Analysts Confident in Supervalu

NEW YORK Industry analysts were generally upbeat about the prospects for Supervalu as it moves through the early stages of integrating its retail operations with the Albertsons assets it acquired in June. Following a four-hour investor presentation here by various Supervalu executives, Jay Whitmer, senior research analyst with Cleveland Research Co., Cleveland, told SN he's been bullish on Supervalu

NEW YORK — Industry analysts were generally upbeat about the prospects for Supervalu as it moves through the early stages of integrating its retail operations with the Albertsons assets it acquired in June.

Following a four-hour investor presentation here by various Supervalu executives, Jay Whitmer, senior research analyst with Cleveland Research Co., Cleveland, told SN he's been bullish on Supervalu for the last several months, “but my conviction level is even stronger now about its ability to establish a better enterprise and about its strategic direction as well.

“One of the subtle elements they discussed at the conference was the shift of merchandising and marketing to Minneapolis, where they will create a centralized platform based on consumer research and other practical information to customize their initiatives — as exemplified by the new ‘premium fresh and healthy’ store format and the planned acceleration of remodeling activity — instead of the old-school approach of simply using pricing and promotions.”

Supervalu said the “premium fresh and healthy” store format will emphasize perishables, natural and organic items, ethnic foods and pharmacies.

“I think Supervalu has a lot more flexibility than some might think to be very aggressive,” Whitmer said, “and I think they're being very conservative in terms of the synergies they're talking about, which I believe will be comfortably accretive and enable them to build momentum as they reinvest some of that back into the business. And I think the more synergies they look for, the more they will find.”

Perry Caicco, an analyst with CIBC World Markets, Toronto, said the company had successfully addressed three of his major concerns at the meeting: day-to-day store conditions, the balance between national direction and local needs, and longer-term customer strategies.

“Our impression was that necessary improvements in daily store conditions were proceeding very slowly,” Caicco said in a written report. “[But] the company has now laid out an aggressive plan to ‘raise the bar’ on cleanliness, service, in-stock, presentation and merchandising.

“It will be a little slower addressing the confusing promotional pricing programs, but those will be altered over time.”

Supervalu presented “an intelligent plan to balance centralized strategies and directions with local sensitivity,” he said. “It said a substantial portion of the merchandising and marketing programs and all business process and supply chain efforts will be centralized, while local banners will drive a defined portion of the merchandising and marketing and will be responsible for pure execution of programs and offers. Store design and investment will be a cooperative effort, as it was at the old [pre-Albertsons] Supervalu.”

Supervalu has conducted consumer research, “and the results were not surprising,” Caicco said. “Customers want convenient meal solutions, good produce, ethnic products, and health and wellness programs, and Supervalu intends to deliver those with a steady renovation program [involving 6% of square footage per year], many minor renovations and the launch of new targeted programs.”

Supervalu's challenge, Caicco said, will be to improve the store offerings without “blowing the labor line out of control and while improving the acquired company's generally poor price image. These challenges could cause a quarter or two of pain down the road while adjustments are made, but the general direction of the business is strong and, in a few years, we could be surprised by the revival of the Albertsons assets, based on their great locations.”

DIFFERENT STRENGTHS

“It seems clear the integration process is running smoothly,” though Supervalu has provided few details, Meredith Adler, an analyst with Lehman Brothers here, noted in a written report.

Adler said the company outlined “a well-honed focus on local merchandising and marketing that we consider a key to long-term success,” given its broad geographic footprint and its ability to offer a variety of formats. “And management recognizes the acquired business has different strengths than its core operation, so it plans to work to share best practices and differing technology in a disciplined and methodical manner.

“In addition, the new organizational structure gives managers from both Albertsons and Supervalu responsibility for all the stores in a region, forcing them to think and act as managers of one company right away.

“Clearly we see risks associated with integrating the two companies, though these are mostly at the corporate level, [and] we are confident the integration will be successful.”

Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, told SN the strategies Supervalu discussed “are similar to what Kroger and Safeway are doing, and that should make the Albertsons stores more competitive in the future.

“Supervalu is developing merchandising approaches based on front-end data as it gets better at collecting that information, and it's reinvesting in areas where it has the strongest market share and increasing the emphasis on fresh product, including prepared foods, which are all positive moves.”

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., told SN his mood after the meeting was a bit skeptical. “Everything sounded good, but they were short on specifics, though companies often don't get too specific about their plans for competitive reasons.

“But Supervalu has never been a big retail player, and the stores it ran were mostly discounters like Cub and Save-A-Lot. Now that it's added the better Albertsons assets, it's still a matter of faith how successful it will be merchandising those stores.”

He said the “premium fresh and healthy” store format Supervalu discussed “sounds like Safeway lifestyle stores.”

Supervalu's comments that it will use any extra cash flow to invest in increased store remodels rather than alter its goal of committing $400 million a year to pay down debt may be a disappointment to some investors, Wolf added, “but it is sticking to its promise on the debt paydown, and that's a positive thing. And using free cash flow for other purposes than debt paydown gives it more financial flexibility, which is also a positive thing.”