Why SuperValu Inc. Stock Dropped 20% in August

Markets Motley Fool

What happened

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Shares of SuperValu (NYSE: SVU) shed 20% last month, according to data provided by S&P Global Market Intelligence.

The slump added to significant losses for many long-term shareholders, as the grocery retailer and wholesaler has declined nearly 40% since the start of 2017.

So what

August's slump had more to do with increasing pessimism in the broader industry than with SuperValu's latest operating trends. After all, the company posted surprisingly strong sales gains at the end of July as its wholesale segment outperformed expectations.

Growth in that division completely offset weakness in the retailing segment. SuperValu's retailing shops posted a brutal 5% decline in comparable-store sales and generated a loss in the most recent quarter.

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Now what

CEO Mark Gross and his executive team aim to continue bulking up their wholesale segment as the retail side of the industry stagnates under price-based competition. The latest business trends, along with the recent acquisition of Unified Grocers, suggest SuperValu has a good shot at achieving that goal.

Investors aren't bracing for booming growth, given that most industry participants are struggling with declining comps as well. In any case, SuperValu appears likely to lose earning power over time since the wholesale segment carries far lower profitability. Gross profit last quarter fell to 13.8% of sales from 14.6% a year ago, and that trend should continue as the sales mix shifts away from retailing and toward the wholesale segment.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.