Supervalu Pinned to Neutral

We reaffirm our Neutral recommendation on Supervalu Inc. (SVU - Analyst Report) following an assessment of its third quarter fiscal 2013 results.

Why the Reiteration?

Supervalu reported its third-quarter results on Jan 11, 2013. Both earnings and sales missed the Zacks Consensus Estimates. The company’s earnings lagged the prior-year earnings due to the disappointing same store sales during the quarter and reduced discretionary spending by consumers in the U.S. due to ongoing economic challenges.

The company has reported negative identical store sales successively for the past four years. The trend has continued in the first half of fiscal 2013 as well.

Moreover, high inflation has proved to be a challenge for several financially fragile customers. Therefore, as a hard discount store, Supervalu could not increase prices to match the cost of inputs and thus its margins were crippled.

However, Supervalu has embarked on turnaround initiatives and has taken several cost reduction measures to improve its margins. The fair price strategy of the company that aims to reduce the price of its products to a competitive level is also expected to boost sales in the long term.

Supervalu has entered into a definitive agreement to sell 877 supermarkets grouped under five supermarket chains to Cerberus Capital Management LP. The sellout of these underperforming-performing stores is expected to improve its margins in the future.

Currently, Supervalu has a Zacks Rank #3 (Hold). Investments to consider include The Jeronimo Martins (JRONY), Safeway Inc. (SWY - Analyst Report) or Koninklijke Ahold N.V. (AHONY) all of which carry a Zacks Rank #2 (Buy).