SVU - SuperValu Inc.

[ragnarisapirate]

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.

 

BUT SAFEWAY HAS A PENSION PROBLEM!!!!!!!! Oh, wait, so does SVU.

 

In jest.

[Viking]

I just listened to the SVU conference call and I now better understand why the stock sold off 50%. Despite all the work done over the past year, in its most recent quarter SVU posted terrible results. And their hope for the future (Save A Lot) posted -3.7% comps.

 

What to do? It appears they are going 'all in'. The question of the day was the analyst who asked what happens if volume does not increase after prices are dropped? Perhaps competitors will simply match the price reductions...

 

In the near term, dropping prices results in an immediate hit to margins as volume does not respond quickly enough. The expectation is over time volume will increase. If volume does not improve fast enough over the medium term then profitability falls even faster and the death spiral accelerates.

 

Hard to see how SVU survives. I am trying to decide if SWY's business model is viable (i.e. are its margins and free cash flow sustainable looking into the future). KR remains my favourite long term pick of the three, although SWY is looking pretty attractive trading under $16.

 

SVU kind of reminds me of RIM... turnarounds sure are difficult to figure out...

[jrallen81]

Admittedly I haven't looked closely at this. But while they haven't make much progress on debt, it looks stable over the past couple few years. I understand things are incrementally worse, but it doesn't look like a BK situation, and might be priced as such? No position.

 

 

[negative alpha]

Saw this WSJ article and noticed a grocer I didn't recognize, A&P, in the infographic.

 

http://online.wsj.com/article/SB10001424052702304373804577522912244866078.html?mod=WSJ_qtoverview_wsjlatest

 

Looks like they went into bankruptcy in 2010.

 

http://blogs.wsj.com/deals/2010/12/13/everything-you-need-to-know-about-the-ap-bankruptcy/

 

Any one have any additional color on A&P? Are there any lessons that can be applied to SVU?

[rmitz]

Saw this WSJ article and noticed a grocer I didn't recognize, A&P, in the infographic.

 

http://online.wsj.com/article/SB10001424052702304373804577522912244866078.html?mod=WSJ_qtoverview_wsjlatest

 

Looks like they went into bankruptcy in 2010.

 

http://blogs.wsj.com/deals/2010/12/13/everything-you-need-to-know-about-the-ap-bankruptcy/

 

Any one have any additional color on A&P? Are there any lessons that can be applied to SVU?

 

A&P was one of *the* granddaddies of supermarkets in the US.  From my recollection, they were slow to innovate and figure out what more their customers wanted, they were slower to optimize their supply chain, and generally they were resistant to change, and then they were toast...after decades of decline.

 

http://en.wikipedia.org/wiki/The_Great_Atlantic_%26_Pacific_Tea_Company

[ragnarisapirate]

This is very interesting... I have long said that this thing would likely go to zero or do very well; the new developments make me think that more than ever.

 

http://www.bloomberg.com/news/2012-07-16/supervalu-loans-cost-bondholders-471-million-corporate-finance.html?cmpid=yhoo

 

Supervalu is arranging $2.5 billion in loans that allows the company to get rid of covenants in its prior credit agreement that restricted the amount of debt it can have relative to earnings before interest, taxes, depreciation and amortization.

At the same time, the grocery chain plans to accelerate price reductions and cut costs by an additional $250 million over the next two years as part of its strategic review, according to a July 11 statement.

“It’s a risky maneuver because usually when you mark down prices competition will follow,” Mui said.

Michael Siemienas, a spokesman for Supervalu, declined to comment beyond what was included in the statement.

Supervalu’s $1 billion of 8 percent notes due May 2016 fell 16.4 cents in the two days ended July 13 to 85.13 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield rose to 13.1 percent, the highest since the debt was issued in 2009.

[FCharlie]

So, what's stopping SuperValu from using it's new credit line to repurchase it's 2016 bonds at 85 cents on the dollar?

