Supervalu Earnings: Grocer's Woes Continue with Profits Down 40%

Grocery shopping is usually an easy process for the customers. They go to the store, buy what they need, pay for it, and leave. This earnings season has proven that from the grocery store's point of view, the business is not as simple.

Supervalu (SVU) reported a net income of 31 cents per share this morning for their first quarter of fiscal 2011, which ended May 10, a 40% decline year-over-year. An after-tax charge of 12 cents per share that brought the figure down, but the quarter was a disappointment regardless. The 14 analysts covering the company expected average earnings of 42 cents per share.

The numbers are in line with the underwhelming report earlier this month from competitor Safeway (SWY), whose report, while compatible with overall analyst estimates, also marked a 40% decline in earnings per share. Safeway's struggles with margins and price cutting proved to be the issue that the entire industry would have to deal with.

New strategy has not paid off yet

Consumers have shown a strong preference for less expensive goods in the past few years, and Supervalu has had to shift its focus accordingly. The franchiser of the Bristol Farms, Cub Foods, Farm Fresh, Lucky, Save-A-Lot, Shop 'N Save names is now concentrating more on discount stores and cutting costs aggressively.

With this initiative, management hopes to give Supervalu an edge in the highly competitive grocery industry. Almost the entire team of executives is new. Most notably, Craig R. Herkert became CEO and president in 2009 after having the same role in the Americas for Wal-Mart (WMT).

However, both the business environment and company's financial position have limited its effectiveness in translating the new plan to a better bottom line. As consumers demand cheaper goods, stores must cut prices and margins. Supervalu took a hit from the small margins especially hard because it is also in a deleveraging stage.

The problem was exacerbated even further by the choice to close a number of its locations because of the renewed focus on discount stores. Net sales have fallen nearly 10%, largely due to the smaller number of sites. Cutting debt from the balance sheet in a situation where revenue has decreased and margins are depressed is a difficult strategy to implement.

Still, these measures are absolutely necessary for the company's longer term prospects. It is better to face the strategic and financial issues sooner, as the management team is doing, rather than pretend they do not exist. While the present is bleak for this franchise, there is a good chance that the effort will create a more profitable future.

Grocers have seen bad times so far, but if their initiatives are successful, these times will be short lived.