SVU - SuperValu Inc.

[FCharlie]

 

 

Right, that's the turnaround.  Will it happen, that is the question.

 

 

These are very prosaic, macro-oriented observations, which if true, probably apply across the entire industry.  So the question remains: why will SVU be able to stabilize the business in the face of less leveraged competition that arguably operates more efficiently (I'm thinking of Wal-Mart, for example).

 

 

Care to share any estimate of normalized earnings?

 

 

I  think it's perfectly reasonable to expect a 1% bottom line.  On a $34 billion revenue stream you're talking $340 million, or $1.60/share.... a 30% earnings yield on today's price

 

Is a turnaround going to happen? Will SVU stabilize?  I guess it depends on what your definition of turnaround is. If you look at ID Sales:

 

Q3, 2010  (6.5%)

Q4, 2010  (6.8%)

Q1, 2011  (7.2%)

Q2, 2011  (6.4%)

Q3, 2011  (4.9%)

Q4, 2011  (5.0%)

Q1, 2012  (3.9%)

Q2, 2012  (1.8%)

Q3, 2012  (2.9%)

 

They are much improved from the 6-7% declines we were seeing not long ago. Will they turn positive? I Don't know, but at $5.30/share for the stock, I think simply having flat sales is a victory and is all that's needed for the stock to do well. Debt is down to probably $6.25 billion from $9+ billion in 2007. Perhaps one more year and debt will be in the $5.75 billion range, about the same as Safeway.

 

This is only a small position for me, but I think the market is overreacting here. The market overreacts often. The market hates declining sales more than anything with retailers. But, in the world I live in, free cash flow is all that matters. Give it a little time here, I can see sales flattening out to 0%, debt down some more, and SVU the stock performing quite well.

 

And one other thing,  What's news today that wasn't news three months ago when SVU was 40% higher?

 

[collegeinvestor]

Bmichaud: do you think that an EBIDTA multiple is the right way to value the business given the significant non-cash depletion of goodwill over the last couple of years? I disagree that this company is in total decline a la blackberry. People need to eat, and I would bet that a lot of people will never want to shop at a walmart or a target for their groceries (I find it odd-and i am guessing others do as well). Im not trying to make this a part of my thesis but people need to eat, people don't need to buy a blackberry product.

[bmichaud]

I was only using ebitda as a debt capacity metric - i.e. debt to ebitda. I hate ebitda mutiples for valuation purposes, so I hear your concern.

 

Not sure if he covered, but I believe boardmember Watsa was short the stock at some point. He may have some interesting commentary to add if he's reading this...

 

I agree SVU is not a RIMM. But it has high maintenance capex requirements, zero pricing power, very little if any moat, and is overly indebted. There is just very little cash flow that can be taken out of the business over the next five years.

 

So if we assume SVU generates $500MM of FCF to equity, that means roughly 8 years to pay down the $4B I propose. After eight years it would earn roughly $2.70 per share since it keeps its current share count. $27 no growth value discounted back 8 years at 10% is around $12.50. Two big assumptions are made here: A) the economics of SVU's business model are the same in eight years and B) they actually pay down the debt without starving the business.

 

Id say the debt would be more attractive, but it actually seems to be fairly efficiently priced at par or better. If SVU goes through BK and all debt is wiped out, that means net income is now $650MM (1000 ebit x .65), and 10 times 650 is almost debt out of around $7B. Perhaps some real estate value makes up the difference.

[ragnarisapirate]

This is the result of managements assessment of a more than temporary decline in value of the firm.  The firm puts together DCF and multiples analyses every quarter when an impairment is expected.  If the stock price stays below the book value by a significant amount over an extended period then an impairment charge is taken on goodwill and some of the intangibles.  These write downs only occur as a result of acquisitions and their related intangibles.

 

Packer

 

So for the quarter that is getting ready to be reported, I am guessing there won't be any markdowns due to the equity price falling, though, next quarter may be a different issue?

[Packer16]

It is typically tested every Q so there may be write-down for 1Q which will not reported until the Q1 earnings relaease.

 

Packer

[PlanMaestro]

Rival Chains Secretly Fund Opposition to Wal-Mart

http://online.wsj.com/article/SB10001424052748704875604575280414218878150.html

 

Supervalu's secret anti-Walmart effort OK'd by judge

http://online.wsj.com/article/SB10001424052702304177104577310043213762550.html

http://www.bizjournals.com/twincities/morning_roundup/2012/03/supervalus-secret-anti-walmart-effort.html?ana=yfcpc

[FCharlie]

If you take SVU's FY 2013 guidance, and factor in the difference between projected CapEx and projected depreciation, Looks like SVU is selling for just over 2 1/2 times forward free cash flow

 

 

EPS projections $1.27 GAAP

 

2013 CapEx $675 million

 

2013 Depreciation $875 million

 

Expensed Depreciation - CapEx = $200  million

 

Shares outstanding 213 million

 

GAAP EPS $1.27 + $200 million Depreciation per share $0.94 = $2.21/Share Free Cash Flow

 

Stock Price $5.85

 

 

2.65X FCF or 37.7% FCF Yield.