 

I remember 2009 very clearly when Domino's Pizza was a $6 stock with debt at 55 cents on the dollar. They had a $350 million market cap and $1.7 Billion of debt. The company, profitable and free cash flow positive, did nothing but repurchase debt quarter after quarter for over a year, booking enormous gains in the process.  What stops SuperValu from doing the same? They are, after all, still profitable, very much free cash flow positive, and even though sales are in decline and have been in decline, it's not an industry that is collapsing. People have to eat, people need groceries. Not everyone is loading up the cart at the Dollar Tree.

 

I'm tempted by this one. I own lots of Safeway, a little Kroger, but at $2.40, this is tempting.

 

Possible outcomes?

 

1) The food distribution business is kept, Albertson's is sold, Save A Lot is sold. Debt is gone. The distribution business is now selling for only about three times earnings.

 

2) The distribution business is spun off, leaving the Albertson's and traditional grocery to die under the weight of all it's debt. The distribution business is worth more than $2.40/share

 

3)  Save A Lot is sold for $2 billion. Debt is repaid and Albertson's and distribution remain profitable with less interest expense.

 

4) SuperValu uses it's new credit line to repurchase $1 billion of debt at 85 cents on the dollar. The $150 million gain is equal to 75 cents per share. The interest expense saved allows SVU to be more profitable. They do this in addition to using $500 million of free cash flow to repay debt and a year from now they have 10-15% less debt.

 

5) They muddle along, barely alive, a year from now the stock is unchanged.

 

6) They go under. Chapter 11

 

7)  ??

[FCharlie]

This is from Domino's Pizza's 10Q  in the beginning of 2009.

 

5. Debt Repurchases

 

During the first quarter of 2009, the Company repurchased and retired approximately $43.3 million of principal of its outstanding 5.261% Fixed Rate Series 2007-1 Senior Notes, Class A-2 (Class A-2 Notes) for a total purchase price of approximately $22.3 million, resulting in a pre-tax gain of approximately $21.2 million. This pre-tax gain was recorded in Other in the Company’s consolidated income statement. In connection with the aforementioned transaction, the Company wrote-off approximately $0.6 million of pre-tax deferred financing fees during the first quarter of 2009, which was recorded in interest expense in the Company’s consolidated income statement.

 

Subsequent to the first quarter of 2009, the Company repurchased and retired $25.0 million of additional principal of its outstanding Class A-2 Notes for a total purchase price of approximately $12.3 million, resulting in a pre-tax gain of approximately $12.9 million. The pre-tax gain will be recorded in the second quarter of 2009 as Other in the Company’s consolidated income statement. The Company has classified the $25.0 million of outstanding Class A-2 Notes as a current liability in the consolidated balance sheet as of March 22, 2009.

 

 

This went on all year during 2009. Could SuperValu do this as well?

 

If so, then the next question is, and I don't know because I don't live near any SVU stores, but Is SuperValu, Albertsons, Jewel, etc... Are these stores permanently flawed? Are they in bad locations? Are they in dire need of remodeling? Are they unable to compete? What's wrong with SuperValu as a business that's not wrong with Kroger and Safeway? Why are Kroger and Safeway able to have flat and positive sales and Supervalu can't do it? Anyone living in the area? Anyone shop SVU?

[tooskinneejs]

In the Washington, DC area we have one of the Supervalue banners, Shoppers Food Warehouse.  Shoppers Food Warehouse used to be a place with really good prices but no frills at all.  You used to have to bag your own groceries (and maybe even pay for bags?).  It wasn't a nice place to shop, but if you wanted to save money you might go there.  At some point, Supervalu bought Shoppers Food Warehouse.  The stores are somewhat nicer than they used to be, but the perception of the chain by consumers is still that it isn't all that nice of a place to shop.  Where the Shoppers Food Warehouse story gets interesting is that the one thing that used to draw in customers - really low prices - don't really exist there anymore.  Their prices are the same and often higher than many of the other grocery stores in the area.  So who wants to pay full price to shop in a somewhat lousy grocery store?  (And wait in long check out lines to do so?)  I also perceive the stores to be understaffed, as there usually aren't workers on the floor to help people find products.

