Financial assessment and investment potential of Supervalu Inc

Finance

Financial Assessment of Supervalu

Overview of Supervalu

Supervalu Today

Financial Analysis

Summary of the Statements

Income Statement

Balance Sheet

Cash Flow Statement

Statement of Owners Equity

Ratio Analysis

Liquidity

Asset Management

Debt Management

Profitability

Market Value

Information from Analysis Sites

Forecasting Stock Value

Consolidated Statements of Earnings

Consolidated Balance Sheet

Consolidated Cash Flow Statement

Consolidated Statement of Owners Equity

Investment decisions are never easy; there are many firms whose shares provide suitable investment vehicles. The ultimate aim of an investor is usually to create an acceptable return on investment. While the actual return required may vary between investors, reflecting their personal risk profile, the process of decision making will be relatively similar. The process will include an assessment of the firm and their financial performance along with consideration of the way the firm may perform in the future. A key issue in achieving positive returns is to pick a firm where there is a potential for capital growth in the share price; where the firms shares may be bought at a low price and sold later at a higher price.

One firm that may offer an opportunity is Supervalu; a U.S. based supermarket chain that has seen their share value fall a significant amount over the last few years. The organization is committed to a turnaround and has just appointed a new CEO; Wayne C. Sales, with the aim of speeding up the turnaround (Gasparro, 2012). To assess the potential of the firm it is necessary to look at the background to the firm and then look at their current financial performance and consider the history of the share price movements and how this may impact on future share price values.

2.

Overview of Supervalu

2.1

Financial Analysis

Organizations produce annual reports designed with the shareholder as the primary audience. The annual reports, which are published utilizing a standard format, presents the performance of the organization in the preceding 12 months, to allow for an assessment of the performance. The annual reports, the 10-K in the U.S., are overseen by an auditor, to ensure that they reflect a true and honest picture of the company and are compiled in line the required financial accounting standards. It is notable that in some cases annual reports may be misleading, as seen with recent cases such as Enron and WorldCom, but for the purposes of this report it will be assumed that there are no potential misstatements.

This section will start with a summary of four main financial statements with in the annual account, and then undertake a ratio analysis looking at the five main areas of financial performance. The financial analysis then moves on and considers the pattern seen in share price movements and seeks to forecast the potential future share price.

3.1

Summary of the Statements

When examining the different financial statements all figures presented will be in millions of U.S. dollars unless otherwise specified with the exception of per-share figures. All figures for Supervalu Inc., have been taken from the 10-k for the financial year ending February 2012, where industry comparisons are made these have been taken from the relevant ratio pages on MSN Money.

3.1.1

Income Statement

The income statement, which can be found in appendix 1, is also referred to as the consolidated statements of earnings, shows that in the financial year which ended on 25 February 2012, (a 52-week year) the organization had net sales of $36,100; this demonstrated a fall in revenue on the previous two years, as the 2011 net sales was 37,534, and the 2010 net sales of $40,597. Since 2010 the organization has demonstrated a decline in revenue of 11.08%. However, one would expect some decline as a result of the divestments took place in 2011.

The gross profit for the year ending 2012 was $8,019, which equates to a gross profit margin of 22.21%. However, the operating profit demonstrated a loss of $519, hindered by high ongoing Goodwin and intangible asset charges. However, was a lower operating loss compared to the operating loss in 2011 when it was $976.

The income statement shows the net earnings. In financial ***** earnings may be presented either before or after tax. As Supervalu are struggling and benefited from a negative tax payment in 2011, this report will use the definition of net earnings being earnings after tax. Calculated after provisions for income tax, showed a loss of $1,040, equating to -2.88%. However, it is notable that this is an improvement on the previous year, when the net earnings demonstrated a loss of $1,510, equivalent to a -4.02% net profit margin.

