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At Supervalu, Bearish Investors Roam Aisles

--Supermarket chain to report fourth-quarter results Tuesday --Earnings per share are expected to fall 20% from a year earlier --Supervalu has become feeding ground for short sellers --Chain has been slow to see results from turnaround plan By Matt Andrejczak It is hard for a supermarket chain to change its price image among shoppers overnight. Supervalu Inc. (SVU), owner of Albertsons and Jewel-Osco, is a prime example. With a 36% decline since Jan. 1, Supervalu shares rank as one of the worst performers on the S&P 500 this year. In comparison, rival Kroger Co. (KR) is off 3%, while Safeway Inc. (SWY) is down 8%. Whole Foods Market Inc. (WFM) is up 19%. Supervalu has become a feeding ground for short sellers. Bets against the supermarket chain's shares gaining in value have jumped 41% since the end of 2011 to 72.9 million shares. That is one-third of all the company's shares outstanding and a considerably high number. There are growing concerns about whether Supervalu has enough liquidity to execute its long-stated turnaround, according to J.P. Morgan analyst Ken Goldman. His analysis suggests the company can earn enough money to avoid running afoul of debt covenants. On Tuesday, Supervalu's top brass will have a chance to shore up investor confidence when the grocer reports fiscal fourth-quarter results. Analysts calculate the grocer will earn 35 cents a share, down 20% from the same period in 2011. Same-store sales are expected to drop 3%, the latest FactSet survey shows. When former Wal-Mart Stores Inc. (WMT) man Craig Herkert took the job as Supervalu CEO in May 2009, he knew there would be heavy lifting to do. It has been a brutal uphill climb to lower shelf prices and convince shoppers to shop in its stores. Declines in same-store sales at Supervalu have accelerated for three straight years. Profits and market share have shrunk too. Fortunately, gross profit margins have stayed steady at 22%. Minnesota-based Supervalu generates $37 billion a year in sales through its regional chains that also include Acme, Shaw's and Save-A-Lot. One jewel in the Supervalu franchise is Save-A-Lot, which has fared well during the slow U.S. economic recovery. Analyst Ajay Jain of Cantor Fitzgerald estimates that network of 1,280 hard discount stores is worth $5 to $6 a share. That is roughly the same price as one Supervalu share. Supervalu shares traded at $5.30 on Monday. Jain, who has a buy rating on Supervalu, thinks the stock has been oversold. He believes the supermarket chain is worth $10 a share. Supervalu, long rumored to be a target of private-equity shops, also has been seen as a hunting ground for deep-value investors over the past couple years. Now, there are questions as to whether even those investors have the stomach for Supervalu's long-awaited turnaround. "If Mr. Herkert and team merely ask investors for more patience around a fundamental turnaround plan that thus far has borne little apparent fruit and do not address larger concerns head on, we think the stock could remain under pressure," said J.P. Morgan's Goldman. --By Matt Andrejczak, 415-439-6400;

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