Inflation May Be Having More Impact: Supervalu

ELLIOT ZWIEBACH

MINNEAPOLIS — Supervalu's cautionary statement last week about the pressures of inflation have led some analysts to rethink the potential ramifications of product cost increases.

“Coming as the ‘third strike’ after Kroger's 2-cent inflation hit and Safeway's speculation that spiraling inflation might soften consumer demand, Supervalu's comments sent the stock tumbling,” said Perry Caicco, an analyst with CIBC World Markets, Toronto.

The company “seems to be in the teeth of the wind of inflation at the moment,” said Jeff Noddle, chairman and chief executive officer, Supervalu, during a conference call to discuss financial results for the first quarter, which ended June 16.

“But our objective remains to pass on the cost increases, even though those increases are impacting consumer spending behaviors.”

Kroger and Safeway said in the last few weeks they were passing through cost increases selectively and had seen margin pressures as shelf prices have lagged cost increases.

Noddle said inflation has crept up over the last three months to a level “moderately higher than 2% — somewhere in the 2% to 3% range” — with dairy products under the most pressure and the cost of corn creating short-term volatility in certain food categories.

“But because a lot of it is in meat and produce, it can change rather quickly, and we're hopeful that later in the year, as new crops come on, we'll see some lessening of the inflation rate,” he said.

Noddle said it's difficult to quantify the impact of consumer resistance to inflation because it's been a factor for only a relatively short time. “But consumers are constantly adjusting their purchasing and responding to the inflation they encounter, and with the high gas prices, it's very hard to predict.”

Those comments — and warnings that same-store sales may soften — apparently prompted investors to sell off Supervalu stock early in the week.

“Investors have concluded food inflation is not nearly as bullish as the sector previously thought,” said John Heinbockel, an analyst with Goldman Sachs, New York.

Gary Giblen, executive vice president of Goldsmith Harris, New York, expressed a similar sentiment. “Despite the conventional wisdom that food inflation is good for supermarkets, it seems to be having a negative impact right now as a softening in consumer demand is squeezing margins, particularly in the perishables area,” he said.

Caicco said he believes inflation is manageable and should not ultimately hurt Supervalu. “Earnings growth at Supervalu is driven primarily by its ongoing integration [of the Albertsons stores it acquired last year] and the attendant synergies, and Albertsons was so damaged that simply operating a cleaner, brighter, more in-stock store could drive same-store sales and margins for years.”

He said Supervalu is where Kroger and Safeway were three years ago in terms of operating momentum, “so weathering a softened economy and delivering temporarily depressed same-store sales results is just a bump in the road for Supervalu.”

Sales for the 16-week quarter rose 130% to $13.3 billion, a Supervalu record, with record earnings of $148 million, up 70.1%. Identical-store sales, including the acquired stores, rose 1.2%, with the Albertsons stores up 1.7% and legacy Supervalu stores down 0.4%.

Noddle said like-store sales showed signs of softening late in the first quarter, “and it has continued so far into the second quarter.

“During the year [since the acquisition] we had higher like-store sales than we anticipated, but we are now turning the corner on some of those, and some of the further improvements are somewhat dependent on our remodeling program, which is accelerating, and on a lot of merchandising and marketing initiatives we are doing.”

He said Supervalu plans to invest margins in certain markets “where we think we need to solidify our banner positions and drive customer loyalty. But those investments are not being made because of whatever our last quarter like-store sales performance was.”

Noddle declined to pinpoint which markets are targeted for margin investments.

In other topics discussed by Noddle during the call:

“We are on schedule with our three-year plan to leverage our transformed business model into improved operating metrics and improved return on invested capital,” Noddle said.