Supervalu's Albertsons Need More Investment

MINNEAPOLIS — Supervalu here said last week it expects to invest $1.2 billion in capital spending during fiscal 2008 as part of a four- or five-year spending effort to boost results at the Albertsons stores it acquired last June.

The company also said it was considering selling its 15 Jewel-Osco stores in the Milwaukee market.

Investors seemed more concerned with present realities than future possibilities as the price of the distributor's stock dropped early in the week after the company released financial results for its fiscal third quarter, which ended Dec. 2.

“Although Supervalu said in December its identical-store sales would show ‘modest sequential improvement,’ maybe some people were hoping for a stronger sales progression,” Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, told SN.

The results Supervalu reported — overall comparable-store sales up 0.6%, comps at acquired stores up 1.1% and comps at Supervalu legacy stores down 1.3% — “were in line with what the company indicated last month,” he pointed out.

Part of the problem for investors, Cerankosky suggested, may be that, with Supervalu operating Albertsons for only two quarters, “there's no strong data base for people to generate their own forecasts.”

Steve Chick, an analyst with JPMorgan Securities, New York, acknowledged as much when he wrote, “Supervalu's quarters still contain many moving parts, making comparisons difficult to analyze.” However, he said the company's retail business during the quarter “was generally OK.”

Sales progress seemed to be the issue for John Heinbockel, an analyst with Goldman Sachs, New York, who acknowledged that the improvement in the Albertsons comp to 1.1% — compared with a gain of just 0.3% in the second quarter — was “relatively broad-based and reflects the early benefits of better blocking and tackling.”

“[However], a firm upward trend has not yet been established, and because much will hinge on the forthcoming remodels, there could still be some backward movement in future quarters, [and] significant work remains, especially with respect to rejuvenating the top line.”

Perry Caicco, an analyst with CIBC World Markets, Toronto, also expressed concerns about the sales potential. “The acquired Albertsons assets have the benefit of great locations, but the chain is vast and damaged,” he wrote. “Supervalu's plan [to remodel a large number of stores] is appropriate, but material changes in the customer experience will come slowly.

“Competitive pricing is fundamental to the shopping experience, and this is an area where Supervalu needs to improve quickly, or all the other efforts could be wasted.”

Jeff Noddle, chairman and chief executive officer, said Supervalu expects to do 100-110 major remodels in fiscal 2008, which begins in late February, and to open 25-30 standard-sized stores and between 60 and 80 limited-assortment stores, including licensed locations.

Supervalu's goal for its store base is to have 80% of stores new or newly remodeled over the prior seven years, Noddle said; while the company's legacy stores are already at that level, only 65% of the 1,100 Albertsons stores are there, he pointed out.

“With approximately 385 of the acquired stores below the desired metric and with stores aging every year, it will take us about four to five years to fully achieve that metric.”

The $1.2 billion in capital expenditures represents a boost of approximately 26% over the $950 million Supervalu expects to spend through fiscal 2007, Noddle said — a total that excludes $150 million in spending by Albertsons during the quarter prior to its sale to Supervalu last June.

It also represents $200 million more than previous spending projections by Supervalu for fiscal 2008 — a reflection of Supervalu's confidence in its ability to generate cash flow, Noddle noted.

“If we find ways [to generate] more cash flow, our initial reaction is to put more into the remodel program. But while our first inclination would be to do more remodels more quickly and affect sales trends sooner rather than later, if we reach a maximum of what we can handle, then we certainly will look to pay down debt.

“But the increase of about $200 million in our capital allocation clearly indicates we intend to put additional cash flow into remodels first.”

Noddle said some of the anticipated increase in cash flow will come from the sale of assets in Milwaukee. “Obviously, that capital will be recycled into more remodels.”

Supervalu said it is in discussions with Roundy's Supermarkets there to sell five Jewel-Osco locations — two in Milwaukee and single units in Glendale, New Berlin and West Allis, Wis.

Industry sources said Supervalu is also in discussions with other area retailers, including some of its own independent customers, regarding potential alternatives for the other 10 locations.

“This market was identified early in our due diligence process as one with limited strategic growth opportunities,” Noddle said in the analyst call.

Net income for the third quarter — which encompassed 12 weeks for Supervalu and 13 weeks for Albertsons — rose 50.7% to $113 million on a sales increase of 127% to a record $10.7 billion, of which the acquired Albertsons stores represented $6.1 billion.

Sales in Supervalu's retail segment, which represents 80% of the total, were $8.4 billion, with $6.1 billion from the acquired stores (accounting for 73% of the total). The company said sales at Supervalu's legacy retail stores were down approximately 8%, following the divestitures earlier in the year of 181 units, including 26 corporate Cub Foods in Chicago, 17 Shop 'n Saves in Pittsburgh and 138 Deal$ stores in 16 Midwestern states.

Sales in Supervalu's supply chain services division rose 1.2% in the quarter to $2.2 billion, resulting from new business, which was partially offset by normal customer attrition, said Pam Knous, Supervalu's chief financial officer.

Net income for the company for the 40-week period was up 66% to $332 million, with sales climbing 78.1% to $27.1 billion.

Noddle said Supervalu has seen some small synergies from the Albertsons acquisition, including some procurement savings, “[but] they're not significant enough to call out at this stage.”

Supervalu has also realized some savings from better use of labor, Noddle added. The “3's a Crowd” program in Southern California — in which additional checkstands are opened when more than three customers are in a checkout line — required a higher labor investment initially “but our actual throughput has improved, and we're not hesitant to invest in labor in some markets,” he said.