The income statement also shows the net earnings per share, which obviously show a loss is due to the net profit sharing and loss. This is a loss of $4.91 per share in 2012, which is an improvement on 2011 when the net loss per share was $7.13. It is notable that these changes are not impacted by any changes in the weighted average number of shares that are outstanding, which remained at 212 million (Supervalu, 2012). The income statement demonstrates a difficult position that the organization finds itself in, but does indicate that the financial performance is improving.

3.1.2

Balance Sheet

The balance sheet, which can be found in Appendix 2, shows a position of the firm in terms of assets and liabilities. In 2012 there is a decline in the value of assets, but there is also a decreasing the overall total of liabilities. Current assets, which are generally calculated as assets which has an economic life of 12 months or less, have fallen from $3,420 in 2011, to $3,225 in 2012. The decline in total value is seen across all current asset categories. Longer-term assets, including plant, property, goodwill and intangible assets also declined, with the total in 2012 falling to $12,053, from the 2011 level of $30,758; a decline in asset value of 12.39%.

The cost-cutting and control of debt is obviously having some benefit, as is the level of current liabilities has also declined, this was $3,786 in 2011, and declined to $3,590 in 2012. However, the long-term liabilities of the organization have increased, with total liabilities rising from $11,524 in 2011 to $12,032 in 2012. A major for shareholders is the decline in the level of equity within the organization, which has declined from $1,340 in 2011 to only $21 in 2012. The organization is suffering from the accumulated losses and the retained deficit. The total capital of the firm, equity plus debt, has declined from $13,758 in 2011 to $12,053 in 2012.

The balance sheet is also demonstrating the difficulties that are being faced by the firm, and indicative of the problems that the organization faces, and also reflects the lack of significant investment it has been made over the last few years, although some investment has been made.

3.1.3

Cash Flow Statement

The cash flow statement, which can be found in Appendix 3, shows that at the end of 2012 the organization had cash and cash equivalents of $157, a decline on the previous year (2011) which ended with cash and cash equivalents of $172. In turn 2011 showed a decline on 2010, where opening balance the 2011 was $211, and the opening balance the 2010 was $240. This shows a gradual but ongoing decrease within the cash and cash equivalents in the firm. Significant impacts are the losses that are carried into the cash flow, $1,040 for 2012 and $1,510 for 2011. This reduces the amount of cash which was provided by operating activities. It is also notable that while the organization has been selling off some assets, there have also been additional investments, resulting in an overall net investment, which must $484 in 2012 and $227 in 2011

The cash flows from financing activities also show a negative figure, with $291 raised from the issuance of long-term debt, but this is counteracted with $794 payment of long-term debt and capital lease obligations. This results in a net cash outflow from financing activities of $587. However, this is a decline on the previous year of $975.

3.1.4

Statement of Owners Equity

The consolidated statement of stockholders equity, which can be found in Appendix 4, shows the balance of equity over a period of four years, 2009-2012. The statement shows that the position of common stock is not changed, with a total of $230. The capital in excess the par has only changed slightly, this was $2,853 in 2009, and is $2,855 in 2012. The major influence on the level of equity is the retained a deficit, which has resulted in a balance of -$1,892 at the end of 2012, and when added with other accumulated losses results in a total shareholder equity in the firm of $21. This is a significant change as in 2009 the total balance of equity was $2,581

3.2

Ratio Analysis

A ratio analysis may be utilized to examine the financial position of the firm and the way in which it is performing, looking at internal performance as well as providing a benchmark for comparison with the industry. This section will demonstrate a number of ratio analysis calculations and where available will make a comparison with the industry average.

3.2.1

Liquidity

Liquidity is an important measure for any firm facing difficulties, it is a measure of the ability of the firm to survive in the short-term and meet its current obligations (Libby et al., 2010). There are two main measures of liquidity; the current ratio and the quick ratio which is also known as the acid test.

