Supervalu Q2 Raises Questions

MINNEAPOLIS Supervalu's sharp declines in sales and profits for the second quarter led analysts to speculate whether the slumping company can regain lost market share with a new pricing initiative. The company, based here, said it was implementing a strategy it calls fair pricing plus promotions in order to drive more consistent volume from shoppers who Supervalu indicated had been cherry-picking

MINNEAPOLIS — Supervalu's sharp declines in sales and profits for the second quarter led analysts to speculate whether the slumping company can regain lost market share with a new pricing initiative.

The company, based here, said it was implementing a strategy it calls “fair pricing plus promotions” in order to drive more consistent volume from shoppers who Supervalu indicated had been cherry-picking items on sale. Some analysts, however, wondered whether the strategy could be effective after the company had recently been eschewing the price battle in favor of preserving margins.

“Given that Supervalu is somewhat late to the game on price reductions, it's unclear how much traction these incremental price investments will have on traffic in [the second half],” said Ajay Jain, a New York-based analyst with Hapoalim Securities.

Supervalu last week lowered its sales guidance slightly for the year and sharply cut its earnings outlook, which analysts said was expected. It also took a one-time, $1.6 billion goodwill and asset impairment charge to second-quarter results, citing a need to reconcile its stock price to book value.

“Given the slower than anticipated economic recovery, we see a longer timeline for our corporate initiatives to gain traction,” said Craig Herkert, president and chief executive officer, in a conference call with analysts.

The company also attributed its woes to a highly competitive operating environment — citing nontraditional food retailers and indirectly citing competition from Minneapolis-based Target — in reporting a 6.4% decline in same-store sales for the 12-week quarter, which ended Sept. 11. Adjusting for a labor dispute at Shaw's, the company said same-store sales were down 5.9%, including a 3.9% decrease in traffic and a 2% decrease in average basket.

The loss for the period was $1.47 billion, but without the one-time charge and adjusted for other one-time charges primarily related to the Shaw's labor dispute, Supervalu said it would have posted net income of $59 million. That compared with $74 million net income in the year-ago quarter. Sales for the quarter were down about 8.5%, to $8.66 billion.

The company said it expects sales for the year to be about $38 billion, down from $40.6 billion last year. It reduced its projections for full-year same-store sales to negative 5.5%, down from previous projections of negative 5.0%, and lowered its earnings guidance to a range of $1.40 to $1.60 per share, off from a previous forecast of $1.75 to $1.95.

“We believe the turnaround will take a year, and are not convinced success is ultimately achievable,” said Karen Short, a New York-based analyst with BMO Capital Markets.

Jain of Hapoalim Securities noted that “Supervalu's turnaround efforts may be in a more critical state than we envisioned previously.”

Scott Mushkin, an analyst with Jefferies & Co., New York, said he is “skeptical” that Supervalu's increased emphasis on price can be sustained, “given the strength of the competition,” which includes Safeway, Kroger and Ahold.

“As such, we humbly suggest management also consider alternate actions that may better preserve/enhance shareholders' equity,” he concluded.

Analysts have long suggested asset sales as a possibility for Supervalu to drive returns for shareholders, but the company did not focus on that possibility in the latest quarterly call.

Instead, Herkert discussed the company's pricing strategies, its efforts to better localize and rationalize its assortments and other matters aimed at improving performance.

He cited an example of a pricing initiative at one of the company's banners, which he did not identify, in which Supervalu rolled out “value pricing” on some key seasonal produce items.

“We reset base retail [prices], and promoted this with less depth and frequency. The results were greater sales volume and stronger margins throughout the category,” Herkert said. “Given the success of this program, we have accelerated the rollout of this strategy to other banners.”

He also cited the everyday reduction of the price of a “prominent juice item” by about $1, to $1.99.

“Parents shopping for their families have noticed this change in price, and as a result, we are moving more units than we did last summer,” Herkert said. “This is a great example of how Supervalu can drive traffic and change price perception by offering customers better value on key shopping items.”

The efforts, he said, are a “departure from past practices” and show how the company is now “acting differently.”

Supervalu is also discussing with vendors how it can “change [its] pricing architecture with the shared goal of moving more units,” Herkert explained.

Other initiatives include ongoing “power sales,” in which the company promotes items across its entire 4,300-store network. During the second quarter, these offerings included successful promotions for canned tuna and canned pasta, he said.

In September, the company also began testing a continuity program at 400 stores offering what Herkert described as “professional-quality” cookware. He did not divulge details of the six-week-old program, which runs into the fourth quarter, but said it was “tracking to expectations.”

“Loyalty programs like this will help pull customers back into our stores and in doing so, expose them to the investments we are making to shelf prices,” he said. “These investments remain an important part of our strategy and will allow us to address consumer perceptions and nullify the price differential that we face in some, though not all, of our markets.”

Q2 RESULTS

Qtr Ended 9/11/10 9/12/09
Sales $8.66B $9.46B
Change -8.5%
Comp-store -6.4%
Net Income ($1.47B)* $74M
Change N/A
Inc/Share ($6.94)* 35 cents
28 Weeks 2010 2009
Sales $20.2B $22.2B
Change -8.9%
Comp-store N/A
Net Income ($1.4B)* $187M
Change N/A
Inc/Share ($6.63) 88 cents

* REFLECTS A ONE-TIME, NON-CASH CHARGE OF $1.6 BILLION FOR A GOODWILL AND ASSET IMPAIRMENT WRITE-DOWN.