Supervalu Cites Progress; Remerchandising Begins

Despite lower sales, Supervalu here said last week it is pleased by its progress in promotional spending and expense controls, though it may take up to 18 months for improvements at the store level to show up in reported financial results. Analysts said they are taking a wait-and-see attitude on the wisdom of the company's strategies. According to Craig Herkert, president and chief executive

MINNEAPOLIS — Despite lower sales, Supervalu here said last week it is pleased by its progress in promotional spending and expense controls, though it may take up to 18 months for improvements at the store level to show up in reported financial results.

Analysts said they are taking a wait-and-see attitude on the wisdom of the company's strategies.

According to Craig Herkert, president and chief executive officer, the focus at Supervalu going forward will be to install new merchandising programs within each store, with more than 300 locations scheduled to be affected this year.

For the third quarter and 40 weeks that ended Dec. 5, the company reported a profit for both periods, compared with losses a year ago. Sales fell 9.4% for the quarter to $9.2 billion and 7% for the 40 weeks to $31.4 billion, while identical-store sales for the quarter dropped 6.5%. Lower customer counts contributed 2% to the same-store sales decline, while a decline in average basket size shaved another 4.5%, the company pointed out.

That downward trend has continued into the fourth quarter, Pamela Knous, executive vice president and chief financial officer, said during a conference call with analysts last week.

Margins remained flat at 22.4% of sales. “Our margins held up well,” Herkert pointed out, “[and] we saw more effective promotional spending.”

Supervalu's goal, he said, is to narrow the gap between regular shelf prices and promotional prices. “A hyper-promotional environment can encourage routine cherry-picking and may not necessarily build long-term brand equity,” he noted.

“We remain a promotional retailer, but we will not sacrifice margin for promotional activities, which we do not believe will influence long-term customer loyalty … [but only buys] short-term gains.”

Karen Short, an analyst with the New York office of BMO Capital Markets, Toronto, said she's not sure if Supervalu's strategy will work. “The company made a conscious decision to adjust promotional cadence to deter the cherry-picker, and the strategy helped margins but hurt sales,” she wrote last week. “Only time will tell if the strategy is sustainable or appropriate.”

However, she noted that the quarterly results were strong “[and] indicate the company is making progress with its cost-cutting initiatives, slightly offsetting the challenging consumer environment and continued deflation.”

John Heinbockel, an analyst with Goldman Sachs, New York, said he regards Supervalu's third-quarter performance “as a clear sign the company is more likely to be rational when it comes to price investments and attempts to protect near-term earnings.”

Herkert said analytics teams at Supervalu are working to not only improve pricing initiatives but also to address other parts of the store experience “so the consumer can make a choice to shop at our stores based on more than just the weekly ad,” he explained.

As it works on improving the in-store experience, Supervalu is continuing to rationalize SKUs across its retail network, with changes in 15 product categories scheduled to be implemented beginning next month, Herkert said.

Asked whether Supervalu is considering selling assets, Herkert said, “Our real estate team is going through a market-by-market granular review of all the markets we're in [to find] the best way to maximize our opportunity within a given sub-market.”

Q3 RESULTS
Qtr Ended 12/5/09 11/29/08
Sales $9.2B $10.2B
Change -9.4%
Net Income $109M ($2.9B)
Inc./Share 15 cents ($13.95)
40 Weeks 2009 2008
Sales $31.4B $33.7B
Change -7%
Net Income $296M ($2.7B)
Inc./Share $1.39 ($12.56)