One company that may provide investors such an opportunity is Supervalu, Inc. Supervalu is an Eden Prairie, Minnesota based retail supermarket chain that has experienced sharp drop in the value of their share over the past several years. The company has committed itself to a turn-around by replacing Wayne Sales with Sam Duncan as CEO. Duncan followed his appointment as CEO by shuffling the top management deck and bringing in a new president in charge of Save-A-Lot, the companies most important subsidiary.
All this was done with the ultimate aim of speeding up the turnaround. The company is also trimming down with layoffs and selling some of its well known brand to investment group Cerberus Capital (Anderson, 2013). 2. Overview of Supervalu Supervalu is an American retail giant. It has been in business for more than a century. With over 130,000 employees, it is the third largest food retail company in the United States (after Kroger and Safeway), and ranks number seventy five on the 2012 Fortune 500 list of America’s largest companies (Forbes, 2012).
On June 2nd 2006, the company announced the purchase of Boise, Idaho based Albertsons, Inc and all of its 1,124 stores. The Supermarket News magazine’s ranking of “Top Wholesalers for 2008” put Supervalu at the very top of the list (Supermarket News, 2008). The company has been listed on the New York Stock Exchange since 1967. The company’s mission is served by operations consisting principally of grocery and pharmacy operations with a total of 2,432 stores with the firm also offering supply chain services for smaller retailers, serving over 4,300 retailers (Supervalu, 2012).
The retail operations are supported by 22 distribution centers, and the wholesale distribution is supported by nine distribution centers, the latter of which also supply company owned stores. The company benefits from a solid level of diversification with a number of different brands targeting different markets, including Acme, Albertsons and Shop ‘n Save brands. The company owns 1,102 traditional food retail stores, as well as 397 hard discount stores trading under the Save-A-Lot brand name (Supervalu, 2012).
In addition the company also licenses the Save-A-Lot brand to 935 independent operators. With what seems to be a successful operation, the company however still faces a number of uphill battles with the last three years reporting significant losses and extreme pressure from competitors. In 2012 CEO Craig Hackert in charge since 2009 was replaced by company chairman Wayne Sales. A move that saw a sharp drop in share prices was met eight months later with Sales’ own firing and replacement with newcomer Sam Duncan in January of this year with the aim of accelerating the company’s turnaround.
There have been significant problems including massive losses and decline in revenue production. Measures are now being taken to limit losses, slash cost and regain sales, including the sale of non-profitable brands as well as a shakeup in top management as discussed earlier. However, issues such as high levels of debt, a low level of equity and difficult trading conditions may persist for some time. In order to assess the organization as a potential investment, it is necessary to look at the financial analysis. 3. Financial Analysis
Companies produce annual reports designed with the shareholder as the primary audience. The annual reports which are published using the standard format present the performance of the organization in the preceding 12 month period. The annual reports – the 10-K in the United States – are overseen by an auditor to ensure that they reflect a true and honest picture of the company and are compiled in line with the required account standards. It should however be noted that financial reports may sometimes be rife with misleading information as was the case in recent years with Enron and WorldCom.
However, for the purpose of this project, it is assumed that there are no potential misstatements. 4. 1 Summary of Statements All figures presented will be in millions of US dollars when examining the different financial statements – unless otherwise specified with the exception of per-share numbers. All figures for Supervalu, Inc. , have been extracted from the 10-k for the financial year ending February 2011 and 2012. Where industry comparisons are made, these have been taken from relevant ratio pages on MSN Money. 4. 2. 1 Income Statement
The income statement, which can be found in appendix 1 is also called the Consolidated Statement of Earnings and shows that the financial year which ended on February 25th 2012 (a 52-week year) saw net sales of $36,100. This represented a deep in revenues on the previous two years as the 2011 net sales was $37,534 and the 2010 net sales was $40,597. Since 2010 the company has seen an 11. 0 percentage point decline in revenues. Some downward movement in revenue was however expected as a result of the divestments that occurred in mid to late 2011. The gross profit for the year 2012 was $8,019 which is a gross profit margin of 22. 1%. However the company saw a loss in operating profit of $519, primarily the result of high cost on intangible assets. 2012’s operating profit was still a lower loss in operating profit compared to 2011 when it was $976 and a gain of $1,201 in 2010. Net earnings are shown on the income statement. For the sake of accounting, net earnings may be presented before or after taxes. Since Supervalu is experiencing an adverse financial climate and took advantage of a negative tax payment in 2010 and 2011, this paper will utilize the definition of net earnings as being earnings after tax.
