CockRoach Theory Applied to SuperValu

SuperValu ($SVU) is a company that we have been following since it’s most recent earnings release on April 14.  The stock has performed poorly in recent years.  On April 14 the company announced earnings of $0.44 compared to consensus estimate of $0.34.  The stock opened up 12%.  Since then, the stock continued to rally for a few weeks before declining back to below the post-earnings level.  It has rallied slightly from the lows of last week: 

 

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$SVU is scheduled to release earnings on July 25.  Consensus estimate is $0.33 per share, significantly below last quarter actual $0.44.  We think there is value in Supervalu ahead of this earnings release. Competitors, including $WINN and $KR, reported strong earnings recently, and the Cockroach Theory states that whenever you see a roach there are usually more hiding.  In this case the competitor earnings are the visible roaches, and we think SVU is hiding a roach (good earnings) as well.  

 

The chart below shows $SVU in blue compared to $WINN in red and $KR in green.  As you can see, $SVU has declined significantly compared to its peers since the weeks following its last earnings release.   It has started to tick higher, but we think it has more room to run ahead of July 25 earnings. This is the bias we have in trading $SVU at the moment. We are very active in trading spreads of $SVU against other instruments:

 

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$SVU has a new management team focused on cutting costs and branding. Consumers are still budget-conscious, to the benefit of low-cost grocery stores such as $SVU.  When investors start to focus on the next round of earnings, SVU could benefit.  That said, there are risks to our bullish view. Grocery retailing is a competitive business.  $SVU still struggles to draw customer loyalty to its brand, and big chains like $WMT and $TGT continue to expand grocery product offerings.  $SVU faces an uphill battle against these competitors and a headwind of high unemployment and fears about the economy.

 

Written by Jennifer Galperin. Follow me on Twitter and StockTwits.

Comments

[Gabe]

Purely anecdotal here and we still like Shaws;
but my young family(with 3 growing kids) has recently started shopping at BJ's more often for the bulk purchases of (paper towels, detergent, garbage bags etc).

[Michael Bigger]

Yes, I do the same with Amazon. We are trading this very short term, not long term.

[Jen Galperin]

Hi Gabe, thank you for your response. Discount grocery business is quite competitive as customers are by definition price sensitive.