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Supervalu Inc. (SVU - Analyst Report) is scheduled to report second quarter fiscal 2014 earnings after the market closes on Oct 17, 2013. Last quarter, Supervalu posted a positive surprise of 250.0%.

Why a Likely Positive Surprise?

Our proven model shows that Supervalu is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +10.0%. This is meaningful and a leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank #1 (Strong Buy): Supervalu carries a Zacks Rank #1 (Strong Buy). Note that stocks with a Zacks Rank #1, #2 and #3 have a significantly higher chance of beating earnings estimates. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement. 

The combination of Supervalu’s Zacks Rank #1 (Strong Buy) and a positive ESP of +10.0% makes us confident of an earnings beat on Oct 17.

What is Driving the Better-than-Expected Earnings?

Supervalu’s turnaround initiatives have helped reverse four successive years of negative identical store sales and re-positioned the company for growth. These are expected to drive fiscal second quarter 2014 results as well.  

The company is in the process of revamping its stores. The company continues to focus on the ‘fresh from farm’ department in Save-A-Lot stores as the category has reported decent sales in the past. The fresh saw cut meat program organized in all the Save-a-Lot stores also helped the company post better comps during the first quarter of fiscal 2014. We expect this program to boost second quarter sales too.

The company adopted a fair price plus promotion strategy in fiscal 2013, which aims to lower the pricing of its products and is expected to help the company gain market share in the longer term.

As part of the broad-based strategic alternatives, Supervalu sold its Albertson's, Jewel-Osco, Acme, Shaw's and Star Market chains in order to reduce loss in the coming quarters as well as streamline its operations in order to focus on Save-A-Lot discount stores and its smaller regional chains. The sale of non-performing assets is expected to unlock the value of the company’s stock and increase focus on its core distribution business.

The company has also emphasized on cost reduction initiatives that are expected to lower administrative and operational expense by $250 million through fiscal 2014. In Mar 2013, the company reduced 1100 positions in order to right-size the organization. In Sep 2012, Supervalu closed 60 of its underperforming stores, which is expected to generate $80 million-$90 million in savings over three years.

Other Stocks to Consider

Here are some other companies in the retail sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

DSW Inc (DSW - Snapshot Report), Earnings ESP of +2.59% and a Zacks Rank #1.

Dollar General Corp (DG - Analyst Report), Earnings ESP of +1.41% and a Zacks Rank #2 (Buy).

Spartan Stores Inc. (SPTN - Snapshot Report), Earnings ESP of +2.00% and a Zacks Rank #2.

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