Supervalu said ongoing weakness in its retail operations and added expenses in its wholesale business pressured its profitability in the third quarter and caused it to scale back its outlook for the full fiscal year.
The Minneapolis-based company on Wednesday posted a loss of $11 million from continuing operations for the quarter (excluding results from the recently sold Save-A-Lot chain), after several one-time charges. The quarter marked the first time Supervalu has reported quarterly results since the Dec. 5 sale of Save-A-Lot. The company’s third quarter ended Dec. 3.
Supervalu’s retail woes continued in the period, with identical-store sales in the retail division down 5.7% compared with year-ago results. The decline included a 3.8% drop in customer traffic and a 1.9% decline in average basket size.
The company said deflation, increased competition and lower levels of SNAP benefits all impacted retail sales in the period.
“We know we cannot change either deflation or competition, but we are working to offset their overall impact with several initiatives,” said Mark Gross, president and CEO, in a conference call discussing the results.
In response to a question from an analyst, Gross said the company’s retail business in its home Minneapolis-St. Paul market, where it operates the Cub Foods banner, came under increasing pressure both from a small-format discounter — presumably Aldi, which has been expanding in the market — and a large operator from the Midwest that has also been gobbling share in the market, presumably referring to Hy-Vee.
“They are very good competitors,” he said.
Gross said about two-thirds of Supervalu’s retail stores were impacted by competition from new store openings in the quarter.
Segmentation and ecommerce
To battle the declining performance in its retail division, Supervalu is deploying a multifaceted strategy of customer segmentation to better tailor merchandising to local demographics, investment in employee training, and other initiatives.
“We continue to evolve our efforts around customer segmentation, and have seen stronger sales in unit movement from both low- and high-end segments compared to what we referred to as mainstream,” Gross said.
Bruce Besanko, EVP, chief operating officer and CFO at Supervalu, said the company has seen “a couple hundred basis points of improvement” between segmented and non-segmented stores. He also said Supervalu has added more product density to its retail merchandising, which appears to have boosted holiday-season sales, and is making small capital investments in things such as grab-and-go deli coolers as well as store remodels.
Supervalu also has been ramping up its online grocery operations, and expects to roll out home delivery to stores within its fifth retail banner in February. The other four banners already offer the service.
It is also expanding its click-and-collect grocery offering to the Twin Cities market. Click-and-collect currently is available only at its Hornbacher’s banner in Minnesota and North Dakota.
Supervalu’s ecommerce customers tend to have much bigger baskets and shop more often, and also tend to buy more of the company’s private labels, the company said.
“It’s a nice story here, and we are working to roll this thing out rapidly,” said Besanko.
Supervalu’s retail operating loss in the quarter totaled $14 million and included a $15 million goodwill impairment charge and $1 million for store closure charges and costs. Adjusted for those items, retail operating earnings were $2 million, compared with adjusted retail operating earnings of $22 million in the year-ago period. Retail sales in the quarter were down 3.4%, to $1.06 billion.
Rollout to The Fresh Market
On the wholesale side, Supervalu said that after a successful, 16-store test, it would begin rolling out distribution to the rest of The Fresh Market chain, effective Feb. 28. The company previously had announced that it had won the primary supply contract for the 178-store retailer, which is based in Greensboro, N.C.
Supervalu also began transitioning distribution services to America’s Food Basket, a 50-unit retailer in New York and New England.
Supervalu’s wholesale business reported a sales increase of 0.2% in the third quarter, to $1.91 billion, although operating income in the division was squeezed by costs related to overtime pay increases in some distribution centers and increased costs for third-party trucking services. Wholesale operating earnings were $52 million, or 2.7% of net sales, compared with adjusted operating earnings of $60 million, or 3.2% of net sales in the year-ago period.
Companywide sales from continuing operations (excluding Save-A-Lot) in the third quarter totaled $3 billion, down about 1.4% from year-ago sales from continuing operations. The company said the sale of Save-A-Lot generated about $1.3 billion of cash proceeds and enabled it to reduce outstanding debt by $1.1 billion.
Analysts have anticipated that Supervalu would be able to focus on making gains with its wholesale operations after divesting Save-A-Lot.
“With the separation of Save-A-Lot, [Supervalu] can now refocus on its core wholesale business and is less exposed to the macro pressures, which had an outsized impact on Save-A-Lot,” said Bill Kirk, an analyst with RBC Capital Markets, in a research note after Supervalu released earnings.
Supervalu said it now expects fiscal 2017 pro forma adjusted EBITDA to be up to 11% below the $557 million of fiscal 2016 pro forma adjusted EBITDA cited in a recent filing, primarily due to the weakness in the retail segment. Full-year retail sales are now expected to be about $70 million below previous projections.
Wholesale adjusted EBITDA for the full fiscal year is also expected to be “slightly lower” due to higher staffing and freight costs as well as product deflation.