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In the face of lower sales and smaller margins brought about by bargain-hunting food shoppers amid the ongoing difficult economic environment, Supervalu posted a 30 percent decline in first-quarter profits of $113 million vs. $162 million a year earlier, and a 4.7 percent comparable net sales decrease of $12.72 billion from $13.35 billion, missing analysts’ estimates of $12.82 billion for the period ended June 20.
The Minneapolis-based retailer’s first-quarter retail food net sales of $9.9 billion also slid compared with $10.3 billion last year, a decrease of 4.3 percent, primarily reflecting the impact of a 3.2 percent same-store sale slide during challenging economic conditions, heightened competitive activity, additional investments in price and promotions, and previously announced store closures. The company said its comp sales performance primarily reflects results from a challenging economic environment, heightened competitive activity, and additional investments in price and promotions.
Separately, Supervalu said it would sell the majority of its Albertsons stores in Utah to Associated Food Stores, resulting in net proceeds of about $150 million.
The first-quarter numbers reflected an updated first-quarter financial outlook Supervalu issued in late June that was expected to be substantially below the consensus of Wall Street analysts. “As we noted in our press release of June 24, our first-quarter results reflected the continuing difficult economic environment, as well as investments we are making in price and higher levels of promotional spending,” said Craig Herkert, who took the helm of Supervalu as its new CEO in early May. “As a result, sales and margins in the first quarter were weaker than originally expected. We anticipate no near-term change in consumer spending patterns, and we will operate our business accordingly.”
Addressing why first-quarter results were below expectations and what additional observations and steps would come next, Herkert, during a conference call with analysts on Tuesday, said: “Being on the job for only 64 days now, I am not yet in a position to address the larger question; however, following a comprehensive business review, which includes visiting our stores and supply chain operations, as well as talking with associates, independent retailers, suppliers, and the board, I will have more to say shortly.
“My plan is to share a new vision as part of our second-quarter earnings call scheduled in October,” Herkert continued, adding that he “[could] confidently say…that this vision will build upon the tremendous assets and associates that make up our business.”
Citing current economic headwinds that aren’t expected to become favorable in the near term, Herkert said: “Current conditions have made being thrifty cool once again, and we are seeing this in our customers’ cautious purchasing behavior. The average number of items per basket is down about one-half item from the fourth quarter, and trading-down behavior is changing the composition of the items that remain.”
Moreover, Herkert told analysts what was “essential just a few quarters ago is now more likely a discretionary purchase, and trade-down continues at a higher year-over-year rate than originally expected. If the item is not on sale in our stores, it’s far more likely to remain on the shelf,” he said, adding that the magnitude of the change in consumer spending to buying sale items “significantly moved our mix of sales to the highest promotional mix we have on record,” which, he noted, was “clearly not anticipated.”
Supervalu’s recently implemented “Big Relief” program has thus far shown encouraging results, with increased unit movements. “But we also knew and fully expected that the goals of increasing customer loyalty and building basket size would take time and not materialize until the back half of the year.” Overall, he said, the program has held customer count at the -1 percent level experienced in the fourth quarter.
During the analyst call, Herkert singled out the “superb performance” of Supervalu’s supply chain business, which, under the direction of Janel Haugarth, achieved near record-setting operating performance as a percent of sales, “despite the ongoing transition of the remaining target business. This confirms not only the effectiveness of our supply chain business, but [also] the stellar performance of our independent retailers.”
Summing up Supervalu’s quarterly performance, Herkert said, “Results were not acceptable, and we will not wait until my vision is complete to take actions that will position the company for improving results.”
In terms of exiting the Salt Lake City market with the sale of 36 Albertsons stores and their respective pharmacies and fuel centers to Utah-based Associated Food Stores, Herkert said the locations “were deemed non-strategic to our ongoing operations and will be monetized. The company must continually review its asset base and take action to dispose of non-core holdings when deemed appropriate.”
In connection with the transaction that is expected to close in the fall and generate approximately $150 million in after-tax net proceeds, Supervalu is also seeking a buyer for its two Albertsons stores in Orem, Utah, and two Albertsons stores in West Jordan, Utah, and will continue to operate those stores while a buyer is identified. Associated Food Stores intends to rename the 36 purchased stores, and expects to interview and offer employment to most Albertsons associates.
The company further said it plans to retain its Salt Lake City distribution center, which will remain open to serve Albertsons stores in Idaho, Wyoming and Montana.