(By Mani) It is all happening at Supervalu, Inc.
). A weak first quarter results, review of strategic alternatives, including sale of the struggling grocery chain, and now the ouster of the top brass- the Chief Executive Officer.
Supervalu fired Chief Executive Craig Herkert, and named Chairman Wayne Sales as his successor to boost the execution of its turnaround strategy. Sales while at Canadian Tire Corp. (TSX:CTC), gained turnaround experience, which Supervalu clearly needs at this juncture.
However, the speed with which the company's business unraveled in the first quarter was startling, particularly after business trends appeared to be showing a bit of stability during the fourth quarter of 2011.
The market was not expecting a sharp deceleration that apparently unfolded over the mid April – mid June time frame and has likely continued into July. The company reported a 45 percent fall in its first quarter profit after posting two consecutive quarterly losses, and suspended its dividend. Quarterly identical-store sales declined 3.7 percent for overall retail food business and 3.4 percent at Save-A-Lot (SAL) – Supervalu's deep discount, limited assortment grocery format.
"We expected SAL to be much more resistant to macro or competitive weakness, given its very defensive positioning (prices 30-40% below conventional grocers) and its increasingly value-focused core low-income customer," Deutsche Bank analyst Charles Grom said in a client note.
However, SAL is not the only food retailer targeting this market, as the rapid growth of the dollar stores appears to be taking share. In addition, pricing war got fierce in the industry, and Supervalu has been losing market share to lower-priced rivals such as Kroger Co. (NYSE:KR) and Safeway Inc. (NYSE:SWY).
Moreover, the strategy of carrying more groceries by club stores like Costco Wholesale Corp. (NASDAQ:COST) and mass retailers such as Wal-Mart Stores Inc. (NYSE:WMT) hurt the prospects of Supervalu, whose pricing remains too high relative to competitors, resulting in lower customer traffic.
Meanwhile, Supervalu has been cutting costs and reducing capex for years. Specifically, the company is cutting prices across the store and ramping up marketing to communicate the improved prices.
In addition to the price investments, the company plans to accelerate cost cutting, with an incremental $250 million of administrative & operational costs savings planned over the next two years.
"Unfortunately, SVU's actions may be too little, too late. Competitors are well aware of SVU's challenges, and we expect they will respond to SVU's actions," Grom noted.
Should competitors answer with more aggressive pricing/promotions, traffic at Supervalu may be slow to pick-up and margins could take another step down.
Moreover, Wal-Mart's continued expansion in Chicago, Supervalu's largest market, could be a bad sign. Also, the company's balance sheet remains highly-leveraged, with credit ratings below investment grade, which could make it more expensive to refinance debt as it matures.
"Looking ahead, we expect SVU and margins to remain under pressure, at least for the next few quarters. Specifically, we are forecasting nonfuel ID's to be -4.0% for the remainder of the year," Grom said.
Meanwhile, the company may seek a buyer for part or all of the business. However, secular challenges facing conventional grocers, the need for additional capital investment, underfunded pensions and heavy debt load could distract buyers, thereby acting as a roadblock in unlocking significant shareholder value.