After Another Dismal Quarter, Supervalu Suspends Dividend, Seeks Asset Review

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The end is near for Supervalu as we now know it following a dismal first quarter (ended June 16) in which the company once again saw key metrics plummet. Quarterly profit plunged 45 percent as the Eden Prairie, MN based retailer/wholesaler earned $41 million, down sharply from the $74 million it earned in the corresponding period last year. Net sales were $10.6 billion, substantially less than the $11.1 billion in revenue posted in fiscal 2012’s first period. And identical store sales once again remained worst in class at negative 3.4 percent. And for the first time, Supervalu broke out Save-A-Lot earnings and sales. And similar to its entire retail network, ID sales were negative 3.4 percent.

Along with the earnings and sales results the company made this statement: “The company’s board and management, in conjunction with its financial advisors, Goldman Sachs and Greenhill & Co., have initiated a review of strategic alternatives to create value for the company’s shareholders. Supervalu’s non-executive chairman, Wayne Sales, will oversee this process so that management can remain focused on executing the company’s accelerated business plan. There can be no assurance that such a review will result in any transaction or any change in the company’s overall structure or its business model.”

Additionally, Supervalu announced that it will suspend its dividend.

“These are bold but necessary moves, which will position Supervalu for success in this increasingly competitive environment,” beleaguered Supervalu CEO Craig Herkert said. Its shares, which had been trading in the $5.00 per share range for most of the past month, nosedived to $2.34 per share at the end of the day on July 11.

Herkert, who will remain chairman and chief executive during the review process, chose to say little about the direction or timeline of the process, but as usual, chose to address improvements the company has made in recent quarters.

“While our shift to a fair price plus promotion strategy is right for our business, it is essential that we move even more aggressively to lower prices, and anticipate and respond to competitor actions. We expect our business transformation to meet our customers’ demands for great quality at lower prices,” said Herkert. “We intend to do this while remaining profitable, continuing to pay down debt and investing the capital to maintain and enhance our stores and related assets. Accordingly, we will be pursuing deeper and more structural cost savings initiatives. Also, we are adopting more flexible financing facilities, reducing our near-term capital expenditures and suspending our dividend.”

“As we proceed with these actions in an effort to drive more traffic to our stores and ensure we are the destination of choice in the neighborhoods we serve, we remain focused on maintaining our operational and financial strength,” continued Herkert. “We are committed to generating operating cash flows of more than $1 billion annually and meeting or exceeding our debt reduction targets. And, to assure we are evaluating the full range of opportunities available to us to create value for shareholders, the company’s board and management, together with its financial advisors, are reviewing strategic alternatives for our business.”

Supervalu said it recently launched “fair price plus promotion” repositioning at its Jewel-Osco banner, supported by a comprehensive media campaign. It also noted that with additional efforts this year, approximately half of the company’s stores are expected to be priced appropriately to competitors by the end of fiscal 2013, with the remaining stores moved to fair price plus promotion in fiscal 2014.

“While near- and medium-term operating profit margins will come under pressure as price reductions initially outpace cost takeouts and volume improvement, the acceleration of these price investments is expected to create a path to improved longer-term performance and market share growth,” said Herkert.

Supervalu also announced that it intends to achieve an additional $250 million in administrative and operational expense reductions over the next two years by adopting an intense focus on efficiency and productivity across all functions and every part of its businesses. It expects the program to result in a leaner, more efficient organization. The savings expected to be achieved from these efforts are incremental to the $75 million in cost reductions the company targeted for fiscal 2013. The company noted that it has exceeded its expense saving targets in each of the past three years.

Supervalu announced that it is also implementing important measures to enhance the company’s already strong liquidity position and balance sheet and provide further flexibility to invest in price.

Those steps include: entering into underwritten commitments with banks related to these financings, which are expected to close in August, 2012; reducing capital expenditures in fiscal 2013 to a range of $450 to $500 million from$675 million. The company said will continue to invest in its store base, including 40 remodels and the addition of 40 Save-A-Lot locations in fiscal year 2013; and suspending the quarterly dividend.

The board will continue to review its dividend policy annually; and increasing debt reduction to a range of $450 to $500 million in fiscal 2013. The company plans to pay down at least $400 million of debt annually thereafter. The company has less than $1 billion in aggregate debt coming due for fiscal years 2013 through 2015.