 

As an FYI, the other stores in the DC area include:

 

Giant (home grown chain (now part of Stop n Shop), been around forever, fairly good prices, pretty decent stores)

Safeway (very high prices, often confusing shelf labeling of prices, disorganized stores, not the best customer service, lots of expired food, rarely more than a register or two open)

Harris Teeter (entered the scene in the last decade or so, high prices, good customer service, has a vibe that attracts lots of shoppers despite the high prices)

Wegman's (high prices, good service, and a crazy, cult like following that I just don't understand)

Trader Joe's (very very good prices and service, although selection is more limited than traditional grocers.  deservedly attracts lots of customers in our area)

Whole Foods (expensive, organic food that makes people feel better about themselves.  don't know how people afford to shop there on a regular basis, but they do.  it's always busy in the DC area)

 

Then you've got the non-traditional grocery retailers such as Target, Wal-Mart and Costco, which all do tons of business in this area.

 

The problem for the old line grocers is they have high people costs and are increasingly turning to lower prices as the way to solve their problems.  What they really need to do is stop paying union wages and benefits and get some new blood in the stores that don't have nasty union-caused attitudes.  If they did that, they'd actually be able to lower their prices and still turn a profit.  But the union wages are like a weight hanging around their necks.  They keep swimming but it gets harder and harder to tread water with that weight weighing you down.

[17thstcapital]

So, what's stopping SuperValu from using it's new credit line to repurchase it's 2016 bonds at 85 cents on the dollar?

 

The bank debt credit agreements wouldn't allow for this - can't take out unsecured debt with collateral pledged to lenders, especially in stressed/distressed situations.  I don't know the Dominos story but my guess is that they were investment grade and so probably weren't restricted to buy debt at a discount using cash on the balance sheet.

[Viking]

KR began its metamorphosis 7 or 8 years ago. A strategy was put in place to enable them to compete with the best (Walmart, Costco etc). Each year they have been improving on the plan. Most importantly, much of the profit improvements were reinvested in the business. They manage the business for the long term. The result is KR today is one of the sharks. Of interest, the company is hinting that beginning in 2013 they may re-invest a little less in the business which will enable profit margins to start to finally expand; if this happens, the stock will appreciate nicely as the market will give it a much higher multiple. The one knock on Kroger has been its shrinking GM so I will be watching this closely.

 

SWY looks to have a decent business model. However, where I live (BC) they have a hi/low strategy so I rarely shop at SWY (except to buy the stuff they are giving away). Most of the stores have been recently renovated and are in good shape and they have very good locations as they have been around for a very long time. They are definitely not a shark. Same store sales are declining. As weaker competitors get taken out I expect SWY will see their business start to deteriorate at a quicker rate. They are doing OK right now because there are many weaker players out there. At some point in the future the sharks will be taking bigger bites out of its business. My problem with investing in SWY is I have little confidence that their business model is sustainable long term and things could get ugly fast. And management does not seem to understand that its business model needs to be revamped; they should be doing what KR has been doing... re-investing part of profitability to make pricing more competitive. Instead management has increasing debt and using free cash flow to buy back stock; both decisions were short sighted and look terrible in hindsight. SWY is clearly not managing their business for the long run; they look very short term focussed.

 

SVU started trying to get more competitive one year ago. It took KR seven years and KR's business was much simpler. My guess is SVU will not make it; they have too much to fix and not enough time or money to fix it with. They are at (or near) the bottom of the food chain. Everyone is feasting on their carcass right now. Walmart, Target, Costco, Kroger and the well run regional chains. As SVU drops their price in select banners competitors will simply follow. SVU earnings will be falling dramatically. SVU looks headed to bankruptcy to me.

 

What surprises me with KR, SWY & SVU is given the large differences in their competitive position and long term prospects how similar the valuations are today (EV/EBITDA).

