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SUPERVALU's Dismal Start in 2018 Gives Investors Cold Feet

Zacks Equity Research

SUPERVALU INC SVU is witnessing no relief from adverse industry conditions, which are plaguing its retail segment’s performance. This, in combination with the company’s dismal gross margin trend, has been a hurdle for long.  The implication of such factors is quite apparent from the recent downtrend in the Zacks Consensus Estimate and investors’ receding optimism in the stock, following its third-quarter fiscal 2018 outcome.

Evidently, shares of this leading grocery company declined almost 16.8% over the last three trading sessions, post the company’s quarterly results on Jan 10, 2018.  In fact, SUPERVALU’s shares have been struggling for a while.  The company’s shares plunged almost 45% in a year, much wider than the industry’s dip of 3.8%.

Soft Retail Business & Gross Margins: A Consistent Worry

While earnings for third-quarter fiscal 2018 beat the Zacks Consensus Estimate, sales missed the same, on account of underlying weakness in the retail segment. Well, the issues pertaining to the retail segment runs deep and has been pulling down the company’s overall results for a while. Price competition, competitive store openings and intense promotional environment are major deterrents.


 

Markedly, the company has been witnessing identical store sales decline in the retail segment for the past 11 quarters. In third-quarter fiscal 2018, identical store sales dropped 3.5%, which along with store closures caused net sales at the retail unit to tumble 4.1% to $1,017 million. Moreover, 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.

In addition to the worries pertaining to the retail segment, SUPERVALU has been suffering year-over-year declines in gross margin, since three consecutive quarters. Notably, unfavorable business mix and lower margins from Unified Grocers dented gross margin during the third quarter.  

Estimates Trending Down

For fiscal 2018, management projects net earnings from continuing operations in the range of a loss of $20 million to earnings of $2 million. Management also expects adjusted EBITDA in a range of $475-$485 million, compared with the previous expectation of $475-$495 million. The narrowed view reflects the impact of greater-than-expected trucking and logistic expenses incurred in the Wholesale segment during the third quarter.

Owing to such factors as well as the aforementioned hurdles pertaining to the retail segment, consensus estimate for the fourth quarter have declined 8 cents to reach 73 cents, since earnings announcement.

Growth Catalysts

Nevertheless, SUPERVALU’s booming Wholesale business segment offers considerable strength to combat the aforementioned hurdles and keep the company afloat in the industry. Notably, sales from this segment improved 52% year over year to $2,888 million in third-quarter fiscal 2018, representing roughly 73% of the company’s total revenues. Thus, the company is on track to develop wholesale operations, primarily through adding new customers, retaining and developing business with existing customers and acquisitions. Incidentally, 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 Wholesale business.

Further, SUPERVALU has been trying to improve performance and business effectiveness by focusing more on prospective areas, such as organic food products. The company has been evaluating the growth prospects in the organic foods arena and has partnered with wholesale merchants to explore opportunities in this category. Apart from this, SUPERVALU also strives toward improving its omni-channel capabilities to resonate with the evolving consumer trends. In this respect, the company recently agreed on a multiyear contract with Instacart to provide integrated store coupons and loyalty rewards at its e-commerce sites.

Bottom Line

While SUPERVALU’s retail business continues to be pressurized, management is optimistic about the underlying growth of its Wholesale business and the strategies it is undertaking to fuel the same. Further, this Zacks Rank #3 (Hold) company has been working hard to achieve a turnaround in retail segment, through e-commerce innovations, new divisions and increased focus on private brands. We expect such dedicated efforts to boost the company’s performance in the forthcoming periods and thereby uplift investor’s confidence in the stock.

Do Consumer Staples Stocks Interest You? Check These

Investors interested in the same sector may consider stocks such as Estee Lauder Companies Inc EL, Kimberly-Clark Corporation KMB and Church & Dwight Company Inc. CHD, all carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Estee Lauder came up with an average positive earnings surprise of 18% in the trailing four quarters. It has a long-term earnings growth rate of 12.5%.

Kimberly-Clark pulled off an average positive earnings surprise of 2% in the trailing four quarters. Also, it has a long-term earnings growth rate of 6.2%.

Church & Dwight delivered an average positive earnings surprise of 6.8% in the trailing four quarters. It has a long-term earnings growth rate of 8.9%.

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