Concurrent with the actions noted above to enhance performance and shareholder value, the company is suspending identical store sales and earnings per share guidance and withdrawing any previous guidance given for fiscal 2013. It will continue to provide forward-looking information on debt reduction and capital expenditures. For fiscal year 2013 debt reduction is estimated in the range of $450 to $500 million.

According to Supervalu, replacing the company’s senior credit facility with an asset-based lending facility and term loan secured by a portion of the company’s real estate, will remove restrictive covenant concerns and increase financial flexibility.

“Supervalu continues to be a profitable company with cash flow from operations of $227 million in the first quarter of 2013. With our first fiscal quarter results falling well below our expectations, we must wage a more forceful response to the competitive challenges we face. We believe that the steps we are taking are prudent and will be beneficial to all of our constituents,” said Herkert.

Gross profit margin for the first quarter was $2.32 billion, or 22.0 percent of net sales, compared to $2.46 billion or 22.1 percent of net sales last year. The decrease in gross margin as a percent of net sales reflects the rate benefit from lower fuel sales (approximately 30 basis points) and a lower LIFO charge, which were more than offset by the negative rate impact of higher shrink, marketing costs and a change in business mix. The impact of price investments was fully offset by funding initiatives during the quarter.

Selling and administrative expenses in the first quarter were $2.12 billion, or 20.0 percent of net sales, compared to $2.18 billion, or 19.6 percent of net sales last year. The increase in selling and administrative expenses as a percent of net sales reflects the impact of sales deleveraging and lower fuel sales, partially offset by the benefits from lower employee-related costs and the company’s cost reduction initiatives. Without the negative rate impact from lower fuel sales, selling and administrative expenses as a percent of net sales would have been relatively flat compared to last year.

Net interest expense for the first quarter was $155 million – the same figure as last year. Supervalu said that was primarily due to the benefit of lower debt levels in the current year and a benefit in last year’s first quarter related to prior years’ tax audit activity. The company remains in compliance with all debt covenants.

Supervalu’s income tax expense for the first quarter was $13 million, or 25.2 percent of pre-tax income, reflecting benefits from tax planning activities. Last year’s first quarter tax expense was $51 million, or 40.8 percent of pre-tax income, and reflected approximately $4 million of tax expense related to prior years’ audit activity.

Diluted weighted-average shares outstanding for the first quarter were 214 million shares compared to 213 million shares last year. As of July 6, 2012, Supervalu had 214 million shares outstanding.

Beginning this quarter, the company is breaking out its former “retail food” reportable segment, which previously included both the traditional retail and hard discount stores, into stand-alone “Retail Food” and Save-A-Lot reportable segments.

First quarter “Retail Food” net sales were $6.83 billion compared to $7.33 billion last year, primarily reflecting identical store sales of negative 3.7 percent and the sale of fuel centers.

“Retail Food” operating earnings were $99 million, or 1.5 percent of net sales, compared to $150 million, or 2.0 percent of net sales last year. The change in “Retail Food” operating earnings as a percent of net sales was largely due to the impact of sales deleveraging, higher shrink and marketing costs, partially offset by a lower LIFO charge and cost reduction initiatives.

First quarter Save-A-Lot net sales were $1.29 billion compared to $1.28 billion last year, primarily reflecting the benefit from 53 net additional stores being operated at the end of the first quarter of fiscal 2013, partially offset by network identical store sales of negative 3.4 percent.

Save-A-Lot operating earnings in the first quarter were $59 million, or 4.6 percent of net sales, compared to $69 million, or 5.4 percent of net sales last year. Supervalu said the decline in operating earnings as a percent of net sales was primarily attributable to the impact of negative network identical store sales and additional administrative costs related to its growth strategy.

First quarter “Independent Business” net sales were $2.48 billion compared to $2.50 billion last year, a decrease of 0.9 percent, primarily attributed to the sales benefits from net new affiliations being more than offset by a decrease in sales to existing customers.

“Independent Business” operating earnings in the first quarter were $65 million, or 2.6 percent of net sales, compared to $77 million, or 3.1 percent of net sales last year. The decline in Independent business operating earnings as a percent of net sales was primarily attributable to costs related to a consolidation of facilities in the first quarter of fiscal 2013 and a gain on sale related to the sale of a non-core asset in the first quarter of fiscal 2012.

First quarter net cash flows from operating activities were $227 million compared to $245 million in the prior year. First quarter net cash flows used in investing activities were $206 million compared to $133 million last year, reflecting higher cash payments for capital expenditures. First quarter net cash flows used in financing activities were $27 million compared to $112 million last year, reflecting a higher level of debt reduction in the prior year.