SUPERVALU Inc. ended fiscal 2017 with better-than-expected fourth-quarter results, wherein both its earnings and sales beat estimates. Consequently, its shares were up nearly 5.7% in after-market trading hours.

After posting negative earnings surprise of 61.5% in the fiscal third quarter, the company posted positive earnings surprise of 44.44% in the reported quarter. SUPERVALU posted adjusted earnings per share of 13 cents that outpaced the Zacks Consensus Estimate of 9 cents. However, earnings fell 7.1% from the prior-year quarter.

Adjusted earnings exclude $32 million of after-tax charges, which consists of $25 million of asset impairment and $7 million of unamortized financing cost expenses. Including these items, the company reported earnings of 2 cents per share.

However, we note that the company does not have a good track record of earnings and has reported negative surprises in two of the past three quarters. In fact, the Zacks Rank #3 (Hold) company’s shares have underperformed since past one year. The stock declined 26% over the past one year, underperforming the Zacks categorized Food – Miscellaneous/Diversified industry’s gain of 1.9%.

It continues to face tough competitive pressure that has hit the grocery industry as a whole. Traditional grocery rivals are strengthening their franchises, while outside players are offering alternative outlets for food and other staples. Further, deflationary environment in food products and depleting footfalls at the supermarkets are causes of concern for the grocery chain.

Revenues and Margins

SUPERVALU’s net sales inched up 0.6% year over year to $2,907 million. Also, the top line came ahead of the Zacks Consensus Estimate of 2,888 million. This upside was backed by increased sales witnessed at the Wholesale segment, coupled with higher gross margins.  

Gross profit rose 0.9% year over year to $435 million, with gross margin expansion of 10 basis points (bps) to 15.0%. The increase was because of higher vendor allowances, along with reduced inventory shrink expenses.

Adjusted selling and administrative costs increased 2.3% to $358 million in the quarter. Also, the same as a percentage of sales, rose 20 bps to 12.3% primarily due to increased employee expenses, partly compensated by lower pension cost.

Further, adjusted net interest expense surged 24.3% to $28 million in the reported quarter, owing to reduced outstanding debt balances in connection with the utilization of the sale proceeds of Save-A-Lot business.

In the reported quarter, SUPERVALU completed the divestment of its Save-A-Lot business, as its recent performance has been quite disappointing. Moreover, management announced that Anne Dament will join SUPERVALU to supervise the company’s Retail business along with the merchandising and marketing operations.

Segment Details

Net sales at Wholesale business grew 3% year over year to $1,793 million, mainly driven by sales to new customers, coupled with greater sales from new outlets operated by existing customers. These were partly compensated by stores from the previous year that are no longer supplied by the company. Also, the segment’s operating income came in at $64 million, up from $50 million recorded in the year-ago quarter. Additionally, its operating margin expanded 70 bps to 3.6%, backed by increased gross margins and vendor allowances.

Net sales at Retail slipped 3.2% to $1,072 million. This decrease represents unfavorable identical store sales of 5.8%, partly mitigated by sales from acquired and new outlets. In fact, this decline was similar to the figures posted in the fiscal second and third quarters. Moreover, customer counts decreased 4.3% as well as average basket dropped 1.5%. Also, deflation affected about 1% in the quarter.

Further, the segment recorded adjusted operating income of $14 million, down 53.3% from $30 million in the year-ago quarter. Also, operating margin contracted 140 bps to 1.3%, owing to soft sales along with greater employee charges. Notably, the operating income on excluding an asset impairment expense was the strongest of the year.

Corporate

During the fiscal fourth quarter, fees earned under services agreements were down 4.5% to $42 million.

Further, the segment reported an adjusted operating loss of $1 million as against operating income of $1 million delivered in the year-ago quarter. The decline was due to increased employee expenses, somewhat offset by lower pension charge.

Other Developments

SUPERVALU has inked a deal to buy grocery distributor Unified Grocers for $375 million in early April. Per the agreement, Supervalu agreed to pay $114 million in cash, and will also assume and pay off $261 million in United Grocer debt as of Apr 1. This deal is likely to close in mid-to-late summer, subject to approval by Unified’s shareholders and other customary closing conditions.

In fact, this deal is in line with the company’s Wholesale segment’s three-pronged strategy, which focuses on maintaining its existing customers; discovering more business with the existing customers and adding new wholesale customers.

Financial Update

SUPERVALU’s cash and cash equivalents totaled $332 million as of Feb 25, 2017, compared with $42 million as of Feb 27, 2016. Long-term debt was $1,263 million and total stockholders’ equity came in at $383 million.

Further, net cash from operating activities of continuing operations came in at $308 million in fiscal 2017 versus $245 million reported in the prior year.

Outlook

Management remains impressed with the performance witnessed at its Wholesale segment and improved balance sheet, post the sale of the Save-A-Lot business. Also, management remains encouraged to work as a grocery distributor to The Fresh Market, Inc.

Further, SUPERVALU is expanding its distribution network, boosting its brand portfolio and value-add services that can aid the company to operate effectively. We also note that the company is on track to improve the customers’ shopping experience at its retail outlets.

However, the company continues to feel the pinch of competitive new store openings at its Retail segment. Going forward, it hopes that the new leadership will result into the improvement of the current scenario, along with maximizing customers’ value.

Stocks to Consider

Better-ranked stocks in the same industry include ARAMARK HOLDINGS CORP (ARMK Quick QuoteARMK - Free Report) , Conagra Brands, Inc. (CAG Quick QuoteCAG - Free Report) and Lamb Weston Holdings, Inc. (LW Quick QuoteLW - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ARAMARK HOLDINGS, with a long-term earnings growth rate of 12.8% increased 9.4% in the past three months.

Conagra Brands, with a long-term earnings growth rate of 8% jumped 12.6% in the past one year.
 
Lamb Weston, with a long-term earnings growth rate of 4.2% has climbed 12.2% year to date.

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