Supervalu Ramps Up Remodels

MARK HAMSTRA

MINNEAPOLIS — Supervalu is ramping up the rollout of its “premium fresh and healthy” remodeling program this fiscal year after ending fiscal 2007 on a positive note.

The company turned in a better-than-expected performance for its fiscal fourth quarter, which ended Feb. 24, as the Albertsons stores it acquired last year boosted sales and contributed to better operating margins.

“The most surprising thing is that there haven't been any major surprises,” said Jeff Noddle, Supervalu's chairman and chief executive officer, in a conference call with analysts last week discussing the company's year-end results.

He continued to emphasize that the upside of the company's remodeling efforts at the acquired stores is greater than he had anticipated, but noted that the costs in terms of managerial oversight for each remodel are extensive — “more than for a new store,” he said. “The only challenges we have are, how many of these can we handle and manage at the same time?”

The “premium fresh and healthy” format has been introduced in “about a dozen” locations since the program was launched in November, he said. He declined to provide details about sales results from the remodels.

The program is being rolled out as a package of components that can be “plugged in” to each store based on local demographics and banner identity. A new Albertsons store in Henderson, Nev., includes extensive kosher offerings, for example, while new Shaw's stores in Warwick, R.I., and Brockton, Mass., include expanded natural and organic offerings and ethnic selections tailored to the local markets.

Supervalu projected $1.2 billion in capital expenditures for fiscal 2008, which began in February, up from just under $1 billion in fiscal 2007 cap-ex.

The company also continued its effort to exit retail markets where it said it does not see potential for growth — the latest being Fort Wayne, Ind., where it has agreed to sell its Scott's Food & Pharmacy banner to Kroger for an undisclosed sum (see Page 6). That sale follows the divestment of Supervalu's Jewel stores in Milwaukee. Supervalu said it closed or sold a total of 50 stores in the recently ended fiscal year.

“These markets were not consistent with our long-term vision and returns,” Noddle said.

Supervalu did expand its presence in some new markets with its Save-A-Lot banner, he said. The company opened 73 new locations of the limited-assortment format last year, including sites in what he described as “Far South Texas” along the Mexican border. The banner also is increasing its presence in the Pacific Northwest.

Noddle said he was also encouraged by the recent hiring of Mark Goodman as executive vice president and chief operating officer of Save-A-Lot (see Page 8), citing Goodman's experience with franchising at McDonald's. Save-A-Lot is largely owned by licensees.

Overall, retail sales for the fourth quarter totaled $8.2 billion, vs. $2.5 billion a year ago. Identical-store sales on a combined basis, as if the acquired stores were in operations for a full year, were up 1.4%, including 1.8% from the acquired Albertsons locations. Legacy stores posted flat IDs for the fourth quarter.

Operating earnings in the retail segment totaled $363 million, vs. a loss of $2 million in the year-ago fourth quarter, which included several charges for asset dispositions. The recent figure included a charge of $26 million for the sale of Scott's and a charge of $1.6 million for stock option expensing.

Sales in Supervalu's supply chain operations were $2.1 billion for the fourth quarter, up slightly from year-ago levels. Operating earnings were $55 million, vs. $41 million in the year-ago period.

In total, Supervalu reported net income for the fourth quarter of $119 million, vs. $6 million in the year-ago period. Sales were up 55%, to $10.3 billion, compared with year-ago results. For the full year, net income more than doubled to $452 million, vs. $206 million a year ago. Sales rose 47% to $37.4 billion.

The results for the full year include three quarters of operations with the Albertsons banner.

“I think all the reasons Supervalu did the acquisition of Albertsons, given the tougher outlook of the grocery wholesale business, are bearing out,” said Chuck Cerankosky, an analyst with FTN Midwest Research, Cleveland. “They are continuing to point to attrition in that wholesale business, and yet the acquired retail operations have performed at least as well as expected.”

John Heinbockel, an analyst with Goldman Sachs, New York, cautioned, however, that sales growth is still relatively slow at Supervalu, compared with Safeway and Kroger, and that many of the efficiencies from the integration of Albertsons operations will not bear fruit for another year or more.