SUPERVALU Soars on Earnings Growth, Spinoff Plans


The massive restructuring at grocery chain SUPERVALU that has taken place over the past several years has transformed the way the company looks, with a much smaller base of stores that has increasingly emphasized the discount-retail side of the business. Coming into Tuesday morning's fiscal first-quarter financial report, though, SUPERVALU shareholders had mixed views of the company's future, having sent shares to their lowest levels since early 2014. Along with solid performance, though, SUPERVALU announced plans to consider breaking off its Save-A-Lot discount business into a separate company, and investors celebrated that news by pushing shares sharply higher. Let's take a closer look at SUPERVALU's quarterly results and what a spinoff would mean for Save-A-Lot and the company's grocery businesses.

SUPERVALU keeps growing -- slowly SUPERVALU's fiscal first-quarter results showed the company staying on its growth track, although the pace of its gains slowed and even came to a standstill in some respects. Overall sales rose 2.7% to $5.41 billion, which was better than the $5.39 billion that most investors had expected. Earnings from continuing operations of $0.23 per share were better than the $0.20 per share consensus forecast, with overall adjusted net income rising about 30% from year-ago figures.

The problem that SUPERVALU faces is that its growth isn't coming equally from all of its business segments. On one hand, the Save-A-Lot unit has performed reasonably well, with same-store sales growth of 0.6% networkwide and a healthier 2.8% rise in comps from corporate-owned Save-A-Lot stores. Yet stores in the retail food segment saw same-store sales decline by 0.3%, and total sales within the independent business segment rose at a tepid 1.7% pace.

SUPERVALU also saw some struggles in its cost-management efforts. Overhead expenses climbed at almost a 5% rate, outpacing sales gains and putting pressure on the company's margins. Still, improved gross margins outweighed the impact of higher overhead, and net margin climbed three tenths of a percentage point to 1.1%.

CEO Sam Duncan highlighted SUPERVALU's ability to boost earnings despite sales weakness. "We delivered sales increases across all three business segments and managed our costs very well," Duncan said, and he said that "we have plans in place" to reach toward a brighter future.

Is splitting Save-A-Lot the right move for SUPERVALU?Yet the big news from SUPERVALU came from the simultaneous announcement that it would explore separating Save-A-Lot into a stand-alone publicly traded company. As Duncan noted, "Over the last two and a half years, Save-A-Lot has repositioned its brand, refocused its efforts on fresh produce and meat, and remerchandised its stores and product offerings to better appeal to a broader group of customers." As a result, Duncan explained, SUPERVALU wants to look at ways to boost shareholder value and allow the company's component segments each to focus more sharply on their own strategic vision for the future.

SUPERVALU held back some key details about the potential move. Specifically, the company didn't list a timeframe for a spinoff, and it warned that the exploration might not lead to an actual reorganization. Still, SUPERVALU said that it had hired financial advisors and legal experts to help it work through the potential separation, and with some investors having called for such a move for quite a while, it's likely that the company will do its best to make a deal happen unless it proves completely unworkable.

SUPERVALU shareholders clearly believe that a spinoff will be positive for the ailing stock, as they bid shares up by as much as 13% in the first hour and a half of pre-market trading following the announcement. With the company having made so much progress in its restructuring efforts, SUPERVALU has to hope that a spinoff could finally lead other investors to recognize the value of its progress and assign a more reasonable valuation to the stock in the long run.

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