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Remaining Neutral on Supervalu

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We reiterated a Neutral recommendation on Supervalu Inc. (SVU - Free Report) following a dismal second quarter for fiscal 2013 and consistently negative same-store sales.

Eden Prairie, Minnesota-based Supervalu reported break even earnings in the second quarter of its fiscal 2013, lagging the Zacks Consensus Estimate of 12 cents and the prior-year quarter earnings of 28 cents a share. The weak results were due to disappointing sales in all the segments during the quarter. Gross profit in the second quarter declined 8.2% to $1.7 billion from $1.8 billion a year ago.

Moreover, Supervalu has reported negative same-store sales consistently for the past four years. The trend has continued in the first half of fiscal 2013 as well. Although management is taking several initiatives to rebound, the efforts have not shown any substantial result so far.

However, we appreciate Supervalu’s efforts to develop its retail operations primarily through new store development, the addition of merchandise to existing stores and an increase in the number of replacement food distribution centers. The company expects to complete the remodeling of approximately 100 stores and add approximately 50 Save-A-Lot stores in fiscal 2013. Further, the company plans to add 250 Save-A-Lot stores in the next five years. This strategic expansion is expected to give a wider base for the retailer’s products, thereby generating revenue streams going forward.

Moreover, the company is geared up to expand its private brand portfolio. The ‘Essential Everyday’ equivalent brand launched last year with 41 categories and more than 500 Stock Keeping Units (SKUs) has gained popularity. The company has undertaken a fair price plus promotion strategy, under which it aims to lower the pricing of its products to match with its competitors. The company expects to do so by the end of fiscal 2013. Although this initiative may hurt short-term operating margins, it is expected to help the company gain market share over the longer term.

However, the fair price strategy has not yet generated the desired results as core competitors like Kroger (KR) are also offering goods at very low prices. Moreover, management does not appear to be reaching any constructive decisions on its plans to sell off the company or parts of its business. Supervalu currently holds a Zacks #4 Rank (Short-term Sell rating).

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