Supervalu: A Good Value in Grocery Stocks

Grocery stocksThe grocery market has been rough in the last decade. Big-box stores such as Wal-Mart (WMT) and Target (TGT) have been crowding into the space as a means of drawing repeat traffic to their locations. And non-traditional players such as CVS Caremark (CVS) and Walgreen (WAG) have expanded their grocery offerings as well.

The increased competition has put a lot of pressure on traditional supermarket chains. Margins are thin -- from about 1% to 1.5% for solid operators -- and competition is fierce.

Before you dismiss a potential investment in the grocery business, consider taking a cue from the lady in line in front of you, the one whose shopping cart is brimming with markdown bargains.

Start Your Engines, Shoppers

Bargain-shopping investors should take a stroll down the aisles of Supervalu (SVU). The company trades at about seven times this year's earnings. It also offers a 3.9% dividend. Even better, it has a clear way to massively increase shareholder value as the company deleverages.

Supervalu operates a variety of grocery chains across the U.S., including Albertsons, Jewel-Osco, Shaw's and Save-A-Lot. (Peers Kroger (KR) and Safeway (SWY) are also publicly traded.)

A few years ago, SUPERVALU took on a huge slug of debt to acquire the Albertsons chain. That debt has been weighing on the company since, eating up more than 50% of operating earnings in the last four quarters. But Supervalu is in turnaround mode now under CEO Craig Herkert, a former Wal-Mart veteran, and is looking to clean up its balance sheet and improve its operations.

Here are four strategies Supervalu's pursuing to improve its operations.

1. Cashing In on Cheap Grub

Supervalu is putting a lot of stock in its strongest chain: hard discounter Save-A-Lot.

Unlike Supervalu's conventional stores, Save-A-Lot sells a limited selection of merchandise at sharply reduced prices -- as much as 40% cheaper than traditional grocery chains, the company says. There are about 1,300 Save-A-Lot stores right now, and the company plans to add 160 more outlets this year.

Another thing the Save-A-Lot franchise has going for it is that some 70% of these stores are licensed rather than owned outright. That allows the parent company to focus on maximizing return on capital, rather than investing its own cash.

2. Catering to the Locals

Local products make stores feel more oriented to the local community. So Supervalu is also focusing on a hyperlocal approach to draw customers into its locations and appeal to local preferences and desires.

3. Looking at Labels

Supervalu is also intensely focused on realigning its cost structure. Instead of its range of disparate store-level private-label brands, the company is creating a national-level brand that spans its stores. The company is also bringing up its sales of private-label goods to the industry average. Such private-label sales are attractive to retailers because they carry higher margins that traditional branded goods.

4. Paying Down its IOUs

On the balance-sheet side of the investment thesis, the company is committed to paying down its debt. That deleveraging should accrue benefits directly to shareholders. With the company's market cap at just $1.9 billion, the stock is trading at around three times free cash flow. The company reduced its net debt by $885 million last year and has promised to shed $500 million to $550 million more this year. That deleveraging would provide a substantial increase in book value.

While Supervalu's $6.7 billion in debt might look scary, just $1 billion of it matures in the next three years. The company is planning to pay that off with operating cash flow, a move that it should be able to manage. And it still has plenty of time to deal with the remainder of the debt.

So this looks like a classic deleveraging situation in an industry that is lackluster but stable. Management predicts earnings of $1.20 to $1.40 per share for the year. That puts the stock trading at a P/E ratio of just 6 to 7. That's cheap, and this company doesn't need to perform miracles to double in price.

Sacrifices May Have to Be Made

We can paint a rosy picture of the future, but, of course, the stock's performance still hinges to some extent on the turnaround. So we'll need to see that work out favorably. But with a P/E of 7, Supervalu is being priced for negative growth. So we have a margin of safety here.

The company has cut its dividend from years past, but the yield is still sizeable at current stock prices, and the company seems committed to keeping some dividend. While the payout only cost about 13% of Supervalu's free cash flow over the last four quarters, the company could cut the payout if things became really dire. I don't expect it, but if the company became cash-starved, then it could happen.

While this grocery business does have some spots on it, you don't often get to buy a boring but reliable business at such a cheap P/E multiple. And with a clear catalyst to unlock value for shareholders, I think this stock is poised for great returns in the future.
Jim Royal, Ph.D., owns shares of SUPERVALU. The Motley Fool owns shares of SUPERVALU and Wal-Mart. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on Wal-Mart, as well as buying calls on SUPERVALU.

