MINNEAPOLIS - The first quarter of combined results of Supervalu and the Albertsons stores it purchased earlier this year revealed better earnings and a smoother financial integration than some analysts expected, though overall retail sales were sluggish.
"It was a solid quarter, comfortably better than expected on the earnings front," Jay Whitmer, analyst, Cleveland Research, Cleveland, told SN. "The accretion from this deal is clearly better than expected out of the chute."
Supervalu reported net earnings of $132 million on sales of $10.7 billion during its fiscal second quarter - which included 12 weeks of Supervalu results that ended Sept. 9, and 13 weeks of the acquired Albertsons assets that ended Aug. 31. Earnings of 61 cents per share exceeded analyst estimates of around 53 cents, reflecting a smoother financial pairing than some had anticipated.
"A lot of the risk out there was not so much operational integration, but financial integration," Mark Husson, analyst, HSBC Securities, New York, told SN. "What's most important is that the mystery surrounding the financial integration has gone away."
Jeff Noddle, chief executive officer of Supervalu, hailed the financial results as a "first milestone" in the process of combining the two companies. The transformed Supervalu saw its net income rocket 288% as sales climbed 134%. Operating earnings of $361 million, or 4.2% of sales, dwarfed the 1.6% margins Supervalu reported in the same period a year ago. (Absent one-time charges in both years, margins increased to 3.8% from 3.1%).
The higher profits reflect a company that today generates around 80% of its sales from retail, compared with 53% a year ago.
"We're delivering the economics of the new company," Noddle told analysts in a conference call last week. "Not only are we significantly larger, but we have a more profitable business model."
The results prompted Supervalu to shave 2 cents per share off the bottom of its annual earnings range; the company now expects to earn between $2.62 and $2.80 per share (around $2.11 to $2.36 when adjusted for charges). This revision may not have surprised analysts who previously remarked that Supervalu had "threaded the needle" on initial estimates, making the number small enough to exceed but large enough to excite investors.
Nevertheless, the report cleared up some uncertainties, according to Husson.
"You were never really sure that Albertsons' accounting policies were consistent with Supervalu's," he said, "so if you placed Albertsons' results in Supervalu methodology, what happens to them? Also, what does the combined overhead look like? What does the combined buying muscle do or not do?"
Combined results provided a satisfying answer to most of those concerns, though Pam Knous, chief financial officer, noted that buying power would suffer somewhat due to lower scale in pharmacy related to Albertsons' stand-alone drug stores spun off to CVS in the breakup.
Effects of reduced pharmacy buying and selling are expected to offset synergies of the Albertsons' deal realized in the current fiscal year, Knous explained. However, she maintained the company still anticipates synergies of $150 million to $175 million.
Despite the earnings surprise, analysts were cautious last week, noting the integration of operating procedures - and addressing what so far have been slow retail sales - still awaits Supervalu.
"Although [exceeding earnings estimates] is a very positive data point and suggests the Albertsons integration is off to a solid start à the company must still jump-start sluggish comps," said John Heinbockel, an analyst for Goldman Sachs, in a research note last week.
Identical-store retail sales were flat, Noddle said, reflecting a 1% decrease from legacy Supervalu stores and an increase of 0.3% from Albertsons stores. Supervalu stores' performance increased slightly from the first quarter, when comps were down by 1.8%. Comp figures exclude fuel sales.
Some Sales Progress
Noddle noted some progress has already been made in addressing sales at the newly acquired stores, but more is to come. "As much as I'd like to say we had a dramatic impact on 1,100-some stores, I think that's unlikely," he said.
At Jewel-Osco, Supervalu has introduced a sales-building program focusing on store-level execution to reduce out-of-stocks during peak shopping periods. In Southern California, it reintroduced the "Three's a Crowd" program, which assures shoppers that Albertsons and Lucky stores in the region will open additional checkout registers whenever more than three shoppers are waiting.
Elsewhere, Noddle said the company recently completed a "deep dive" into the acquired banners, studying issues such as price perception, competition, advertising and brand positioning in order to prioritize capital spending. Noddle said he has spoken to store managers in every region but Philadelphia and the Intermountain West, but expects to complete those visits this week.
"I think there are a few markets where over time, we're going to need to change some pricing structures and promotions," Noddle said about the results of the deep dives, though he did not specify specific banners or regions.
He identified the Northeast as a particularly promotional market, but said he believed the activity was not specifically geared to disrupt its takeover of the Shaw's banner, where comps were down as the result of vigorous promotional activity in the year-ago period.
Work is continuing on a national merchandising platform that the company will blend with a regional and local focus, Noddle said.
"We think we've developed a good plan that balances the two," said Noddle, adding that additional details about the plan should emerge next month. "We think it will be a little more unique than others have done it."
The integration of Supervalu and Albertsons distribution will likely result in consolidation of facilities in areas - Pennsylvania, Chicago and the Pacific Northwest - where the companies have overlapping capabilities, Noddle said. Companywide pharmacy distribution has already been reconfigured and is now based in Illinois, he said.