MINNEAPOLIS — Saying its turnaround program was gaining some traction, Supervalu slowed sales declines and posted earnings that exceeded analyst expectations during the fiscal first quarter.
The retailer here reported net earnings of $74 million on sales of $11.1 billion during the quarter, which ended June 18. Overall sales declined 4.4%, reflecting a 3.9% identical-store sales decline and the effects of market exits and the divestiture of Total Logistics Control. Net earnings increased 10.4%.
Speaking at a conference call reviewing results last week, Craig Herkert, Supervalu's chief executive officer, said the company was making progress in ongoing efforts to improve value and local selections at stores, while also keeping pricing right despite steady inflation. He said the company remained on pace to meet its annual earning estimates.
“I'm pleased with the progress our entire team made this quarter,” Herkert said. The stock market agreed — with shares trading up nearly 10% after results were posted last Tuesday.
Analysts remained circumspect about Supervalu, noting concerns over debt and the challenge of continuing to improve sales in a sluggish consumer market.
“While we remain cautious on Supervalu's long-term prospects strategically and fundamentally, we believe liquidity and free cash flow will be adequate to meet upcoming debt maturities for the next several years,” Karen Short, an analyst for BMO Capital Markets, said in a research note last week. Short maintained a “market perform” rating on Supervalu stock and raised her price target.
Supervalu's effort to present “hyper-local” selections at stores passed around 25% of store display space to store managers during the quarter, with the effort growing to as much as 50% now. For example, Herkert described a Shoppers Food store in Herndon, Va., adding around 100 new products with appeal to local population of Indian descent; and an Albertsons store in Beaverton, Ore., showcasing 15 local food purveyors at an in-store event.
“The vendors loved showing off their products in this venue and customers were enthusiastic, and our store realized a sales lift in the mid-single digits,” Herkert relayed of the Beaverton event. “But what really excites me is that this idea came from the store's grocery manager, which underscores how our store teams are embracing the empowerment we've given them.”
Store managers and other employees are sharing ideas like this on an internal company social network, Herkert said.
Private-brand sales also made progress during the quarter, with penetration of 19% in the quarter vs. 18.1% in the same period last year. Herkert said the company intends to reach 20.3% penetration by the fourth quarter, with new items in the Shopper Value line as well as a new national-brand equivalent, Essential Everyday, rolling out in stores now.
A new private-label wine with a $6 price point, Chill Out, helped the company add an incremental 40% sales gain in the wine category during the quarter, Herkert added.
Stores also made progress on plans to improve in-stock conditions and reduce shrink during the quarter, he noted. These changes are coming about as the company rolls out new tools to improve those performances to its stores.
Supervalu's earnings improvement came mainly as a result of a lower tax rate. Gross margin declined by 40 basis points to 27.2% of sales driven primarily by high fuel costs and inventory charges. Sales were positively affected by an increase in items per basket and a slight improvement in customer count. Inflation, which Supervalu officials estimated was 3.5% in the quarter, was largely offset by customer trade-downs.
Herkert said Supervalu funded sales gains through improvements in shrink and more effective promotions, and said he would be reluctant to invest more in price while also servicing debt and making earnings goals.
“Our pricing is not where we want it to be,” he cautioned, although he said Supervalu was “making progress” on some levels. “And why are we holding margin? Because we are going to fund our price investment in advance of doing it.”