HEDGEYE OPINION
We recently covered our SHORT on SVU, due to the cash infusion from the sale of the Save-A-Lot brand, which management touched upon on today’s 2Q17 earnings call. They expect to complete the transaction by the end of January 2017, with at least $750mm of net proceeds being used to make a mandatory prepayment against the company’s outstanding term loan. Additionally, according to CFO Bruce Besanko, it is likely that this sale will be dilutive to earnings. Past this event, when we get a better look at the other business, we will revisit the SHORT thesis. That being said, there was nothing in the 2Q17 earnings release that would make the longs feel good, as the focus of the call was by far the deflationary environment that has engulfed the food retail industry.
Management felt a need to harp on this topic throughout the call, and it is hard to blame them, as earnings were less than stellar (revenue came in at $3.87bn, missing Factset estimates of $3.94bn) and the deflationary environment, in addition to increased competition and ever-changing consumer behavior, has caused food retailers to turn to aggressive pricing practices to compete for and earn share-of-stomach. Net sales for the Save-A-Lot brand and the wholesale and retail food segments followed suit, also coming up short of estimates (please see below).
Despite this quarter’s lackluster performance, management remains focused on steering the business in the right direction through appropriate capital investment (investing among the store base and employee training) to continue to improve the customer experience, and the expansion of their e-commerce and home delivery options.
NOTABLE COMPANY THOUGHTS
“As we expected, the transformation of our business continues to take time, but I am optimistic about our ability to grow our wholesale business by adding new customers, securing long-term supply agreements with existing customers, and expanding overall product sales to all customers. We expect wholesale sales in H2 of this year to be higher than last year as we add new customers, grow our base business, and cycle select customer losses from last year,” (Mark Gross, CEO)
“We continue to see deflation in lower levels of snap benefits as headwinds to the rest of the year. These external factors simply are what they are. Our job is to operate and merchandise our stores as best we can in this challenging environment,” (Eric A. Claus, CEO of Save-A-Lot)
“We had low to single-digit deflation throughout our system. It was more pronounced to Save-A-Lot (mid-single digit), due to its added assortment,” (Bruce Besanko, Executive VP, COO, CFO)
“I’ve had a very early read of what deflation looks like for the period that we’re just now closing, and I would say that it actually seems to be getting just slightly worse from that very early read,” Bruce Besanko, Executive VP, COO, CFO)
QUICK COMPS
- $.3.87bn in revenue vs Factset $3.94bn
- Adjusted EBITDA $147.0mm vs Factset $146.0mm
- Gross margin 14.5% vs consensus 14.3%
- EPS $0.10 ex-items vs Factset $0.10
Save-A-Lot:
- Net Sales $1.06bn vs consensus $1.11bn
- IDs (5.2%) vs consensus (2.0%)
- Operating Income $22mm vs consensus $23.4mm
Wholesale:
- Net sales $1.73bn vs consensus $1.74bn
- Operating income $58mm vs consensus $47.1mm
Retail Food:
- Net sales $1.03bn vs consensus $1.05bn
- IDs (5.9%) vs consensus (5.2%)
- Operating income ($12mm) vs consensus $1.4mm
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
