Atlanta, GA 7/12/12 (StreetBeat) -- Shares of Supervalu Inc. (NYSE:SVU) are set to open sharply lower on Thursday following the company's decision to suspend its dividend.
SVU data by YCharts
News Release Highlights
• Dividend suspended.
• Launching a strategic review.
• Fiscal first quarter profits fell 45% to 19 cents per share.
• Total sales fell 4.7%, while same store sales fell 3.7% .
• Capital spending plans cut by $125 million.
Short Interest
Short interest in Supervalu currently stands at 98 million shares or 46% of the float. Clearly, many are betting that the worst is yet to come for Supervalu. However, it should be noted that any positive news could cause a sharp move higher in a short squeeze. It would not surprise me to see some short sellers cover their positions on Thursday on the sharp decline.
Debt
One reason why the short interest is so high is the company's massive debt load. Currently, Supervalu has more than $6 billion in debt, and more than $1 billion in pension liabilities. If business continues to deteriorate, Supervalu may find it difficult to meet its obligations.
My Take
For a very quick trade, I think Supervalu can be bought for one reason: a dividend suspension was inevitable. Most investors who have followed the company's recent history know that the turnaround plan has not gone well, and the company was not in a position to continue paying the dividend.
For a very long time, investors in Supervalu have been selling the rumor, now it might be time for a quick buy the news trade. However, I would not hold Supervalu for very long as the long-term outlook is not good. The company is losing market share and faces a difficult financial situation. A better alternative in the supermarket sector is Whole Foods Market, Inc. (Nasdaq:WFM).
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