Retail Unit Woes Hit SUPERVALU, Can Wholesale Offer Respite?

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SUPERVALU INC. 's SVU retail segment performance has long been eclipsed by adverse industry conditions, leading to store closures and decline in identical store sales. Moreover, in an effort to offload underperforming stores from the retail segment, the company recently announced selling off several of its Farm Fresh stores. That said, the company has lately been focused on strengthening its wholesale business and has undertaken several initiatives to this end.

Retail Segment Crumbling Down

While consumer inclination toward online shopping has been revolutionizing the e-commerce realm, the changing retail landscape has hit traditional stores hard. Additionally, in an effort to attract more shoppers to the stores, retailers have been engaging in intense promotional activities and price wars, further aggravating the competitive scenario and making survival a remote possibility for the weak.

Notably, retail stores of SUPERVALU have also fallen victim to such downturns and have been gravely underperforming, causing the company to resort to store closures. Owing to these hurdles, the company's identical store sales in the retail segment have declined over the past 11 quarters. In third-quarter fiscal 2018, identical store sales dropped 3.5%, which, along with store closures, dragged down net sales at the Retail unit by 4.1%. Also, the segment incurred adjusted operating loss of $3 million, while retail gross margin also contracted due to soft sales and high promotions. Unfortunately, management expects the retail segment to continue bearing the brunt of these headwinds in fiscal 2018 as well.

Continuing with the company's endeavors to cut down retail stores, SUPERVALU has entered into definitive agreements with Mid-Atlantic Division of Kroger KR ; Harris Teeter and Food Lion to sell 21 of its Farm Fresh Food & Pharmacy stores, in a transaction worth nearly $43 million. The deal is expected to close in May 2018, subject to certain closing conditions. Looking back, during fiscal 2016, the company sold nearly 1,350 Save-A-Lot stores. The company is expected to undertake more Farm Fresh store closures in the near future, which is likely to pull down the retail segment's performance even further.

Moreover, such challenges have taken a toll on investors' sentiments upon the stock. Shares of this Zacks Rank #4 (Sell) company have plunged 36.9% in the past year, considerably wider than the industry 's decline of 13.2%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Focus on Wholesale Business

While on one side SUPERVALU has been shuttering its retail stores, the company has also been undertaking endeavors to fortify its foothold in the wholesale arena. This move is backed by the motive of transforming the company's business into a wholesale operational model. Thus, it is on track to develop wholesale operations, primarily through acquisitions. In this regard, the company concluded the buyout of Associated Grocers of Florida in the beginning of the fourth-quarter fiscal 2018, while it acquired Unified Grocers in June 2017. Notably, Unified Grocers contributed sales worth about $860 million to SUPERVALU's Wholesale business during the fiscal third quarter and the company remains on track to generate targeted synergies from this buyout. Notably, a number of companies operating in the food industry, such as Campbell Soups CPB and Conagra Brands CAG , have been resorting to strategic buyouts and widening their growth prospects.

Apart from this, the company also has supply agreements with retailers like America's Food Basket, which is expected to fuel sales growth at this segment. Also, management remains committed toward enhancing operating efficiency, reducing costs and optimizing distribution channels, information technology and logistics, which will lift margins.

Backed by such dedicated growth efforts, sales from this segment grew 52% year over year to $2,888 million in the fiscal third quarter, representing roughly 73% of the company's total revenues. All said, the company remains dedicated toward making investments in its Wholesale business to boost future growth.

Wrapping it Up

By exiting from Farm Fresh and other retail banners, SUPERVALU has been able to allocate more resources toward the strategic expansion of its wholesale business. Given the fact that the retail segment has been going down in shambles, thanks to industry-wide headwinds, the company's move to strengthen its wholesale business seems quite rational and is expected to uplift its performance in the forthcoming periods.

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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.

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

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