Wednesday, July 20, 2011

Supervalu: Enlightened Innovation in a Prosaic Business

Corporate managements are placing a growing emphasis on sustainability.   There is a growing realization that a company’s business practices are critical in determining its profitability, ability to retain and attract desirable employees, and even its long-term viability.  A company’s environmental, social, and governance (ESG) considerations are a reflection of a company’s management integrity and ability to anticipate and respond to changes in the world.  Companies that are well governed have fewer problems with employees and regulators, and good environmental practices save companies money on energy and water consumption, and on waste disposal costs.

Supervalu, the grocery wholesaler and retailer, has several positive developments relating to ESG efforts.  On the environment, Supervalu has set aggressive goals to reduce its carbon footprint.  It is applying LEED standards to new construction and store remodels, which include fuel cell power, LED lighting, composting, and increasingly ozone-friendly refrigeration).  Last year it became the first U.S. grocery retailer to achieve “zero waste” stores with two new stores in southern California.  “Zero waste” is a threshold of 90% of all waste recycled, reused, or composted.  The new Supervalu stores achieved a 95% level.

Sustainability also enhances a company’s bottom line.  Last year, for the first time revenues from recycling exceeded the company’s landfill waste expense.  Their landfill waste expense was more than 12% less than in the prior year, largely due to an aggressive cardboard recycling program.

A particularly innovative initiative is a new store in California that generates 90% of its electricity from a fuel cell, which results in a 40% reduction in energy costs.  Fuel cells are one of the cleanest and quietest energy sources in the world, and are virtually pollution free.  The electromechanical process produces electricity, heat, and water without burning fossil fuels.

Supervalu is also the first retailer to join the World Wildlife Fund’s “Climate Savers” program through improvements in electricity, refrigeration, natural gas heating, and transportation fuels.  It also is a member of the EPA’s “GreenChill Advanced Refrigeration Partnership” and received the Partner of the Year award for altering its refrigerant to reduce emissions and lower carbon dioxide.  In addition, driver education has improved the miles per gallon of its distribution system.

Through it new store design, the use of LED lighting and the use of skylights with sensors that adjust electric light levels accordingly results in a 50-65% savings in electricity.   Their new stores also result in a water savings of 45%.

On social factors, Supervalu achieved the top rating of 100% on Human Rights Campaign Foundation’s annual Corporate Equality Index, for the fourth straight year.  The company was the first grocery retailer to achieve 100%--in 2008.

Supervalu also partners with World Wildlife Fund on sustainable seafood.

Also on social considerations, the company’s Nutrition IQ program helps to inform shoppers of healthful food options.   Last year Supervalu donated 60 million pounds of food (worth $94 million) through its partnership with Feeding America, the nation’s leading domestic hunger relief organization.

Aside from these laudable initiatives by Supervalu, the company’s stock is inexpensive and unpopular among analysts.  The price/earnings ratio on this year’s earnings is 7.3, only slightly more than half the multiple of Kroger and Safeway.  This clearly is a low expectations stock, though there are signs of a turnaround under its CEO, who joined the company from Wal-Mart in 2009. 

The dividend is well covered and yields 3.9%.  Though the debt load from its acquisitions in recent years is heavy, the cash generation has improved considerably.  The free cash flow yield after dividends on last year’s cash flow is 25%, which is probably why the company has been rumored to be a target of a private-equity takeover.

Steve Lehman

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