MINNEAPOLIS -- Supervalu here said last week it plans to sell about 30 stores and eliminate 10% of its work force positions to help cover the costs of implementing its Supervalu Advantage project. Announced in September, Supervalu Advantage is a program designed to improve the effectiveness and efficiency of the company's food distribution system. It includes changes in pricing, vendor relations and systems. The plans for staff reduction and store selloffs drew initial negative reaction from some analysts, while the company said the moves are necessary for gains down the road.
Supervalu said it will take a third-quarter pretax charge of about $244 million to reflect the restructuring activity and other charges incurred in connection with the Advantage project and changes in its retail operations. That is expected to reduce earnings by about $118 million, or $1.66 per share, and to result in a net loss for the quarter.
In announcing the moves, Michael Wright, chairman, president and chief executive officer, said the company is "actively negotiating for the sale of certain retail locations and assets," and
said "approximately 30 retail locations might be affected." However, he declined to identify the stores that will be sold.
Supervalu expects to generate "substantial cash proceeds" from asset dispositions over the next 18 months, Wright noted. Observers said likely candidates for sale would probably include the company's Twin Valu stores in the Cleveland and Akron areas -- Supervalu's attempt at a supercenter format -- and the Laneco stores in northeastern Pennsylvania that were part of the company's acquisition of Wetterau Inc., Hazelwood, Mo., in November 1992. Regarding the work force reduction, Wright said, "Our plans [for Supervalu Advantage] are very ambitious and represent our vision for a very exciting future, but their achievement can only come with some significant short-term costs. "Approximately 4,300 positions, or 10% of our total work force, are expected to be eliminated pursuant to these programs over the next two years. Hopefully, many of the positions can be eliminated through normal turnover and retirements." Wright said these moves will buoy the company's Advantage program, whose goals include lower cost of goods, more efficient distribution, increased market share growth and new business opportunities.
In relaying negative reactions about Supervalu's actions, some analysts expressed surprise. Gary Giblen, newly installed managing director of Smith Barney, New York, told SN Supervalu "is running very hard, spending a lot of money on the Advantage project, devoting a lot of management effort to maintaining profitability over the long term, but all the benefits are long-range and not very certain. "It's spending money now for benefits that may or may not happen. The work force cutback is a drastic step, and Supervalu never mentioned anything in its previous discussions about the Advantage program that indicated that would happen." Gary Vineberg, an analyst with Merrill Lynch, New York, questioned the connection between the restructuring and the potential benefits to the Advantage program. "Supervalu is presenting the restructuring as a growth vehicle for the future," he said. "But downsizing the work force and eliminating underperforming stores are standard restructuring practices, and trying to relate those changes to the potential growth benefits that will come from Advantage is questionable. "It's a way of sugar-coating the problem to give people the sense that something is happening, and a lot of people aren't buying into it." Wright said the impact of the restructuring and other charges on third-quarter results will be significant, with earnings falling short of analyst expectations of 60 cents per share. "Management's preliminary estimates are in the area of 47 to 52 cents per share for the quarter before the special items, and a loss after reflecting these items," Wright said. "The expected earnings shortfall results primarily from the continued costs of Supervalu Advantage and additional expenses being incurred on a short-term basis in connection with the consolidation of a number of distribution centers acquired in the Wetterau and Sweet Life [Foods] acquisitions. "In the short term, the vast modernization of the distribution system and the enactment of the Supervalu Advantage project means that we will be incurring substantial additional costs. However, these costs are short-term in nature, and in the long term, benefits of the actions being taken have the potential to provide enormous benefits." Supervalu also said it expects to record an after-tax credit of $40.8 million in the quarter following a favorable ruling from the Internal Revenue Service. The credit results from an IRS ruling on the 1992 disposal by Supervalu of 54% of ShopKo Stores.