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Why SUPERVALU (SVU) Shares are Down Post Q3 Earnings

Zacks

SUPERVALU Inc. SVU plunged almost 8% on Jan 11, 2017, following the company’s disappointing results in the third quarter of fiscal 2017, wherein both the top and bottom lines declined year over year.

After posting in-line earnings in the second quarter, the company succumbed to a negative earnings surprise in the third quarter. The company posted adjusted earnings per share of 5 cents that missed the Zacks Consensus Estimate of 13 cents, and also plunged 37.5% from 8 cents recorded in the year-ago quarter. The fall in the bottom line was due to lower revenues and soft margins.

Adjusted earnings exclude $25 million of after-tax non-cash charges comprising a pension settlement charge, a goodwill impairment charge and store closure charges and costs, partially mitigated by a deferred income tax benefit. Including this the company incurred a loss of 4 cents per share.

SUPERVALU has been in troubled waters for the past one year owing to tough competitive pressure, deflationary environment in the food industry and soft sales in the retail segment. The shares of this Zacks Rank #4 (Sell) company have declined 12.8% in the past one year, underperforming the Zacks categorized Food-Miscellaneous Diversified industry that witnessed an increase of 10.6% in the same time frame.


Revenues and Margins

SUPERVALU’s total sales slumped 1.4% year over year to $3.0 billion due to negative identical-store sales in retail division. Sales were almost in-line with the Zacks Consensus Estimate of $3.04 billion.

Adjusted gross profit declined 6.7% year over year to $407 million, affected by higher costs of production. Gross margin, shrank 70 basis points (bps) to 13.6%.

Adjusted operating earnings came in at $1 million compared with $66 million reported a year ago due to lower operating earnings in both the segments.

SuperValu Inc. Price, Consensus and EPS Surprise

SuperValu Inc. Price, Consensus and EPS Surprise | SuperValu Inc. Quote

Segment Details

Net sales at Retail Food slipped 3.4% to $1.06 billion. Operating margins shrank 190 bps to 0.2% of sales. Lower sales and higher employee costs led to the deterioration.

The Wholesale business gained 0.2% year over year to $1.91 billion, primarily driven by sales to new customers and increased sales to new stores operated by existing customers, partially offset by stores from the prior year no longer supplied by the company. The Wholesale business’ adjusted operating margin contracted 50 bps to 2.7% due to higher employee and trucking costs.

Corporate

During the fiscal third quarter, fees earned under the TSAs were $37 million compared with $41 million last year. Adjusted operating earnings totaled $4 million compared with a loss of $7 million last year. The improvement in net corporate operating earnings can be attributed to lower pension expense along with lower operating and employee-related costs.

Other Financial Update

SUPERVALU’s cash and cash equivalents totaled $47 million as of Dec 3, 2016 compared with $57 million as of Sep 10, 2016. Long-term debt was $1.26 billion as of Dec 3, 2016 compared with $2.16 billion as of Sep 10, 2016.

Save-A-Lot Spin Off

SUPERVALU recently completed the divestment of its Save-A-Lot business to private equity firm Onex for $1.365 billion in cash. The company shows the Save-A-Lot results as discontinued operations.

SUPERVALU intends to use the sale proceeds to reduce debt and improve its capital structure. It also wants to contribute part of its proceeds to its pension plan, as well as fund corporate and growth initiatives. SUPERVALU has used $750 million of net proceeds from the sale of Save-A-Lot to prepay a portion of its outstanding debt by approximately $1.1 billion.

Stocks that Warrant a Look

Some better-ranked stocks in the broader consumer staples sector include Sysco Corporation SYY, Lancaster Colony Corporation LANC and Pinnacle Foods Inc. PF, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sysco Corporation has an expected earnings growth of 8.6%. Lancaster has an expected earnings growth rate of 3%, while Pinnacle Foods has a long-term growth rate of 6.5%.

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