Following another disastrous quarter, the suspension of its dividend and a call by the board of directors for a strategic asset review, Supervalu finally fired president and chief executive officer Craig Herkert on July 30.
The Eden Prairie, MN based retailer/wholesaler then announced that non-executive chairman Wayne C. Sales has been named president and chief executive officer. Sales will also continue to serve as chairman of the board. Current director Philip L. Francis has been elected lead director.
Herkert’s dismissal marks a nearly 39 month run that will go down as one of the worst performances in recent food industry history.
“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,” said 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.”
“On behalf of the entire board, I would like to thank Craig for his efforts and wish him well as he pursues new opportunities,” concluded Sales.
Susan E. Engel, chair of the board’s Leadership Development and Compensation Committee said, “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.”
A director of Supervalu since 2006 and non-executive chairman of the board since 2010, Sales, 62, has enjoyed a long and distinguished career and brings extensive retail experience to his new role as chief executive officer. He is the retired vice chairman of Canadian Tire Corporation Limited,Canada’s most-shopped general merchandise retailer and the country’s largest independent gasoline retailer, which he led as president and chief executive officer from 2000 to 2006.
At Canadian Tire, Sales led the development and implementation of the first enterprise strategic plan, which included the creation of transformational strategies for Canadian Tire Retail, Canadian Tire Financial Services, Canadian Tire Petroleum and Parts Source, and the acquisition of Mark’s Work Warehouse. Sales also leveraged Canadian Tire’s value proposition to reposition the corporation in the face of entry of key U.S. competitors. These strategies revitalized Canadian Tire and led to retail sales increases of nearly $3 billion and annual share price appreciation of nearly 19 percent. Sales’ accomplishments earned him several industry awards, including Distinguished Retailer of the Year in 2004 by the Retail Council of Canada and CEO of the Year by Canadian Business Magazine in 2005. In 2009, Sales was also inducted into the Canadian Marketing Hall of Legends.
Sales’ retail executive experience spans more than 35 years. Prior to joining Canadian Tire in 1991, he served in several senior leadership positions with theU.S.division of Kmart Corporation in the areas of marketing, merchandising and store operations.
He is a director and chair of the Compensation Committee of Tim Horton’s Inc., the fourth-largest publicly traded quick service restaurant chain inNorth Americabased on market capitalization.
Given his intention to focus full attention on his new role at Supervalu, Sales will retire from his board positions with Georgia Gulf Corp, a leading integrated North American manufacturer of chemicals and vinyl-based building and home improvement products, and Discovery Air Inc., a specialty aviation company.
Francis, 65, brings to his role as lead director significant retail industry experience, as well as experience in business strategy as a senior executive of a large public company. A Supervalu director since 2006, Francis is the retired executive chairman of PetSmart, Inc., a specialty retailer of services and solutions for pets. Francis transitioned to the role of executive chairman in 2009, following his retirement as chief executive officer at PetSmart, a position he held from 1999 to 2009. Prior to joining PetSmart, Francis was the president and chief executive officer of Shaw’s Supermarkets (a current Supervalu property). He also continues to be a director of PetSmart, as well as CareFusion Corporation, a leading global medical device company.
The changing of the guard is only surprising in that it didn’t come much sooner. However, on July18, Supervalu posted some of its poorest number in the post-Albertsons era (2006) in which it 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). On August 3, following the announcement of Herkert’s firing, Supervalu’s stock rebounded slightly to $2.54 per share.
In its first quarter (ended June 16), 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.
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. The release also noted that Sales would 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.”
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.
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.