Gross margin increases despite lower sales
Despite a decline in sales, Supervalu (SVU) reported a 50 basis point increase in its gross margin during the fiscal 3Q16. The higher gross margin was primarily driven by higher base margins across all three segments, lower logistics costs, and higher TSA (transition services agreements) fees, which were partially offset by higher employee and occupancy costs.
SVU’s operating margin lowest among its peers
An increase in Supervalu’s (SVU) gross margin resulted in a 14 basis point increase in operating margin despite a 2.6% increase in selling, general, and administrative expenses. SVU’s operating profit stood at $118 million in fiscal 3Q16 as compared to $115 million in fiscal 3Q15.
SVU’s adjusted operating margin for the quarter stood at ~2.9% while the GAAP[1. generally accepted accounting principles] operating margin stood at ~2.5%.
SVU’s operating margin is among the lowest in the supermarket industry. While the supermarket giant Kroger (KR) reported an operating margin of 3.5% in the last quarter, natural and organic food companies Whole Foods Market (WFM), Sprouts Farmers Market (SFM), and The Fresh Market (TFM) reported much higher operating margins of 5.2%, 5.1%, and 7.3% in their last reported quarters, respectively.
Operating margins of the segments
Supervalu’s operating margin increase in fiscal 3Q16 was a result of lower corporate (TSA) losses during the quarter. All the three major revenue segments of SVU either reported a lower or flat operating margin in fiscal 3Q16 as compared to fiscal 3Q15.
Save-A-Lot’s operating margin stood at 3% as compared to 3.1% during the last year’s third quarter. The segment’s higher gross margin was offset by higher expenses as a result of the business mix shift to a larger number of corporate stores.
The operating margin of the Independent Business segment declined from 3% in 3Q15 to 2.8% in 3Q16. The Retail Food segment was the worst performer as its operating margin declined to 1.9% as compared to 2.5% in the previous year’s third quarter.
Supervalu (SVU), Kroger (KR), Whole Foods (WFM), and Sprouts Farmers Market (SFM) are included in the holdings of the Fidelity MSCI Consumer Staples Index ETF (FSTA) and have a combined weight of ~2.6%.
Read the next part of the series to know about the company’s shareholder’s returns.