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| | Why Supervalu?
Description of the Business
Supervalu operates retail food stores and provides supply chain services in the USA.
Analysis of Competitors
The main competitors of SVU are:
- Walmart
- Sysco corporation
- The Kroger
- Safeway
- The Fresh Market
- Target Corporation
- Ahold
The food retail business is highly competitive. However the large retail chains tend to operate like an oligopoly, because economies of scale are a prerequisite to be competiive. Because of the stability of the business, the repetitive character of purchases it is as a result posible to make economic profits. However the competive position of SVU is not strong and they are not making an economic profit. At the same time they are thrinking by closing unprofitable shops. This should increase profitability, but the potential of creating value by growth is limited.
Competitive Advantages
The competive advantages of SVU are limited. As a result SVU is not making an economic profit.
Financial Analysis
SVU has a massive amount of debt due to the acquisition of New Alberton's in 2006. This aquisition also leads to goodwill charges and a very high leverage.
Risks
The main risks are:
- not being able to refinance their massive debt or comply with debt convenants, which could lead to a forced sale of equity, which couldd significantly dilute current share holders
- Further deterioration of their competitive positioni, which could further reduce their profit margins
- Interest payments are higher than the net profit, which makes the company very high leveraged.
- A downgrade of their credit rating could lead to higher interest costs.
Although the food retail business is stable and anti-cyclical the high leverage and low margins significantly increases the risks compared to competitors. We use a discount rate of 13%.
Management Team
The management is new and have the challenge to turn the company around after taking too much dept on the balance sheet because of the too expensive acquisition in 2006.
The new CEO Craig Herkert has worked many years for Walmart and therefore should know the business.
Valuation Calculation
We estimate that SVU is generating a postive cash flow of about $1.5 a share, which gives a value of $11 based on a 13% discount rate.
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