Supervalu poised for turnaround: Barron’s (SVU)

Barron’s presents the reasons Supervalu (SVU) presents a strong investment opportunity. I’ve been saying this for a few months now!

Now, however, Supervalu (ticker: SVU) may finally live up to its name. Obscured by those problems, the company, with annual sales of $38 billion, is starting to benefit markedly from a corporate refocusing, and some parts of Supervalu already are humming along nicely.

The scorn may be masking some developments that argue in favor of a turnaround in Supervalu’s fortunes in the coming months. For instance, the company is still generating positive cash flow, even after capital spending, and that has allowed it to pay down its debt load by some $1.7 billion in the past two fiscal years to $7.1 billion, including capitalized leases. At the same time, Supervalu has been able to lay out some $700 million a year on capital expenditures.

This cash generation is the result of the Herkert team’s moving to sell several nonstrategic units, dump some 100 underperforming stores in the past year and cut the corporate payroll by 10%. Overhead costs of the Eden Prairie, Minn.-based company have dropped from $8.7 billion in the year before Herkert took over, to $7.6 billion.

Finally, investors are overlooking several existing strengths in Supervalu’s portfolio of operations that should prevent it from becoming another industry death star like A&P, which filed for bankruptcy last December.

One is Supervalu’s wholesale-grocery business—which supplies the company’s 1,140 traditional grocery stores, 1,230 deep-discount Save-A-Lots and 1,900 small, independent stores. This steady-eddy concern, the largest grocery wholesaler in the U.S., will chip in about a third of Supervalu’s operating earnings, or some $300 million a year, and is largely impervious to price competition from the discounters.

Supervalu is investing heavily in the Save-A-Lot chain of small, no-frills discount stores that are increasingly set up in densely populated metropolitan areas largely beyond the reach of big discounters like Wal-Mart. Their competition is mainly from dollar stores and small, high-priced ma-and-pa establishments. “These stores keep prices down by offering lots of private-label goods and limited brand selection while at the same time providing low-income customers with an assortment of fresh items like produce, meat and dairy that the neighborhood establishments may not carry,” an insider at Supervalu, now in its earnings quiet period, tells Barron’s. “The chain caters to the fastest-growing cohort in the U.S. population—the households making $45,000 or less, and frequently on food stamps.”

Read the full article here.

Author Disclosure: Long SVU

Talk to Frank about Supervalu

  • http://seekingalpha.com/author/tim-welland Tim Welland

    Perhaps my biggest fear on Supervalu is that it gets taken out at something like a 50% premium when it could easily double or triple in the next 1-3 years.

    Tim

    • john

      Why would you fear a 50% premium?

      • Anonymous

        Yes, I wouldn’t be too disappointed with a 50% upside. I guess if that’s
        your biggest worry, then you are ahead of the game!

        Frank Voisin

        • http://seekingalpha.com/author/tim-welland Tim Welland

          My point was basically that a take out would give you a big gainer, but it would remove the possibility for this to be 2 or 3 bagger, which I consider to be a strong possibility.

          It’s hard to be disappointed with a 50% (or whatever it would be) gain, but the opportunity cost is potentially quite high.