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Why Supervalu’s Gross Margin Could Fall Further in 4Q18

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Apr. 20 2018, Published 12:46 p.m. ET

SVU’s EPS to fall in 4Q18

Supervalu (SVU) is slated to report its 4Q18 results on April 24. It’s likely to post a 14% YoY (year-over-year) decline in earnings per share (or EPS). EPS is projected to land around 78 cents for the quarter by the Wall Street.

The company missed consensus expectations during the first quarter, but it beat forecasts in the second and third quarters.

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SVU’s gross margin to worsen further in Q4

The company’s gross margin is likely to contract further, by ~280 basis points to 12.1% in 4Q18. It was down 80 basis points in Q1, followed by a 280 basis point decline in Q2 and another 300 basis points in Q3. The main reason for the decline was a shift in the company’s sales mix toward wholesaling and away from retail. Wholesale, which now represents more than 70% of the company’s sales, typically carries a lower gross margin.

The company’s ongoing integration with United Grocers has boosted SVU’s sales, but it has further depressed its margins as Unified Grocers has a lower gross profit rate than SVU’s legacy wholesale business.

Supervalu has the lowest margins among peers

Supervalu’s trailing-12-month gross margin stands at 12.6% and is among the lowest in the food wholesale group as well as the retailing peer group.

In comparison, supermarkets Kroger (KR) and Sprouts Farmers Market (SFM) recorded LTM gross margins of 22% and 29%, respectively. Though margins for food wholesalers are typically lower than retailers, competitors still have a better margin than SVU. TTM gross margins for United Natural Foods (UNFI) and Sysco (SYY) stood at 15.2% and 18.9%, respectively.

The SPDR S&P Retail ETF (XRT) invests 1.1% of its portfolio in the company.

See the next part of this series for a view of the company’s stock market performance and valuations.

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