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Price Investments Threaten Margins: Fitch

NEW YORK — A renewed period of price investments across the industry — driven by Supervalu's efforts to drive customer sales and traffic — could have a negative impact on already declining gross margins over the next 18 months, according to a report by Fitch Ratings here.

As Kroger, Safeway and Wal-Mart respond to Supervalu's pricing, Supervalu is likely to see sales and margins worsen over the near term, Fitch added.

According to the ratings agency, EBIT (earnings before interest and taxes) margins, which had stabilized last year after two years of significant compression, could also be pressured next year, "unless companies can offset gross margin pressure with SG&A [savings, general and administrative costs] leverage." Fitch agency said Kroger is in the best position to leverage expenses and sustain EBIT margins because of its healthy mid-single-digit identical sales growth, while Safeway would have to improve in identical-store sales from the second-quarter levels of 0.8% to sustain its existing EBIT margin, while Supervalu will see additional margin pressure going forward.

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On Wednesday Fitch assigned a rating of B/RR1 to Supervalu's $1.65 billion senior secured asset-based revolving credit facility and its $850 million senior secured term loan, both of which replaced facilities that were secured only by equity in Supervalu subsidiaries. The new revolver is secured by inventories and receivables, and the loan is secured by real estate, with a second lien on inventories and receivables, the agency pointed out.

Fitch also affirmed Supervalu's issuer default rating at CCC, which it lowered in July from B. At the time, it said Supervalu's strategy of making gradual price investments to become more competitive "is not gaining traction, [and] there is also the potential for higher financial leverage should the company be sold."  

Fitch said it believes a complete sale of the business is unlikely, adding that a sale of Save-A-Lot or the company's wholesale distribution business would weaken the company's business profile.

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