Economy, Miscues Hit Supervalu

MINNEAPOLIS — Supervalu said last week that although it was making some progress in stemming sales erosion, its outlook for the rest of the year has been dimmed by the weak consumer and its own marketing mistakes.

“We all know it is a difficult environment, and one of the most challenging operator climates we have seen in a long time,” said Jeff Noddle, chairman and chief executive officer, in a conference call discussing results for the second fiscal quarter. “But we cannot blame external forces alone for our results. We did not execute well on several fronts, and that contributed to our delivering results below expectations.”

Supervalu said same-store sales declined 1.3% in the quarter, which ended Sept. 6, after price promotions in some markets failed to produce the results the company expected. In addition, the drop in sales put pressure on the company's profit margins as its administrative and labor costs remained too high for the reduced sales volume, and profits fell 13%.

Although the company said it was cutting costs and implementing a new direct-marketing effort that it hoped would drive sales, it reduced its sales and profit outlook for the year. Supervalu now expects current fiscal-year earnings to be in the range of $2.86-$2.96 per share, down from the previous guidance of $3-$3.16 per share. Same-store sales are expected to improve, but for the full year are projected to be flat to down 0.5%.

Analysts said the company has not seen enough positive impact from its efforts to reverse declining sales at the Albertsons stores it acquired.

“We are concerned about management's ability to turn around the acquired Albertsons stores, which are underperforming, in this environment,” said Deborah Weinswig, an analyst with Citigroup Global Markets, New York, in a report.

Scott Mushkin, an analyst with Jefferies & Co., New York, said Supervalu faces an increasingly difficult road in seeking to reverse trends at the acquired Albertsons stores.

“The Albertsons assets have now been losing share of traffic for several years, and despite management's contention on the call that the industry as a whole has seen declines, we think the issue could turn increasingly problematic if the industry begins to lose pricing power in a slowing economy,” he wrote in a research report. “This is especially true with tonnage declining as well, which has de-levering implications.”

He said he believes that of the estimated 300 stores that have been remodeled since the acquisition, many may not be seeing sustained sales gains.

“Management suggested that just one-third of its stores are comping at 2% or better,” he said. “This suggests that few non-remodeled stores are positive, and remodeled stores are likely seeing a significant slowdown in year two.”

Noddle said Supervalu has taken several actions to improve performance for the balance of the year, and he said sales trends improved by 80 basis points — though they are still negative — in the first five weeks of the third quarter as the company's marketing and merchandising initiatives “gain traction.”

“I'm disappointed that we had a bump in the road here, although I'm not completely surprised that that would occur along this journey,” he said.

Noddle said all markets had some stores with positive comps. In general, customer counts were down slightly in the quarter, partially offset by larger baskets due to inflation and consolidation of shopping trips.