[FCharlie]

 

SVU started trying to get more competitive one year ago. It took KR seven years and KR's business was much simpler. My guess is SVU will not make it; they have too much to fix and not enough time or money to fix it with. They are at (or near) the bottom of the food chain. Everyone is feasting on their carcass right now. Walmart, Target, Costco, Kroger and the well run regional chains. As SVU drops their price in select banners competitors will simply follow. SVU earnings will be falling dramatically. SVU looks headed to bankruptcy to me.

 

What surprises me with KR, SWY & SVU is given the large differences in their competitive position and long term prospects how similar the valuations are today (EV/EBITDA).

 

 

I have been thinking Rite Aid wouldn't make it for years now. They still survive. Supervalu is cash flow positive, profitable, loaded with a new credit line, and loaded with assets that can be sold.... and yes, loaded with debt.

 

Look at the list of assets that could be sold:

 

Acme          117 stores

Albertson's    453 stores

Cub              46 stores

Farm Fresh  43 stores 

Hornbashers    6 stores

Jewel-Osco      182 stores

Lucky                4 stores

Save-A-Lot        1,280 stores

Shaws              169 stores

Shop and Save    42 stores

Shoppers            56 stores

 

Distribution business with operating income of $240 million annually

 

With a $2.40 stock price they will no doubt sell off parts of this company. How much debt can they repay with the proceeds? Will they survive? I'm going to guess that yes, they survive in some form or another. I'm also going to guess that whatever form they end up with will be worth more than $2.40 per share.

[Viking]

FCharlie, you may well be right. I do like the CEO at SVU; they look to be taking the hard decisions to be in business in 10 years. Too many moving pieces for me.

 

As you can probably tell from my comments I am not looking for the more speculative plays. This is not to say there is not money to be made by owning SVU; just not something that fits what I am looking for at the present time. Best of luck should you decide to buy!  :)

[ragnarisapirate]

(i) Article Fourth, Section 1 was amended to change the par value of the Company's common stock from $1.00 per share to $0.01 per share.

 

 

I am going through this in my head, and am trying to figure out why they would do this.

 

thoughts?

[A_Hamilton]

(i) Article Fourth, Section 1 was amended to change the par value of the Company's common stock from $1.00 per share to $0.01 per share.

 

 

I am going through this in my head, and am trying to figure out why they would do this.

 

thoughts?

You can't issue shares below par value. So, assumedly someone is concerned that this could become an issue. Otherwise par value is completely irrelevant.

[Kraven]

(i) Article Fourth, Section 1 was amended to change the par value of the Company's common stock from $1.00 per share to $0.01 per share.

 

 

I am going through this in my head, and am trying to figure out why they would do this.

 

thoughts?

You can't issue shares below par value. So, assumedly someone is concerned that this could become an issue. Otherwise par value is completely irrelevant.

 

It's not completely irrelevant.  It's been a long time, but I believe some states allow stock to be issued without any par value.  Some states require there be a par value.  I don't recall the details but I believe it can have certain esoteric tax implications, like franchise taxes, transfer taxes, etc.  So SVU changing their par value could have some financial implications somewhere along the way, but there is nothing sinister to it.

[17thstcapital]

Any intel on the sharp move down today?

[beerbaron]

I just noticed SVU has hit a market value of about 1 times FCF, I did not follow this company for a while but it's a highly levered bet. Some people on this board must either be mad or backing up the truck...

 

BerBaron

[Guest hellsten]

Does anyone here have an opinion on Wayne Sales, the new CEO?

