Supervalu Bedeviled by Sluggish Sales Growth

ELLIOT ZWIEBACH

MINNEAPOLIS — Supervalu here said last week it is on track to deliver within the next 18 months the full measure of synergies from its purchase of Albertsons, despite disappointing identical-store sales during its recently ended fiscal second quarter.

Analysts said they believe the company is on the right track.

IDs for the 13-week quarter, which ended Sept. 8, increased 0.5% — below the company's guidance of 1% to 2% — “but we remain on track [to deliver synergies of $150 million to $175 million] with virtually every key metric,” Jeff Noddle, chairman, president and chief executive officer, told analysts during a conference call.

He said the company's current run rate on ID sales is slightly improved, “and as such, our ID sales range for the year remains at 1% to 2%, with the expectation we will be at the low end of the range.”

ID sales improvement “is one of our top priorities,” he said, and announced that the company's ID goal for fiscal 2010 (which begins in March 2009) is 3% — a goal he said he expects Supervalu to achieve by continuing to invest in remodels, implement merchandising and marketing programs, and execute at store level.

Net income for the quarter rose 12.1% to a record $148 million, while sales fell 4.8% to $10.2 billion, due in part to one less week of acquired operations and the closure of 79 acquired stores that were underperforming. ID sales in the company's retail food segment, excluding fuel, rose 0.5%.

“Sales softened as we finished our first quarter, and inflationary pressures in our pharmacy business from increased sales of generics continued in the second quarter,” Noddle said. “There were also competitive challenges in several markets, and we did not adequately plan for and cycle prior-year promotional activities.”

For the half, net income rose 35.2% to $296 million, and sales rose 42.6% to $23.5 billion.

Analysts said last week that while Supervalu still faces serious challenges in its efforts to drive stronger sales, they remain optimistic about its long-term prospects.

“Supervalu is the company that gets no respect,” Perry Caicco, an analyst with CIBC World Markets, Toronto, said, “[although it] does nothing but deliver. The company has put up two strong quarters, defying the opinions that the business is somehow in severe decline.”

He conceded that same-store sales have been sluggish, but said that “investors must continually remind themselves that the bulk of the asset base [the acquired Albertsons stores] is unrenovated, plagued with reputation problems and still adjusting conditions, pricing and offerings.”

“At this stage in its development, there's much more change in the hopper. Supervalu is just beginning to improve its vast acquired store network, so weathering a softened economy and delivering temporarily depressed same-store sales results is just a bump in the road.”

John Heinbockel, an analyst with Goldman Sachs, New York, said Supervalu allayed investor concerns “[by] delivering slightly better-than-expected earnings and preventing IDs, excluding fuel, [from] slipping into negative territory.”

Excluding the loss of the extra week and the store closures, total sales would have risen 2%, Heinbockel pointed out — “a decent but not spectacular increase,” he noted.

He said the company faces a long-term challenge turning around the former Albertsons stores, “[which] possess the highest profit margins and the weakest sales momentum among larger peers.

“A major remodel program has been launched to address sales, but this top-line turnaround is being executed in a tougher competitive and macro environment than peers had to contend with.”

Deborah Weinswig, an analyst with Citigroup Global Markets, New York, said she anticipates short-term sales increases will be difficult. “Although Supervalu's Premium Fresh & Healthy remodel program should ultimately lead to stronger year-over-year growth, we expect near-term comps to remain pressured,” she said.

She said she anticipates ID sales excluding fuel to increase 1% in the third quarter vs. a comp of 0.6% in the prior year.

In response to a question during the conference call, Noddle said food inflation during the second quarter continued to run between 2% and 3%, the same level as in the first quarter, “[though] we're still hopeful we'll see some abatement, particularly in the meat and dairy complex. But although some commodity prices have improved somewhat, it's still not enough to say we will see a lower run rate during the third quarter.”

Asked whether consumers are trading down, Noddle said customers at Save-A-Lot are. “Those trends were fairly consistent in the second quarter,” he said.

While stressing that Supervalu is on target to realize synergies of $150 million to $175 million by the end of the third year after its June 2006 acquisition of the premiere properties of Albertsons, the company declined to specify what level of returns has been achieved through the second quarter.

According to Pamela Knous, executive vice president and chief financial officer, “The synergies had just started to emerge in the first quarter, [though] we really just slightly overcame the negative synergies of the acquisition in the quarter.

“So when we talk about synergies at this point, it's because they're actually having a favorable impact on the bottom line, and we were actually slightly above that rate in the second quarter.

“We've given a range of $40 million to $50 million [in pretax savings for the fiscal year], but we didn't give a specific number, because a lot of it is dependent on timing and other things that could possibly shift.”