Supervalu to sell and lease back DCs, divest Shop ’n Save

In the wake of a proxy fight, Supervalu Inc. has unveiled plans to sell and lease back eight of its owned distribution centers and divest its Shop ’n Save retail operations.

The company announced the moves late Tuesday along with its 2018 fourth-quarter and fiscal year results.

Accounting for about 5.8 million square feet, the eight DCs — in Champaign, Joliet and Oglesby, Ill.; Commerce and Stockton, Calif.; Green Bay, Wis.; Harrisburg, Pa.; and Pompano Beach, Fla. —  are being sold to an undisclosed buyer for approximately $483 million, Supervalu said.

After the sales close, Supervalu is slated to enter into lease agreements for each facility for an initial term of 20 years, with five five-year renewal options. Adjusting for taxes and closing costs, net proceeds are estimated at $445 million, Supervalu said. The sale and leaseback transactions are expected to be finalized for seven of the DCs in May and for one DC in October.

Net proceeds from the sales are earmarked to reduce debt, including the payoff of a mortgage related to one of the properties being sold and a mandatory prepayment of a secured term loan, according to Supervalu.

After the sale of the DCs, Supervalu will continue to own over 13 million square feet of space, the company noted. The buyer has also agreed to fund an expansion at the Harrisburg DC for an estimated cost of $20 million. Supervalu said the expansion, to be leased back to the company when completed, will help fuel the growth of its wholesale business and expand the availability of its Market Centre products across the network.

Related:Supervalu selling off Farm Fresh stores

“The completion of these sale leaseback transactions is another positive step in the continued transformation of our business,” president and chief executive officer Mark Gross said in a statement. “By unlocking significant value in a portion of our real estate portfolio, we’re able to meaningfully pay down debt, improve our balance sheet and deliver value to our shareholders. I appreciate the hard work and dedication from our team as we continue to move quickly on a variety of initiatives we believe position us for future success.”

The retail grocery operations being put on the block include Supervalu’s Shop ‘n Save stores in St. Louis and Shop ‘n Save East stores in West Virginia, Maryland, Pennsylvania and Virginia, which had been acquired from Food Lion.

“These stores have faced challenges for some time now, and we’re undertaking actions that we believe are in the best interests of our business and shareholders,” Gross told analysts in a conference call late Tuesday.

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The planned sale of the Shop ‘n Save stores comes after last month’s sale of 21 Farm Fresh stores to Harris Teeter, Kroger Co. and Food Lion. Supervalu also plans to sell off the remaining 17 Farm Fresh stores.

With the latest divestitures, Supervalu’s retail chains will include Cub Foods, Hornbacher’s and Shoppers. The company said that as of Feb. 24 it had 114 traditional retail grocery stores under three banners.

Struggling to compete with larger grocery companies and fast-growing online players, Minneapolis-based Supervalu has been restructuring its business to focus on its core food wholesale operations and firm up its financial footing.

In late March, Blackwells Capital initiated a proxy battle with Supervalu as part of a months-long effort to get the company to expedite its restructuring. The investment firm called for Supervalu to explore such options as a sale/leaseback of its distribution centers, a sale of the company or a merger with a wholesaler competitor, and a spin-off of its retail operations, among other measures.

The previous month — after Blackwells announced its aim to nominate directors to Supervalu’s board — Supervalu highlighted the progress of its transformation. That has included new leadership; the sale of Save-A-Lot for $1.3 billion in 2016; new wholesale customers such as The Fresh Market; last year’s acquisitions of Unified Grocers and Associated Grocers of Florida; and the divestiture of supermarket retail assets, most recently the Farm Fresh chain.

“Exiting from our Farm Fresh banner and our announcement to pursue the sale of two others demonstrates our efforts to transform this company and make Supervalu an increasingly wholesale-oriented company,” Gross said in the conference call Tuesday.

Indeed, food wholesale now accounts for the lion’s share of Supervalu’s business: 78% of total sales in fiscal 2018, up from about 44% only two years ago. Overall, the company serves a network of 3,437 stores, including 3,323 stores operated by its food distribution customers.

For the fourth quarter ended Feb. 24, Supervalu posted sales of $3.59 billion, a gain of 42% from $2.53 billion a year earlier. The total included $970 million from Unified Grocers and AG Florida.

Wholesale segment revenue rose 60% to $2.87 billion, while retail segment sales dipped 0.6% to $694 million. Retail identical-store sales inched up 0.1% but were more than offset by the lost sales from closed stores, Supervalu said.

The company reported net earnings including non-controlling interests of $33 million, which includes $25 million of net earnings from continuing operations and $8 million of income from discontinued operations, net of tax. Diluted net earnings per share attributed to Supervalu were 86 cents, reflecting 64 cents from continuing operations and 22 cents from discontinued operations.

Analysts, on average, had projected adjusted EPS of 79 cents, with estimates ranging from a low of 72 cents to a high of 96 cents, according to Thomson Reuters.

“We finished fiscal 2018 strong with results in-line with our expectations, after having made significant progress throughout the year with our ongoing wholesale business transformation,” Gross stated. “We’re pleased with our efforts to date to create a stronger company with more focused operations through the purchase of Unified Grocers and AG Florida.”

For the full 2018 fiscal year, Supervalu totaled sales of $14.16 billion, up 29.7% from $10.91 billion in fiscal 2017. The increase reflected revenue of $2.6 billion from Unified Grocers and AG Florida, Supervalu said. Wholesale sales climbed 43.5% to $11.05 billion, and retail sales fell 2.8% to $2.94 billion for the year.

Supervalu posted fiscal 2018 net income including non-controlling interests of $46 million, comprised of $49 million of net earnings from continuing operations and a loss of $3 million from discontinued operations, net of tax.

The consensus analyst estimate was for adjusted EPS of $2.45, with projections running from a low of $2.42 to a high of $2.49, according to Thomson Reuters. 

“On the new business front, we’re having ongoing dialogue with potential new customers who operate a broad range of traditional and nontraditional formats, and our broad new business pipeline is strong,” Gross told analysts in the call. “We obviously need to convert conversations into sales, but I’m optimistic we’ll be able to add more customers here in fiscal year 2019.”