SVU: Could Be Super Value Soon

Written by GSCR Staff   
Thursday, 12 July 2012 10:33

Supermarket stocks have always been hard to digest. Investors were shocked today with news of the serious troubles at retail and wholesale food powerhouse Supervalu, Inc. (NYSE – SVU - $2.92). The list of issues is long. Sales and profitability are down, with income down 45% for the most recent quarter. All guidance is suspended, along with its dividend, capital expenses are being slashed and the Board hired Goldman Sachs and Greenhill to pursue strategic alternatives including a possible sale of the 3rd largest grocery company in the U.S.

The Company, which generates roughly $35 billion in annual sales remains profitable but is getting crushed on one side by Walmart (NYSE – WMT) and Target (NYSE – TGT) and dollar stores on the other.  Plus, its $600M in annual interest expenses due to $12 billion in total debt cripples chances for meaningful net profits.

Given the size of the company, enormity of the debt on the books and poor positioning, it is unlikely the company will be sold. However, we would not be surprised to see 1 or 2 of the chains in the SVU family be sold, which would raise funds to lower the debt on the books and possibly improve operating performance as well.  Reducing the top-line to improve margins and the balance sheet are wise moves that would be rewarded by the Street.

I would consider 3 ways to play the situation.  One is to buy it for the inevitable dead cat bounce. Two, is to play it for the bounce and sell a portion, retaining a piece in the hopes we are right and that it is just sold off way too much and the execution of chain sales will occur to boost the stock. Third, I would see what kind of options trade on the stock, and consider buying Jan 13 calls.

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