SuperValu: A Super Value?

07/08/2015 7:00 am EST


Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

Hurt by years of sagging profits and a mountain of debt, many saw bankruptcy as inevitable for this grocery wholesaler and retailer, explains Taesik Yoon, editor of Forbes Dividend Investor.

Indeed, back in July 2012, SuperValu (SVU)—one of the largest grocery wholesalers and retailers in the US—tumbled to an all time low of just $1.68. 

But this proved premature as a deal struck six months later to sell nearly half of its revenue-producing assets resulted in a smaller, more manageable company that has been successfully turning its operations around.

While this helped the stock stage an impressive rebound to a four-and-a-half year high in mid-April, weaker-than-expected sales in its most recently reported quarter have investors dumping the stock once again. 

Yet after taking a deeper look at SVU, we think the company’s turnaround is far from finished. And the near 30% sell-off since seems overly excessive in our view.

The fact is, SVU is a much stronger company now—both from an operational standpoint and in terms of financial health—than it was several years ago. 

The company’s turnaround began with the tough but necessary decision to sell its most desirable grocery store banners and real estate assets to a consortium of investors in early 2013. 

The financial flexibility afforded by the sale helped fund other strategic initiatives designed to return these businesses back to growth and improve the company’s overall profitability. 

The company’s Save-A-Lot and Retail Food segments have enjoyed six and five consecutive quarters of positive identical store sales, respectively, which strongly suggests that SVU’s effort to increase the appeal of these stores has been successfully resonating with customers.

SVU also announced the pending termination of its current Transition Services Agreement with Albertson’s, which has contributed to revenues and operating profits in each of the past four quarters. 

However, SVU noted that it will take four years to completely wind-down the agreement. 

Additionally, a new agreement signed with supermarket operator Haggan, which acquired 164 grocery stores—in connection with Albertson’s acquisition of Safeway in January—is expected to mitigate much of the estimated revenue loss after the estimated wind-down period. 

Thus, investors are overestimating the impact this expiring agreement is likely to have on SVU’s operations in our view. 

As this becomes increasingly evident—and as the company’s turnaround efforts continue to bear fruit—we think more investors will come to realize the compelling appreciation potential that the stock continues to offer.

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