February 27, 2015 SUPERVALU Inc (SVU-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 09/07/2011 Current Price (02/26/15) $10.00 Target Price $10.00 52-Week High $10.43 52-Week Low $6.22 One-Year Return (%) 55.28 Beta 2.05 Average Daily Volume (sh) 1,899,587 Shares Outstanding (mil) 261 Market Capitalization ($mil) $2,613 Short Interest Ratio (days) 3.63 Institutional Ownership (%) 69 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) -19.1 Earnings Per Share (%) -36.4 Dividend (%) -22.8 using TTM EPS 15.4 using 2015 Estimate 14.4 using 2016 Estimate 13.7 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY SUPERVALU s third-quarter fiscal 2015 earnings of $0.18 beat the Zacks Consensus Estimate by 28.6% and improved 38.5% from the year-ago results backed by higher sales. Net sales surpassed the Zacks Consensus Estimate by 3.7% and increased 4.7% year over year on the back of positive identical store sales in the Save-A-Lot network and retail food segment. Additionally, we commend the company s efforts to cut costs by divesting its underperforming assets. Moreover, it has undertaken several initiatives to improve comps in the retail sector. Despite modest recovery in macroeconomic environment, the company will face the pressure over the near term. Hence we prefer to remain on the sidelines with this stock Risk Level * Average, Type of Stock N/A Industry Food-Misc/Dvrsd Zacks Industry Rank * 217 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (May) (Aug) (Nov) (Feb) (Feb) 2013 7,913 A 3,890 A 17,097 A 2014 5,158 A 3,948 A 4,012 A 3,953 A 17,155 A 2015 5,234 A 4,018 A 4,204 A 4,361 E 17,808 E 2016 5,517 E 4,235 E 4,431 E 18,186 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (May) (Aug) (Nov) (Feb) (Feb) 2013 $0.03 A -$0.14 A -$0.37 A 2014 $0.14 A $0.13 A $0.13 A $0.18 A $0.58 A 2015 $0.18 A $0.11 A $0.18 A $0.22 E $0.69 E 2016 $0.22 E $0.12 E $0.16 E $0.73 E Projected EPS Growth - Next 5 Years % 4 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW SUPERVALU Inc., founded in 1871, and based in Eden Prairie, MN, is one of the leading companies in the United States grocery business. The retail operations of the company are conducted under the banners like, Acme Markets, Shoppers Food & Pharmacy, Cub Foods, Farm Fresh, Lucky, Shop 'n Save, Scott's, Star Markets, Bristol Farms, bigg's, Hornbacher's, and Sunflower Market. The company operates through three retail food store formats - combination stores, food stores and limited assortment food stores. The combination stores refer to the combination of food and pharmacy. SUPERVALU operates through two reportable segments: Retail food and Independent business. These divisions refer to two distinct businesses; one of them is retail and the other wholesale. Each segment has a separate customer base, marketing strategy and management structure. The Retail Food division derives revenues from the sale of groceries at retail outlets operated by SUPERVALU. The Independent Business division derives revenues from wholesale distribution to independentlyowned retail food stores, mass merchants and other customers and logistics support services. The company s Independent business network is spread over 47 states. It serves as the primary grocery supplier to independent retail customers, the company s own stores, as well as secondary grocery suppliers. REASONS TO BUY Strong Retail Expansion: SUPERVALU derives a major portion of its revenues from the retail food segment. The company is trying to develop retail operations, primarily through new store development, addition of merchandise to existing stores and increasing the number of replacement food distribution centers. The company has also upgraded its technology to drive productivity and added a number of customer-facing merchandising initiatives to drive sales. SUPERVALU added approximately 50 Save-A-Lot stores in fiscal 2014. Additionally, 200 private label items were introduced at the Save-A-Lot stores in fiscal 2015 and accelerated the momentum of store expansions under the banner. SUPERVALU is working on refreshing Save-A-Lot's private label packaging and expects to update more than 1,000 stocks by the end of fiscal 2015. This strategic expansion is likely to give a wider base to the retailer s products, thereby generating solid revenue streams, going forward. The company plans to add 250 Save-A-Lot stores till 2018. Initiative to Boost Sales and Margins: In order to boost sales growth, SUPERVALU is geared to expand its retail banners. The company is rebranding most