Will SUPERVALU Inc. Sink or Swim?

By Markets Fool.com

Right now, SUPERVALU investors wouldn't be out of line to question the company's odds of survival.

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The supermarket chain today is a mere shadow of its former self: its stock traded close to $50 before the recession, but now fetches only a little more than five bucks.

Over the years, Supervalu has shed thousands of stores, selling banners like Albertson's, Acme, Jewel-Osco, and Bristol Farms as it attempted to slim down and turn a profit.

Source: Supervalu

Today, Supervalu's business consists primarily of the Save-A-Lot discount store chain, as well as regional grocery chains like Cub Foods, Hornbacher's, Shop 'N Save, Shoppers, and Farm Fresh. It supplies approximately 1,900 independently owned stores through its Independent Business segment.

Let's take a closer look at Supervalu's prospects today to see whether the company will sink or swim.

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Sales are still falling
In its most recent quarter, overall sales fell 2.6%. Comparable sales were down 3.4% at Save-A-Lot, and 2.6% at its Retail Food division, which is made up of regional grocery stores like Cub Foods. Its performance through the first three quarters of the fiscal year was better, as sales were up slightly, increasing 0.3%. CEO Sam Duncan characterized the environment as a "challenging one," but the pattern of declining comps is a familiar one to investors, despite progress in the prior fiscal year. Customer traffic, however, was down 4.3% in the recent quarter -- another foreboding sign.

Supermarkets are a highly competitive environment, and rivals likeKroger that have demonstrated growth in recent years have done so by launching an affordably priced line of organic products, improving stores, and using data and technology to become more efficient and customer friendy. Supervalu relaunched its Wild Harvest organic brand a year ago, and said sales were 75% in its last quarter.

Despite the overall sales decline, the growth in the organics department is a promising sign.

Profits are stable
Third-quarter earnings per share fell slightly from $0.18 to $0.16,but the company has seen some improvements on the cost side of the equation as gross margin increased from 14.2% to 14.7% over the last nine months and operating margin increased 50 basis points to 2.6%. Following the 2013 sales of five banners, Supervalu's operating income has been consistently positive for the first time in years, and the company plans to add new Save-A-Lot stores. Analysts expect profits to be flat through the next fiscal year, which, given Supervalu's recent history, is a favorable projection.

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Staying afloat
As competition increases in the supermarket space, Supervalu's prospects may get dimmer. We've already seen fallout in the high-end organic space, withWhole Foods' slowing growth,Fairwayon the verge of bankruptcy, and the recent sale of the strugglingFresh Market.

Supervalu is unaffected by that echelon of the industry, but it is vulnerable to aggressive moves from the likes of KrogerandWal-Mart, which is expanding its grocery pick-up program and opening more small-format Neighborhood Markets, urban locations that are primarily supermarkets and likely competitors of Supervalu stores. Wal-Mart is already the country's biggest grocer, and sees grocery as one of its biggest growth opportunities.

Considering those threats and the headwinds already facing Supervalu, it's reasonable to expect that it stays afloat and generates a profit, but significant growth is unlikely. The company has had years to mount a serious turnaround and has been unable to do so as it lacks a competitive advantage. As the grocery industry evolves over the next ten years or so, it seems more likely that Supervalu will sink than swim.

The article Will SUPERVALU Inc. Sink or Swim? originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Whole Foods Market. The Motley Fool recommends Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.