SUPERVALU Beats on Q1 Earnings on Save-a-Lot Business - Analyst Blog

By Zacks Equity Research,

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SUPERVALU Inc. ( SVU ) posted better than expected first-quarter fiscal 2015 results.Adjusted earnings per share of 18 cents surpassed the Zacks Consensus Estimate by a penny. The results were also better than the prior-year quarter's earnings of 14 cents by 28.6%. Adjusted earnings exclude an after-tax charge of $2 million. Share price increased 2.7% to $9.12 in response to the results.

The upswing in profits resulted from higher operating margins in all its segments following effective cost-reduction initiatives.

Supervalu Inc - Earnings Surprise | FindTheBest

Revenues and Margins

SUPERVALU's total sales remained approximately flat year over year at $5.23 billion as positive identical store sales in the Save-A-Lot network and retail food segment were offset by decline in the Independent business. Sales, however, surpassed the Zacks Consensus Estimate of $5.18 billion by 1.0%.

Gross profit slipped 5.4% to $752.0 million and gross margin shrank 80 basis points (bps) to 14.4% in the quarter due to lower fees received under the Transition Services Agreement (TSA) and higher price discounts given during the quarter. The TSA are agreements under which SUPERVALU provides support services to Albertsons LLC. It relates to sale of several of SUPERVALU's major brands, such as Albertson's and Acme to Cerberus Capital. SUPERVALU collects a consulting fee for providing certain transition services to the brands' new owners.

Selling and administrative expenses as a percent of sales shrank 70 bps to 11.8% driven by the benefits of cost reduction initiatives and lower surplus property charges.

Segment Details

Net sales at Retail Food remained flat with the prior-year quarter at $1.43 billion in the reported quarter. Same-store sales recorded a gain of 0.6%. Strong traffic at the stores improved same-store sales during the quarter. Operating margin in the segment inflated 40 bps to 2.1% in the reported quarter due to the benefit of cost reduction initiatives, including lower depreciation expense.

Net sales at Save-A-Lot stores increased 6.5% to $1.35 billion in the year-ago quarter due to 5.6% positive same-store sales across the network. Same-store sales for corporate stores within the Save-A-Lot network were 7.2%. Save-A-Lot's operating margin shrank 110 bps to 3.4% due to incremental investments in fair price promotion strategy.

Save-A-Lot's results this quarter continued to reflect the benefits from the fresh cut meat program started in the previous quarter.

Net sales at the Independent business declined 2.6% year over year to $2.40 billion in the quarter from $2.46 billion a year ago. Lower sales to existing customers, including military, and the loss of two larger customers were partly offset by net new business. Sales also declined due to the completion of transition of an Albertson store to self distribution business during the quarter. The Independent business' operating margin, however, remained flat at 2.8% during the quarter backed by lower bad debt expenses and cost reduction initiatives.


During the third quarter, SUPERVALU received $58 million under the TSA compared with $84 million last year, due to higher number of stores and distribution centers covered under the agreements.

Other Financial Update

Cash and cash equivalents of SUPERVALU were $90.0 million as of Jun 14, 2014, versus $83.0 million as of Feb 22, 2014. Long-term debt and capital lease obligations were $2.5 billion as of Jun 14, 2014 compared to $2.7 billion as of Feb 22, 2014.

Our Take

Save-a-Lot stores, which are being revamped, remain the major growth driver for SUPERVALU. The company is focusing on the 'fresh from farm' department at these stores as it reported decent sales in the past. The fresh saw-cut meat program organized at all the Save-a-Lot stores also aided comps in the first half of fiscal 2014.

The company embarked on a fair price promotion strategy (lowering prices to competitive level) in fiscal 2013. Although the strategy has been quite well received and we expect the program to help the company gain market share in the longer term, we are concerned that it may pressure margins in the near term.

Other Stocks to Consider

SUPERVALU currently carries a Zacks Rank #3 (Hold). Better ranked stocks in the retail sector worth considering include Swisher Hygiene Inc . ( SWSH ), Treehouse Foods Inc. ( THS ) and Pinnacle Foods Inc. ( PF ). While Treehouse Foods sports a Zacks Rank #1 (Strong Buy), Swisher Hygiene and Pinnacle Foods have a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Stocks: SVU , PF , THS , SWSH

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