Supervalu Eyes Potential Sale, Slashes Spending to Cut Prices

MINNEAPOLIS — Supervalu last week said it would seek strategic alternatives including a potential sale of all or part of the company as part of sweeping plans to slash expenses and capital spending and increase price investments that one analyst termed a “shift to survival mode.”

The changes — which included the suspension of its dividend, the withdrawal of fiscal earnings guidance and a plan to replace its current credit facilities with more flexible loans backed by its real estate — will enable the retailer to accelerate price investments to rebuild sales momentum, Craig Herkert, chief executive officer of Supervalu, said. His announcement — a marked departure from his previous philosophy to protect profits while turning around the company — came as Supervalu revealed first-quarter financial results that were well below plan, including a 45% decrease in net income and comparable-store sales declines at conventional stores and its discount Save-A-Lot unit.

“We need to move faster to execute our strategy,” Herkert said in a memo to Supervalu employees last week. “The competitive environment we’re in demands that we do better.”

Although Herkert in a conference call with analysts last week said that the company was not considering bankruptcy, analysts said that was one possible scenario, as the company might find it difficult to sell assets or find a buyer, and is poorly positioned if its “fair pricing plus promotions” initiative sparks a competitive response or fails to catch on with shoppers.

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“Supervalu’s future is highly uncertain given the magnitude and speed of the deterioration [of fundamentals] in a seemingly unchanged environment,” said Karen Short, an analyst with BMO Capital Markets.

Other analysts were similarly skeptical. Fitch Ratings downgraded its credit ratings on Supervalu, citing deteriorating performance and increased risks in its revised strategy. John Heinbockel of Guggenheim Securities said he believed “prospects for success are not good,” noting that changing price perceptions is lengthy process. “It took Kroger five years to do so a decade ago, but the economy was stronger and the competitive environment less crowded,” Heinbockel said.

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Ajay Jain of Cantor Fitzgerald maintained a “buy” rating but dropped his price target and acknowledged a bearish sentiment around the stock would only increase as a result of its latest setback, which he called “a shift to survival mode.” While he acknowledged widespread skepticism that price investments would gain traction, Jain estimated that between expense cuts and the dividend suspension, Supervalu could have $400 million with which to offset its sales weakness.

“While we believed that the upbeat sales guidance provided just a few short months ago was insufficiently conservative, the sharp deterioration evident in Supervalu’s latest results is likely to result in renewed speculation regarding its ability to remain intact and solvent under its current structure,” Jain said in a research note. “We still maintain our view that the risk of bankruptcy is off the table, but the latest missteps by Supervalu could give fresh ammunition to what is already an extremely aggressive bear case with the stock.”