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July 12, 2012 – Comments (1) | RELATED TICKERS: SVU

SVU is getting wrecked this morning (in case you didn't notice), and possibly, rightfully so.  I'm gonna think out loud.  If you're looking for a clear, concise blog on SVU, I'd recommend venturing elsewhere.

The positives:

Management claims that they will be able to pay down another $500MM in debt this year, which would be in-line with last year's debt reduction amount.

Last year they spent $660MM in CapEx.  This year, they plan to spend $500MM.  So even in OCF has a substantial decline, they should hopefully be able to make their targeted debt payment of $500MM.

While cost savings estimates are more like guesstimates, the company thinks they can save about $250MM through 2 years.  This should also allow for the targeted debt repayment to come to fruition, even if OCF falls.

Using the $400MM in FCF from FY 2012, and this morning's equity value of $640MM, the equity is yielding +60%.  (A P/FCF of <2).

The negatives:

They cut their dividend, which was the only reason that many investors were still invested.  Same store sales continue to decline, but that's not new.  Earnings came in about 40% lower than Q1 2012, but OCF was only about 8% off the mark from the year prior.

If you tally all the cash savings planned for FY 2013, it floors me that the company is only planning to reduce debt $500MM:

$75MM in savings from the cut dividend + $125MM in savings through cost reductions + $160MM in savings from reduced CapEx should yield an additional $360MM in excess cash at year's end.  I'm not sure why they don't think they can pay down $600-800MM in debt this year.  It could be that they want to pad their cash balances, I guess.

Even if SVU averts bankruptcy this year (and next year), and their debt load is reduced from $6B to $4B over the next several years, can they eventually sustain their revenues, stabilize profits, and avert the death blow from Wal-Mart?  Or is the entire industry compromised, with KR & SWY heading toward the same situation in 5-10 years?  Is SVU just a classic value trap?

I don't own any SVU (or any other grocers), and don't plan on it right now.  But a 60% cash yield on equity is tough to ignore... 

1 Comments – Post Your Own

#1) On July 12, 2012 at 1:18 PM, jspatel (< 20) wrote:

Management also said that the dividend was safe and guided for FY13 EPS of 1.27-1.42.  I hate to say it because I believed so strongly in the company, but these guys don't know their own business or the industry (that's why they're suspending guidance) and frankly can't be trusted for any of the points above, which I noted from the conference call as well.  My $0.02.

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