of its retail banners so that each has a clearly-defined identity communicated through in-store signage, weekly ads, customer emails, mobile devices and banner web pages. The company is focusing on the private labels among the retail banners as they have been reporting decent sales for the past few quarters. In addition, the company s fair price plus promotion strategy, started in fiscal 2013, helps the company to competitively price its products with the aim to increase its market share. Additionally the load-to-card program started in fiscal 2014 in the Cub stores in Minnesota that allows customers to download digital coupons directly to their phone or their Cub Rewards Card, making their shopping Equity Research SVU Page 2
experience faster, more convenient and consistent is expected to boost the company s sales in the coming quarters. Moreover, SUPERVALU has collaborated with its licensees to improve store operations and merchandising. Licensees have shown a greater willingness to adopt programs into their stores, including new directional sign packages, more prominent displays of price investment items, and SUPERVALU s new merchandising sets. This has helped SUPERVALU to improve its comps. Moreover, SUPERVALU is geared to remodel its stores to make it more impressive for customers. Initiatives are being taken to display bulk products in visually attractive ways and facilitate easier navigation through products. Proper classification of categories has helped the company gain comps at its stores. Focus on fresh from farm department at the Save-A-Lot stores has been increased as the category reported decent sales in the past. The company s recent endeavor to keep seasonally relevant general merchandise at its Save-a-Lot stores is also encouraging. Although the company has rolled out its seasonal items in a few of its stores, the initial results have prompted it to expand its seasonal items in a greater number of stores, going ahead. Taking Steps to Increase Operating Efficiency: The company has been bearing the brunt of higher operating costs since past few quarters. As part of the broad-based strategic alternatives, SUPERVALU sold its Albertson's, Jewel-Osco, Acme, Shaw's and Star Market chains (acquired in 2006) comprising 877 stores in total. This sell off undertaken in March 2013 was done in order to reduce loss in the coming quarters as well as streamline its operations in order to focus more on Save-A-Lot discount stores and its smaller regional chains Cub, Farm Fresh, Shoppers, Shop 'n Save and Hornbacher's. In order to increase operating efficiency, SUPERVALU has resorted to single sourcing in its independent business. Under this system, the company is supplying goods to retailers who source their products only from SUPERVALU. As a result, the company has been able to increase efficiency and predictability around demand. Moreover, SUPERVALU made a new organizational design and divided the business into two geographic regions to help in both affiliating new, independent retailers and driving sales growth with current customers. The new design will also help in eliminating duplicative work and lowering cost structure. In fiscal 2015, SUPERVALU started using Volvo trucks that operate on compressed natural gas (CNG) to distribute grocery items from its distribution center to grocery stores. These trucks reduce oil consumption and emit fewer tons of greenhouse gases. In addition to the environmental benefits, the new CNG fleet and fast-fill stations are expected to reduce SUPERVALU s operating costs given the lower cost of CNG. REASONS TO SELL Possible Margin Headwinds in the Future: There is a possibility that the company s Transition Services Agreements (TSAs) with Albertson's LLC and New Albertson's, Inc. may not be extended beyond its initial term (ending Sep 2015) posing a risk. This could affect profitability if cost cuts are unable to offset the lack of revenues from the TSAs. Equity Research SVU Page 3