The current ratio measures the ability of an organization to pay its current liabilities out of its current assets. This calculates how many times the current assets will pay the current liabilities. For Supervalu, there are not sufficient current assets to pay the current liabilities. However, this is not necessarily a problem. In many industries where there is a rapid cash flow, a relatively low current ratio may be acceptable, due to the expected cash flow to be generated. This is typical of mass-market retail firms and high-tech firms. Therefore, Supervalu is not showing any sign of increasing distress, with the current ratio remaining the same at 0.9 between 2011 and 2012, as shown in table 1. The industry average current ratio is 1.1, which is slightly higher, but this differential may indicate a more efficient use of capital, although it may also indicate some cash flow issues.

Table 1: Current ratio

(Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012)

The quick ratio is an alternate method of examining liquidity within an organization. The theory is that an organization may not be able to realize the full value for the inventories it is held if they are required to liquidate inventory in order to pay current liabilities. The quick ratio is calculated in a similar manner to the current ratio, but the inventory's value is deducted from the total current assets, as shown in table 2. The organization has a relatively low quick ratio, or 0.3, which remains the same for both 2011 and 2012. However, this is starting to show some of the signs of stress, as the industry averages 0.7. This may also be indicative that the organization is carrying a high level of stock as the differential between the company and industry average is much greater.

Table 2: Quick ratio

(Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012)

3.2.2

Asset Management

The way in which Supervalu manages its assets will be a key issue in whether or not the firm is able to survive and return to profitability. There are two main measures of asset management; these include the return on assets and return on equity (which is also a type of asset). The return on assets demonstrates the profit, or loss, that the organization makes on its assets. It is notable that where there is an overall loss, there will also be a negative on the return on assets as well as the return on equity. In many assessments were an organization is making a loss, there will not usually be a report of the return on assets and return on equity is it is known that they will be negative.

For Supervalu, the return on assets shows slight improvement in 2012, at only -8.63% compared to the level of -10.98% in 2011.

Table 3: Return on assets

(Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012)

The return on equity shows a poor picture, while the actual loss itself has declined in 2012; the phenomenal change in the return on equity showing exponentially large loss is the result of the mathematical calculation following the sharp decline in the level of equity.

Table 4: Return on equity

(Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012)

When assessing a loss-making firm, measuring the return on assets and equity may be insufficient to determine the efficiency of the management's use of assets. An alternate approach is to use the asset turnover (Libby et al., 2010). This looks at the way in which assets are used to generate revenue; it is calculated by taking the revenue for the year and dividing it by the average asset value. This will show the number of times that the asset value has been turned over in that year. Supervalu appear to be increasing the efficiency in terms of asset utilization, they turned over assets equivalent 2.49 times in 2011, increasing this 2.8 times in 2012. Placing this in context of the industry, where the average is 2.4 times, the organization appears to be gaining some efficiency which is a good sign for recovery.

Table 5: Asset turnover

(Supervalu figures taken from Supervalu Inc. 10-K, industry comparison figure from Microsoft Money, 2012)

Therefore, it appears that while the organization is making losses, there are also some positive signs with improvement in the way that the organization is utilizing its assets.

3.2.3

Debt Management

Debt management is important in any organization, but it is particularly important in an organization it is facing difficulties. The first ratio that will be utilized is the debt ratio, this shows the proportion of assets which are funded by debt. Table 6 demonstrates that the position of the firm is delicate, with the majority of assets being funded by debt. The company appears to be showing a decline in this respect, as the debt ratio was 0.84 in 2011, but in 2012 it is 0.998. However, many other companies have faced similar difficulties, as a result of losses and erosion of equity, and recovered, as seen with companies such as Ford and General Motors. However, many other companies in this position have failed.

Table 6: Debt ratio

(Supervalu figures taken from Supervalu Inc. 10-K)

An alternate measure when examining debt management is the debt equity ratio, which indicates the proportion of debt compared to equity. Here the company also shows very poor figures as a result of the decline in equity. The company can be seen as in a very weak position compared to the industry, as shown in table 7, with the industry average at 1.03 showing a much greater level of equity competitive debt, whereas the company has