New Supervalu CEO Sales Faces Uphill Climb; Goldman Sachs ‘Review’ Role Seen As Critical

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New Supervalu chief executive Wayne Sales has many daunting challenges ahead of him. The former CEO of Canadian Tire Corp., who has also served on Supervalu’s board since 2006 (and as non-executive chairman since 2010), will attempt to fix (or sell) a company whose performance at its approximately 1,100 supermarkets has been worst-in-class for the past four years. (Although Supervalu acquired 1,124 stores from Albertsons in 2009, adding to the number of retail locations it already owned, the company has sold off or shuttered a number of stores in the ensuing years).

And the primary reason the Eden Prairie, MNc ompany has performed so dismally since it acquired five key operating divisions from Albertson in 2006 is that it continues to fail in almost every aspect of its core supermarket business: pricing, store conditions, morale of the associates and real estate.

After the board named him CEO on July 30 following the firing of Craig Herkert (whose three year run as chief executive could only be described as horrific), Sales sent a letter to Supervalu’s approximately 130,000 associates (see page 46) asking for their assistance in helping turn the company around.

“In my new role, I will work closely with our leadership team to improve our sales and earnings trajectory and generate long-term shareholder value, focusing relentlessly on identifying factors that will drive meaningful improvements in our strategy execution and overall performance,” wrote Sales. “We will take significant cost out of the business, and move with urgency in our retail food business to lower prices and create points of sustainable differentiation for our customers. We will work closely and collaboratively with independent retailers to ensure that they continue to receive the superior service they need to increase sales and profitability. We will strengthen our engagement with our Save-A-Lot licensees – leveraging their expertise, enhancing our collective performance, and ensuring our ability to grow a nationwide network of hard discount stores. As we execute our business plan, the board will continue its review of strategic alternatives, and I am still leading that process.”

Susan E. Engel, chair of the board’s leadership development and compensation committee said of Sales’ appointment, “We are grateful toWaynefor taking on the chief executive position at this important juncture in Supervalu’s history. He has been a valued member of the Supervalu board, bringing a wealth of executive experience from an extremely successful career in business and retailing and a strong track record of transforming businesses and driving profitable growth.”

Also as part of the overall restructuring, current director Philip L. Francis has been elected lead director.

Many trade observers believe that Sales’ primary objective will be to sell Supervalu, and the company’s announcement on July 11 that it has hired financial advisors Goldman Sachs and Greenhill & Co. to review Supervalu’s assets gave analysts more reason to believe that Supervalu is in full asset disposition mode.

“All I needed to hear is that Goldman Sachs is spearheading the review and my first reaction was that everything is for sale,” said a Wall Street analyst who has tracked Supervalu for several years. “That doesn’t mean that everything is readily saleable (see Taking Stock column which begins on page 1 for more about potential buyers and possible SVU strategy) or ultimately will be sold, because there are a lot of diverse parts to a company that has been backsliding for a long time, creating some dysfunctional pieces. But I believe the intent of Sales and the board is to sell the company, piece-by-piece if necessary.”

Sales will be given at least two years to improve Supervalu’s performance (or sell the firm) and he will be handsomely compensated for assuming the helm. According to Supervalu’s 8-K SEC filing on August 1, Sales’ new agreement runs through July 28, 2014 and he will be paid an annual salary of $1.5 million will receive a signing bonus of $1.26 million payable in two equal installments, one within 14 days of signing the agreement and the second on July 29, 2013. Sales will also be entitled to receive a cash bonus for the portion of Supervalu’s fiscal year ending February 23, 2013 equal to no less than $1 million, the opportunity to earn a bonus for Supervalu’s fiscal year ending February 22, 2014 with a minimum of zero, a target of $1.5 million and a maximum of $3 million, and the opportunity to earn a bonus for the period commencing on February 23, 2014 and ending at the end of the term with a minimum of zero, a target of $500,000 and a maximum of $1 million, each based on the achievement of performance goals approved by the leadership development and compensation committee of the board.

Additionally, on August 2, 2012, the Supervalu’s board granted Sales 447,155 stock units under the company’s 2012 stock plan. Subject to his continued employment as chief executive officer of Supervalu, Sales will be entitled to receive an additional grant of stock units on July 29, 2013 equal to $1.1 million divided by the closing price of Supervalu’s common stock on the New York Stock Exchange on the date of grant. The stock units will convert into shares of common stock on a one-for-one basis at the earliest of: the second anniversary of the date of grant; Sales’ “separation from service”; the fifth business day after his death or “disability”; or a “change in control” (as defined in the plan).

