|Written by GSCR Staff|
|Thursday, 12 July 2012 09:33|
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.
This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports.
It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.
This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com