Supervalu looks to break reverse stock split curse

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Supervalu looks to break reverse stock split curse

By Mike Troy - 07/24/2017
A 1-for-7 reverse stock split that goes into effect at Supervalu on Aug. 2 will boost the company’s stock price and earnings per share but the prospects for the underlying business remain challenging despite recent strategic moves.

The number of Supervalu shares will decline to 38.4 million from 268.5 million on Aug. 2 when the reverse split takes effect. As net income is spread over the reduced share count, earnings per share will surge and so will the company’s stock price. However, those changes are purely cosmetic as Supervalu’s core business remains challenged. The big benefit of the move is that Supervalu’s low stock price will no longer spook investors. Large institutional investors are reluctant or may be prohibited from investing in companies whose shares trade in single digit territory, as Supervalu’s has for the past six months.

“We believe that the reduction in outstanding shares caused by the reverse stock split, together with the anticipated increased stock price immediately following and resulting from the reverse stock split, may encourage interest and trading in our common stock and thus possibly promote greater liquidity for our stockholders, thereby resulting in a broader market for our common stock than that which currently exists,” the company explained to shareholders in its proxy statement.

Aside from the optics of the move, what will really drive Supervalu’s stock price over the longer term is improvement in the base business and a stronger balance sheet. To that end, the company is in the midst of executing a broad range of initiatives under the leadership of Mark Gross who joined the company in February 2016 as President and CEO. He has spent the prior 10 years as head of a consulting firm he founded and his first big move at Supervalu was to divest the Sav-A-Lot retail business. Toronto-based private equity firm Onex agreed to pay nearly $1.4 billion in late 2016 for the 1,368 unit Sav-A-Lot business.

Gross followed that move with a key hire in early 2017 when he nabbed Anne Dament following her departure from Target in November 2016. Dament was tapped for the role of Senior Vice President of Retail, Merchandising and Marketing after serving the prior two years as Senior Vice President of Merchandising at Target where she oversaw all aspects of the grocery business. Prior to Target, Dament held key merchandising roles at PetSmart and Safeway. The Minneapolis native began her career at Supervalu as a buyer.

Most recently, Supervalu closed its $390 million acquisition of Unified Grocers to expand its core wholesale business in the western U.S. where Unified Grocers is strong. The combined company will be uniquely positioned to efficiently serve a broad range of independent customers and offer a diverse array of value added services, helping customers compete in an increasingly demanding grocery environment, according to Supervalu. The acquisition also provides new growth opportunities across multiple geographies, including the expansion of Unified Grocers’ Market Centre division, a growing business providing specialty and ethnic products to independent customers, according to Supervalu.

With a strengthened balance sheet, a new head merchant and a key acquisition under its belt, Supervalu does have some things going for it even if the company does operate in one of the most challenging segments of the highly challenging food retailing industry. A reverse stock split may increase the company’s appeal to investors in the short run, but how long they stick around will depend on whether the company’s operational moves yield results.