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TMFDeej (99.47)

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December 17, 2010 – Comments (7) | RELATED TICKERS: SVU

I have seen a ton of interesting articles about investing in distressed supermarkets lately.  To give you an idea of how distressed some of the companies in this sector are, one doesn't have to look any further than The Great Atlantic and Pacific Tea Company, which filed for bankruptcy earlier this week. Anyone who is looking to procrastinate should look up the history of A&P. It's absolutely amazing how huge this company once was. In the 1930s the company had more than 16,000 stores nationwide. Compare that to the 395 that it has today. Wow. 

Anyhow, a number of intelligent value investors have been poking around this segment lately. Below I will post links to a couple of interesting articles on investing in supermarkets, specifically in this case SuperValu (SVU).

 

I'm not comfortable enough with this idea to invest real money in it yet, but I am long SVU in CAPS.  The authors make some good points.

The losses that SVU has been reporting are actually from goodwill writedowns from past acquisitions and that the company actually generates a ton of cash. 

Of course, it has a ton of debt as well...$7.1 billion versus a market cap of $1.8 billion. In 2009 SVU hired a solid new CEO, a former top Wal-Mart exec, who has been using this strong cash flow to pay down the company's debt. He has paid off more than a billion dollars in debt in the past three quarters alone. The more debt he pays off, the more SVU is worth in both a dollar for dollar sense and in the sense that it is a less risky investment that theoretically would be provided with a higher multiple.

SuperValu: Leveraged Buy-Out For Retail Investors

SuperValu May Soon Have Its Day 

Deej 

7 Comments – Post Your Own

#1) On December 17, 2010 at 10:23 AM, JakilaTheHun (99.93) wrote:

I've debated myself on SVU for quite a while.

Net tangible assets are very, very negative (since a huge chunk of their total assets is nothing more than goodwill.)  Cash flows are good, but the heavy debt load has to be factored in.  I'm not so sure it's greatly undervalued --- however, if people ignore the debt load and price solely based on future earnings, it could jump quite a bit. 

I'm only familiar with Shoppers, but my views on it as a grocery store are mixed.  In the DC area, I'd favor Trader Joe's, Wegmans, and Harris Teeter over Shoppers, but Shoppers isn't bad.  They have good deals on fruit sometimes.  They've made some recent improvements.  Not sure that it's enough to make them stand out to me, though. 

So ... I continue to be on the fence.  I think it would have to get even cheaper for me to consider it. Right now, I believe it is slightly undervalued based solely on cash flows, but the risks associated with the debt load and with the grocery industry in general push me away from buying in without a more attractive risk premium.

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#2) On December 17, 2010 at 3:47 PM, vriguy (80.65) wrote:

I've no specific opinion on SVU but profit margins in the grocery store business tend to be razor thin, and moats non-existent. 

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#3) On December 17, 2010 at 4:41 PM, rd80 (99.11) wrote:

I've got Ruddick (RDK), Harris Teeter's parent, on a watchlist. 

The valuation is reasonable and balance sheet isn't levered to the hilt.  It's the kind of stock that I might want to own in real life, but tough to make CAPS points with it unless we roll into a bear market.

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#4) On December 17, 2010 at 4:47 PM, lemoneater (87.47) wrote:

I prefer foreign grocery stores because I think some of them have more growth ahead and less competition than many US chains.

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#5) On December 17, 2010 at 4:53 PM, lemoneater (87.47) wrote:

I have Tesco TSCDY.PK for a chain in the UK. and BSI (Alon Holdings used to be Blue Square Israel) for a chain in Israel. Both are more than just grocery stores and provide other in- demand services.

Tesco sells pet insurance. The Brits love their moggys very much.

BSI also has some energy holdings in oil. I only have a small position because it is a volatile under $10 stock.

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#6) On December 17, 2010 at 5:30 PM, dbjella (< 20) wrote:

SVU scares me.  Below is my opinion why:

Price
In my neighborhood, I have an SVU grocery store, Walmart and Target and another grocery store within 5 miles of each other.  For low prices, Walmart is first, Target and a distant 3rd is SVU and this other grocier.  I guess $75 at Walmart is at least $100 at SVU for similar items.

Customers
In my neighborhood there is pretty broad range of income groups.  The upper middle income and high income shop at Target. Middle to lower income shop at Walmart.  When I go to the SVU grocier I see more older people and very few young people.

Selection
Walmart and Target have limited grocery items, but I can get other items that I can't at SVU.  SVU is a grocery bonanza, but I don't make elaborate dishes, so I don't need the selection.

Appearance
Walmart and Targat change the layout and store appearance fairly often.  Sometimes to my chagrin.  New sign designs appear frequently.  The SVU store has looked the same for 10 years or more.

Speed
I can get in and out of Walmart and Target much faster than SVU.  When I shopped at SVU I can't tell you how many times items had to be looked up which slowed my checkout.

Frankly, I have no idea how SVU will make it.  I stopped shopping there regularly about 20 years ago.  I go to SVU only when I need a specialty item.

 

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#7) On December 17, 2010 at 5:38 PM, goalie37 (96.99) wrote:

"Of course, it has a ton of debt as well...$7.1 billion versus a market cap of $1.8 billion."

 

Even if they are paying off debt, that is way, way too much.  I would prefer to wait for them to fix this.

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