We initiate coverage on SUPERVALU Inc. (SVU) with a Neutral recommendation and a target price of $17.00.
Founded in 1871 and based in Eden Prairie, Minnesota, SUPERVALU is one of the leading companies in the United States grocery market. The retail operations of the company are conducted under various banners such as Albertsons, Save-A-Lot, Shaw’s Supermarkets and Jewel-Osco among others. The company operates through three retail food store formats: combination stores, food stores and limited assortment food stores. The combination stores consolidate food and pharmacy.
SUPERVALU operates through two reportable segments: retail food and supply chain services. These divisions refer to two distinct businesses; one of them is retail and the other wholesale. The two segments contributed 78% and 22%, respectively, of net sales of $44,564 million in fiscal 2009 (ended Feb 28, 2009).
SUPERVALU operated 2,421 retail stores at the end of fiscal 2009. This comprised 874 combination stores, 369 food stores, 316 limited assortment food stores and 862 licensed Save-A-Lot stores. The company closed 97 stores in fiscal 2009.
We are pleased by SUPERVALU’s efforts to develop its retail operations primarily through new store development, adding merchandise to existing stores and increasing the number of replacement food distribution centers. The company added 44 new stores through new store development in fiscal 2009.
SUPERVALU also provides supply chain services in addition to its retail food operations. The supply chain services mainly provide wholesale distribution of products to independent retailers. The company also provides third-party logistics solutions. The wide range of services offered at SUPERVALU should expand its customer base and drive growth.
However, we are concerned about the intense competition facing SUPERVALU. Competitors will always look to grab market share by offering lower prices, new and better services. Furthermore, the significant unionized labor force at SUPERVALU has inherent risks.
The operations at SUPERVALU depend greatly on information technology, which has intrinsic risks. Technological failure or obsolescence has the potential to adversely affect the company’s results.
Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market.
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