Supervalu (NYSE: SVU) was today’s market loser, losing nearly half its stock value after announcing it is cutting its dividend to nothing and announcing a “strategic review”.
Investors chasing yield were obviously burned by this decision, amongst other people getting into the trap of thinking “if they can just increase their operating margin by 50 basis points this company is worth a fortune”.
Before yesterday, longer-dated debt of Supervalu (mainly through bonds of Albertsons) was trading above 10% yields to maturity – not exactly the sign of a stable credit. Now, you can get some 2030-dated paper for a yield to maturity of 14%.
Grocery chains run into the problem of the question of: “How do we compete with Walmart?”. All other chains try to diversify into more “premium branding” and those that don’t will end up in trouble like SVU. Whole Foods (NYSE: WFM) is probably the best example of a premium-branded grocery store (ironically with a premium valuation at present).