Challenging Consumer Spending Affecting Sales: The consumer environment in the developed countries continues to be challenging despite moderate recovery. The pace of economic recovery is relatively slow. Slow job growth, high interest rates and still-tightened credit availability continue to hurt customer discretionary spending. Tax increases and higher healthcare costs have further lowered the disposable incomes of consumers. Sluggish recovery in these markets is expected to negatively impact the demand for SUPERVALU s commodities. Moreover, inflation has proved to be a challenge for several cash-strapped customers. As a hard-discount store, SUPERVALU has been unable to increase prices to match the cost of inputs, which has crippled its margins. The U.S. government has taken up the sequestration policy as a way to combat the ongoing macroeconomic headwinds in the country. Under the policy, the government is reducing military expenditure by temporarily shutting down several commissaries. This is putting pressure on the company s military segment sales. RECENT NEWS SUPERVALU Beats Third Quarter Earnings Estimates on Higher Sales Jan 08, 2015 SUPERVALU's third-quarter fiscal 2015 earnings per share of $0.18 beat the Zacks Consensus Estimate of $0.14 by 28.6%. Earnings also surpassed year-ago results of $0.13 by 38.5%, backed by a higher top line. Adjusted earnings exclude an after-tax charge of $1 million. Revenues and Margins SUPERVALU s total sales increased 4.7% year over year to $4.20 billion, backed by positive identical store sales in the Save-A-Lot network and retail food segment as well as the Independent business. Sales surpassed the Zacks Consensus Estimate of $4.05 billion by 3.7%. Gross profit increased 4% to $593.0 million from the year-ago quarter. However, gross margin shrank 20 basis points (bps) to 14.1%. The decline resulted from lower fees earned under the TSA, predominantly related to the one-year transition fee earned under the TSA in fiscal 2014. Despite cost reduction initiatives, operating earnings declined 47.1% to $56 million and operating margin shrank 130 bps to 1.3% mainly due to higher employee related costs and selling, general and administrative expenses. Segment Details Net sales at Retail Food increased 5.7% from the prior-year quarter at $1.12 billion contributed by the newly acquired stores and higher comps. Same-store sales recorded a gain of 2.3% compared with a gain of 0.4% in the previous quarter. Strong store traffic improved same-store sales. Operating margin in the segment inflated 20 bps to 2.5% due to lower depreciation, occupancy and employee-related costs. Net sales at the Save-A-Lot stores increased 9% from the year-ago quarter to $1.08 billion backed by 6.9% positive same-store sales across the network. Same-store sales for corporate stores within the Save-A-Lot network were 8.5%. Save-A-Lot's operating margin shrank 90 bps to 3.2% due to incremental investment in fair price promotion strategy as well as higher advertising, employee and occupancy costs. Save-A-Lot s results continued to reflect the benefits from the fresh cut meat program started in the previous quarter. Equity Research SVU Page 4
Net sales at the Independent business gained 2.6% year over year to $1.96 billion. Higher sales to existing customers drove sales higher. The Independent business operating margin gained 10 bps to 3% of sales. Corporate During the third quarter, SUPERVALU received $43 million under the TSA compared with $48 million a year ago, due to higher number of stores and distribution centers covered under the agreement. Other Financial Update Cash and cash equivalents of SUPERVALU totaled $418.0 million as of Nov 29, 2014, versus $88.0 million as of Sep 6, 2014. Long-term debt and capital lease obligations were $2.6 billion as of Nov 29, 2014 compared with $2.3 billion as of Sep 6, 2014.. VALUATION SUPERVALU s current trailing 12-month earnings multiple is 15.4x, which is a 34.2% discount to the industry average of 23.4x. Based on 2015 earnings estimate of $0.69, the stock is trading at 14.5x, which is a 51.5% discount to the industry average of 29.9x. Target price of $10.00 is based on approximately 14.5x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low SUPERVALU INC (SVU) 14.5 13.8 5.4 5.8 15.4 267.0 2.3 Industry Average 29.9 26.8 9.7 13.6 23.4 82.0 16.0 S&P 500 16.8 15.7 10.7 15.3 18.5 19.4 12.0 GENL MILLS (GIS) 18.9 17.7 7.1 13.7 19.8 19.8 14.8 SAN MIGUEL CORP (SMGBY) 2.2 4.0 42.4 3.7 CONAGRA FOODS (CAG) 16.2 15.0 7.3 9.6 16.0 17.3 12.8 ARAMARK HOLDING (ARMK) 21.6 19.2 11.0 8.7 23.8 23.4 18.3 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA SUPERVALU INC (SVU) 153.7 153.7 0.8 781.5-4.4 0.0 7.0 Industry Average 3.8 3.8 3.8-1.7 0.4 1.1 6.8 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research SVU Page 5
Earnings Surprise and Estimate Revision History Equity Research SVU Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SVU. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.5%, Neutral - 75.6%, Underperform 8.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research SVU Page 7