 

On the surface he seems very competent and in my mind he seems like someone who is capable of turning the company around:

At Canadian Tire, Sales led the development and implementation of the first enterprise strategic plan, which included the creation of transformational strategies for Canadian Tire Retail, Canadian Tire Financial Services, Canadian Tire Petroleum and Parts Source, and the acquisition of Mark’s Work Warehouse. Sales also leveraged Canadian Tire’s unique value proposition to reposition the corporation in the face of entry of key U.S. competitors. These strategies revitalized Canadian Tire and led to retail sales increases of nearly $3 billion and annual share price appreciation of nearly 19 percent. Sales’ accomplishments earned him several industry awards, including Distinguished Retailer of the Year in 2004 by the Retail Council of Canada and CEO of the Year by Canadian Business Magazine in 2005. In 2009, Sales was also inducted into the Canadian Marketing Hall of Legends.

http://www.supervaluinvestors.com/phoenix.zhtml?c=93272&p=irol-newsArticle&ID=1719861&highlight:

 

Canadian Tire's stock started it's long decline after Sales stepped down as CEO:

 

According to Canadian news reports, Sales, 62, is known for his gregarious personality. He would wander off during store tours to chat up customers and examine inventory. He’s obsessed with details, too. Apparently he could reel off stats on shelf-widths in particular stores. Sales is an avid fisherman who got his start in the retailing world unloading trucks and stocking shelves at Kmart in his hometown of Lynchburg, according to The Globe and Mail.

 

He stepped down at Canadian Tire in April 2006, opting not to renew his contract.

http://blogs.marketwatch.com/thetell/2012/07/30/what-supervalus-new-ceo-did-in-canada/

 

Interestingly, Bill Ackman thought management was good even after Sales left:

It was around that time hedge fund manager Bill Ackman of Pershing Square Management bought a stake in the company right. Ackman told Canadian news reporters that Canadian Tire was an undervalued company with “great management.”

 

With the stock still far from where it was when Sales left, Bill Ackman was proved wrong.

 

Sales is saying "We Will Prove the Naysayers Wrong":

I see a number of similarities between what I find as I join the SUPERVALU leadership team today and what I found upon joining Canadian Tire, a multi-billion-dollar, publicly owned retailer that was anticipating large, fierce competitors who were expanding into Canada. I served as president and CEO of that company from 2000 through 2006. We were faced with high prices, a high cost structure and no defined point of differentiation.

http://blogs.wsj.com/deals/2012/07/30/supervalus-new-ceo-we-will-prove-the-naysayers-wrong/

 

Digging in the archives you can find this from 2000:

"Our intense selection process has confirmed our view of Wayne's stature as one of the very best retail executives in the world, and he has the Board's complete confidence as he leads Canadian Tire into the future," said Gilbert Bennett, the company's Chairman of the Board. "He has been a key architect behind the revitalization of the Canadian Tire store network and our growth strategies. Wayne brings tremendous business insight and knowledge to every issue, is a terrific motivator and leader of people, and has a strong vision for Canadian Tire's future direction."

http://www.hardwaremerchandising.com/news/canadian-tire-veteran-wayne-sales-becomes-president-of-canadian-tire/1000166387/

 

SVU has been left for dead. To me SVU's death seems far from certain. IMO, the competition from other companies is what could kill the company, but SVU can probably adapt.

[Guest hellsten]

http://www.businessweek.com/news/2012-10-19/supervalu-bonds-rise-most-ever-after-buyer-interest-disclosure

 

Bonds of Supervalu Inc. (SVU) rose the most since they were issued three years ago after the third- largest U.S. grocery store chain said it’s received a “number of indications of interest” as it conducts a review of strategic options.

 

The company is in “active dialogue” with several parties, the Eden Prairie, Minnesota-based company said yesterday in a statement. The talks may not lead to any sale, the company said.

 

http://www.bizjournals.com/twincities/news/2012/10/22/supervalu-shares-jump-on-cerberus-talk.html

 

Supervalu Inc. shares skyrocketed more than 30 percent Monday on a report that private equity firm Cerberus Capital Management was trying to arrange up to $5 billion in debt financing to take over the grocer.

Cerberus is talking to a handful of banks, including JP Morgan Chase & Co. (NYSE: JPM) and Bank of America (NYSE: BAC), about arranging $4 billion to $5 billion in debt financing, according to Debtwire, which cited five sources familiar with the situation.