[Viking]

FCharlie, I have been getting up to speed on SVU and SWY. SVU is very cheap; if they are able to continue to generate free cash flow (and pay down debt) the stock should do very well. Today I will be reading their Q results and listening to the conf call. Safeway below $20 also looks tempting.

 

My hang up is when buying in a weak market I have done best buying best in class companies (BRK, WFC). In strong markets (like we have had the past four months) I have done best with the more speculative positions. Just rambling...

[PlanMaestro]

2.65X FCF or 37.7% FCF Yield.

 

Considering that SVU is a indebted declining business it might be worth to do the analysis on an unlevered basis.

[FCharlie]

2.65X FCF or 37.7% FCF Yield.

 

Considering that SVU is a indebted declining business it might be worth to do the analysis on an unlevered basis.

 

Is it in permanent decline? One of the issues I have with SVU is that I don't live near any of their stores. I don't know if they are nice, run down, etc...  SVU is expecting negative 1-2% sales next year, much better than the negative 5-6% sales they were reporting a couple of years ago. Is it possible sales could reach break even some time in the next year?  Is it possible the business is not in permanent decline?

 

Also,  at what point would debt be acceptable? Most grocery stores have debt. If management is correct, by this time next year, SuperValu's debt should be approaching $5.4 billion, a 40.5% reduction since the Albertson's merger.

[PlanMaestro]

Turnaround Cases: Penn Traffic  http://variantperceptions.wordpress.com/2009/11/24/turnaround-cases-penn-traffic-ptfc/

 

Is it in permanent decline? ... I don't know. I just know it is in decline in a very competitive market where turnarounds are few and far between.

Is it possible the business is not in permanent decline? ... Yes.

At what point would debt be acceptable? ...  Yes, today. Depends on the EBITDA though. The debt markets seem to think it is not too high but profitability has been declining and might decline furthermore over time

Most grocery stores have debt.  .... Yes, and that is a problem in this sector.

If management is correct, by this time next year, SuperValu's debt should be approaching $5.4 billion.... Yes, and that is $5.4 billion in debt.

 

So you see, by the number of yes we are not that far apart on the assumptions. But I do not think any of those invalidate the usefulness of an unlevered analysis and to not count on debt to make the profit for you. Oh, and also rule number 1 and number 2: it's important to know what you don't know,

[Viking]

The grocery business is not in decline like other industries like paid daily newspapers or magazines. Or the printers that print the magaazines and newspapers (i.e. RRD, QUAD). Or the newsprint companies (ABT).

 

People will continue to eat food. And during recessions (when disposable income falls) people tend to eat at home more and away from home less (not good for Sysco). The trend to private label will also continue (not good for the branded companies like KFT). Population in the US continues to grow which means underlying growth in food business will happen.

 

Food retail looks to be a great space to be in right now.

 

The real issue with food retail is the competitive set. How much share will Walmart/Target ultimately get? Will the big box retailers put averyone out of business? How much will the dollar stores take share?

 

I am thinking that this is an industry where strong management can make all the difference (I am trying to decide if SVU's chief is the real deal). I also think there is a place for well managed mid-sized regional chains. Location is king and my guess is SVU has some great retail locations (and they continue to close the dogs).

 

I think food retail is a great business. It is not disappearing like other industries. Perhaps the disruption (due to big box retailers, dollar stores etc) has largely happened and what we are seeing now is the dust settling. Perhaps SVU and SWY are the survivors we just do not know that yet. 

[Junto]

Big move last couple of days after earnings. Went through resistance at $6.50 earlier today. Nice considering it has jumped off lows last Thursday and this Monday at $5.07. Good for those of you who joined in the last week. Big move.

 

[Junto]

Time to start accumulating again...

[alertmeipp]

Time to start accumulating again...

 

Same for many other stocks. Only if I have cash.

[PlanMaestro]

Cuts dividend, capex, and forecasts. Under 4 after market.

[eclecticvalue]

Woah dropping 25% already. It makes me want to take a position or I could wait for bankruptcy and trade it in the short term.

[given2invest]

Another example where value investors don't appreciate the debt load.  FCF to equity was great, but its a levered beast. 

[ragnarisapirate]

Another example where value investors don't appreciate the debt load.  FCF to equity was great, but its a levered beast.

 

None of this is decided yet. I don't think that there are any value guys out there that were super invested in this.

 

I am bothered by the talk of competitors and economic conditions hurting results. That said, the company is still cash flowing pretty well... The new debt facility has the potential to be interesting (in a good or bad way). I am not upset holding the stock right now.

 

This is a trying time for the company, but is part of what makes investing fun... Right? Now, I am going out for a stiff drink. :)

[beerbaron]

Levered bets are what they are... levered. There is a nice discussion about EV/EBITDA in the General Section, on a PE ratio SVU is a great deal but on EV/EBITDA ratio not so much. EV should never be discarded when valuing a company.

 

BeerBaron

[bmichaud]

I hate to pull a Burke CEO and comment ad infinitum on other investors' positions that I have no position in, but since I've had the unfortunate experience of being a long and short investor in this POS, I'm going to take a stab at how I would look at it.

