Can SuperValu Shed Sav-A-Lot Quickly Enough to Save Itself?

Print Email

Some of the August enthusiasm for SuperValu Inc. (NYSE: SVU) has burned off recently, and the company’s announcement Thursday morning of a wider-than-expected loss has thrown gasoline on the flames. The supermarket chain more than tripled its estimated full-year EBITDA decline from a prior forecast of 1.5% to a new estimate of 5%.

The trouble lies in Supervalu’s retail and Sav-A-Lot divisions, where competition and the same challenging retail environment that virtually every retailer reports have weighed on sales. The company also noted that its roll-out of store resets in the Sav-A-Lot division has had a negative impact on sales, but that the changes are expected to benefit the division later this year.

CEO Mark Gross, however, is looking on the bright side:

Although we are seeing softness in portions of our business, I am excited and encouraged by the recent announcements pertaining to new customers for our core Wholesale segment and the opportunities that exist to further grow that business. In addition to the already announced two new large customers, we have recaptured some previously lost business from two other customers. We look forward to adding the volume from these new customers and do not expect any meaningful customer losses for the remainder of this fiscal year.

Not an optimistic word there about either the retail or Sav-A-Lot division. In January the company said it was considering spinning off the division and might even sell it. The store resets are probably an attempt to dress up Sav-A-Lot for prospective buyers. Somehow spinning off this division does not seem like a winning plan; a fire sale of the Sav-A-Lot stores seems more likely.

SuperValu attributes the decline in second-quarter performance to more competition in the retail segment and “a challenging sales and operating environment for its stores.” Regarding Sav-A-Lot, the weights on performance have been “deeper levels of deflation” and lower levels of federal support for the SNAP program. Those effects are expected to carry through the rest of this year.

The company now says that second-quarter same-store sales for both its retail stores and its Sav-A-Lot stores will be lower than first-quarter same-store sales. Retail same-store sales were down 4.5% year over year in the first quarter and Sav-A-Lot same-store sales were down 1.4%.

Investors chopped nearly 4% from SuperValu’s share price Wednesday and trimmed another 7% off the stock Thursday morning. Shares closed at $5.47 on Wednesday and traded at $5.08 in Thursday’s premarket session. The consensus 12-month price target is $6.31.