MINNEAPOLIS -- Supervalu here sounded an optimistic note for the coming year during a conference call discussing its year-end earnings last week, citing the performance of its Save-A-Lot limited-assortment grocery chain and its regional supermarket banners.
Despite double-digit increases in costs for health care and pensions, Jeff Noddle, chairman, president and chief operating officer, Supervalu, said the company saw less competitive pricing pressure on gross margins in the fiscal year ended Feb. 28 than it did in the preceding year. He also said inflation appears to have returned to normal levels of about 1%, which is easily passed on to consumers.
"This past year, we did not see the indiscriminate use of gross margins to chase sales as much as we did in the prior year," he said. "Rather we are witnessing more internal transformations. A number of retailers began implementing large-scale infrastructure initiatives primarily to address increased competitive pressures, raising health care costs, and the need to restore same-store sales growth."
The company predicted a "slowly recovering economy" and comparable-store sales gains of 1% to 2% for the year.
Supervalu said it planned to accelerate the expansion of extreme-value combination stores pairing the Save-A-Lot banner with the Deal$-Nothing Over a Dollar general merchandise format, adding between 110 and 140 new locations.
"Our licensees will be a significant source for growth for Save-A-Lot as we expand the rollout of our combination stores to these licensees," Noddle said. He said the company during the last year focused on testing the combination of the two extreme-value formats and on preparing the distribution system for more aggressive retail development.
Included among the new combination stores planned for the current fiscal year are about 50 "Super Deal$" outlets, which feature the traditional general merchandise assortment of a dollar store with some added food offerings. The rest will be the reverse: Save-A-Lots fitted with dollar merchandise sourced through the Deal$ system. In addition to the new stores, about 40 to 50 existing sites will be converted to one of the two formats.
Noddle said because of the accelerated growth of the Save-A-Lot banner, the company expects that its retail revenues -- which include distribution revenues from Save-A-Lot licensees -- will accelerate at a faster pace than its wholesaling volumes during the next few years.
Noddle also said the company was confident in the performance of its regional banners after exiting the Denver market last year and negotiating a new labor contract in St. Louis. At the Shop N Save chain in Pittsburgh, the company is exploring opening a new store in that market for the first time in years after repositioning the banner there, he said.
Plans for the current fiscal year call for eight to 10 new regional supermarkets overall, including four new Cub stores in the Twin Cities, and about 30 remodels.
"They are putting a lot of their emphasis on retail," said Jason Whitmer, analyst, FTN Midwest Research, Cleveland. "We see great execution in the big-box business, and unlimited growth potential in the Save-A-Lot business."
Asked if the company was considering the acquisition of either Bruno's or Bi-Lo, the two Southeastern chains that Ahold, Zaandam, Netherlands, is seeking to sell, Noddle declined to comment directly, but pointed out that Supervalu has no existing operating base of traditional supermarkets in the Southeast.
On the wholesale side, Noddle said the industry continues to be influenced by fallout from the bankruptcy last year of Fleming, Dallas, whose supermarket distribution operations were absorbed by a handful of other wholesalers, including Supervalu.
"The rationalization of the Fleming assets continues," Noddle said. "Some of those distribution centers that were bought by others are underutilized, and that's where we see some very aggressive offers in the marketplace. It's kind of a continuation of the dismantling of the Fleming business, if you will."
He said attrition of wholesale customers was expected to continue at a rate of about 2% to 4% per year. (See story on D'Agostino's defection to C&S Wholesale Grocers, Page 8.)
"I think there's going to be some competitive posturing to get whatever's left over from Fleming," said Whitmer. "People will scratch and claw to get whatever little bit of sales they can."
Supervalu projected earnings per share for the current fiscal year to be between $2.75 and $2.90, which includes the impact of about 40 cents per share from the sale of the company's interest in WinCo Foods, Boise, Idaho. Earnings per share in the year just ended were $2.07. The WinCo transaction will result in a one-time after-tax gain of 50 cents per share, offset by a reduction of 10 cents per share from the elimination of WinCo's equity earnings.
Supervalu said its net income for the fourth quarter totaled $95.6 million, up 51% from year-ago results. Sales in the fourth quarter, which included an extra week, improved 9.3%, to $5.04 billion.
For the year, which also included one extra week, the company posted a net income of $280 million, up 9% over year-ago results, on sales of $20.2 billion, up 5.5% over year-ago results.
Retail sales totaled $2.8 billion, up 10.9% from year-ago levels. Retail operating earnings for the fourth quarter were up 19.7%, to $138 million.
The company attributed the sales increase primarily to new-store development, a comparable-store sales gain of 2.5%, and the extra week in the more recent fourth quarter. The company said its Save-A-Lot division had positive comp-store sales in the period, although it did not provide specific results.
Distribution net sales for the fourth quarter were up 7.5% over year-ago results, to $2.3 billion, which the company attributed primarily to the extra week in the quarter. Operating earnings in the company's distribution segment totaled $55.9 million, up 80.3% over year-ago results.
The company said the asset swap with C&S Wholesale Grocers, Brattleboro, Vt., in which it acquired some of the former Midwestern operations of Fleming in exchange for its New England operations, had a negative impact on the top line, but bolstered the company's profitability by driving more sales through existing facilities.
The company said capital expenditures for the fourth quarter and full year totaled $111.5 million and $371.5 million, respectively. That was down from $439 million in the year before, which included the Deal$ acquisition. Cap-ex for the current fiscal year is projected to total about $400 million to $425 million.
Qtr Ended: *2/28/04; 2/22/03
Sales: $5.04 billion; $4.61 billion
Net Income: $95.6 million; $63.9 million
Inc/Share: 70 cents; 48 cents
53 Weeks: *2004; 2003
Sales: $20.2 billion; $19.2 billion
Net Income: $280 million; $257 million
Inc/Share: $2.07; $1.91
* Results for the most recent quarter and year included one extra week. Also, included in the net income for the most recent quarter are pretax restructuring charges of $4.9 million; net income in the fourth quarter of the preceding year included restructuring charges of $2.9 million.