The grocery market in the U.S. is the second-largest in the world after China. Supervalu and Safeway are two companies that have been selling off their assets in order to be more efficient and benefit from this big market. This seems to be helping them improve their performance, as they have both begun posting better results. On the other hand, Kroger is following the path of acquisitions to fortify its position.
The moves that these companies are making have been paying off handsomely, and this is reflected in their share price performance.
Supervalu was able to pay off $3.2 billion worth of debt when it sold off stores it acquired from Albertsons to Cerberus earlier in the year. This also meant, however, that 57% of Supervalu's FY 2013 free cash flow was gone with this deal. However, this allowed Supervalu to better focus on its remaining operations, and the strategy has been paying off rather well.
Supervalu's total sales rose 0.2% year over year to $4.0 billion. The increase in revenue wasn't great, as positive same-store sales at Save-a-Lot were offset by negative same-store sales in the network retail-food segment. But Supervalu did manage to beat the consensus estimates of $3.8 billion in revenue.
However, retail food sales improved 210 basis points sequentially. Going forward, one can expect that this will improve further as management is focused on the task of winning new customers and increasing sales per customer through different strategies.
Supervalu is also working on its "single source" initiative with its retail customers so that these clients source everything from Supervalu and eliminate logistics complexities that arise when multiple vendors are involved. This would enable retailers to concentrate on their job of selling items and catering to their customers, leaving the back-end complexities for Supervalu to handle.
The retailers that Supervalu has converted to "single source" have seen improved sales trends and better profitability. Going forward, this will mean more business for Supervalu as it converts more of its retailers into its "single-source" model.
Supervalu has also witnessed better performance from its corporate stores in the meat department wherever it implemented the fresh saw-cut meat program. This program has led to an improvement of around 1,000 basis points in margins as compared to the rest of the store. Meat is one of the most important departments of the Save-A-Lot segment, and Supervalu is planning to complete the roll-out of the fresh saw-cut meat program by the end of this year.
Driven by such cost-saving programs, Supervalu beat consensus estimates by posting adjusted earnings of $0.13 per share, reversing last year's loss of $0.09 per share. The better-than-expected earnings came on the back of higher gross earnings following effective cost-reduction initiatives, as gross margins saw an expansion of 120 basis points compared to last year.
Looking at Safeway
Safeway has also sold-off its operations in Canada in a deal worth $5.7 billion. In addition, Safeway also recently decided that by early 201, it will be exiting the Chicago market, where it operates 72 Dominick's stores. An exit from Chicago seems to be a well thought out move from Safeway, as losses in Chicago are offsetting gains from the asset sale in Canada. This will result in cash tax benefits, which Safeway plans to invest in assets or for share buybacks.
A leaner Safeway reported its third-quarter results with revenue of $8.6 billion. This was a year-over-year jump of 1.1%. The increase in revenue was primarily driven by a 1.9% increase in comps, partly offset by lower fuel sales. Total revenue for the quarter beat the Street estimates of $8.4 billion. Just like Supervalu, even Safeway came up with an impressive performance by focusing on profitable areas. Hence, asset sales and restructurings are working well for these two giants.
On the other hand, Kroger's policy of growth through acquisitions stands in stark contrast to Supervalu and Safeway. In July, Kroger announced the acquisition of Harris Teeter in a deal worth $2.4 billion. There are, however, a series of lawsuits being filed to block the acquisition, so technically this deal has yet to go through. Once it does, though, the deal would help Kroger expand its reach in the Southeast and Mid-Atlantic markets.
There is also speculation that Kroger will acquire the Great Atlantic & Pacific Tea Company. This acquisition, if it turns out to be a reality, could help in expanding Kroger's reach in the Northeast, where it has no presence currently. Before going bankrupt in 2010, Great Atlantic, also known as A&P, had a chain of 400 stores. It emerged from bankruptcy last year.
Kroger has been undercutting its rivals in recent years by slashing prices. Its pricing has remained within a 10% band of those charged by big-box discount retailers like Wal-Mart. Despite stiff competition, the company increased its market share in nine out of 17 markets in the previous quarter, and its acquisitions suggest that it won't be stopping anytime soon.
The bottom line
These three grocery retailers have been following different growth strategies, and all seem to be working. All of them have performed well this year, with Supervalu being the pick of the lot.
The more conservative investor would probably be interested in Kroger, as the company trades at a cheap 14.8 times earnings and carries a dividend yield of 1.5%. Safeway is also worth considering, as it is not too expensive and trades at a P/E of less than 20, and carries a dividend yield of 2.4%.
Hence, the grocery industry provides good investment options, and investors should consider looking at these three.
Will any of these grocers come to rule retail?
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
The article Supervalu, Safeway, and Kroger: 3 Ways to Benefit From the Grocery Market originally appeared on Fool.com.Ayush Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.