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SUPERVALU (SVU) Q3 Earnings Beat, Weak Retail Unit Hits Stock

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Shares of SUPERVALU INC tumbled 13.7% yesterday, after the company reported third-quarter fiscal 2018 results. While the bottom-line topped estimates and improved year over year, the top line crushed its three-quarter long positive surprise trend. Sales were marred by persistent softness in the retail segment, which has long been grappling with mounting competition and a tough pricing environment in the grocery space.

In fact, the dismal retail business performance has been weighing on investors’ sentiment for a while now. This is evident from the Zacks Rank #4 (Sell) stock’s plunge of 45.4% over a year, in comparison with the industry that has remained flat over the same time frame. So, let’s delve deeper into the third-quarter numbers and see where this grocery company is headed.





 

Q3 in Detail

The company reported adjusted earnings from continuing operations of 61 cents per share that surpassed the Zacks Consensus Estimate of 48 cents and jumped considerably by 74.2% year over year. Earnings in this quarter included a roughly 30 cents impact from a discrete tax benefit. Apart from this, earnings were driven by higher sales in the Wholesale business, efficient expense management and lower interest costs.

SUPERVALU’s net sales advanced 31.1% year over year to $3,938 million, attributable to higher wholesale unit sales which in turn was mainly driven by contributions from Unified Grocers (acquired in June 2017). However, the retail segment continued to struggle, leading the top line to miss the Zacks Consensus Estimate of 4,002.3 million.

SuperValu Inc. Price, Consensus and EPS Surprise


 

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

 

Adjusted gross profit amounted $411 million that depicted a 1% upside from the prior-year period. However, adjusted gross margin contracted 310 basis points to 10.5%, owing to unfavorable business mix, as Wholesale accounted for a bigger portion of total sales and gross profit and gross margin from Unified Grocers remained soft.    

During the quarter, SUPERVALU’s operating earnings came in at $39 million, significantly higher than $1 million in the prior-year period. This stemmed from lower selling and administrative expenses.

Segment Details

Wholesale: Net sales at Wholesale business surged 52% year over year to $2,888 million, mainly driven by the sales contributions from Unified Grocers, sales to new customers and greater sales to new stores run by existing customers. These were partially offset by reduced military sales and stores that no longer receive supplies from SUPERVALU.

The segment’s adjusted operating income totaled $48 million, down from $52 million in the year-ago quarter. Also, the adjusted operating margin contracted 100 bps to 1.7% due to lower margins from Unified Grocers and elevated logistic expenses.

Retail: Net sales at Retail dropped 4.1% to $1,017 million, on account of store closures and a 3.5% dip in identical store sales, which has been declining year over year for 11 straight quarters now. This was partly compensated by sales from acquired and new outlets.

Further, the segment reported adjusted operating loss of $3 million, in as against adjusted operating earnings of $2 million in the year-ago quarter. The downside was a result of lower sales and reduced gross margin.

Corporate: During the quarter, fees earned under services agreements were down 10.8% to $33 million. Further, the segment gerated adjusted operating earnings of $2 million, down 50% year over year.

Financial Update

The company ended the quarter with cash and cash equivalents of $46 million, long-term debt of $1,700 million and total stockholders’ equity of $400 million as of Dec 2, 2017.

Further, the company’s year-to-date net cash flows used in operating activities from continuing operations amounted to $44 million, as compared with cash generated from operating activities of $150 million during the comparable year-ago period.

Outlook

While the SUPERVALU’s retail business remains pressurized, management remains impressed with the underlying growth of its Wholesale business and the strategies it is undertaking to fuel the same. Incidentally, the company concluded the buyout of Associated Grocers in the beginning of the fourth quarter, which along with efficient integration of Unified Grocers underscores the company’s focus on strengthening its Wholesale business.

Though addition of new businesses in various distribution centers led to greater-than-expected rise in costs, management remains encouraged with its efforts to handle these expenses. Also, it remains dedicated toward making further investments in its Wholesale business to boost future growth. The company has also been working hard toward achieving a turnaround in its retail segment, through e-commerce innovations; new divisions and increased focus on private brands.

For fiscal 2018, management envisions net earnings from continuing operations to range from $(20) million to $2 million. This includes a non-cash of roughly $35-$45 million, which is likely to be incurred in the fourth quarter in association with the latest tax reforms.

For fiscal 2018, management expects adjusted EBITDA (including Unified Grocers) in a range of $475-$485 million, compared with the previous expectation of $475-$495 million. The narrowed view reflects the impact of greater-than-expected trucking and logistic expenses incurred at the Wholesale segment in the third quarter.

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Nomad Foods Limited (NOMD - Free Report) , also with a Zacks Rank #2, has surpassed earnings estimates in the past three quarters.

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