Financial analysis of Supervalu Inc

Finance

Financial Assessment of Supervalu

Overview of Supervalu

Supervalu Today

Financial Analysis

Summary of the Statements

Income Statement

Balance Sheet

Cash Flow Statement

Statement of Owners Equity

Ratio Analysis

Liquidity

Asset Management

Debt Management

Profitability

Market Value

Information from Analysis Sites

Forecasting Stock Value

Consolidated Statements of Earnings

Consolidated Balance Sheet

Consolidated Cash Flow Statement

Consolidated Statement of Owners Equity

Investment decisions are never easy; there are many firms whose shares provide suitable investment vehicles. The ultimate aim of an investor is usually to create an acceptable return on investment. While the actual return required may vary between investors, reflecting their personal risk profile, the process of decision making will be relatively similar. The process will include an assessment of the firm and their financial performance along with consideration of the way the firm may perform in the future. A key issue in achieving positive returns is to pick a firm where there is a potential for capital growth in the share price; where the firms shares may be bought at a low price and sold later at a higher price.

One firm that may offer an opportunity is Supervalu; a U.S. based supermarket chain that has seen their share value fall a significant amount over the last few years. The organization is committed to a turnaround and has just appointed a new CEO; Wayne C. Sales, with the aim of speeding up the turnaround (Gasparro, 2012). To assess the potential of the firm it is necessary to look at the background to the firm and then look at their current financial performance and consider the history of the share price movements and how this may impact on future share price values.

2.

Overview of Supervalu

2.1

Historical Background

Supervalu is a major supermarket chain and grocery distributor located in the U.S., with its headquarters in Eden Prairie, Minnesota (Supervalu, 2012). The company is registered as a Delaware corporation (Supervalu, 2012). The company has a long history, which may be traced back to 1870. In this year BS Bull and Company was founded with seed money provided by Hugh G. Harrison (Supervalu, 2012). The firm was a dry goods company supplying wholesale goods. The firm itself did not last long, but it provided a start for the founders (Supervalu, 2012). The founders went on to set up similar companies, which would eventually merge in 1926, to create Winston and Newell Company, the direct parent of the modern Supervalu Inc. (Supervalu, 2012).

The company has grown over the years, making a number of acquisitions as well as innovating. Acquisitions have included the Food Marketing Corporation in 1963, ShopKo in 1971

, Hornbatcher's in 1975, Cub Foods in 1980, Scots food pharmacy 1991, in the 1992 the firm also acquired Watterau Inc., Including its subsidiaries Save-a-Lot and Shop-n- Save (Supervalu, 2012). Biggs was acquired in 1994 and in 1999 which food Holdings and their subsidiaries (Supervalu, 2012).

A major investment was made in 2006 when in a strategic Alliance beside CVS and a number of investors headed by the Ceberus Group, the firm acquired Albertsons Inc. For a total of $9.7 billion (Supervalu, 2012). As part of this acquisition a total in excess of 2,150 stores were acquired, as well as stores operating under the Albertsons brand the acquisition included shops operating under the brands of Acme, Jewel, Osco Pharmacy, Save-on pharmacy, Star Market and Shaw's. As with any acquisition there also some stores acquired which were later sold on, including Bristol Farms and Lazy Acres Market (Supervalu, 2012). This acquisition was momentous for Supervalu as it added significant resources to the organization and increase their size, making them the third-largest grocery retailer in the U.S. behind Kroger and Safeway (Supervalu, 2012).

The performance of the firm declined in 2010/11, and realized it needed to cut costs. A number of costs saving measures were implemented. This included the announcement for the closure of 20 loss-making stores as well as allowing staff in the corporate offices to take unpaid leave (Hughlett, 2011). However, it maybe argued that the cuts were too little too late, as in January 2011 the firm announced a loss of $202 million for the first quarter as well as a fall in revenue (Seeking Alpha, 2012). The company was feeling the impact of the recession as well as a high level of competition not only from other grocery retail firms such as Kroger and Safeway, but from the major discount firms such as Walmart and Target (Seeking Alpha, 2012). Further divestments were to take place later in 2011; all of the fuel service stations would be sold off, with sales arranged for all of the gas stations apart from 27 (Supervalu, 2012), the remaining 27 would follow as soon as buyers could be found (Supervalu, 2012). At this point the company also considered suspending dividend payments to facilitate a better cash flow and enable it to reorganize its debt (Seeking Alpha, 2012; D'innocenzio, 2012), however the last dividends were paid in May 2012 and appear to be utilized as a management signaling device.

