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Why Supervalu’s Margins Are Deteriorating

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Supervalu’s gross margin

Supervalu (SVU) will be reporting its 3Q18 results on January 10, 2018. It will likely post a 34% YoY (year-over-year) increase in its EPS (earnings per share). Wall Street analysts expect the EPS to be $0.47.

Supervalu’s margins are projected to fall more. The gross margin will likely fall by 270 basis points to 10.8% in 3Q18. It fell by 80 basis points in 1Q18 and by 280 basis points in 2Q18. The main reason for the fall was a change in the sales mix towards wholesale and away from retail. Wholesale, which usually has a lower gross margin, represented 72% of the total sales in 2Q18—compared to 45% of the sales in 2Q17.

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Operating margin

Supervalu’s operating margin is projected to fall for the ninth consecutive quarter to 1.4% of its sales in 3Q18. The wholesale operating margin fell by 60 basis points during 2Q18. It reflected the contribution from Unified Grocers, which had a lower margin business. The retail margin fell mainly due to higher promotional spending and the deleveraging impact of negative identical store sales.

Supervalu has lower margins than its peers

Supervalu recorded an operating margin of 0.7% in the last 12 months. While food retailers and wholesalers generally have paper-thin margins, Supervalu’s margins are lower than the industry average.

Kroger (KR) and Sprouts Farmers Market recorded operating margins of 2.5% and 4.8%, respectively, in the last 12 months. Wholesalers’ operating margins were also better than Supervalu. United Natural Foods (UNFI) and Sysco (SYY) posted operating margins of 2.4% and 3.8%, respectively, in the last 12 months.

ETF investors seeking to add exposure to Supervalu can consider the SPDR S&P Retail ETF (XRT), which invests 1.3% of its portfolio in the company.

Next, we’ll discuss Supervalu’s stock market performance.

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