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Why SUPERVALU Inc. Stock Popped Today

What happened

SUPERVALU Inc.  (NYSE: SVU  ) were surging today after the struggling supermarket chain said it would acquire wholesale grocery distributor Unified Grocers in a $375 million deal.

As of 11:16 a.m. EDT, the stock was up 9.4%.

So what

The parent of Shoppers Food Warehouse and other supermarket chains said it would take over the California-based distributor in a definitive merger, which includes $114 million in cash for the outstanding stock and the assumption of $261 million in debt. 

A Supervalu truck en route in a delivery

Image source: Supervalu.

The move will enhance Supervalu's wholesale business as management said it would now have 24 distribution centers in 46 states serving 3,000 stores. While Supervalu operates its own retail stores, a majority of its sales comes from wholesaling to a network of nearly 2,000 stores.

Supervalu CEO Mark Gross said, "We're thrilled at the opportunity to bring together these two great organizations. The transaction will enhance our ability to help our customers better compete in the evolving grocery industry."

Now what 

The Unified Grocers acquisition looks like a smart move for Supervalu as it strengthens the company's wholesale business, but the overall headwinds in the supermarket industry should continue to pressure the stock as retail comparable sales fell 5.7% last quarter even as the wholesale business grew slightly.

Food deflation has caused comparable sales growth to fall at most major supermarket chains, and competition continues to increase as Wal-Mart has lowered prices and expanded its online grocery pick-up services. Supervalu has sold off retail banners in recent years, and that pattern could continue as the company increases its focus on wholesale business with the recent acquisition.

Stay tuned for the company's fourth-quarter earnings report, which should be out later this month and could shed more light on Supervalu's new direction.

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4/28/2017 4:03 PM
SVU $4.10 Down -0.07 -1.68%
SuperValu CAPS Rating: ***

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