After provisions for income taxes were factored in, the company showed a loss of $1,040 or -2. 88% in net earnings in 2012. It must however be noted that this number represents an improvement on the previous year when net earnings registered a -4. 02% loss at $1,510. In 2012 there was a loss of $43. 91 per share in net earnings. This number is however an improvement from 2011 when the net loss per share was $7. 13 . It should be noted that these changes are not influences by the weighted average of outstanding share which stood at 212 million (Supervalu, 2012).
The income statement highlights a company in some serious difficulties; however the numbers show encouraging signs of a rebound to better times in 2010. 3. 1. 2Balance Sheet The balance sheet referenced in Appendix 2 defines the company’s position in terms of assets and liabilities. The company experienced a drop in the value of its assets in 2012, however there was also a decrease in total liabilities overall. Current assets – generally calculated as having an economic shelf life of 12 months or less fell steadily from 2010 ($3,711) to 2011 ($3,420) and 2012 ($3,225).
This decline can be seen across all asset categories. Long-term assets also declined to $12,053 representing a 12. 39% drop in value. Measures to cut cost and control debt are starting to take hold as the level of current liabilities has declined year to year since 2010. The long term liabilities of the companies on the other hand have seen an upward tick with total liabilities rising from $11,524 in 2011 to $12,032 in 2012. Important to investors is the decline in the level of equity within the organization. This has gone down from $2,887 in 2010 to $1,340 in 2011 and just $21 in 2012.
The balance sheet continues to paint a picture of current gloom face the organization in the near term. 3. 1. 3 Cash Flow Statement The cash flow statement in Appendix 3 shows $157 in cash and cash equivalents in hand at the end of 2012. This represented a decline in the previous two years of $211 in 2010 and $172 in 2011. This represents a gradual but consistent drop in cash and cash equivalents of the company. Significant impacts are the losses carried over into cash flow which amounted to $1,040 for 2012 and $1,510 for 2011. The net effect is a reduction in the amount of cash provided for operating activities.
It is important to make note of the fact that while the company has engaged in disposing of some assets, there have also been new investment resulting in overall net investing of $484 in 2012 and $227 in 2011. Cash flow from financing activities was also negative with $291 raised from the issuance of long-term debt, but this is counteracted with $798 payment of long-term debt and capital lease obligations. This results in net cash outflow from financing activities of $587. However, this is a decline on the previous year of $975. 3. 1. 4Statement of Owners Equity
The consolidated statement of stockholders equity found in Appendix 4shows the balance of equity over a period of four years, 2009-2012. The statement shows that the position of common stock has not changed, with a total of $230. The capital in excess of par has only change very slightly from $2,853 in 2009 to $2,855 in 2012. The major factor of the equity level is a deficit which resulted in a negative balance of -$1,892 at the end of 2012. When added with other accumulated losses results in a total shareholder equity in the firm of $21. This is a notable change compared to 2009 when the total balance of equity was $2,581. . 1 Ratio Analysis Ratio analysis can be used here to explore the financial position of the firm and the way in which it is performing by analyzing internal performance as well as providing a benchmark for comparison with the industry. This section puts forward some ratio analysis calculations and makes comparisons with industry averages where available. 3. 2. 1 Liquidity Liquidity is an important measure companies facing hard times. It measures the firm’s ability to survive in the short term and meet its current financial obligations (Libby et al, 2010).
