SUPERVALU Beats on Q4 Earnings, Revs - Analyst Blog

SUPERVALU Inc.'s SVU fourth-quarter fiscal 2014 adjusted earnings per share of 18 cents surpassed the Zacks Consensus Estimate of 16 cents by 12.5%. The results were much better than a loss of 11 cents reported in the prior-year quarter. Adjusted earnings exclude an after-tax charge of $8 million. Share price increased 11.4% to $7.54 on Apr 23, 2014 after the announcement of the earnings results.

The better-than-expected results were due to higher operating margins in all its segments following effective cost-reduction initiatives.

Revenues and Margins

SUPERVALU' total sales went up 1.3% year over year to $3.95 billion as positive identical store sales in the Save-A-Lot network and retail food segment. Sales were ahead of the Zacks Consensus Estimate of $3.88 billion by 1.8%.

Gross profit went up 5.9% to $590.0 million due to lower cost of sales. Gross margin inflated 60 basis points (bps) to 14.9% in the quarter on the back of higher fees earned under the transition services agreements (TSA) compared with the last year and lower infrastructure costs.

Selling and administrative expenses as a percent of sales shrank 170 bps to 11.7% driven by the benefits of cost reduction initiatives and lower surplus property charges.

During the third quarter, SVU received $46 million under the TSA compared with $9 million last year, due to higher number of stores and distribution centers covered under the agreements.

Segment Details

Net sales at Retail Food remained flat with the prior-year quarter at $1.09 billion in the reported quarter. Same-store sales recorded a gain of 0.2% — first time since 2008. Strong traffic in the stores improved same-store sales during the quarter. Operating margin in the segment inflated 220 bps to 3.5% in the reported quarter due to the benefit of cost reduction initiatives, including lower depreciation expense.

Net sales at Save-A-Lot stores increased 3.1% to $999 million from $969 million in the year-ago quarter. The increase was due to positive same-store sales in the Save-A-Lot network of 2.1%. Same-store sales for corporate stores within the Save-A-Lot network were positive 3.5%. Save-A-Lot's operating margin shrank 70 bps to 4.3% 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 that the company started in the previous quarter.

Net sales at the Independent business declined 0.6% year over year to $1.82 billion in the quarter from $1.83 billion a year ago. Lower sales to existing customers, including military, and the loss of two larger customers were partly offset by net new business. The Independent business' operating margin, however, inflated 50 bps to 3.2% during the quarter backed by lower bad debt expenses and cost reduction initiatives.

Fiscal Results

Fiscal 2014 adjusted earnings per share of 58 cents surpassed the Zacks Consensus Estimate of 56 cents by 3.4%. The results were much better than a loss of 36 cents suffered by the company in the prior-year quarter.

Total sales went up 0.5% year over year to $17.2 billion and also ahead of the Zacks Consensus Estimate of $17.0 billion by 1.2%.

Other Financial Update

Cash and cash equivalents of SUPERVALU were $83.0 million as of Feb 22, 2014, versus $72.0 million as of Nov 30, 2013. Long-term debt and capital lease obligations were $2.7 billion as of Feb 22, 2014 compared to $2.9 billion as of Nov 30, 2013.

Our Take

Save-a-Lot stores remain the major growth driver for SUPERVALU and it is in the process of revamping these stores. The company is focusing on the ‘fresh from farm' department in 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 in the first half of fiscal 2014.

The company embarked on a fair price promotion strategy (lowering prices to competitive level) in fiscal 2013. Although the strategy has been quite well received and we expect the program to help the company gain market share in the longer term, we are concerned that it may pressure margins in the near-term.

Other Stocks to Consider

SUPERVALU currently carries a Zacks Rank #2 (Buy). Other stocks in the retail sector worth considering include B&G Foods Inc. BGS, Treehouse Foods Inc. THS and McCormick & Company, Inc. MKC. All these stocks carry the same Zacks Rank as SUPERVALU.