Summary
- The company is expected to report solid sales in the future due to its strategic initiatives.
- The company's Save-A-Lot segment has performed well and is expected to continue promising growth.
- A new Transition Service Agreement will continue to be a source of higher bulk revenues in the future.
- SUPERVALU is slightly undervalued based on my price target.
SUPERVALU Inc. (NYSE:SVU) is one of the largest grocery wholesalers and retailers in the U.S. with almost 3,360 stores. The company has four business segments, namely independent, corporate, food retail and wholesale. I am bullish on the company due to its various initiatives, including seasonal promotions, expansion of private label, redesigning of stores and innovative placement of its products. The food retail segment under the banner of Save-A-Lot continues to remain a growth driver for the company. Furthermore, I believe the company is slightly undervalued, based on my price target of $9.84 per share.
Strategic Initiatives
The company has recently taken many initiatives, of which brand restructuring was an integral one. The restructuring refers to growth in private labels rather than national brands. The main reason behind this initiative is to improve margins, as these brands are cost efficient in comparison to national brands. It also helps reduce the reliance on national brands. Additionally, private labels earn brand recognition for the company, due to the company's logo. Lastly, SVU has recently launched its organic product brand, Wild Harvest, by adding 160 items to its product portfolio. The company is planning to add 500 new items by the end of this year. Thus the planned expansion in the product portfolio will boost the penetration of private labels in its product mix and improve the company's margin.
Another important step taken by the company is that it is remodeling and redesigning stores in accordance with customer demographics, such as social class, family size, taste, buying behavior, and more importantly, their income level. This will help the company better target the needs of its customers, and hence increase revenues. Furthermore, the company is constantly innovating its designs and product placements, for example, it recently introduced front-ended wired racks to display fast moving products. This will help generate incremental revenues for the company.
Looking ahead, SVU is shifting its business strategy to benefit from seasonal opportunities, especially in the food segment and consumer goods. A good example of this is the convergence to fresh food offerings like meat cuts, rather than packaged food. This will give SVU the chance to earn revenue from customers who prefer fresh food intake, rather than packaged food, which have a lot of preservatives. The other top-line offering includes the back-to-school offers at discounted prices, including school uniforms, paper items and stationary items, which are in the top list of the company's promotional focus. This will appeal to the mid- to low-income group of parents with school-age children. These seasonal investments are attractive because they reduce the company's dependence on the holiday season, and give attractive offers to customers throughout the year.
Save-A-Lot
Save-A-Lot is an important business segment for the company, with 1,333 stores, out of which 911 stores are licensed to retailers and 195 are traditional grocery stores, which serve consumers directly. SVU has heavily invested to control the production cost in order to reduce its product prices, which will make its product and service offerings cost-efficient for customers. Additionally, SVU has smartly sized its stores at 15,000 to 20,000 square feet. It also improved space adjustments within the stores, unlike traditional supermarkets that normally consist of 50,000- to 70,000-square-foot areas. Both these initiatives will help the company create an element of convenience for shoppers to visit the whole store in relatively less time.
Save-A-Lot is building on licensing arrangements with various retailers dispersed in the U.S. These arrangements are the source of licensing fees for Save-A-Lot. In addition to this, Save-A-Lot is generating revenue by supplying products and differentiated services to licensees like site locations for the stores, which is considered to be a more appealing and appreciated service by retailers. The improved services brought up the licensees' confidence in Save-A-Lot, evident from last quarter's reported Licensees ID purchases of positive 5.8% i.e. 60 basis points improvement from the second quarter; these are expected to fuel further growth for the company.
Furthermore, Save-A-Lot is striving hard to improve its "modular general merchandise program," which facilitates in bringing seasonal variations to stores and assortments adjustments to different sizes for the sake of better space utilization in stores. Currently, initiatives are taken at a very small scale, but due to the potential growth opportunity, the management is keen on expanding this program. Additionally, Save-A-Lot is expected to grow further through the planned store expansion of about 65 stores in FY2015. The company has not given any specific guidance for next year, but it plans to open new stores this year. This will facilitate customers with more access to stores in nearby locations.
Transition Service Agreement
During December, SVU announced a new transition service agreement, or TSA, with Haggen. This agreement refers to exclusive supplies by SVU to 64 Haggen stores, and it will also offer transition services to all of Haggen's 164 stores. Furthermore, Haggen will also acquire 146 stores, which will be divested after the Albertsons-Safeway merger will be completed. This provides an opportunity for SVU to add more stores in the Northwest region, which will result in more bulk revenue for the company. With this new opportunity, the termination of transition service agreements with two Albertson companies by the end of September 16 will not be of any material concern to the company.
Valuation
As per my analysis, the price target for SVU is $9.84 per share. In order to get this target price, I averaged out the price targets of $10.08 and $9.60, calculated through P/E and EV/EVBTIDA multiples respectively. Currently, SVU's share is trading at $9.70, which shows that the company is slightly undervalued. The information regarding total debt value and outstanding shares is taken from Yahoo Finance.
Price-Earnings Multiple
I have used a forward P/E of 14.0x and an estimated EPS of $0.72 for next year. This translates into a price target of $10.08 per share.
EV/EBIDTA Multiple
Using this method, I have reached the price target of $8.76 per share. In order to calculate the price target, I have used the EV/EBITDA of 6.99 x and my forecasted EBITDA value of $815 million for next year. The total business value comes out to be $5,697million, and after deducting total debt of $3,220 million, the equity value comes to be $2,477 million. Considering the outstanding shares of 258 million, a price target of $9.60 is calculated.
Final Words
The company is expected to report solid sales in future due to its strategic initiatives. Similarly, the Save-a Lot segment has performed well and is expected to continue its promising growth, through initiatives like the modular general merchandise program. Moreover, the new TSA agreement will continue to be a source of higher bulk revenues in future.
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