Albertson’s and Supervalu

Supervalu is the third largest conventional supermarket operator in the U.S., and the fifth largest food retailer after Walmart, Kroger, Costco, and Safeway. Supervalu is also a wholesaler, providing supply chain services to third-party retailers.

Store count

Store Type Count as of 2/26/2011 (end of fiscal year 2010)
Conventional supermarkets 1,114
Corporate-owned Save-a-Lot hard discount stores 381
Licensed Save-a-Lot hard discount stores 899
Total 2,394
 (Source: Supervalu’s 10-K report for fiscal year 2010, Part I Item 1, p. 6)

Key Banners

Acme, Albertsons, Cub Foods, Farm Fresh, Hornbacher’s, Jewel-Osco, Lucky, Shaw’s, Shop ‘n Save, Shoppers Food & Pharmacy, Star Market (conventional supermarkets); Save-a-Lot (hard discount format).

(Source: Supervalu’s 10-K report for fiscal year 2010, Part I Item 1, p. 6)

Supply Chain Services

Supervalu is the largest publicly traded food wholesaler in the U.S., with customers in 47 states. Supervalu is the primary supplier to 1,900 third-party retail stores and a secondary supplier to 800 third-party retail stores

(Source: Supervalu’s 10-K report for fiscal year 2010, Part I Item 1, p. 6)

Employees

  • As of 2/26/2011, Supervalu had 142,000 employees, with 88,000 covered by collective bargaining agreements. Note: the company does not break out employees by segment (retail and supply chain). (Source: Supervalu’s 10-K report for fiscal year 2010, Part I Item 1, p. 8)
  • According to the Contract Directory, the UFCW represents 92,000 Supervalu employees. (Source: UFCW Contract Directory)

Financial Performance

Sales

Companywide sales were $37.6 billion in fiscal year 2010, up 0.4% from $37.4 billion in 2006. Retail sales were $28.9 billion, or 77% of total sales in 2010, up 3.2% from 28.0 billion (74.9% of total sales) in 2006. (Source: Standard & Poor’s Compustat database)

Operating profits

Profits from operations of the company (prior to paying interest on debt and taxes) were negative $976 million in 2010, while operating profits from the retail stores were negative $1,212 million. The operating loss from the retail segment was partly offset by operating profit from the supply chain segment. This compares to an overall operating profit of $1.4 billion and a retail operating profit of $1.18 billion in 2006. However, it is important to note that excluding the impact of a one-time charge for impairment of the company’s goodwill and intangible assets (in everyday terms, loss of value of the company’s brand and intellectual property), Supervalu had an operating profit of $870 million in 2010. (Source: Standard & Poor’s Compustat database)

Net profits

Supervalu made a net loss of $1.5 billion in 2010. (Source: Standard & Poor’s Compustat database)

The reasons for Supervalu’s poor profitability

As noted above, Supervalu would have been in the black last year but for the one-time charge for goodwill and intangible asset impairment. Of greater concern going forward is the fact that, even adjusted for this one-time charge, operating profits of $870 million were 37.7% less than their level five years ago. As a percentage of sales, operating profits declined from 3.73% in 2006 to 2.32% (excluding the impairment charge) in 2010. The declining profitability is attributed to growing operating costs, which increased by more than 12% over a five-year timeframe while sales grew by only 0.4%. Part of the growth in operating costs is due to the cost of closing non-performing stores. (Source: Standard & Poor’s Compustat database; Supervalu’s 10-K report for fiscal year 2010, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, p. 22)

Same store sales growth

Same store sales growth, or growth in sales at stores open for at least a year, is a key measure of retail sales growth since it shows how much a retailer is able to grow sales from an existing store base (excluding new store openings and mergers and acquisitions). Supervalu’s same store sales were negative 6% in the last fiscal year, negative 5% in the last quarter, and have been consistently negative for the last three fiscal years. The company attributes its negative same store sales to competitive pressure on prices and the weak economy. (Source: Standard & Poor’s Compustat database; Supervalu’s 10-K report for fiscal year 2010, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, p. 20)

Debt levels

Supervalu’s agreement with a consortium of creditors requires it to maintain certain ratios for measuring indebtedness within prescribed values. The prescribed values and the current values (as of the end of the last quarter) for the two ratios set out in the credit agreement are shown below.