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12 Comments

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wiekiang

Supervalu is a great Grocery Stocks, check for discount coupons by visiting this link : www.couponsforgroceriesprintable.net/cottonelle-coupons.htm

September 08 2011 at 12:14 PM Report abuse rate up rate down Reply
mmcdonald2k

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July 23 2011 at 12:12 AM Report abuse rate up rate down Reply
msherer260

I would agree with comment about some of SuperValu's banners going away next year. I would belive all they need is a buyer. The CEO is bound and determind to save the company with the SaveALots, which is a band aid to turn the stock around and make someone some money. Does anyone really belive that these over sized mom and pop stores will have staying power? They will do ok in the short term but over time someone else will bring a larger store back up against them as the economy heals and they will be history. By that time (3 or 4 years at most) SuperValu will have lost any chance with their bigger stores and be gone or tied in with Kroger or Safeway.

July 19 2011 at 5:42 PM Report abuse rate up rate down Reply
kenneth

I have worked for Safeway owned Vons cos for years And would never reenter by all means the " cut throat " grocery industry. It definitely isnt the same as it was in 80's and 90's......greedy companies agreed to pay " journeyman" clerks a liveable wage and hours to match. Now they want to renege on the agreement look for stupid reasons to fire the loyal employees and hire todays group of employees who are obvisioulsy not trained in Customer Service or just dont give a damn.

July 18 2011 at 12:45 PM Report abuse rate up rate down Reply
toosmart4u

I have started to check where the groceries come from. I only want American groceries. Banannas are the only foreign product I will buy.

July 18 2011 at 11:58 AM Report abuse rate up rate down Reply
raidrmik67

I'd have my doubts about Super Valu's ability to swallow Albertsons debt, $6.7 billion IS VERY SCARY I don't care if only 1 billion is due in short term. I don't know if they have cleaned up the disaster Larry Johnston left but Albertsons had a lot of dead weight.

July 18 2011 at 9:47 AM Report abuse rate up rate down Reply
kv37

I worked for super value also, and it was the worst run organization. The author is pushing this stock. I wouldn't touch super value with a ten foot pole!

July 18 2011 at 9:19 AM Report abuse rate up rate down Reply
1 reply to kv37's comment
bray747474

Worked for Super Value?
Don't you mean Super Valu?
We should take the advice of someone who can't spell the name -- twice -- of a company they (allegedly) worked for?
What teck stocks do you recommend?
Maybe you could give me some advice on my 401 OK.
If you're going to buy this stock do it before end of fiscal 2011. That's when the hammer is falling on certain banners. The publicity will hurt at first, but the financial reprecussions will make it worth it.

July 18 2011 at 1:11 PM Report abuse rate up rate down Reply
dgutin

I shop at aldi`s

July 18 2011 at 9:16 AM Report abuse rate up rate down Reply
JGLOJO

I work for supervalu and have for the last 8 years. As a manager I have recieved o raises in the last 2 years as well as o in our bonus category. The stores keep being told that we have not hit our numbers and the managers keep being told that the company is in transition. they have increased employee related costs including making employees pay more out of pocket for health insurance and prescriptions. So if they company is doing so well why are they increasingly asking for more for less. The bonus program was restructured to amke it impossible for any store to hit there numbers.

July 18 2011 at 8:09 AM Report abuse rate up rate down Reply
1 reply to JGLOJO's comment
linux

Locally, we have the Shaw's chain (owned by Supervalu). Although they seem to be more expensive than other chains around here, likely because of the parent company's debt (and I hope that is temporary), I like Shaw's because the overall quality of the products is better than some other chains and the staff is friendlier. I went into our local store earlier today and was actually greeted by a produce clerk. That was a first. :) There have been a couple of rounds of store closings in the past, but our local Shaw's has survived each time. It's only one of two large supermarkets in town, so I hope Shaw's remains open.

July 18 2011 at 1:53 PM Report abuse rate up rate down Reply
1 reply to linux's comment
JGLOJO

Lest you forget that supervalu has closed a lot of the shaws locations and closed or sold off all the ct shaws.

July 18 2011 at 8:45 PM Report abuse rate up rate down