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SUPERVALU's (SVU) Focus on Wholesale Business Bodes Well

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SUPERVALU INC. (SVU - Free Report) has been struggling against declining sales in its retail segment owing to rising competition in the grocery industry. Nevertheless, the company’s focus on accelerating business by focusing on acquisitions and supply agreements in the wholesale segment has proved to be quite yielding.

With these aspects in mind, let’s delve into the factors that have been impacting SUPERVALU’s performance.

Sluggish Retail Segment & Other Headwinds

SUPERVALU is facing price competition, competitive store openings and challenging retail environment, particularly in the retail segment. Such factors have been denting the company’s retail sales for a while now and the trend is likely to continue in fiscal 2018. This has further weakened the segment.

SUPERVALU’s future sales growth prospects have also been shadowed by the wind-down of existing transition services agreements with Albertson’s LLC. The company expects a revenue decline of approximately $40 million from the Albertson’s TSA in fiscal 2018.

Also, the recent acquisition of Whole Foods Market by Amazon.com (AMZN - Free Report) has sent ripples across the grocery segment. Immediately after the acquisition became effective, Amazon slashed down the prices of a large number of Whole Foods products, thereby pressuring other companies in the same segment.

The impact of ongoing headwinds is well reflected in the company’s share price performance. SUPERVALU’s shares declined 16.5% wider than the industry’s fall of 7.7%.

Focus on Wholesale Business & other Growth Initiatives  

SUPERVALU derives a major portion of its revenues from the wholesale business. Sales from this segment grew 12.4% year over year in the last reported first-quarter fiscal 2018, up from 3% growth in the preceding quarter. This shows that the segment offers great potential and will boost company’s sales. The company is trying to develop wholesale operations, primarily through adding new customers, retaining and developing business with existing customers and acquisitions. The company’s recent acquisition (completed on Jun 23) of Unified Grocers, justifies such growth initiatives. Although the bankruptcy protection filing by Marsh Supermarkets in May 2017 has resulted in volume decline in the first quarter, the company expects to mitigate these with sales to new and existing customers.

The company is also undertaking store sales and closures for underperforming locations, which will allow the company to focus its resources and investments on a smaller number of strong performing locations. Additionally, SUPERVALU has been striving to reduce cost and resorted to ‘single sourcing’ in its independent businesses, in order to induce greater operating efficiency.

Bottom Line

While we applaud SUPERVALU’s growth initiatives, its retail segment is yet to revive itself from the industry-wide headwinds. Given the mixed pros and cons, SUPERVALU currently carries a Zacks Rank #3 (Hold).

Looking for More? Check these Consumer Staples Stocks

Investors may also consider better-ranked stocks such as Nu Skin Enterprises, Inc. (NUS - Free Report) and Estee Lauder Companies, Inc. (EL - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Nu Skin delivered an average positive earnings surprise of 10.8% in the trailing four quarters. It has a long-term earnings growth rate of 8.7%.

Estee Lauder delivered an average positive earnings surprise of 13.7% in the trailing four quarters. It has a long-term earnings growth rate of 11.8%.

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