Supervalu said it would continue to take actions to improve operations in its struggling retail division, including selling underperforming locations, as the company shifts its primary focus to integrating the recently announced acquisition of Unified Grocers.
Meanwhile, the wholesale division of the company showed gains in the recently ended fourth quarter and fiscal year from both new customers and expanded sales to existing customers.
In a conference call discussing financial results, Mark Gross, president and CEO, said the company was focusing a greater proportion of its capital investment on its Cub Foods and Hornbacher’s banners, while reviewing and optimizing its entire retail portfolio.
“The challenging operating environment in our markets remains largely unchanged” from previous quarters, he said. “We continue to feel the impact of competitive new store openings against over half of our retail stores.”
Identical-store sales in the retail division were down 5.8% in the fourth quarter, including a 4.3% decrease in customer counts and a 1.5% decline in average basket size. In addition, product price deflation was about 1% in the fourth quarter.
Gross said the company was seeking to sell its weaker retail locations.
“We are in the process of marketing a number of underperforming stores, where disposition would allow us to focus on a core base of stronger stores,” he said.
In January, Supervalu hired Target veteran Anne Dament as SVP of retail, merchandising and marketing to oversee Supervalu’s retail division, and she has been spearheading a range of initiatives to improve the performance of the stores, Gross said.
These include accelerating the rollout of category management to better match product assortments to customer preferences and customize offerings by store location, adding more meal solutions and grab-and-go offerings, and expanding the variety in the produce and deli departments.
Bruce Besanko, EVP, COO and CFO, said Supervalu plans to continue to open new stores in the Hornbacher’s and Cub Foods regions.
He also said the 22 Food Lion stores that Supervalu acquired from Delhaize in the Mid-Atlantic region last year Have performed “a little below expectations, particularly on the sales line.”
Those stores have been converted to Supervalu’s Shop ‘n Save banner and plans call for them to be marketed for sale to Supervalu’s wholesale customers, he said.
Overall retail sales were down 3.2% for the fourth quarter, to $1.07 billion. The company reported an operating loss of $27 million for the quarter in the retail division, including a $41 million asset impairment charge. Excluding the charge, retail operating earnings were $14 million, versus $30 million in the year-ago fourth quarter.
Bill Kirk, an analyst with with RBC Capital Markets, said he believes that abating food price deflation could help the performance of the retail division.
“We believe the retail division improved in March and, with deflation easing, should show better results from this period forward,” he said in a research report.
On the wholesale side of the company, Supervalu has enjoyed much stronger performance.
Wholesale operating earnings for the fourth quarter rose 28%, to $64 million, on a 3% increase in sales, to $1.79 billion, which the company attributed to sales to new customers and increased sales from existing customers.
“We kept approximately 99.5% of our customer sales volume this past fiscal year, a truly significant accomplishment,” said Gross.
Earlier this month, the company also entered into a long-term extension of the supply agreement with its largest customer in the Northeast. That customer is also expected to anchor a new warehouse Supervalu has acquired in Harrisburg, Pa., and plans to begin operating out of in fall 2018. Supervalu is transitioning out of an Albertsons-owned facility it operates in Lancaster, Pa.
Supervalu has also now fully onboarded The Fresh Market as a customer, along with other relatively new accounts at Marsh Supermarkets in Indianapolis and America’s Food Basket in the Northeast.
Asked by an analyst about Marsh’s financial deterioration, Gross said, “Marsh is paying our bills on time, period,” and declined to comment further, other than to say it would be able to manage through whatever loss in volume it incurs.
In addition to the new customers, Supervalu is also getting a boost from its efforts to expand produce distribution, which was reflected in an increase in total cases shipped.
“We're improving the quality of produce going to our customers and retail stores,” said Gross. “We're doing a better job on the procurement side, and we're more effectively working with vendors on national contracts. And most importantly, we're changing the culture and mindset towards produce. As a result, our produce sales and profitability have grown.”
Supervalu reiterated its plans to focus on the previously announced $375 million acquisition of West Coast cooperative wholesaler Unified Grocers, which is expected to be completed this summer. That acquisition is expected to bring annual synergies valued at about $60 million, which will be derived from areas such as reducing overlapping cost structures, distribution center and supply chain best practices, and economies of scale in terms of purchasing power.
Q4 sales up 0.6%
Overall Supervalu reported financial results for the fourth quarter and year that exceeded its previous projections.
Net income for the 12-week fourth quarter, which ended Feb. 25, totaled $599 million, including $594 million from discontinued operations and $6 million form continuing operations. The company completed the sale of its Save-A-Lot operations in the fourth quarter.
After adjusting for $32 million in one-time costs, net income from continuing operations in the fourth quarter totaled $38 million, compared with adjusted net income from continuing operations in the year-ago fourth quarter of $39 million.
Fourth-quarter sales were up 0.6%, to $2.91 billion, compared with the fourth quarter of a year ago.
For the full year, sales were $12.48 billion, down about 3.3% compared with the preceding year. Net income for the full year was $650 million, including $627 million from discontinued operations, compared with net income of $178 million a year ago.
Supervalu is also winding down its service agreement with Albertsons, which will result in a decline in revenues of about $40 million in the current year, fiscal 2018. The loss will be partially offset by a service agreement with Save-A-Lot, the company said.
“With the separation of Save-A-Lot, SVU can now refocus on its core wholesale business and is less exposed to the macro pressures, which had an outsized impact at the discount chain,” said Kirk of RBC Capital Markets.