2.2

Supervalu Today

Today Supervalu remains the third-largest grocery retailer within the U.S. The mission statement of the company states

"We will provide America's Neighborhoods with a superior grocery shopping experience enhanced by local expertise, national strength and a passion for our customers"

(Supervalu, 2012).

This mission is served by approximately 130,000 employees with operations consist principally of grocery and pharmacy retail operations with a total of 2,432 stores, with the firm also offering supply chain services and support services for smaller grocery retailers, serving 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 stores. The organization benefits from a degree of diversification with a number of different brands targeting different markets, including the Acme, Albertsons and Shop 'n Save brands. In total there are 1102 traditional food retail stores, as well as 397 hard discount stores trading under the Save-a-Lot brand, a brand concept which stocks high-volume custom branded food items (Supervalu, 2012). In addition the organization also licenses the Save-a-Lot brand to a further 935 independent operators.

However, the company is still facing a number of difficulties, with two years reporting significant losses and a high level of competition. In 2012 Craig Herkert who had been the CEO and president since 2009 was replaced with Wayne C. Sales, a move which followed further share price falls and general pessimism in the market, with the aim of accelerating the turnaround of the organization (Gasparro, 2012).

Therefore, the organization may be seen as reaching a low point in the history. There have been a number of difficulties, including significant losses and a decline in revenue production. However, the organization has also undertaken measures to try and limit the losses, control costs and re-gain sales, including the sale of non-profitable stores as well as a significant change in leadership. However, issues such as a high level of debt, a low level of equity and difficult trading conditions may remain problematic 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

Organizations produce annual reports designed with the shareholder as the primary audience. The annual reports, which are published utilizing a standard format, presents the performance of the organization in the preceding 12 months, to allow for an assessment of the performance. The annual reports, the 10-K in the U.S., are overseen by an auditor, to ensure that they reflect a true and honest picture of the company and are compiled in line the required financial accounting standards. It is notable that in some cases annual reports may be misleading, as seen with recent cases such as Enron and WorldCom, but for the purposes of this report it will be assumed that there are no potential misstatements.

This section will start with a summary of four main financial statements with in the annual account, and then undertake a ratio analysis looking at the five main areas of financial performance. The financial analysis then moves on and considers the pattern seen in share price movements and seeks to forecast the potential future share price.

3.1

Summary of the Statements

When examining the different financial statements all figures presented will be in millions of U.S. dollars unless otherwise specified with the exception of per-share figures. All figures for Supervalu Inc., have been taken from the 10-k for the financial year ending February 2012, where industry comparisons are made these have been taken from the relevant ratio pages on MSN Money.

3.1.1

Income Statement

The income statement, which can be found in appendix 1, is also referred to as the consolidated statements of earnings, shows that in the financial year which ended on 25 February 2012, (a 52-week year) the organization had net sales of $36,100; this demonstrated a fall in revenue on the previous two years, as the 2011 net sales was 37,534, and the 2010 net sales of $40,597. Since 2010 the organization has demonstrated a decline in revenue of 11.08%. However, one would expect some decline as a result of the divestments took place in 2011.

The gross profit for the year ending 2012 was $8,019, which equates to a gross profit margin of 22.21%. However, the operating profit demonstrated a loss of $519, hindered by high ongoing Goodwin and intangible asset charges. However, was a lower operating loss compared to the operating loss in 2011 when it was $976.

The income statement shows the net earnings. In financial ***** earnings may be presented either before or after tax. As Supervalu are struggling and benefited from a negative tax payment in 2011, this report will use the definition of net earnings being earnings after tax. Calculated after provisions for income tax, showed a loss of $1,040, equating to -2.88%. However, it is notable that this is an improvement on the previous year, when the net earnings demonstrated a loss of $1,510, equivalent to a -4.02% net profit margin.

The income statement also shows the net earnings per share, which obviously show a loss is due to the net profit sharing and loss. This is a loss of $4.91 per share in 2012, which is an improvement on 2011 when the net loss per share was $7.13. It is notable that these changes are not impacted by any changes in the weighted average number of shares that are outstanding, which remained at 212 million (Supervalu, 2012). The income statement demonstrates a difficult position that the organization finds itself in, but does indicate that the financial performance is improving.

