MINNEAPOLIS — It didn't take long for Craig Herkert, Supervalu's new chief executive officer, to pull the trigger on divesting some of the company's assets.
Just two months into his new role, Herkert last week announced that Supervalu, struggling amid declining sales and profits, had reached an agreement to sell 36 Albertsons stores in Utah to Associated Food Stores, the Salt Lake City-based cooperative wholesaler.
The specific terms were not disclosed, but Supervalu, based here, said it expected to record $150 million in after-tax proceeds from the sale. The deal — the first major divestiture since Herkert took over as CEO in May — is expected to close by this fall.
In addition, Supervalu said it was seeking buyers for four additional stores in Utah, and it will continue to operate those locations in the meantime. Supervalu is retaining three Utah stores in the St. George area — closer to Las Vegas than to Salt Lake City — and is also keeping its distribution center in the state.
In a conference call with analysts, Herkert said the 36 Utah stores were profitable and the decision to sell them was more related to their market share. He said he would have a more complete outlook on his vision for the company when Supervalu reports second-quarter results in October.
At AFS, the acquired stores will form a new division within the company, separate from its 22 other corporately owned locations. Dick King, senior vice president at AFS and a former president of Albertsons, was named president of the new division.
“As president of Albertsons, I was involved in the approval of a lot of these locations, and I know a lot of the people that work there,” King told SN last week. In addition, King noted that he began his Albertsons career in Utah and has spent more than half of his career in the state.
He said the two companies had been in discussions concerning the deal for the last four or five months. The stores will be served from AFS' facility in Farr West, Utah, and will be renamed after the acquisition is completed, King told SN.
In a prepared statement, Herkert said the sale will allow Supervalu “to focus on our greatest growth opportunities while at the same time monetize non-strategic assets for debt paydown.”
In his first earnings conference call since becoming CEO, Herkert said he was disappointed with the company's first-quarter results, but said he thinks Supervalu overall has a solid foundation for growth.
“I believe we have great physical assets,” he said in response to an analyst's question. “We have good market shares in many great markets in this country, and we have a really strong leadership team.”
He said the company was open to the possibility of selling additional assets, but declined to identify which assets were being considered.
In a research note, Meredith Adler, an analyst with Barclays Capital, New York, said she “would not be surprised” if the company shed additional assets, although she declined to speculate about which ones.
In the first quarter, Supervalu said same-store sales fell 3.2%, compared with year-ago results, as aggressive promotions did not drive the top line, disinflation in some categories hindered sales growth and customer traffic fell by about 1%.
“Consumers have become even more value focused and cautious in their spending, which has made predicting their behavior more difficult,” Herkert explained. “This prompted us to make heavier-than-anticipated investments in margins, some of which proved to be ineffective.”
Supervalu introduced its Big Relief pricing program in the Southern California and Chicago markets in the first quarter. Herkert said the program was having the expected result in driving unit volume, but the company doesn't expect to see the full benefits of the program until the second half of the year.
He also said the company's conventional retail stores have been too reliant on promotional pricing.
“As a high-low operator in our largest banners, we have relied too heavily on our promotional activities,” he said. “We need to be less dependent on deep-discount offerings and be better positioned on everyday pricing.”
Herkert praised the company's distribution operations and the work of Janel Haugarth, executive vice president and chief operating officer of supply chain services.
“I have been very impressed with the caliber of our independent [customers],” Herkert said. “They are an integral part of our business, and I look forward to working with Janel and meeting more of them to understand their growth objectives and the role we can play in their continued success.”
Supervalu also cut its capital-expenditure projections for the year by about $50 million, to a total of $700 million. Herkert said the company's stores were not in dire need of investment.
For the first quarter, which ended June 20, Supervalu reported a 30% drop in net income, to $113 million, on a 4.7% decline in sales, to $12.7 billion.
Retail operating earnings totaled $311 million, or 3.1% of net sales, compared with $399 million, or 3.9% in the first quarter of last year.
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