Why SUPERVALU Inc. Stock Jumped 15% Last Month

What happened

Shares of SUPERVALU Inc. (NYSE: SVU) were moving higher last month after the supermarket operator and supplier yielded to activist pressure and agreed to sell and lease back eight distribution centers in order to lower costs and improve its cash position. The stock surged on the news and finished the month up 15%, according to data from S&P Global Market Intelligence.

As you can see from the chart below, SUPERVALU shares were actually down before the news came out, but jumped on April 25 following the announcement.

SVU data by YCharts

So what

SUPERVALU stock gained 11.6% on April 25 after the company said it would sell off eight distribution centers and continued rising from there. The company also reported fourth-quarter earnings on the same day, but investor focus seemed to be on the sale/leaseback arrangement. SUPERVALU said it sold the properties for $483 million, and it expected to gain $445 million in net proceeds after taxes and closing costs.

The company said the proceeds would be used primarily to pay off debt as it had more than $1.7 billion in long-term debt as of February, and last year the company paid $132 million in interest expense, which compares to $45 million in total net income. In other words, cutting interest expense could lead to a jump in profits.

As for the earnings report itself, revenue in the period increased 42% to $3.59 billion due to the acquisitions of Unified Grocers and Associated Grocers of Florida as the company pivots from retail to wholesale. Retail comparable sales increased 0.1%, showing improvements in that side of the business, and SUPERVALU posted earnings per share from continuing operations of $0.86, beating estimates at $0.79.

Now what

In that report, SUPERVALU also said it was pursuing the sale of Shop 'n Save and Shop 'n Save East retail operations as the company seeks to optimize its retail business and monetize its real estate portfolio. In May, the company said it completed the sale of 21 of its Farm Fresh stores, which it had previously announced were for sale.

For fiscal 2019, which started at the end of February, the company sees total revenue of $15.5 billion to $15.7 billion and comparable sales to be flat to slightly positive. It also said it expects net income from continuing operations of $55 million to $73 million, above $45 million last year.

SUPERVALU's strategy of pivoting to the wholesale business appears to be paying off. Though investors still seem skeptical, the stock should rise as the company pays down debt and increases earnings.

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Jeremy Bowman 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.