3.1.2

Balance Sheet

The balance sheet, which can be found in Appendix 2, shows a position of the firm in terms of assets and liabilities. In 2012 there is a decline in the value of assets, but there is also a decreasing the overall total of liabilities. Current assets, which are generally calculated as assets which has an economic life of 12 months or less, have fallen from $3,420 in 2011, to $3,225 in 2012. The decline in total value is seen across all current asset categories. Longer-term assets, including plant, property, goodwill and intangible assets also declined, with the total in 2012 falling to $12,053, from the 2011 level of $30,758; a decline in asset value of 12.39%.

The cost-cutting and control of debt is obviously having some benefit, as is the level of current liabilities has also declined, this was $3,786 in 2011, and declined to $3,590 in 2012. However, the long-term liabilities of the organization have increased, with total liabilities rising from $11,524 in 2011 to $12,032 in 2012. A major for shareholders is the decline in the level of equity within the organization, which has declined from $1,340 in 2011 to only $21 in 2012. The organization is suffering from the accumulated losses and the retained deficit. The total capital of the firm, equity plus debt, has declined from $13,758 in 2011 to $12,053 in 2012.

The balance sheet is also demonstrating the difficulties that are being faced by the firm, and indicative of the problems that the organization faces, and also reflects the lack of significant investment it has been made over the last few years, although some investment has been made.

3.1.3

Cash Flow Statement

The cash flow statement, which can be found in Appendix 3, shows that at the end of 2012 the organization had cash and cash equivalents of $157, a decline on the previous year (2011) which ended with cash and cash equivalents of $172. In turn 2011 showed a decline on 2010, where opening balance the 2011 was $211, and the opening balance the 2010 was $240. This shows a gradual but ongoing decrease within the cash and cash equivalents in the firm. Significant impacts are the losses that are carried into the cash flow, $1,040 for 2012 and $1,510 for 2011. This reduces the amount of cash which was provided by operating activities. It is also notable that while the organization has been selling off some assets, there have also been additional investments, resulting in an overall net investment, which must $484 in 2012 and $227 in 2011

The cash flows from financing activities also show a negative figure, with $291 raised from the issuance of long-term debt, but this is counteracted with $794 payment of long-term debt and capital lease obligations. This results in a net cash outflow from financing activities of $587. However, this is a decline on the previous year of $975.

3.1.4

Statement of Owners Equity

The consolidated statement of stockholders equity, which can be found in Appendix 4, shows the balance of equity over a period of four years, 2009-2012. The statement shows that the position of common stock is not changed, with a total of $230. The capital in excess the par has only changed slightly, this was $2,853 in 2009, and is $2,855 in 2012. The major influence on the level of equity is the retained a deficit, which has resulted in a balance of -$1,892 at the end of 2012, and when added with other accumulated losses results in a total shareholder equity in the firm of $21. This is a significant change as in 2009 the total balance of equity was $2,581

3.2

Ratio Analysis

A ratio analysis may be utilized to examine the financial position of the firm and the way in which it is performing, looking at internal performance as well as providing a benchmark for comparison with the industry. This section will demonstrate a number of ratio analysis calculations and where available will make a comparison with the industry average.

3.2.1

Liquidity

Liquidity is an important measure for any firm facing difficulties, it is a measure of the ability of the firm to survive in the short-term and meet its current obligations (Libby et al., 2010). There are two main measures of liquidity; the current ratio and the quick ratio which is also known as the acid test.

The current ratio measures the ability of an organization to pay its current liabilities out of its current assets. This calculates how many times the current assets will pay the current liabilities. For Supervalu, there are not sufficient current assets to pay the current liabilities. However, this is not necessarily a problem. In many industries where there is a rapid cash flow, a relatively low current ratio may be acceptable, due to the expected cash flow to be generated. This is typical of mass-market retail firms and high-tech firms. Therefore, Supervalu is not showing any sign of increasing distress, with the current ratio remaining the same at 0.9 between 2011 and 2012, as shown in table 1. The industry average current ratio is 1.1, which is slightly higher, but this differential may indicate a more efficient use of capital, although it may also indicate some cash flow issues.

Table 1: Current ratio

(Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012)

The quick ratio is an alternate method of examining liquidity within an organization. The theory is that an organization may not be able to realize the full value for the inventories it is held if they are required to liquidate inventory in order to pay current liabilities. The quick ratio is calculated in a similar manner to the current ratio, but the inventory's value is deducted from the total current assets, as shown in table 2. The organization has a relatively low quick ratio, or 0.3, which remains the same for both 2011 and 2012. However, this is starting to show some of the signs of stress, as the industry averages 0.7. This may also be indicative that the organization is carrying a high level of stock as the differential between the company and industry average is much greater.