On that same date (August 2, 2012), the board also granted Sales performance shares under the plan with a target number of shares of 447,155. Subject to his continued employment as CEO of Supervalu, Sales will be entitled to receive a grant of performance shares on July 29, 2013, with a target number of shares equal to $1.1 million divided by the closing price of Supervalu’s common stock on the New York Stock Exchange on the date of grant. The performance shares will convert into shares of common stock at the earliest of: the second anniversary of the date of grant; the fifth business day after Sales’ death or “disability”; or a change in control. The number of shares will equal: zero, if the average closing price of Supervalu ‘s common stock for the 20-trading day period prior to the measurement date is 50 percent or less than the closing price on the date of grant; 100 percent of the target number, if the average closing price on the measurement date is equal to the closing price on the date of grant; 200 percent of the target number, if the average closing price on the measurement date is 200 percent of the closing price on the date of grant; and 300 percent of the target number, if the average closing price on the measurement date is 300 percent or more of the closing price on the date of grant, with a straight-line interpolation of the number of shares where the average closing price on the measurement date does not equal 50 percent, 100 percent, 200 percent or 300 percent. The measurement date is the earliest of: the first anniversary of the applicable grant date; the date of a change in control; or the date of Sales’ separation from service due to a termination by Supervalu without cause. In the event that Sales’ employment is terminated by Supervalu without cause, he will be entitled to receive: the unpaid portion of his signing bonus; the portion of his annual salary that would have been paid from his termination date through the end of the term; the minimum cash bonus for Supervalu’s fiscal year ending February 23, 2013, the target bonus for Supervalu ‘s fiscal year ending February 22, 2014 and for the period from February 23, 2014 through the end of the Term (to the extent Sales’ termination occurs prior to the end of such periods) and the actual bonus earned for Supervalu ‘s fiscal year ending February 23, 2014 (if Sales’ termination occurs on or after February 23, 2014); and the conversion of any performance shares which have been granted and for which the measurement date has not occurred into the greater of the number of shares of common stock determined using the termination date as the measurement date or the target number of shares. In addition, if Sales’ employment is terminated by Supervalu without cause prior to July 29, 2013, Sales will be additionally entitled to receive a lump sum payment of $2.2 million in lieu of the stock unit and performance share grants scheduled to be made to Sales on July 29, 2013. And, if Sales’ employment ends on account of his death or “disability,” any performance shares which have been granted and as to which the measurement date has not occurred will be converted into the target number of shares of common stock. Sales will not be entitled to receive these payments if his employment ends for any other reason during the term.

The agreement provides that Supervalu will pay or reimburse Sales for travel expenses, up to one round-trip visit per week, from Florida or Michigan to Minnesota to facilitate the performance of his duties. Sales will be eligible to participate in Supervalu’s executive nonqualified deferred compensation plan and to receive the standard annual physical for executives.

Sales is not eligible to participate in Supervalu’s multi-year performance awards for the fiscal 2012-2014 performance period or the fiscal 2013-2015 performance period. Sales will not be entitled to participate in Supervalu’s executive and officer severance pay plan and will not be provided with a change of control severance agreement. While Sales is serving as president and CEO, he will not receive any new grant of compensation solely for his service as a member and chairman of the board. The amount of the annual deferred stock retainer awarded to Sales as non-executive chairman of the board on July 17, 2012 was increased by $150,000 in recognition of his responsibilities for overseeing Supervalu’s review of strategic alternatives.

The handwriting was finally on the wall for Herkert’s 39 month run when Supervalu released its first quarter earnings (for the period ended June 16) on July 11.

During that 13 week period, Supervalu posted some of its poorest number in the post-Albertsons era (2006) in which it also said it would suspend its dividend and seek an asset review as it continued to struggle with declining sales and earnings.

Not surprisingly, Supervalu, which traded at $18 per share when Herkert came aboard in May 2009, lost nearly half of its already declining value when the company announced it was suspending its dividend (the stock went from $5.29 per share to $2.69 per share within 24 hours and reached a historic low of $1.68 on July 25). With Herkert gone, the stock has rebounded slightly to $2.33 per share on August 17.

In that first quarter, quarterly profit plunged 45 percent as Supervalu 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 3.7 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.

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.