SUPERVALU (SVU) Has Multiple Pressures - Little Relief

RBC Capital analyst, William Kirk, published a research note highlighting the challenges SUPERVALU (NYSE: SVU) is facing both today and in the near future. Quarterly results and an evaluation of changes in business follow:

SUPERVALU reported adjusted 2Q’16 EPS of $0.13 on $4.06bn of revenue, compared to consensus estimates of $0.14 and $4.13bn. Save-A-Lot's comp store sales of -1.6% and Retail Food's comp store sales of -3.3% were below expectations.

Customer counts for both Save-A-Lot and Retail Food decreased, partially offset by increased average transaction size. Independent Business sales also came in below consensus

The company now expects to open 90 stores for FY16 which is down from 100 in the first quarter.

Deflation is pressuring same store sales growth. Pricing was -4% for 2Q vs. -2.5% in 1Q. This considerably different where pricing was up 2% and 4% in the respective quarters. Pharmacy margin compression is also expected to persist through 2H16.

Following its 2013 divestiture of ~900 stores and debt reduction of $3.2bn, SUPERVALU is in better financial and operational standing. It has increased its focus and improved identical store sales growth at Save-A-Lot and its other remaining food retail concepts (Cub Foods, Farm Fresh, Shop'n Save, Shoppers, and Hornbacher's).

However, longer term, upside is limited due to increasing private-label penetration which de-emphasizes third-party distribution and price competition from hard discounters ahead of Lidl's entry into the US.. If this occurs sooner than 2018 expectation or if competitors pre-emptively adjust pricing strategy, SUPERVALU would be impacted negatively.

The firm reiterated an Sector Perform rating and cut its price target to $9.00 (from $10.00)

For an analyst ratings summary and ratings history on SUPERVALU click here. For more ratings news on SUPERVALU click here.

Shares of SUPERVALU closed at $6.98 yesterday.

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