[Cardboard]

Any idea as to how much their roughly 24.3 million square foot of retail estate could be worth?

 

Cardboard

[Guest hellsten]

http://stateimpact.npr.org/idaho/2013/01/10/cerberus-to-buy-albertsons-grocery-stores-for-3-3-billion/

 

An investor group led by Cerberus Capital Management agreed on Thursday to buy a number of grocery chains from Supervalu, including Albertsons, for about $3.3 billion.

 

The Cerberus-led group will also buy up to 30 percent of Supervalu itself, paying $4 a share in a tender offer. That represents a 50 percent premium to the grocery chain operator’s 30-day average closing price and nearly 32 percent higher to Wednesday’s closing price.

 

At a minimum, the investor consortium will own at least 19.9 percent of Supervalu.

 

Separately, Supervalu said that it had secured a $900 million credit facility from Wells Fargo and a $1.5 billion loan from a group of banks led by Goldman Sachs.

 

Seems I sold a bit early, but time will tell. SVU's pile of debt kept me up at nights. I'm glad I walked away with a nice and quick profit.

[PlanMaestro]

Cancer surgery. It looks like they are still playing the LBO game, with the debt increase. but higher quality businesses (still retail though). Doing some work on the RE value of the remaining traditional stores. For the moment not entirely convinced by the current valuation.

"I think it is hugely 'de-risk,' because of the growth opportunities that we have at Save-A-Lot, the stability of our independent business, and the leading market shares that we have with the remaining banners," which are smaller, more regional and require less of an investment to turn sales around than those that [supervalu is] selling, Mr. Sales said.

[PlanMaestro]

"Chains Albertsons, Acme, Jewel-Osco, Shaw's and Star Market stores, and also the Osco and Sav-on in-store pharmacies, will all be sold to a Cerberus-led coalition of investors"

 

"The sale to AB Acquisition, an investor group led by Cerberus Capital Management, will include 877 stores. Cerberus will also offer to buy up to 30 percent of the remaining Supervalu for $4 per share after the deal closes."

 

So using FCharlie store numbers it seems they are keeping only a minimal  traditional store operation.

 

Cerberus is buying half the EBITDA,  60% of the sales, and most of the RE for $3.3 billion (and pension obligations?) leaving the other half of EBITDA of the higher quality businesses to sustain $2.9 of net debt (plus the newly issued debt).

 

I guess it all depends on how good do you feel about the growth prospects of Save-a-Lot and if those numbers include or not the pension obligation. I like the signal of Cerberus' tendering at $4 per share.

 

 

 

 

Acme          117 stores

Albertson's    453 stores

Cub              46 stores

Farm Fresh  43 stores 

Hornbashers    6 stores

Jewel-Osco      182 stores

Lucky                4 stores

Save-A-Lot        1,280 stores

Shaws              169 stores

Shop and Save    42 stores

Shoppers            56 stores

[Cardboard]

IMO, they forced Cerberus to take on Acme, Jewel-Osco, Shaw's and Star Market stores, Osco and Sav-on in-store pharmacies, to accept the deal in order to leave it pretty much with only Save-A-Lot and the distribution business. Remember that KKR was interested in buying Save-A-Lot and Cerberus wanted mainly Albertson's. Then you have C&S Wholesale Grocers interested in the distribution business.

 

http://blogs.wsj.com/deals/2012/10/25/kkr-contemplating-bid-for-supervalus-save-a-lot/

 

We could very well see a bid from KKR to buy the rest of the company and they would then have to dispose of or to keep the distribution business. Seems like everyone could be getting the piece that they want and Cerberus could make a little bit of money with their shares. The deal also removes some pressure on Supervalu to conduct a fire sale for the rest. By the way, Berkshire owns the distribution business to Wal-Mart and the Supervalu distribution business might make a nice bolt on acquisition.

 

A small position for me, "arbitrage" type.

 

Cardboard