVU) is one of the oldest wholesale and retail food stores in North America. Established in 1871, the company survived several worldwide recessions. However, Supervalu has been going through tough days, recently. It is losing market share due to intense competition in the business. The stock lost almost 60% in this year alone. Although the stock looks like a bargain at the current prices, I am not sure whether it is a good stock to invest now. In this article, I dig deeper into the companyís recent financials and -more importantly- into the debt issue to prove my point.


Second Quarter Results


At the end of second quarter, Supervalu's net sales stood at $8.0 billion in comparison to $8.4 billion last year. The fall in sales was primarily due to the disposition of retail fuel centers and the decline in identical store sales. Identical store sales were affected by the distressed consumer, and ongoing investment in obtaining competitive pricing. The company produced gross profit of $1.72 billion, or 21.4% of net sales. However, in the same period, last year, the company produced gross profit of $1.87 billion or 22.2% of net sales. The decline in gross margins may be a warning signal. The gross margin has reduced primarily due to promotional activities and increased level of competitive pricing.


At the end of second quarter, retail food operating earnings stood at $59 million, or 1.1% of net sales. The retail food segment generated net sales of $5.20 billion in comparison to $5.61 billion the previous year, a decline of 7.3%. The decline primarily reflects the reduction in identical store sales. The company's operating margin from retail food also went down by almost 50%. Now that is another warning signal. The retail food segment forms the backbone of Supervaluís business model, and the profit reduction in this segment can be highly costly to the company and shareholders.


A relatively small portion of sales came from the Save-A-Lot segment. Sales in this segment stood at $973 million which is slightly higher than the previous year. However, operating earnings dropped to $34 million compared to $50 million in the previous year quarter, which is also another red flag.


Cash Flows


It is pleasing that the corporation continues to produce substantial cash flow. In the first half of 2013, Supervalu generated cash flows from operating activities of $415 million. However, this represents a sharp decline of $165 million. Cash flows used from investing activities stood at $307 million in comparison to $203 million last year. The increase in investing activities was due to higher payments for capital expenditures.


Supervalu needs cash at the moment, and the company is estimated to generate $950 million in cash flow through the end of fiscal year. Supervalu will also likely gather cash from the proceeds of asset sales. The company might also issue additional debt as it generated about $117 million of cash flows from financing activities in the second quarter.


Debt Issue


Supervalu has been battling with huge debts. Presently, the debt situation is extremely serious, specifically in comparison to the industry average. The company has about $6 billion of long term debt and lease obligations. In the first quarter of this year, Supervalu managed to complete two debt financing deals, totaling $2.5 billion. This credit facility gives the company better financial flexibility, aiding it to roll off current debts. Thus, despite current challenges, the company is taking positive measures to resolve the situation. Supervalu currently expects debt reduction for financial 2013 to be in the range of $400 to $450 million. Capital expenditure are forecasted to be in the range of $450 to $500 million.


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