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Supervalu Executives Optimistic After Q3 Loss

Supervalu Executives Optimistic After Q3 Loss

MINNEAPOLIS — Supervalu here said last week it believes the strategic initiatives it began implementing a year ago are beginning to have a positive impact as the company’s stores move away from heavy promotional discounts to a “fair prices plus promotion” approach.

Company executives explained their optimism in the wake of reporting a loss of $750 million for the fiscal third quarter, including an $800 million write-down, and ongoing declines in
same-store sales.

“We are cycling through some pretty irrational behavior on our side a year ago,” Craig Herkert, president and chief executive officer, told analysts during a conference call, “but as we get more departments into this fair pricing and much more rational behavior on our part, we feel very good about the long-term plan.”

According to Sherry M. Smith, executive vice president and chief financial officer,  “We continue to see a better mix of items sold at regular prices as a result of more discipline around our promotional spending, and over time these efforts will help to improve customer perceptions of the relative value offered by our traditional stores.”

For the third fiscal quarter that ended Dec. 3, when adjusted for the non-cash goodwill and intangible asset impairment charges (which totaled $907 million before taxes), net income was $50 million.  Sales fell 4% to $8.3 billion, while identical-store sales declined 2.9%.

For the 40-week period the loss was $616 million, while sales dropped 7.5% to $27.9 billion.

Meredith Adler, an analyst with Barclays Capital, New York, told SN she is concerned with the sequential deterioration in Supervalu’s volume and ID sales.  “Although the company is doing the right things, it’s not like flicking on a light switch, and it will take a long time before we know if what it’s doing is successful, which the company acknowledges as well.”

Mark Wiltamuth, an analyst with Morgan Stanley, New York, said the declining trend in ID sales, “which were worse than expected,” raises concerns Supervalu will have trouble getting customers to notice its price investments against an inflationary backdrop, especially with traffic down 4.6%, “which shows consumers leaving the stores.”

John Heinbockel, an analyst with Guggenheim Securities, New York, said the ID sales decline was “discouraging [because] retail inflation should still be running at peak levels, [so] we see weaker comps in 2012 [and] would not be surprised to see comps decline another 2% to 3%.”     

He also said he expects sales to remain challenged and earnings to be negatively impacted by weaker ID sales. “The top-line remains challenged by the macro [economy], and this should get worse in 2012, given the myriad of additional headwinds,” he noted.  “However, profitability and balance-sheet leverage are being managed as well as possible.”

Scott Mushkin, an analyst with Jefferies & Co., New York, said he believes Supervalu needs to pursue more aggressive solutions to enhance shareholder equity.  “While Supervalu’s focus on such initiatives as hyper-local retailing, reducing relative price gaps with savings and eliminating costs across the business is the right strategy, the company continues to lose market share and volumes remain quite negative.  More creative or aggressive plans for capital structure and assets could allow Supervalu the opportunity to further reduce debt and make the business more competitive while also focusing on its best assets.”

Karen Short, an analyst with BMO Capital Markets, New York, said third-quarter results were disappointing. “The deteriorating traffic trends on a two-year sequential basis were particularly concerning because we would have thought the company’s [strategic plan] would have gained additional traction this quarter, and yet the opposite happened, which places greater uncertainty on whether a turnaround is achievable and potentially leads us to believe Supervalu has permanently lost relevance with the customer.”

During the call Herkert said Supervalu is continuing to lower prices in certain categories on known-value items, including the launch of “Fresh Produce, Fresh Prices,” which involved lowering everyday prices on about 200 produce items.

That program was introduced during the quarter at all of Supervalu’s conventional corporate and independent stores except those in Southern California, and was implemented last week at all 250 Albertsons stores in Southern California.

In areas where “fair pricing” has already been implemented, “we have seen very positive consumer behavior change on both volume and profitability mix,” he added.

In other comments, Herkert said:

• Net sales at independent retail customers during the third quarter fell 5.4% to $2 billion, primarily due to Target’s transition to self-distribution and the divestiture of Total Logistic Control.

• Identical store sales at Save-A-Lot were up nearly 4% during the quarter.

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