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It’s Finally Time to Buy SUPERVALU INC. (SVU): Wal-Mart Stores, Inc. (WMT), Dollar General Corp. (DG)

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Supervalu Inc (SVU)SUPERVALU INC. (NYSE:SVU) has taken shareholders on a wild ride over the last few years, but it is finally positioned to create lasting value for investors.

The company had historically been a grocery chain and a wholesaler to independent grocers. However, it completed a leveraged buyout of Albertson’s in 2006, which left it with no financial flexibility during the recession. As a result, the company lost significant market share and its margins were crunched.

In January, the company announced the sale of Albertson’s to Cerberus Capital Management, a New York-based hedge fund. As part of the deal, Cerberus agreed to make a tender offer for 30% of SUPERVALU INC. (NYSE:SVU)’s shares outstanding. The hedge fund was also allowed to appoint a new chairman and a new CEO.

As part of the restructuring, SVU will now consist of its original grocery chain, its wholesale operation, and its dollar store-type format Save-A-Lot. This new model positions SUPERVALU INC. (NYSE:SVU) to take advantage of upward trends in wholesale and dollar store formats and shifts it away from the declining supermarket business.

In addition to the Albertson’s stores, Cerberus also agreed to take on the associated debt. This shores up SUPERVALU INC. (NYSE:SVU)’s balance sheet so that it can accelerate Save-A-Lot store openings and have financial flexibility in the event of another downturn.

Management’s comments about pro forma EBITDA are encouraging. The company estimates 2013 EBITDA at $750 million and 2014 EBITDA approaching $800 million. Most of the increase in EBITDA is expected to come from cost cutting rather than revenue growth.

Competition

An investment in SUPERVALU INC. (NYSE:SVU) hinges on the success of its Save-A-Lot concept. The format has shown promise, but it operates in an intensely competitive environment.

Dollar General Corp. (NYSE:DG) and its compatriots have a foothold in the ultra-value small store format. Dollar General Corp. (NYSE:DG) has substantial growth plans that involve rolling out new stores across the U.S. In addition, the company is near an all-time high in profitability due to operational efficiency. As a result, the company is well-positioned for another recession — same-store sales and profit margins actually expanded during the last recession. It will be difficult for Save-A-Lot to steal share from this experienced competitor.

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