Retail Woes Hurt SUPERVALU (SVU), Wholesale Unit a Breather

SUPERVALU INC.SVU has been progressing well with wholesale business on the back of well-chalked endeavors to enhance customer base and undertake buyouts. However, management is concerned with persistent weakness in the retail unit, which has led to store closures.

Wholesale Arena Looks Strong

SUPERVALU's wholesale business has been gaining on the back of customer additions, retaining and developing business with existing customers as well as acquisitions. Buoyed by such factors, the company's wholesale business has evolved into as one of its prime revenue sources. In fact, during fourth-quarter fiscal 2018, the segment accounted for as much as 80% of the company's total revenues and surging 60% surge year over year.

Among others, buyouts have been one of the prime strategies of the company to augment wholesale operations. Notable mentions in this regard include the acquisitions of Associated Grocers of Florida and Unified Grocers. Notably, during the fourth quarter, sales in this segment gained approximately $840 million from Unified Grocers, whereas AG Florida contributed $130 million. Additionally, the company is on track to generate targeted synergies from these buyouts. Apart from this, the company also has supply agreements with retailers like Fresh Market Inc and America's Food Basket, which are expected to fuel sales growth in this segment. Also, management is committed toward enhancing the segment's operating efficiency and optimizing distribution channels, information technology as well as logistics. All said, the company is dedicated toward making investments in the wholesale business to boost future growth.

Hurdles Yet to be Crossed

SUPERVALU's retail segment has been an aspect of worry for the company for a while, thanks to stiff competition and intense promotions that have been plaguing the unit's performance. These have compelled the company to adhere to store closures and streamline retail operations significantly. Notably, during fourth-quarter fiscal 2018, net sales in retail dropped 0.6% to $690 million on account of store closures.

Further, management has revealed plans to sell its Shop 'n Save and Shop 'n Save East retail businesses. In earlier developments, SUPERVALU entered into definitive agreements with Mid-Atlantic Division of Kroger KR as well as Harris Teeter and Food Lion to sell 21 of its Farm Fresh Food & Pharmacy stores in a transaction of about $43 million. The company is expected to undertake more Farm Fresh store closures in the future. In fiscal 2016, the company sold nearly 1,350 Save-A-Lot stores. While such moves are expected to optimize SUPERVALU's operations by shifting away from less profitable to other prospective business areas, it is also most likely to dent the retail segment's performance further.

Well, persistent softness in the retail arena has also weighed on investors' sentiment. Evidently, SUPERVALU's shares have plunged 42.5% in the past year compared with the industry 's decline of almost 19%. Considering the fact that the retail segment has been falling in shambles, the company's move to strengthen its wholesale business seems quite rational and is expected to uplift 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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