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Supervalu Inc. (SVU - Analyst Report) posted adjusted earnings per share of 13 cents for the second quarter of fiscal 2014 ended Sep 7, 2013, beating the Zacks Consensus Estimate of 11 cents per share by 18.2%. The results were much better than the loss of 9 cents suffered by the company in the comparable prior-year quarter.

Adjusted earnings exclude an after-tax income of $9 million and an after tax charge of $3 million related to legal settlement.

The better-than-expected results were due to higher gross earnings following effective cost-reduction initiatives.  

Revenues and Margins

Supervalu’s total sales rose 0.2% year over year to $4.0 billion as positive identical store sales at the corporate Save-a-Lot network was offset by negative identical store sales in the network retail food segment. Sales beat the Zacks Consensus Estimate of $3.8 billion.

Gross margin inflated 120 basis points (bps) to 14.6% in the quarter on the back of higher fees earned under the transition services agreements (TSA) compared with last year.

During the second quarter, SVU received $62 million under the TSA compared to $10 million last year, due to higher number of stores and distribution centers covered under the agreements.

Segment Details

Net sales at Retail Food declined 1.1% to $1.07 billion in the second quarter of fiscal 2014 from $1.09 billion in the prior-year quarter. Results were affected by a same-store sales decline of 0.9% due to aggressive pricing by its peers and incremental price investments by Supervalu. Operating margin in the segment shrank 40 bps to 0.7% in the reported quarter due to incremental investment in pricing and store remodeling.

Net sales at Save-A-Lot were almost flat at $972 million compared with $973 million in the year-ago quarter. The decline was due to negative identical store sales in the Save-A-Lot network of 0.3%. However, identical store sales for corporate stores within the Save-A-Lot network were positive 4.6%.. Save-A-Lot's operating margin shrank 20 bps to 3.3% of sales as cost reduction initiatives were offset by incremental price investments.

Net sales at the Independent business declined 1.6% year over year to $1.84 billion in the quarter from $1.87 billion a year ago. Lower sales to existing customers hurt sales in this segment. The Independent business’ operating margin, however, inflated 110 bps to 3.9% during the quarter backed by higher gross margins and lower operating cost.

Other Financial Update

Cash and cash equivalents of Supervalu were $81.0 million as of Sep 7, 2013, versus $76.0 million as of Jun 15, 2013. Long-term debt and capital lease obligations remained flat at $2.9 billion as of Sep 7, 2013, compared with the previous quarter.

Other Stocks to Consider

Supervalu currently carries a Zacks Rank # 3 (Hold). Other stocks in the retail sector worth considering include Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report), Tree House Foods Inc. (THS - Snapshot Report) and DiamondFoods Inc. (DMND - Analyst Report), all carrying  a Zacks Rank #2 (Buy).

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