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SUPERVALU Q2 Earnings in Line, Revenues Beat on Comps

SUPERVALU Inc.'s (SVU) second-quarter fiscal 2015 earnings per share of 11 cents were in line with the Zacks Consensus Estimate but declined 15.4% from the prior-year quarter figure of 13 cents. Adjusted earnings exclude an after-tax charge of $1 million.

The dip in profits resulted from lower margins stemmed from higher operating costs during the quarter.

Supervalu Inc - Earnings Surprise | FindTheBest

Revenues and Margins

SUPERVALU’s total sales increased 1.8% year over year to $4.02 billion as positive identical store sales in the Save-A-Lot network and retail food segment offset the decline in the Independent business. Sales surpassed the Zacks Consensus Estimate of $3.93 billion by 2.3%.

Gross profit slipped 1% to $572.0 million and gross margin shrank 40 basis points (bps) to 14.2% in the quarter due to lower fees received under the Transition Services Agreement (:TSA) and higher price discounts offered during the quarter. The TSAs are agreements under which SUPERVALU provides support services to Albertsons LLC. It relates to sale of several of SUPERVALU's major brands, such as Albertson's and Acme to Cerberus Capital. The company collects a consulting fee for providing certain transition services to the brands' new owners.

Selling and administrative expenses as a percent of sales fell 10 bps to 11.9% driven by the benefits of cost reduction initiatives and lower surplus property charges.

Despite cost reduction initiatives, operating earnings declined 16.1% to $94 million and operating margin shrank 50 bps to 2.3% mainly due to higher employee related costs.

Segment Details

Net sales at Retail Food declined 2.8% from the prior-year quarter at $1.1 billion in the reported quarter. Same-store sales recorded a gain of 0.4%. Strong traffic at the stores improved same-store sales during the quarter. Operating margin in the segment inflated 180 bps to 1.8% in the reported quarter due to the benefit of cost reduction initiatives, including lower depreciation expense.

Net sales at the Save-A-Lot stores increased 8% to $1.05 billion in the year-ago quarter backed by 6.5% positive same-store sales across the network. Same-store sales for corporate stores within the Save-A-Lot network were 8.2%. Save-A-Lot's operating margin shrank 120 bps to 2.5% due to incremental investments in fair price promotion strategy.

Save-A-Lot’s results this quarter continued to reflect the benefits from the fresh cut meat program started in the previous quarter.

Net sales at the Independent business declined 1.1% year over year to $1.82 billion in the quarter. Lower sales to existing customers, including military, and the loss of two larger customers were partly offset by net new business. Sales also declined as an Albertson store transitioned to self distribution business during the quarter. The Independent business’ operating margin declined 30 bps to 2.9% of sales.

Corporate

During the second quarter, SUPERVALU received $44 million under the TSA compared with $62 million last year, due to higher number of stores and distribution centers covered under the agreements.

Other Financial Update

Cash and cash equivalents of SUPERVALU totaled $88.0 million as of Sep 6, 2014, versus $90.0 million as of Jun 14, 2014. Long-term debt and capital lease obligations were $2.3 billion as of Sep 6, 2014 compared with $2.5 billion as of Jun 14, 2014.

Our Take

Save-A-Lot stores, which are being revamped, remain the major growth driver for SUPERVALU. The company is focusing on the ‘fresh from farm’ department at these stores as it reported decent sales in the past. The fresh saw-cut meat program organized at all the Save-A-Lot stores also aided comps growth in the first half of fiscal 2015.

The company embarked on a fair price promotion strategy (lowering prices to competitive level) in fiscal 2014. Although the strategy has been quite well received and we expect the program to help the company gain market share over the long term, we are concerned that it may pressurize margins in the near term.

Other Stocks to Consider

SUPERVALU currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks to consider in the apparel industry include V.F. Corporation (VFC), Perry Ellis International Inc. (PERY) and Gildan Activewear Inc. (GIL). All these stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on SVU
Read the Full Research Report on VFC
Read the Full Research Report on PERY
Read the Full Research Report on GIL


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