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Is SuperValue Inc (SVU) a Good Buy at $7.50?

Company Description

SuperValue Inc (SVU) hit its 52 weeks low in $7.23 at 1/26/11. Actually, SuperValue Inc stock price has not been this low since February 1988. SuperValue’s web site shows the company is the number four grocery store operators in the United States, behind Wal-Mart (WMT), Target (TGT) and Kroger (KR). SuperValue operates stores with household names such as Cub Foods, Albertson, Lucky, Save-A-Lot, Shaw’s, Shop ‘N Save, ACME, Shopper’s… Albertson and Lucky chains have major presence in west coast. Cub Foods, Shaw’s and ACME are familiar names in mid-west, especially in Chicago area. Shaw’s and Shop ‘N Save are familiar names in New England area. SuperValue sold more than $40 billion grocery in 2010. On revenue base, it sold 8% of grocery in the United State (total $500 billion). In addition to retail, it also provides grocery to other independent grocery stores and restaurants through its whole sales division, which some Target stores receive their grocery.

Why Stock Drop

There are two major reasons that the stock drops to its 20 years low.

First, it was the US economy. With the great recession of 2008, a lot of SVU’s customers left SVU to search better deals in other stores such as Wal-Mart and Target. One Shaw’s store I visited in Massachusetts in January 2010 looked empty with more employees than customers. Its grocery price was higher than Wal-Mart. It was lucky that the nearest Wal-Mart was 15 miles away. It was not surprise that SVU’s same store sales dropped 5% in 2010.

Second, it was their debt. As Dec 4, 2010, SVU had $6.9 billion debt. Most of them was from their 2006 purchase of Albertson. With such huge debt burden, some investors think the company will go into bankruptcy.  There are several loan covenants SVU needs to keep. According to 2010 annual report (10k page 29), the Company must maintain a leverage ratio no greater than:

  1. 4.25 to 1.0 through December 30, 2011,
  2. 4.0 to 1.0 from December 31, 2011 through December 30, 2012
  3. 3.75 to 1.0 thereafter.

Additionally, the Company must maintain an interest expense coverage ratio of not less than:

  1. 2.20 to 1.0 through December 30, 2011,
  2. 2.25 to 1.0 from December 31, 2011 through December 30, 2012
  3. 2.30 to 1.0 thereafter.

It is a danger that the company can not maintain these ratios. This is the main reason that the stock was in free fall since June 2007.

Is the Stock A Good Buy at $7.50

The stock dropped from its June 2007 high of $46.32 to $7.52 of 1/27/2011. The stock price was at $11.91 at November 2008, at deep of the financial crisis. Is the stock a good buy now? We need to answer several questions.

First, can the company pays its debt obligation? Base on 2010 annual report (10K, page 49), SVU needs to pay

  • $1,415 billion variable rate note due June 2011 to June 2012.
  • $0.679 billion 7.5% note due February 2011
  • Various current debt

SVU faces total $3,214 billion contractual obligation in 2011. (10K, page 31).   For comparison, SVU paid $7.635 billion in 2010 for various long term and current obligations. It generated $1.474 billion cash from operation in 2010. Assuming same cash flow in 2011, it will be hard to cover these addition debt payment of $1.3 billion (50% of $1,415 b and $0.679 b). However the company has a $1.5 billion credit line extended to April 5, 2015 and a $0.5 billion credit line extended to October 5, 2015 (10K page 50). These two credit lines and operating cash add up to $3.5 billion. With these cash SVU can pay off the 2011 obligations and get some time to solve the debt issue. SVU’s management aggressively paid down debts in past two years. Long term debt changed from $8.5 billion in 2008 to $7.0 billion as 2010. That’s $750 million reduction per year. Assuming same rate, SVU can reduce debt by $3.0 billion with $4.0 billion remaining in 2015. It is clear that even if SVU maintains current revenue and cost level, it does not face immediate bankruptcy risk. It may face default risk again in 2015 if there is no major improvement on cash flow.

Second, can SVU maintain its loan covenants? This one requires some digging. The loan covenants are on the SEC’s website. Here are quotes from SEC page:

Interest Expense Coverage Ratio. Permit the ratio of (i) Consolidated EBITDA plus Consolidated Rent Expense to (ii) Consolidated Interest Expense plus Consolidated Rent Expense as of the last day of any Fiscal Quarter occurring during any period set forth below, in each case for the four consecutive Fiscal Quarters ending on such day, to be less than the ratio set forth opposite the period containing such day
Leverage Ratio. Permit the ratio of (i) Consolidated Total Debt to (ii) Consolidated EBITDA as of the last day of any Fiscal Quarter occurring during any period set forth below, in each case for the four consecutive Fiscal Quarters ending on such day, to be greater than the ratio set forth opposite the period containing such day:
Quarter Int Bf Tax Int Exp Depr Adjust EBITDA Rent EBITDA+Rent Int+Rent Int Exp Ratio L Debt Lev Ratio
2010.4 156 130 957 0 1243 146.25 1389.25 290.25 4.79 7022 1.41
2011.1 127 174 288 21 610 146.25 756.25 290.25 2.61 6720 2.75
2011.2 -1526 129 502 1600 705 146.25 851.25 290.25 2.93 6644 2.32
2011.3 -223 124 714 1840 2455 146.25 2601.25 290.25 8.96 6901 1.38

Notes:
1. Use total rent of 2010 divided by 4 to get rent per quarter: 585/4 = 146.25. Actual rent should be less.
2. Use total interest expense of 2010 divided by 4 to get interest expense per quarter: 576/4 = 144. Actual interest expense should be less.

From the data, the company has no problem to meet the loan covenants. On the other hand, a covenants is an agreement. SVU and always negotiates with banks for better terms.

Third, is the stock price attractive? First, the stock has $0.35 dividend. That’s 4.67% dividend yield. That’s much better than any saving account in the country.

Fourth, are insider buying? A search on the internet shows that insider purchased more than 135,000 shares since June 2010 with most of the shares above $10.00. Insiders were betting that the stock would go above $10, which will be 33% increase from current price.

Fifth, what is the price/earning ratio? With current P/E at 6.25, while Kroger at 12 and Wal-Mart at 14, SVU can double its share price just to match Kroger.

Future of SVU

SVU noticed that they had a major problem at hand. They hired Craig Herkert as their CEO. Craig was the CEO of Wal-Mart Americas and COO of Wal-Mart International. We have to assume that he knows retailing. So far, he paid down debt and closing non-performing stores. He also talked to vendors to lower cost and simplified store items. All seems good moves. His major initiate is the Save-A-Lot stores.

Save-A-Lot is a hard discount store chain. It shows items 40% off regular grocery store price. I visited a Save-A-Lot store in downtown Atlanta. It was surrounded by apartment and condo buildings next to a Marta station. It was a cross between Aldi and Trader Joe’s. The store was little smaller than Trade Joe’s. The produce section looked like Trade Joe’s, but not as upscale. The aisle section looked like Aldi with all the grocery still in corrugated boxes.  The store was clean, well lit. I was impressed by its milk price. One gallon of Save-A-Lot milk was priced at $2.49, which was the same as local Wal-Mart. Banana was $0.49/lb, even better than Wal-Mart’s $0.69/lb. Apple juice and orange juice price were comparable with Wal-Mart. With all these low price, walk in customers were steady. If Craig can double number of Save-A-Lot in 2011 to 2,400, SVU should provide very good return.

Summary

SVU is a risky buy but it holds more up-side potential than downside risk.

Sentiment : Risky Buy

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