Can SUPERVALU's Transformation Plan Drive Stock Further?

Moving ahead with its strategic transformation plan, SUPERVALU INC. (NYSE:SVU) unveiled a proposal (the “Holding Company Proposal”) to rearrange its corporate structure into a holding company setup. This move, which is likely to support SUPERVALU’s strategic transformation, is also aimed at enhancing long-term shareholders’ value.

SUPERVALU took this initiative to organize and make further distinctions between its wholesale and retail operations, in a planned and more efficient way. The company also plans to segregate its liabilities into the respective wholesale and retail segments. Further, the move is aimed at supporting SUPERVALU’s previously announced transformation plan to divest various retail assets to third parties.

Additionally, the Holding Company Proposal is aimed at expanding the company’s business, alongside improving its financial flexibility. Finally, through this plan, management intends to help SUPERVALU execute its strategic transformation plan in a tax efficient way. This may help the company generate cash tax gains of nearly $300 million over the next 15 years, roughly.

SUPERVALU has been working on its transformation for approximately two years now, to emerge as a wholesale supplier for U.S. grocery retailers. Incidentally, SUPERVALU’s retail segment has been an aspect of worry for a while, thanks to stiff competition and intense promotions that have been plaguing the unit’s performance. These issues have compelled the company to adhere to store closures and streamline retail operations significantly.

To this end, management recently revealed plans to sell its Shop ‘n Save and Shop ‘n Save East retail businesses. In earlier developments, SUPERVALU entered into definitive agreements with Mid-Atlantic Division of Kroger (NYSE:KR) as well as Harris Teeter and Food Lion, to sell 21 of its Farm Fresh Food & Pharmacy stores in a transaction of about $43 million. The company is expected to undertake more Farm Fresh store closures in the future. In fiscal 2016, the company sold nearly 1,350 Save-A-Lot stores.

Considering the fact that the retail segment has been falling in shambles, the company’s move to strengthen its wholesale business seems quite rational. Also, the company has been focused on undertaking efforts to generate long-term value for shareholders.

These factors have also boosted investors’ confidence in this Zacks Rank #3 (Hold) stock that has rallied 28.1% in the past three months, as against the industry’s decline of 4.75.

That said, we expect the aforementioned proposal to provide further impetus to the company’s ongoing plan, which may drive its stock further.

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