Supervalu Plans 50 Closures

Supervalu said it would close 50 struggling stores by next month, and slash its capital budget for the coming fiscal year, as it continues to adjust to a rough economy. The retailer last week recorded a third-quarter loss of $2.9 billion, or $13.95 per share, reflecting a $3.3 billion non-cash charge reconciling the value of its assets with a battered stock price. Excluding the charge,

MINNEAPOLIS — Supervalu said it would close 50 struggling stores by next month, and slash its capital budget for the coming fiscal year, as it continues to adjust to a rough economy.

The retailer last week recorded a third-quarter loss of $2.9 billion, or $13.95 per share, reflecting a $3.3 billion non-cash charge reconciling the value of its assets with a battered stock price. Excluding the charge, net earnings for the quarter, which ended Nov. 29, totaled $141 million on flat sales of $10.2 billion, which was slightly ahead of estimates. Identical-store sales fell by 0.5% in the quarter.

Jeff Noddle, Supervalu's chairman and chief executive officer, said the chain would close 50 “non-strategic” stores during the current quarter, which ends Feb. 28. He said the stores slated for closure would be spread throughout the company, and although heavier in certain regions, would not include any geographical market exits. Supervalu in addition will make companywide administrative staff reductions this quarter. It expects to incur charges of between $150 million and $200 million in the fourth quarter related to these actions.

Capital spending, expected to be $1.2 billion in the current year, will come in at around $850 million in fiscal 2010, said Noddle, reflecting a reduced pace of major store renovations and new store openings. The company said that in the meantime it will bump up its effort to reduce debt, spending $600 million in the new year, compared with $400 million in fiscal 2009.

While analysts noted that the report was hardly glowing, an 8% stock price increase following the news last week indicated that Wall Street — particularly investors with a wary eye on Supervalu's debt load — feared the news might have been worse.

“The market was afraid it was going to be worse than it was,” one analyst, who asked not to be identified, told SN. “It wasn't great, but it wasn't a complete blowup. To the market, it wasn't a question of whether they were doing well, but whether the company could survive.”

Volatile stock performance, including the broad-based selling and rapid recovery experienced by Supervalu's shares over recent months, has been a common pattern among companies in all industries carrying heavy debt loads, the analyst added. Supervalu carries around $9 billion in debt.

Noddle said identical-store sales have been hurt by consumers trading down to private labels and reducing their discretionary spending as the economy has worsened. To remedy this, he outlined a plan to stimulate sales through a combination of pricing investments, targeted marketing efforts and merchandising improvements at renovated stores. Many of these programs are already under way, he said.

“We know that price has become a key criteria for consumers when choosing where to shop. And in today's challenging environment, it is even more frequently becoming the No. 1 criteria,” Noddle said. “We know improving our price perception ultimately leads to increased trips and basket size.”

Recent moves to switch categories like coffee and soup to an EDLP offering rather than traditional high-low pricing have improved Supervalu's price perception in these areas, Noddle said. In addition, he said, the company will work aggressively with vendors to ensure appropriate pricing, especially in light of the current decline in commodity prices and fuel costs.

“We're going to put tremendous pressure on suppliers for [pricing] relief, in terms of those [items] driven by commodities and fuel, and there's going to be reluctance,” Noddle predicted. “That's the battleground that I foresee.”

Noddle added that he hopes product price inflation will moderate to a “sweet spot” of about 2% by late this year, saying rates much higher or lower than that become difficult to manage.

Supervalu also plans to benefit from targeted loyalty programs and a companywide branding effort it launched this year, Noddle added. The targeted loyalty program has so far involved three mailings to more than 2 million of its Acme, Jewel-Osco and Albertsons shoppers, with each mailing increasing in effectiveness based on redemption rates of the previous effort.

Noddle also said that store renovations — albeit at a slower pace as spending slows next year — will drive better performance. Supervalu expects to complete 85 to 95 major store remodels in fiscal 2010, vs. about 155 in fiscal 2009. Noddle said the spending plan was adjusted to give Supervalu better financial flexibility, but he indicated that the company has largely completed the slate of renovations where they were most needed.

Some analysts weren't convinced, saying they were concerned that Supervalu would slow capital spending while its performance still lagged competitors.

“My thought on Supervalu is that we are sort of entering the endgame for this company,” Scott Mushkin, an analyst for Jeffries & Co., New York, told SN. “You're not remodeling stores and you're closing a bunch of stores? That's great news for Safeway and Kroger, but it's not great news for Supervalu.”

Mushkin said he felt the spending slowdown and store closures would adversely affect Supervalu's operations in areas most affected by the current economy, such as Las Vegas, and areas where its stores are already struggling, such as the Pacific Northwest. A Supervalu spokeswoman told SN that store closures will be announced as they happen.

Karen Short, an analyst for Friedman, Billings, Ramsey & Co., New York, in a research note praised Supervalu for providing a thorough outline of its strategies, but said she felt its outlook was “aggressive.”

Q3 RESULTS
Qtr Ended 11/29/08 12/1/07
Sales $10.2B $10.2B
Change 0.0%
Comp-store -0.5%
Net Income (Loss) ($2.9B)* $141M
Change N/A
Inc. (Loss)/Share ($13.95) 67 cents
Year to date 2008 2007
Sales $7.9B $7.9B
Change 0.0%
Net Income (Loss) ($2.7B) $717M
Change N/A
Inc. (Loss)/Share ($12.56) $2.03
* Quarterly net income excluding a non-cash charge was $132 million, or 69 cents per share.