SuperValu’s Earnings Message: Stay Away from Grocers!

I have never been big on grocery stocks. They carry way too much debt, they
have thin margins, and they are under increasing attacks from competitors .
SuperValu s (NYSE: SVU ) recent earnings report demonstrates all the reasons why
grocery stocks are losers. The question you should ask is, Then should I buy the
competitors? The answer lies in the comparisons I'm about to make. Depending
on what part of the country you live in, SuperValu operates under the Acme,
Albertsons, Cub Foods, Farm Fresh, Hornbacher's, Jewel-Osco, Lucky, Shaw's,
Shop 'n Save, Shoppers Food & Pharmacy or Star Market banners. During the past
four years, the company has lost more than $2.5 billion. Whereas FY 2008 brought
in $44.5 billion in revenue, FY 2011 looks closer to $36 billion. Because the
company is losing money at the operations level, that means the half-billion
dollars in annual debt service is just barely covered by its cash flow after
backing out depreciation. With only a couple hundred million of cash on hand, it
cant afford to make any mistakes. People point to the generous 5% yield, but I
dont believe that is sustainable. Earnings will be flat for 2012 with only 6%
annualized growth expected for the long term. Now, compare that to whats going
on with two important competitors. The first is a company I love Whole Foods
Market (NASDAQ: WFM ). The Buy Organic propaganda machine has so effectively
taken hold of the American imagination that it has propelled Whole Foods into
the stratosphere, and its now the big brand name of that sector. While regular
grocers struggle to make money at all, Whole Foods has operating margins twice
the size, and net margins almost three times larger. While the grocers carry
billions of dollars in debt, Whole Foods has only $17 million of it, and over
$840 million in cash. Why? Because grocers are trying to be all things to all
people. Whole Foods has chosen to own a niche, where it can be most things to
most people while also relying on a massive marketing machine that is obviously
far more effective. In other words, why buy the horse and buggy of a standard
grocer when you can buy the race car that is Whole Foods? This brings us to yet
another problem for the grocers the dollar stores . Hoo, boy! It took a long
time, but those companies finally realized that the way to consumers hearts was
to offer them more food and beverage choices, particularly in a bad economy.
This new focus has propelled the dollar chains across the board. Ninety-Nine
Cent Stores just got bought out by a private investment consortium. Hedge fund
genius Bill Ackman has purchased a massive stake in Family Dollar (NYSE: FDO ),
and my personal favorite, Dollar Tree (NASDAQ: DLTR ), is at an all-time high.
And this is all coming at traditional grocers expense and that includes
SuperValu. If you dont believe me, just look again at SVUs earnings report and
try not to gag. As of this writing, Lawrence Meyers did not hold a position in
any of the aforementioned stocks.