SUPERVALU INC. (SVU): Finding Super Value In Grocery Stores — Not That One

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Coming from the world of retail, I’m happy for someone to market to me when that marketing is good. The unexpected purchase that comes along only because a good sales person really gets me fired up is a purchase that I love to make. But sometimes what the company thinks is exciting strikes me as odd. In its last earnings release, as one of a mere five lead points, SUPERVALU INC. (NYSE:SVU) highlighted that sales fell less quickly this quarter. Huzzah!

SUPERVALU INC.Now, in the company’s defense, it also called out a drop in admin costs and a nice bit of debt refinancing, but the overall message was mediocre. SUPERVALU INC. (NYSE:SVU) had a drop in revenue, a fall in comparable-store sales, and a decline in operating income.

All the hope that’s fit to print

On its earnings call, SUPERVALU INC. (NYSE:SVU) CEO Sam Duncan summed up the company’s current position nicely. He said, “We still have a great deal of work ahead of us but the management team and I are laying the foundational pieces that have to be in place for us to attract more retail accounts through our distribution businesses, more licensees to our Save-a-Lot format and more customers to all of our retail stores.” In short, the company is at the beginning of a long road.

Investors in SUPERVALU INC. (NYSE:SVU) bought into the hope on the day of the announcement, and the company’s shares had jumped up 22% at one point in the day. Then, waking in the cold, bright sunshine of the following day, everyone peeled their eyes back and realized that maybe it wasn’t that great and the stock pulled back. It’s still up 8% from before the earnings release, but some of the hype has faded.

The reason investors were willing to dial back so quickly is twofold. First, the company has a substantial short position held against it and there may have been a squeeze on the day of the announcement as losers sold off to cut their losses. More importantly, investors may have reconsidered how SUPERVALU INC. (NYSE:SVU) was positioned against its competitors.

The land’s lay

With its falling sales, negative operational income, and lackluster brands, SUPERVALU isn’t going to win a beauty contest anytime soon. The line of better choices is long, and investors are quick to move to the new hot thing in the sector. Right now, The Kroger Co. (NYSE:KR) and Whole Foods Market, Inc. (NASDAQ:WFM) both represent more interesting ways to make some money in the grocery store business.

Each has its specific perk, but all three are winning in ways that SUPERVALU is losing. The Kroger Co. (NYSE:KR) recently acquired Harris Teeter Supermarkets Inc (NYSE:HTSI), a regional grocer with higher margins on the East Coast. It also posted a 3.3% year-over-year gain in comparable-store sales last quarter along with a 2.9% operating margin. The stock has been on a run recently due to acquisition news and strong results. Kroger is up 50% year to date, though that’s nowhere near the 196% gain that SUPERVALU has seen as speculation about its future has run rampant.

Whole Foods Market, Inc. (NASDAQ:WFM) has played the very opposite end of the grocery spectrum, but it’s done so in a consistent manner. The company keeps putting up strong sales growth figures, with year-over-year comparable sales rising about 7% in both of its most recent quarters. Operating margin is where Whole Foods sees the biggest distinction, and last quarter it rose to 7.5%, putting other grocers to shame. The stock price reflects that strength, and Whole Foods trades at a costly P/E of 40 compared to Kroger’s P/E of 13 — SUPERVALU doesn’t have an ‘E’, and thus no P/E, either.

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