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SUPERVALU (SVU) Prospects Bleak: Time to Sell the Stock?

Zacks Equity Research

Grocery retailer SUPERVALU Inc. SVU has been in troubled waters for the past one year due to tough competitive pressure, deflationary environment in the food industry and soft sales in the retail segment. Consequently, the company’s shares have declined 30% in the past one year, underperforming the Zacks categorized Food-Miscellaneous Diversified industry that witnessed an gain of 5% in the same time frame.

Weak Earnings Trend

SUPERVALU does not have a good track record of earnings. The company has reported negative surprises in two of the trailing four quarters with positive surprise in one and in-line result in the remaining one quarter. The resultant average stands at a negative 8.9% for the trailing four quarters.

Disappointing Third Quarter Results

In the third-quarter fiscal 2017, both the top line and bottom line declined year over year. Earnings per share of 5 cents missed the Zacks Consensus Estimate of 13 cents, and also plunged 37.5% from 8 cents recorded in the year-ago quarter. The fall in the bottom line can be attributed to lower revenues and soft margins.

Total sale slumped 1.4% year over year to $3.0 billion due to negative identical-store sales in retail division. Sales were almost in-line with the Zacks Consensus Estimate.

Adjusted gross profit declined 6.7% year over year to $407 million, affected by higher costs of production. Gross margin shrank 70 basis points to 13.6%.

Downward Estimate Revision

The company has also seen significant downward estimate revision following the lower-than-expected third-quarter results. For the fiscal year 2017, we have seen two estimates moving down in the past 60 days. This trend has caused the consensus estimate to trend lower, going from 60 cents a share to its current level of 42 cents.

Further, for the current quarter, SUPERVALU has seen three downward estimate revisions while no revisions were observed in the opposite direction, dragging the consensus estimate down to 9 cents a share from 16 cents in the past 60 days.

Industrial Headwinds

The company continues to face tough competitive pressure that has hit the grocery industry as a whole. Traditional grocery rivals are strengthening their franchises, while outside players are offering alternative outlets for food and other staples. Moreover, customers are becoming more receptive to purchasing private label products as a lower cost alternative to national brands.

Further, deflationary environment in food products and depleting footfalls at the supermarkets are causes of concern for the grocery chain.

In order to combat declining sales at the retail segment, it has plans to expand retail banners. The company has developed the store-within-a-store concept to expand its offerings and started offering home delivery through Instacart app. Further, the company has spun off its underperforming Save-A-Lot business as an attempt to concentrate on more profitable core businesses and fund several other turnaround initiatives.

However, the concerns seem to outweigh the turnaround efforts of this Zacks Rank #4 (Sell) company.

Stocks to Consider

Better-ranked stocks in the consumer staples sector worth considering include,

Helen of Troy Limited HELE, Pinnacle Foods Inc. PF and Con Agra Foods Inc. CAG. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Helen of Troy has an expected earnings growth rate of 10.8%. Pinnacle Foods has an expected earnings growth rate of 8.3% and Con Agra Foods has an expected earnings growth rate of 8%.

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