Supervalu To Close 60 Stores, Cantor Fitzergald Notes Value Creation

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The third-largest U.S. grocery chain, Supervalu Inc. (NYSE:SVU), announced that it plans to close 60 of its underperforming stores to compensate for the slumping sales. The maximum cuts are expected to from its Albertson’s chain, which could reduce the count by 27 locations, while Save-A-Lot stores may shut down 22 stores.

Supervalu To Close 60 Stores, Cantor Fitzergald Notes Value Creation

As per the company, shutdowns are expected to generate 35 million in cash within 12 months, and as much as $90 million in the next three years. The company plans to use the proceeds to pay debt. Supervalu Inc. (NYSE:SVU) also expects a pretax gain of about $10 million from the sale of assets in the second quarter. Out of the total stores up for closure, Supervalu owns one-third of the stores and intends to generate cash proceeds by monetizing real estate, asset sales, and elimination of operating losses in the affected stores.

The owner of the Albertson’s and Save-A-Lot grocery-store chain has been resorting to job cuts and reducing the prices on offerings, in order to compete with the deep pocketed retailers like Wal-Mart Stores, Inc. (NYSE:WMT) and The Kroger Co. (NYSE:KR) Also the retailer has been conducting a strategic review of alternatives and suspended the dividend to save on costs. Wal-Mart Stores, Inc. (NYSE:WMT) and The Kroger Co. (NYSE:KR) have the money and scale, which Supervalu lacks. In a low margin industry like retail, this usually makes a huge difference.

 “It’s accretive and that’s good,” Scott Mushkin, a New York-based analyst at Jefferies & Co., said in an interview. “But it does seem like if they were selling assets they wouldn’t be doing this.” The closures “hint at the idea that an imminent sale is not at hand,” Mushkin said.

The Supervalu has been reporting decline in revenues for three straight years. For the fiscal year 2012, company reported revenue of $36.1 billion and also announced that it plans to reduce headcount at Albertsons by 2500 to save on costs.

Chief Executive Officer Wayne Sales, who took the helm after Craig Herkert was ousted, has said that Supervalu will focus on cutting its expenses. “We are doing many things that are not business critical,” he wrote in an e-mail to the company’s 130,000 employees on July 30, after being named CEO. “Tough decisions will be made to change this reality.”

According to a regulatory filing, Supervalu has about 2,400 retail food stores, including its licensed Save-A-Lot locations in the U.S.

Supervalu Inc. (NYSE:SVU) has been making some very important decisions lately, to stay on track in rationalizing its operations, including debt re-financing, which was announced last week, recent changes in Supervalu’s leadership team, and now this, closing 60 stores. However, a much more important and difficult task will be to identify suitable buyers for major pieces of its retailing and wholesaling operations

“We are not providing the number of team members impacted” Mike Siemienas, a Supervalu spokesman, said in an e- mail, citing collective bargaining agreements at stores. Supervalu shares have tumbled 72 percent this year.

Cantor Fitzgerald thinks that the stock is worth $6 price based on a sum-of-the-parts. They also think that the restructuring could unlock value. Many value investors have purchased Supervalu.

Cantor Fitzgerald notes the following:

Surprisingly, 22 Save-A-Lot locations are also slated for closure, with the balance of Albertson’s stores located mostly
in Southern CA. The anticipated charges of $80-90 million are almost entirely non-cash related.

The announced store closures are expected to be accretive. Supervalu owns one-third of the stores scheduled for closure and intends to generate cash proceeds by monetizing real estate, asset sales, and elimination of operating losses in the affected stores.

Operationally, Supervalu continues to have very significant near-term challenges. However, following the completion of its debt re-financing announced last week, recent changes in Supervalu’s leadership team, and our positive read-through into certain aspects of the incentive structure for new CEO Wayne Sales, we think Supervalu is taking some very small but important incremental steps to rationalize its operations.
The much larger question in relation to the on-going strategic review process remains whether Supervalu can identify suitable buyers for major pieces of its retailing and wholesaling operations (or for the entire integrated business).

Cantor Fitzgerald estimates that Supervalu is still set to generate $900 million in unlevered FCF in FY:13 (partially offset by around $350 million of cash interest). Recent industry commentary suggesting that virtually all of the enterprise value is
locked up in Supervalu’s debt lacks reasonable basis.

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