 

This thing is in secular decline at worst, and barely treading water at best. Competition is outrageous, margins are declining, pricing power is non-existent, thus the current total debt to EBITDA ratio of 3.6 times is unsustainable. They are in a virtuous cycle of needing to reinvest back in the business but also pay down debt. So....

 

The way I would look at is in a pro forma scenario where they have to issue equity, then from there I would estimate normalized EPS.

 

Right now total debt is 6.9b and ebitda is 1.9b. I'd say a more sustainable td/ebitda ratio is say 1.5 times. to achieve that, they'd have to reduce debt by 4.05b. If they did that via an equity issuance at $5.50 per share, that's an additional 736 million shares added to current shares of 212 million. So then "new debt" is 2.85b - let's say the "new interest rate" is 6%, that means "new interest expense" is 171 million. LTM ebit is $1 billion, so "new EBT" is $829 million (1,000 - 171). Assuming a 35% tax rate, "normalized net income" is $539 million, or $.57 per share (948 million shares out).

 

So a "no growth" valuation would perhaps be 10 times $.57 per share, or $5.70 per share. I think someone said the real estate is another $2 billion, so that's another say $2.11 per share for an all-in fair value of $8.00 per share.

 

Free cash flow available right now for debt paydown is probably around $500 million, which means it would take 8 years for them to reduce the $4 billion of debt down to 1.5 times ebitda, and that assumes ebitda does not continue to decline, a highly unlikely proposition.

 

Obviously the above analysis can be manipulated ad nauseum, but at current levels I just don't see the margin of safety at these seemingly attractive PE multiples given there is next to zero balance sheet protection.

 

IMO, a stock wouldn't be this heavily shorted if there weren't serious fundamental issues. SHLD, NTRI, RSH, TLB, SVU have all eventually succumbed to the weight of their own deteriorating business models. SHLD is quite the exception given the activism at hand in the stock.

 

As with any "deep value" play, this very well could double from here for one reason or another. I just don't see how, from here, it passes the test of would you be comfortable owning it for five years if the stock market shut down. Between reinvestment just to maintain the business, margin erosion, and debt repayment, I don't see the return over the next five years were the market to shut down. Much better opportunities out there, IMO....

 

And we're back.....

 

At $4 per share, my above-calculated fair value falls to $6.87 if SVU reduced debt by $4.05B. If the issuance price was $3, it falls to $5.77 per share. Tick-tock, tick-tock - they should have bit the bullet and issued stock at higher prices. A) I don't see who would buy such a highly indebted company and B) what good will splitting up the company do? As Munger may quip, if you split a turd in two you now have two turds....

[FCharlie]

Supervalu's interest expense as a % of operating income for Q1 was 74.1%

 

Safeway's interest expense as a % of operating income for Q1 was 37.6%

 

Kroger's interest expense as a % of operating income for Q1 was 17.3%

 

 

 

So, someone who lives in an area where Supervalu exists, please tell me if these stores actually have structural problems. Are the stores that much worse than Safeway or Kroger?

 

If the problem is a debt problem, someone could come in and buy this thing for $4 per share and strip everything, sell the parts and do well.

 

If the problem is a debt problem AND a bunch of crappy stores then I assume no one will want this thing at any price.

 

 

[PlanMaestro]

(1) Beginning this quarter, the Company is breaking out its former Retail Food reportable segment, which previously included both the traditional retail and hard discount stores, into stand-alone Retail Food and Save-A-Lot reportable segments.

 

Margins Q1 Sales Q1 D&A

Retail Food 1.5 % 6,825 235

Save-A-Lot 4.6 % 1,287 21

Independent Business 2.6 % 2,478 20

 

(2) Supervalu Inc., whose 4,400 stores include brands such as Albertsons and Jewel-Osco, said Wednesday it is considering selling all or part of the company.

 

http://online.wsj.com/article/SB10001424052702303919504577521211702141198.html

 

Save-a-lot has value and growth potential, but it is not living up to its potential under this umbrella. At 5x EBITDA might be worth more than $1.5B and substantially reduce debt and capex (but leaving behind essentially a real estate business).

 

 

 

 

 

[FCharlie]

John Heinbockel, an analyst at Guggenheim Securities, said in a research note. He estimated the company could sell Save-A-Lot for more than $2 billion, based on estimated EBITDA of $275 million.

 

Read More: http://supermarketnews.com/retail-amp-financial/supervalu-analysts-skeptical-plan#ixzz20SCi11ij

 

 

When you get an analyst that says $275 million of EBITDA is worth $2 billion, how do you get a company like Safeway with $900 million free cash flow worth $3.7 billion?

 

At the end of the day, value and market price can be way off. Safeway has produced over $3.7 billion of free cash flow over the past four years yet today the market says it's worth $3.7 billion and not a penny more.

 

 

 

[biaggio]

FCharlie,

 

I think this is where you have to look at EV. EBITDA/EV or better yet FCF/EV=$900/$7.1B (still seems pretty good valuation).

 

$275 million of EBITDA is worth $2B (would this be EV or market cap....I think EV makes sense to me)

 

I agree re value + market price.