SUPERVALU (SVU) Q1 Earnings And Sales Miss; Decline Y/Y

Shares of SUPERVALU Inc. (NYSE:SVU) plunged almost 12.50% on Jul 27 after the company posted weaker-than-expected results in the first quarter of fiscal 2017.

Earnings per share of 19 cents missed the Zacks Consensus Estimate of 21 cents by 9.52%. The bottom line also decreased 17.4% year over year from 23 cents due to lower revenues and lower margins. Fiscal first-quarter adjusted earnings exclude $6 million of after-tax charges and costs related to debt refinancing, store closures and impairments, as well as the potential separation of Save-A-Lot and employee severance.

Revenues and Margins

SUPERVALU’s total sales, slipped 3.9% year over year to $5.20 billion due to negative same store sales in all divisions. Sales also missed the Zacks Consensus Estimate of $5.29 billion by 1.7%.

Gross profit declined 3.8% year over year to $779 million owing to higher costs of production. Gross margin remained flat at 15%.

Adjusted operating earnings declined 9.75% to $222 million, while adjusted operating margin contracted 60 basis points (bps) to 2.9% due to higher selling, general and administrative expenses.

Segment Details

Net sales at Retail Food, excluding $1.43 billion in net sales from the additional week in fiscal 2015, slipped 2.9% to $1.11 billion. Negative identical store sales of 4.5% led to the deterioration. Retail food store sales continued to be affected by the decline in pharmacy sales due to generic drug cost inflation. Customer accounts fell 4.1% and basket size declined 40 bps. Adjusted operating margin contracted 160 bps to 0.6% because of higher employee-related costs.

Net sales at the Save-A-Lot stores grew 1.7% year over year to $1.43 billion on increased sales from new corporate and licensed stores. Higher sales were partly offset by negative same-store sales of 1.4%. Same-store sales for corporate stores within the Save-A-Lot network were negative 1% due to an average basket decline of 170 bps, which more than offset 70 bps increase in customer accounts.

Net sales at the Wholesale business fell 7.6% year over year to $2.28 billion, primarily due to lower sales to existing customers and closed stores. The downside was partially offset by increased sales to new customers and the opening of new stores. The Independent business’ adjusted operating margin declined 30 bps to 2.8% of sales.

Corporate

During the fiscal first quarter, fees earned under the TSAs were $58 million as against $64 million last year. Adjusted operating earnings totaled $23 million compared with break-even results last year. The improvement in net corporate operating earnings was primarily driven by lower employee-related costs and lesser pension expenses.

SUPERVALU INC Price, Consensus and EPS Surprise

SUPERVALU INC Price, Consensus and EPS Surprise | SUPERVALU INC Quote

Other Financial Update

SUPERVALU’s cash and cash equivalents totaled $59 million as of Jun 18, 2016 compared with $57 million as of Feb 27, 2016. Outstanding debt decreased by $40 million during the quarter. Long-term debt was $2.26 billion as of Jun 18, 2016 as against $2.19 billion as of Feb 27, 2016.

Strategic Investments

On Jul 6, 2016, SUPERVALU inked a long-term supply agreement with Indianapolis, IN-based grocery wholesaler, Marsh Supermarkets. Under the agreement, which is scheduled to be completed by the end of September, SUPERVALU will provide certain professional services to the grocery chain.

Further, the company is geared to expand its wholesale business with the buyout of 22 Food Lion grocery stores in northern West Virginia, western Maryland, south central Pennsylvania and northwestern Virginia. The takeover is subject to customary closing conditions and is expected to be completed by end of 2016.

SUPERVALU carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the consumer staples sector include Omega Protein Corporation (NYSE:OME) , Treehouse Foods Inc. (NYSE:THS) and The J.m Smucker Company (NYSE:SJM) . All of these stocks sport a Zacks Rank #1 (Strong Buy).