The current ratio and the quick ratio are the two main measure of liquidity also known as the acid test. The current ratio measures the firm’s ability to use current assets to settle current liabilities. In the case of Supervalu, there are insufficient assets available to pay current liabilities. This is however not unusual as like in many industries with rapid cash flow, a relatively low current ratio may be acceptable based on expected cash flow. Supervalu is therefore not necessarily showing any signs of mounting distress with the current ratio at 0. 0 as shown in table 1. The industry average is slightly higher, however this difference may be indicative of better use of capital – although it could also indicate cash flow issues. Table [ 1 ]: Current ratio Current ratio| 2010| 2011| 2012| Industry Avg. | Current assets| 3,711| 3,420| 3,225| | Current liabilities| 4,167| 3,786| 3,590| | Current ratio| 0. 89| 0. 90| 0. 90| 1. 1| (Supervalu figures are extracted from Supervalu Inc. 10-K. Industry comparison figure from Microsoft Money, 2012). The quick ratio is another way to evaluate liquidity within a company.
The idea behind this is that an organization may not be able to realize the full value of its inventory if they are required to liquidate inventory in order to pay current liabilities. Calculations for the quick ratio are similar to the current ratio minus inventory value which is deducted from the total current assets as can be seen in Table 2. Table 2: Quick ratio Quick ratio| 2010| 2011| 2012| Industry Avg. | Current assets| 3,711| 3,420| 3,225| | Inventory| 2,342| 2,270| 2,150| | Net current assets| 1,369| 1,150| 1,075| | Current liabilities| 4,167| 3,786| 3,590| | Quick ratio| 0. 3| 0. 30| 0. 30| 0. 7| (Supervalu figures are taken from Supervalu, Inc. 10K. Industry figures are taken from Microsoft Money, 2012) 3. 2. 2Asset Management The company’s ability to manage assets will be a key deciding factor in its return to profitability. Measures of asset management include return on assets and return on equity. For Supervalu, the return on assets shows a slight improvement in 2012 at -8. 06% compared to -10. 00% in 2011. Table [ 3 ]: Return on assets Return on Assets| 2010| 2011| 2012| Industry Avg. | Net income| 393| -1510| -1040| | Total assets| 16436| 13758| 12053| |
Return on assets| 2. 31%| -10. 00%| -8. 06%| 6. 80%| (Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012) The return on equity is poor. While the actual loss has declined in 2012, the phenomenal change in the return on equity showing large losses is the results of adjustments that followed the steep decline in the level of equity. Table [ 4 ]: Return on equity Return on Equity| 2010| 2011| 2012| Industry Avg. | Net income| 393| -1,510| -1,040| | Equity| 2,887| 1,340| 21| | Return on equity| 13. 60%| -112. 69%| -4952. 38%| 15. 5%| (Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012) The return on equity may not be enough to make an assessment of management’s use of assets. An alternative measure will be asset turnover (Libby et al, 2010). This analyzes the way in which assets are used to generate revenue. It will show how many times assets have been turned over in a given year. Supervalu seems to be improving efficiency in terms of utilization. They turned over assets equivalent to 2. 8 times in 2012 which was an increase from the previous two years (2. 9 times in 2011 and 2. 39 times in 2010). Looking at this in terms of industry context where the average is 2. 4 times, Supervalu appears to be improving efficiency which is positive for recovery. 3. 2. 3Debt Management The company’s debt equity ratio seems to spell doom for the future. This ratio measures the proportion of debt to equity. Compared to the industry average of 1. 03 shown in table 5 Table 5: Return on equity Debt to equity ratio| 2010| 2011| 2012| Industry Avg. | Total debt| | 11,524| 12,032| | Total equity| | 1,340| 21| | Debt/Equity| | 8. 6| 572. 95| 1. 03| Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012) Another measurement of debt management is the debt ratio. Supervalu’s debt ratio shows that it is in a delicate position with the majority of assets being funded by debt. Many companies have gone through similar issues due to losses in equity but have rebounded as was the case with auto maker General Motors. These numbers do not therefore signify an inability for Supervalu to rebound. 3. 2. 4 Profitability An important measure of viability is the profitability of the organization.
