SuperValu reports lower gross margin
SuperValu (SVU) reported a 10.7% YoY (year-over-year) decline in its gross profit on account of higher inventory shrinkage and employee costs in 4Q16. As a result, the company’s gross margin slipped 19 basis points to ~15% of sales.
Higher selling, general and administrative expenses
A narrower gross margin and higher SG&A[1. selling, general, and administrative expenses]-to-sales ratio resulted in a decline in the company’s operating profit. The operating margin narrowed from 3.2% in 4Q15 to 2.6% in 4Q16, as the operating profit declined 27% on a GAAP (generally accepted accounting principles) basis.
Higher SG&A costs in 4Q16 were a result of a change in business segment mix as the Save-A-Lot and Retail Food segments comprised a greater percentage of total sales in 4Q16 than in 4Q15.
SVU’s operating margin is among the lowest in the supermarket peer group. While Kroger (KR) reported an operating margin of 3.5% last quarter, Whole Foods Market (WFM) and Sprouts Farmers Market (SFM) reported higher operating margins of 6.5% and 7.8%, respectively, in their last reported quarters.
Segmental operating margins
Year-over-year, all three of SVU’s segments reported lower operating margins in 4Q16. The Independent Business segment’s operating margin narrowed from 3.2% in 4Q15 to 2.9% in 4Q16 on account of higher employee costs.
The Save-A-Lot segment recorded an operating margin of 2.8% in 4Q16, compared with 4.1% in 4Q15. The decline was driven by higher employee and store occupancy costs and inventory shrinkage .
The Retail Food segment recorded a whopping 230-basis-point decline in its operating margin to 1.3% in 4Q16, primarily driven by narrower base margins and higher inventory shrinkage and employee costs.
SuperValu (SVU), Kroger (KR), Whole Foods Market (WFM), and Sprouts Farmers Market (SFM) are included in the holdings of the Fidelity MSCI Consumer Staples Index ETF (FSTA). They have a combined weight of ~2.6%. Continue to the next part of this series to read about the company’s shareholder returns.