ElCid16 (93.29)

SVU

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...