It has been about a month since the last earnings report for SUPERVALU INC. . Shares have added about 15.5% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is SVU due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
SUPERVALU Q4 Earnings Miss, Drop Y/Y
SUPERVALU released fourth-quarter fiscal 2018 results, with the top and bottom line missing the Zacks Consensus Estimate. Although, sales improved year on year, buoyed by the sturdy advancement of the company’s wholesale business, its retail segment was dismal.
Well, the company has been trying to rationalize its retail operations by exiting certain banners. In this regard, alongside fourth-quarter fiscal 2018 results, management unveiled plans to sell its Shop ‘n Save and Shop ‘n Save East retail businesses. Such moves are expected to aid SUPERVALU to focus on prospective business areas, especially in the wholesale space and raise investor’s optimism in the stock. Also, the company unveiled plans to sell some of its distribution centers to strengthen its financial position.
Q4 in Details
The company reported adjusted earnings from continuing operations of 61 cents per share that came below the Zacks Consensus Estimate of 77 cents and plunged 23.8% year over year.
Although SUPERVALU’s net sales missed the consensus mark of $3,984 million, it advanced 42.1% year over year to 3,594 million during the fourth quarter. The top line gained approximately $840 million from Unified Grocers (acquired in June 2017), whereas AG Florida contributed $130 million. While contributions from these businesses drove results in the wholesale unit, the company’s retail and corporate segment continued to struggle.
Gross profit amounted to $356 million that depicted a 5.3% upside from the prior-year quarter. However, gross margin contracted 350 bps to 9.9%, thanks to unfavorable business mix as Wholesale accounted for a bigger portion of total sales. Prior to this, the company witnessed gross margin declines of 310, 280 and 80 bps in the third, second and first quarters of fiscal 2018, respectively.
During the quarter, SUPERVALU’s operating earnings from continuing operations came in at $68 million. Further, adjusted EBITDA from continuing operations amounted to $117 million.
Wholesale: Net sales in the Wholesale business surged 60% year over year to $2,872 million, mainly driven by the sales contributions from Unified Grocers and AG Florida, 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 $67 million, up from $60 million in the year-ago quarter. However, adjusted operating margin contracted 110 bps to 2.3% due to lower margins from Unified Grocers.
Retail: Net sales in Retail dropped 0.6% to $690 million, on account of store closures — partially offset by a 0.1% gain in identical store sales. Notably identical store sales in this segment, which has been declining year over year for 11 straight quarters, depicted a turnaround for the first time in the reported quarter.
Further, the segment reported adjusted operating earnings of $1 million against adjusted operating earnings of $11 million in the year-ago quarter. Adjusted operating margin in the segment declined 130 bps. The downside was a result of lower base margins as well as increased shrink costs.
Corporate: During the quarter, fees earned under services agreements were down 23.8% to $32 million. Further, the segment reported break-even adjusted operating earnings against operating loss of $4 million in the prior-year quarter.
SUPERVALU ended the quarter with cash and cash equivalents of $41 million, long-term debt of $1,724 million and total stockholders’ equity of $507 million as of Feb 24, 2018.
Further, the company’s year-to-date net cash flows generated from operating activities amounted to $135 million compared with cash generated from operating activities of $364 million in the prior-year quarter.
In a separate release, SUPERVALU announced definitive plans to sell eight of its distribution centers for approximately $483 million. Net proceeds after certain adjustments are expected to be close to $445 million. Management stated that the sale and leaseback of seven of these distribution centers will be completed in May, while proceeds for the remaining one are expected to be completed by October. Management stated that the benefits from such sales will be utilized to reduce the company’s debt burden.
The company also announced its intentions to sell Shop ‘n Save as well as Shop ‘n Save East. These stores form part of the company’s retail operations. We note that the company’s retail operations have long been grappling with price competition, competitive store openings and intense promotions.
Management commented that it remains on track with optimizing its retail operations by exiting businesses, such as that of Shop ‘n Save and Shop ‘n Save East. Other recent developments toward this end includes the company’s plans to sell 21 of its Farm Fresh Food & Pharmacy stores. In this regard, SUPERVALU entered into definite agreements with companies like Harris Teeter, Food Lion and the Mid-Atlantic Division of Kroger.
While SUPERVALU’s retail business remains pressurized, management is impressed with underlying growth of its Wholesale business and is on-track with its strategies to augment the segments’ performance. Incidentally, the company’s buyout of Associated Grocers in the beginning of the fourth quarter, along with efficient integration of Unified Grocers, underscores the company’s focus on strengthening its Wholesale business.
Outlook for 2019
For fiscal 2019, management envisions net sales in the band of $15.5-15.7 billion. Identical store sales in the retail segment are expected in the range of flat to slightly positive.
SUPERVALU predicts net earnings from continuing operations to range from $55-73 million, while total operating earnings are expected in the band of $147-171 million. Further, the company plans to revise its definition of Adjusted EBITDA in fiscal 2019, to adhere to recent changes in accounting policies as well as to exclude stock-based compensation and certain non-service components. According to the revised definition, adjusted EBITDA from continuing operations for 2019 is expected to range between $375-400 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter.
At this time, SVU has a nice Growth Score of B, though it is lagging a lot on the momentum front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than growth investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, SVU has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.