There are various measures of profit, however in this report I shall focus on net profit margin. This is the level of profit that remains after all cost has been deducted. In this report, I shall utilize the measure after interest and taxes. As can be seen on table 6, the company is slowly digging itself out of a low point in 2011 when the net profit margin was negative 4. 02%. However in an industry where the average is 3. 24%, it is obvious the organization has a long way to go. Table 5: Return on equity Net profit margin| 2010| 2011| 2012| Industry Avg. | Revenue (Net sales)| 40,597| 37,534| 36,100| |
Net profit| 393| -1,510| -1,040| | Net profit margin| 0. 96%| -4. 02%| -2. 88%| 3. 24%| (Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012) 3. 2. 5Market Value There are a number of different measures of market value, the most common of which is the price earnings ratio. This is a measure that assesses Harold company will take to earn is total capitalization. However, as Supervalu is making a loss this ratio is not relevant and cannot be calculated. To assess market value a measure which may be utilized are the earnings per share.
The earnings per share are shown in table 10, and are a measure of the profit, or loss, the company makes attributed to each share outstanding. As expected, this is in line with the net profit margin in table 5, with the earnings per share being -$4. 91 in 2012 falling from -$7. 12 in 2011. Table 6: Return on equity Earnings per share| 2010| 2011| 2012| Net profit| 393| -1,510| -1,040| Average share out| 213| 212| 212| Net profit margin| 1. 84%| -7. 12%| -4. 91%| (Supervalu figures taken from Supervalu Inc. 10-K 3. Competitors Supervalu is widely considered the third largest supermarket chain in the country.
Its main industry peers are Safeway, Kroger, and Whole Food Market. Supervalu generated a steady gross margin of 22. 21% in 2012 and 22. 41% in 2011. However, the company is a loss-maker and it produced negative earnings in the previous year. Safeway, Kroger and Whole Food Market generated operating margins of 2. 37%, 1. 61%, and 6. 36%, respectively. It is clear from these gross margin numbers that the grocery industry has very slim operating margins on sales. Table 7: Competitor Analysis Figure in Million| Net Income| Long term D/E| Operating Margin %| Supervalu| -1244| Very High| -2. 1| Kroger| 728| 1. 8| 1. 61| Whole Food Market| 465| 0. 001| 6. 36| Safeway| 523| 2. 3| 2. 37| (Competitor results taken from Finviz. com) It also seems that Supervalu continued to struggle with insufficient growth in its operating activities in the last quarter of 2012. The corporation’s operating income fell for fiscal 2012. Furthermore, Supervalu is susceptible to financial leverage as it took on a new $2. 5 billion of debt in the third quarter of 2012 (Boehme, 2012). Supervalu needs to continue to reduce its operational cost in order to record positive results. 4. Conclusion
The shedding of 877 grocery stores in a $3. 3 billion dollar deal with Cerberus Management LP in the first quarter of this year seems to have been a sign of a new and positive beginning (Dezember, 2013). The company’s stock has been one of the top performers this year; contradictory for a company still drowning in debt and declining sales. However the market has a positive outlook on the company. Since January 1st this year, shared of the company have gained a solid 133%. Supervalu closed the first day of trading this year at $2. 60 and ended the last week trading at $5. 26.
Thanks to these positive numbers, both Fitch and Moody’s have upgraded their ratings on the company from negative to stable which has been a boost to investor confidence. The reduction in non-performing assets is expected to continue to improve the stability of the company. With less exposure to market volatility, the company should be able to rebound and even thrive. Decreasing the debt level will boost the balance sheet and future net revenues. 5. Recommendation Although the bullish run of Supervalu which started early this year continues, the company still has a long way to go in its quest to recover.
Therefore the subjective recommendation of this report will be to hold. Based on the company’s current trend, it is very likely that within the next year the company will show even more positive signs of improvement and therefore warrant a change to a buy recommendation. If the organization is able to make a recovery it will be in a very strong position in the market as the number three grocer that also benefits from a large wholesaler and supply chain management operation.