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Why SVU’s Profitability Is Unlikely to Improve in Fiscal 2018

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SVU has the thinnest margins in its peer group

While the retail food industry has paper-thin margins, SUPERVALU’s (SVU) margins are among the lowest in its peer group. 

The company reported a fiscal 2017 operating margin of just 1.5%, lower than the trailing-12-month operating margins of its peers Kroger (KR) at 2.5%, Whole Foods Market (WFM) at 4.5%, United Natural Foods (UNFI) at 2.5%, and Sysco (SYY) at 3.7%.

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What’s behind SVU’s weak margins?

While SVU has historically had low margins, the company has seen some deterioration over the last year. Its operating margin contracted to 1.5% in fiscal 2017, compared to its average of 2.2% between fiscal 2014 and fiscal 2016. 

Higher employee costs and trucking expenses have pressured SVU’s wholesale business, while negative comps and high costs have affected its retail margins.

Looking forward

SUPERVALU doesn’t expect any improvement in its profitability in the near future. Its fiscal 2018 profit is expected to be negatively affected by the winding down of its Albertson’s transaction service agreement, after which its revenue is expected to fall ~$40 million. Negative retail ID sales could also affect the company’s profitability.

SUPERVALU’s management has guided for fiscal 2018 adjusted EBITDA of $440 million–$460 million, compared to its fiscal 2017 adjusted EBITDA of $507 million.

ETF investors seeking to add exposure to SVU can consider the WisdomTree SmallCap Earnings ETF (EES), which invests 0.4% of its holdings in the company.

Read about SUPERVALU’s stock market performance and valuation in the next article.

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