Supervalu Inc. (SVU - Free Report) posted adjusted earnings per share of 13 cents in the third quarter of fiscal 2014, ended Nov 30, 2013, which was in line with the Zacks Consensus Estimate. The results were much better than the loss of 7 cents suffered by the company in the prior-year quarter. Adjusted earnings exclude an after-tax chargeof $3 million.
The better-than-expected results were due to higher operating margins in all its segments following effective cost-reduction initiatives.
Revenues and Margins
Supervalu’s total sales dipped 1.0% year over year to $4.01 billion as positive identical store sales in Save-A-Lot network was more than offset by negative identical store sales in the retail food segment. Sales were in line with the Zacks Consensus Estimate of $4.01 billion.
Gross margin inflated 120 basis points (bps) to 14.3% in the quarter on the back of higher fees earned under the transition services agreements (TSA) compared with the last year.
During the third quarter, SVU received $48 million under the TSA compared with $10 million last year, due to higher number of stores and distribution centers covered under the agreements.
Net sales at Retail Food declined 2.6% to $1.06 billion in the third quarter of fiscal 2014 from $1.09 billion in the prior-year quarter. Results were affected by a same-store sales decline of 1.9% due to its price investments and aggressive pricing by its peers. Operating margin in the segment inflated 150 bps to 2.2% in the reported quarter due to the benefit of cost reduction initiatives, including lower depreciation expense.
Net sales at Save-A-Lot increased 2.6% to $991 million compared with $966 million in the year-ago quarter. The increase was due to positive identical store sales in the Save-A-Lot network of 1.7%. Identical store sales for corporate stores within the Save-A-Lot network were positive 5.4%. Save-A-Lot's operating margin inflated 30 bps to 4.1% driven by benefits of cost reduction initiatives.
Save-A-Lot results this quarter continued to reflect the benefits from the fresh cut meat program that the company started in the previous quarter.
Net sales at the Independent business declined 3.7% year over year to $1.91 billion in the quarter from $1.99 billion a year ago. Lower sales to existing customers, including military, and the loss of two larger customers were partly offset by net new business. The Independent business’ operating margin, however, inflated 30 bps to 3.0% during the quarter backed by higher level of professional services income and strong expense management.
Other Financial Update
Cash and cash equivalents of Supervalu were $72.0 million as of Nov 30, 2013, versus $81.0 million as of Sep 7, 2013. Long-term debt and capital lease obligations remained flat at $2.9 billion as of Nov 30, 2013, compared with the previous quarter.
Other Stocks to Consider
Save-a-Lot stores remain the major growth driver for Supervalu and it is in the process of revamping these stores. The company is focusing on the ‘fresh from farm’ department in these stores as the category has reported decent sales in the past. The fresh saw-cut meat program, organized at all the Save-a-Lot stores, also helped the company post better comps in the first half of fiscal 2014.
The company embarked on a fair price promotion strategy (bring down price to competitive level) in fiscal 2013. Although the strategy has been quite well received and we expect the program to help the company gain market share in the longer term, we are concerned that it may pressure margins in the coming quarters.
Supervalu currently carries a Zacks Rank # 3 (Hold). Other stocks in the retail sector worth considering include Con Agra Foods Inc. (CAG - Free Report) , Mondelez International Inc. (MDLZ - Free Report) and Green Mountain Coffee Roasters Inc. . All these stocks carry a Zacks Rank #2 (Buy).