Supervalu Inc. (SVU), one of the largest grocery chains in the United States, announced that it will sell 107 of the 134 gas stations in order to free up its cash. The company’s cash has been under pressure, with revenues declining year-over-year in all of its last nine quarters.
The gas stations are mostly situated in the region between Midwest and the West Coast and include the majority of fuel centers within the Albertsons, Cub Foods, Hornbacher’s and Jewel-Osco brands.
According to reports, while Tesoro Corporation (TSO) is purchasing 52 Albertsons fuel centers, Couche-Tard/Circle K has opted for buying 27 Jewel-Osco centers. Holiday Stationstores is purchasing 15 fuel centers from Cub Foods, Hornbacher’s, and Albertsons, and Stinker is buying 14 Albertsons gas stations.
Management at SUPERVALU has revealed that it will continue to operate the 27 remaining stations and will seek suitable buyers for them. Eden Prairie-based Supervalu said it expected the deals to be finalized within the next few months.
The grocery store chain said it will use the money from the non-core assets to further strengthen its business. It also said it will continue to offer fuel rewards through those gas stations.
The company delivered higher-than-expected first quarter 2012 earnings on July 26, 2011. The quarterly earnings of 35 cents a share dipped 18.6% compared with 43 cents posted in the year-ago period. The quarterly earnings surpassed the Zacks Consensus Estimate of 33 cents.
Supervalu operates in a highly competitive market, and faces stiff competition from Wal-Mart Stores Inc. (WMT), The Kroger Co. (KR) and Safeway Inc. (SWY). Moreover, labor unions pose inherent risks for the company and potential labor related issues remain a concern.
The company’s balance sheet is highly leveraged. This high burden of debt attracts a huge amount of interest expense, which is rationalizing net earnings significantly. Debt-capitalization ratio during the first quarter was 81.5%, while interest expense was 1.4% of total revenue. However, the management is somewhat positive about $65.0 million reduction in debt and expects further reduction in the range of $500 to $550 million by this year end. Management plans to reduce the level of matured debts by amending senior credit facilities.
Currently, we prefer to rate the stock as Neutral. Further, Supervalu holds the Zacks #3 Rank, which translates into a short-term Hold rating.
