SUPERVALU (SVU) Q1 Earnings: Will Retail Unit Remain a Drag?

SUPERVALU INC.SVU is scheduled to release first-quarter fiscal 2019 results on Jul 26. The company has been battling softness at its retail segment for quite some time, owing to intense competition and increased promotional activities. Though concentration on strengthening wholesale business remains a driving factor, sluggish retail business remains a concern for SUPERVALU that delivered a negative earnings surprise in the last reported quarter.

SUPERVALU INC. Price and EPS Surprise

SUPERVALU INC. Price and EPS Surprise | SUPERVALU INC. Quote

Let's delve deep and see what's in store for the company this time around.

What to Expect?

The Zacks Consensus Estimate for SUPERVALU's earnings was revised downward over the past 30 days to 46 cents per share, which shows a 27% slump from the year-ago period earnings of 63 cents. Nevertheless, the Zacks Consensus Estimate for sales of $4,659 million indicates year-over-year growth of 16.4%.

Factors Impacting the Quarter

SUPERVALU's retail business has been in shambles, thanks to stiff competition. This has also compelled management to undertake endeavors to cut down retail stores. Store closures impacted the company in the fourth quarter of fiscal 2018, wherein net sales in retail dropped 0.6% to $690 million, on account of store closures. Further, adjusted operating margin in the segment declined 130 bps from the year-ago quarter. The downside was a result of lower base margins as well as increased shrink costs. Along with the results, the company unveiled 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 , Harris Teeter and Food Lion to sell 21 of its Farm Fresh Food & Pharmacy stores.

Clearly, SUPERVALU's retail unit remains an aspect of worry for the quarter to be reported. Nevertheless, the company remains focused on strengthening its wholesale business, as it derives a major portion of its revenues from this segment. Notably, sales in this segment grew 60% year over year to $2,872 million in fourth-quarter fiscal 2018, representing roughly 80% of the company's total revenues. The company is on track to develop wholesale operations, primarily through adding new customers, retaining and developing business with existing customers, and acquisitions. In this regard, the company concluded the buyout of Associated Grocers of Florida in the beginning of the fourth quarter, which along with efficient integration of Unified Grocers (acquired in June 2017) underscores the company's focus on solidifying its wholesale business.

In fact, SUPERVALU's wholesale segment sales gained about $840 million from Unified Grocers, whereas AG Florida contributed $130 million. The company remains on track to generate targeted synergies from this buyout. Apart from this, the company also has supply agreements with retailers like Fresh Market and America's Food Basket, which is expected to fuel sales growth at this segment. Though wholesale segment remains a major sales driver, it carries lower margins which have been denting SUPERVALU's gross margin. In the last reported quarter, gross margin contracted 350 bps to 9.9%, thanks to unfavorable business mix, as wholesale accounted for a bigger portion of total sales. Prior to this, the company witnessed gross margin declines of 310, 280 and 80 bps in the third, second and first quarters of fiscal 2018, respectively. While management remains committed toward enhancing operating efficiency and optimizing distribution channels to lift wholesale margins, it remains to be seen if these efforts yield results in the quarter to be reported.

What Does the Zacks Model Unveil?

Our proven model doesn't show that SUPERVALU can beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

SUPERVALU's Zacks Rank #5 (Strong Sell) and Earnings ESP of -22.30% reduce the chances of earnings beat to a great extent.

Stocks Poised to Beat Earnings Estimates

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Guess? GES , a Zacks #2 Ranked company, has an Earnings ESP of +4.08%. You can see the complete list of today's Zacks #1 Rank stocks here .

Columbia Sportswear COLM has an Earnings ESP of +19.90% and a Zacks Rank of 2.

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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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