 

Debt ratio Prescribed value Current value
(EBITDA+rental expense)/(interest expense+rental expense) ≥2.20 2.23
Total debt/EBITDA ≤4.25 3.76

 

As shown, Supervalu is within the levels prescribed by creditors for its debt ratios.  Even though the company has high debt levels, it does not appear to be in any imminent danger of default. (Source: Standard & Poor’s Compustat database; Supervalu’s 10-Q report for quarter ended 9/11/2010, Exhibit 10.2, Amended and Restated Credit Agreement dated as of April 5, 2010)

Stock price

As of the close of the trading day on June 23, 2011, Supervalu’s stock traded at $8.77, which was 71% lower than its price of $30.12 five years earlier. By comparison, the S&P 500 index rose by 3.1% over the same period. (Source: Yahoo Finance)

Market shares in key metropolitan markets

Supervalu has leading market shares in a number of major metropolitan areas. The following are all the top 20 markets by population in which Supervalu operates (excluding markets in which they operate solely their hard discount Save-a-Lot format):

Metropolitan market Supervalu share (%) Supervalu rank
Los Angeles-Long Beach-Santa Ana, CA 10.2% 4
Chicago-Naperville-Joliet, IL-IN-WI 35.6% 1
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 19.1% 1
Washington-Arlington-Alexandria, DC-VA-MD-WV 8.1% 3
Boston-Cambridge-Quincy, MA-NH 19.0% 2
Riverside-San Bernardino-Ontario, CA 10.7% 3
Seattle-Tacoma-Bellevue, WA 8.5% 4
Minneapolis-St. Paul-Bloomington, MN-WI 22.8% 1
San Diego-Carlsbad-San Marcos, CA 17.1% 2
St. Louis, MO-IL 20.5% 2
Baltimore-Towson, MD 9.2% 1

This shows that Supervalu enjoys strong market positions in a number of major metropolitan markets. (Source: Metro Market Studies, 2010)

Executive Compensation

Supervalu has not yet released its Proxy Statement for its latest fiscal year, so the following discussion is based on fiscal year 2009 numbers.

  • In fiscal year 2009, Supervalu CEO Craig Herkert made $10.79 million in total compensation, and the five most highly paid executives made a combined total of $18.8 million. (Source: Supervalu’s Proxy Statement for 2010 Shareholders’ Meeting, Summary Compensation Table, p. 33)
  • Assuming 40 hours per week for 52 weeks in the year, Herkert’s equivalent hourly rate of pay in fiscal year 2009 was $5,188.
  • In fiscal years 2008 and 2009, the company’s sales growth was 1.2% and negative 8.9%, respectively, and net profit margin was negative 6.4% and under 1% respectively. While Supervalu executives were getting paid handsomely, the company’s financial performance was poor. (Source: Standard & Poor’s Compustat database)

Dividends

Supervalu paid $74 million in cash dividends to shareholders in fiscal year 2010, and a combined $349 million in dividends in fiscal years 2008 through 2010.  As observed earlier, over the entire period, the company’s financial performance was poor. (Source: Standard & Poor’s Compustat database)

What Wall Street thinks of Supervalu

Here is a sampling of what some key Wall Street investment analysts think of Supervalu’s financial performance and competitive position:

  • “We were impressed with the company’s ability to control gross margin. However, we remain concerned about [Supervalu]’s ability to compete in a highly price competitive food retail environment, particularly given the company’s worse-than-expected IDS [identical store sales].” (Citigroup Global Markets, 4/15/2011)
  • “Yesterday, Supervalu reported a better-than-expected EPS [earnings per share] of $0.42 (once we adjust for one time and normalize the tax rate) and provided better-than-expected FY [fiscal year] 2012 guidance…. the company faces very manageable debt maturities for the next several years, so we see little downside to the stock from these levels based on liquidity concerns despite structural challenges.” (BMO Capital Markets, 4/15/2011)
  • “…it is clear that some of [Supervalu]‘s initiatives are lowering costs and protecting gross margin, if not yet helping sales. Much remains uncertain, however… We remain on the fence….” (Barclay’s Capital Equity Research, 4/15/2011)