Supervalu Inc, one of the largest grocers in the US, has had a troubled 12 months – some would argue two years – but the company’s management is looking to the new financial year with optimism. Dean Best reports.

To see a company’s shares jump almost 17% on a day when it reported falling quarterly sales and profits – capping a challenging year overall – came as something of a surprise. That, however, is what happened to US retailer Supervalu Inc yesterday (14 April).

The company, which runs almost 4,300 in the US stores under banners including Albertsons, Jewel-Osco and Acme, saw its stock climb 16.85% to US$10.61 yesterday, even after it reported a dip in fourth-quarter earnings, falling sales and a drop in identical-store sales – a key metric for retailers in the US.

The fourth-quarter numbers rounded off a troubled year for Supervalu. Over the 12 months to 26 February, the retailer made a loss of $1.5bn due to impairment charges and costs from store closures. However, even after putting those expenses to one side, Supervalu’s net earnings still fell by almost a quarter.

Over the last 12 months, Supervalu has cut jobs, closed stores, sold off its Bristol Farms division in California and offloaded its logistics and supply chain subsidiary, Total Logistic Control. All these actions were carried out to, on the face of it, revitalise a business that, in the previous fiscal year, had also seen sales and gross profit fall – even if its net earnings were up. But even then, Supervalu was lapping the year before when its bottom line was hammered by impairment charges and store-closure costs.

In all then, it could be argued that Supervalu, one of the largest grocers in the US, has had a challenging two years, let alone the last 12 months. So why the jump in the retailer’s shares yesterday?

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Part of the reason was a positive reaction from the market on Supervalu’s guidance for its current fiscal year, which is, at the time of writing, almost seven weeks old.

Supervalu forecast that its current financial year would, by the end of next February, generate GAAP earnings per diluted share of $1.20-1.40. This forecast compares to what Supervalu delivered to shareholders in the last 12 months, which was a GAAP loss per diluted share of $7.13. (Stripping out all the impairment charges and costs linked to store closures and so on, Supervalu posted earnings per diluted share of $1.39 for the 12 months just gone, on a non-GAAP basis).

The forecast was supported by an upbeat statement from CEO and president Craig Herkert, who had stoutly defended the company’s fourth-quarter results as “stronger than anticipated” and the “foundation” on which the retailer could “continue to deliver upon our business transformation plan”.

Looking ahead to the rest of the new financial year, Herkert said: “Today, we are aligned and working toward the common goal of delivering greater value to our customers. We enter fiscal 2012 with momentum, a solid plan and new capabilities to drive our business transformation, invest in price and deliver sequential improvement to ID sales.”

Supervalu is forecasting an improvement in identical-store sales in the current financial year – but that forecast is still for sales to fall on the year just reported upon.

The retailer’s identical-store sales fell 6% last year and the company predicts they could fall by 1.5-2.5% this year. On paper, hardly guidance that could drive Supervalu’s shares up by almost 17%.

Supervalu’s fourth-quarter earnings per share also beat analysts’ consensus, which could explain some of the momentum in the shares but not all of Wall Street was convinced.

Ajay Jain, an analyst at Hapolaim Securities, said Supervalu had “clearly defied low expectations with a solid gross margin-driven earnings beat” in its fourth-quarter. However, Jain argued that the reaction to the numbers “seemed overly exuberant” and the retailer’s guidance was “seems aggressive”.

Jain said: “Supervalu deserves credit for reversing some of the missteps associated with ineffective promotional activity in the third quarter. That said, we think many investors have lost sight of the fact that the core earnings trajectory remains sharply negative – with underlying EPS growth down more than 30% in 4Q based on Y/Y comparisons. Both ID sales and EPS guidance for FY12 also seem somewhat aggressive in our view.”

He added: “The potential for any further earnings decline in FY12 does not seem to be fully appreciated at this time.”

That said, Jain did increase his earnings per share forecast on Supervalu’s stock for the current fiscal year, raising it from $1.10 to $1.23. Supervalu’s management, he argued, would focus on protecting gross margins “very carefully” while avoiding the “ineffective” promotions from the third quarter.

However, in a final warning to investors, Jain wrote: “Operationally, [the] business remains highly challenged. The latest results at Supervalu are likely to feed into a growing (mis) perception that sector fundamentals are broadly improving. However, we see no basis to increase exposure to Supervalu at this time.”

And, there are signs, according to Karen Short, a retail analyst at BMO Capital Markets, that Supervalu’s trading in the early part of the first quarter of its new fiscal year may not have improved.

“Given management’s reluctance to provide colour on sales trends in 1Q, we assume trends have not improved sequentially despite higher inflation,” she wrote in a note to clients today. “Achieving FY2012 ID guidance will be highly dependent on improvements in sales trends throughout the year.”

With Supervalu fierce competition, particularly its Shaw’s, Acme’s and Shoppers banners in the north-east of the US, the new fiscal year looks set to be almost as challenging as the last two.