Weaker Albertsons Stores Getting Stronger, Miller Says

ELLIOT ZWIEBACH

BOISE, Idaho — Albertsons LLC, the company composed of the least profitable stores that were split off when Albertsons was sold last year, may not be a losing proposition after all.

According to Bob Miller, president and chief executive officer, the company is operating with a positive cash flow “that's better than the investment in real estate,” and most of the stores are running positive same-store sales.

The company is about to launch its first round of remodeling projects; it's set to install new front-end systems at its 93 operating units in Florida; and it's engaged in discussions with a supermarket operator about a possible acquisition of stores somewhere within its existing operating area, Miller told SN.

“We still have some stores that don't have the ability to be cash-flow-positive over the next year that we want to close, but the stores that are left after that are good to operate and will allow us to continue to increase sales,” he said.

After the sale of 132 Northern California stores is completed and a handful of additional stores are closed, Albertsons LLC will continue to operate 360 locations with estimated sales of about $5.5 billion.

The stores that comprise Albertsons LLC were purchased last June by Cerberus Capital Management and four real estate companies, who planned to sell them for their real estate value — until they talked to Miller about heading the operation. Miller — chairman of Wild Oats Markets, Boulder, Colo., at the time — was reluctant to move to a chain that was going nowhere, he recalled, but he was interested in trying to turn the stores around.

Of the 661 Albertsons stores Cerberus acquired, almost all were operating at about negative 5% comp-store sales rates, Miller noted.

Almost immediately, the new owners closed 125 stores and put them on the block, along with 15 that had been closed by Albertsons prior to the sale. Of that total, the sale of 42 units to Ross Stores is pending, and the company said it is in negotiations to sell about half of the rest.

In addition, the entire 132-store Northern California division (including two closed stores) is being be sold to Save Mart Supermarkets, Modesto, Calif., in a deal scheduled to close by early March.

POSSIBLE ACQUISITIONS

Miller said the company is talking to another supermarket operator about acquiring a group of stores. “We're looking at potential acquisitions all the time, though nothing outside our operating areas. But if it's for sale, we look at it.”

Albertsons LLC divides its store base into five divisions: Texas (141 stores in Texas, Oklahoma and Louisiana), Florida (93 stores), the Southwest (80 stores in Arizona, New Mexico and Utah), Rocky Mountain (46 stores in Colorado, Wyoming, Nebraska and South Dakota) and Northern California.

Miller said four divisions are already showing positive same-store sales, with the fifth very close to positive. However, he declined to pinpoint the amount of the sales increases or to say which division was on the bubble.

“We're very happy with what we've done in terms of sales,” he said. “It's actually better than we thought it would be.

“The original strategy was to buy the stores for their real-estate value, but that was the downside case,” Miller explained. “The thinking was, if we couldn't do something different, then the owners could get a return on their investment by selling the real estate as they had intended.

“But when they hired me, I wasn't interested in shutting all the stores down. I asked if they would let us try to make the stores successful, which would require the right kind of investment on their part, and they said OK.”

Using capital supplied by the new owners, Albertsons LLC cleaned up the stores with minor paint-and-patch jobs, Miller said.

“Then we set about increasing the quality of the fresh departments — buying for quality, not price — while keeping grocery prices in check,” he said. “We also added more store labor, and although labor costs went up, we've been able to reach our goal of getting positive sales increases.”

The company also added a bonus incentive program for store directors and department managers aimed at boosting cash flow.

“It's a reward system they understand and can work to achieve, and that was a big positive for us,” Miller said. “We paid out a number of bonuses in the third quarter, and we expect to pay a higher amount for the fourth quarter.”

Most of the stores are generally in pretty good shape, he said, “but they need a little bit of work to bring them up to speed. So we're about to start minor remodelings at 15 stores, including new paint, new cases and a redesign of the stores' lobby areas to fill space formerly occupied by video rentals,” Miller said. Another 35 remodels will be scheduled later in the year, he added.

Back to Basics

Asked what he's doing differently than the previous Albertsons management team, Miller replied, “We run the stores substantially differently. Certain things are important to us that weren't to them. We want to run really good supermarkets and take care of customers and associates — just getting back to the basics of taking care of customers by giving them what they want at a reasonable price, which is Joe Al-bertsons' old philosophy.”

Albertsons LLC has no interest in selling any more divisions, although some companies have made inquiries, Miller told SN. “We've had a lot of calls, and people come around to kick the tires, but we're more interested in the upside of making improvements than in selling what we have.”

Selling off the entire Northern California division was a unique decision, Miller pointed out. “I got a call from Bob Piccinini [Save Mart chairman and CEO] even before I took this job, and he said he wanted to talk to me about buying all those stores.

“Bob is a good operator, and he pushed hard to buy them, and he was willing to pay a reasonable price. And selling to him created jobs for all associates, and that was appealing to us.

“Northern California is a tough market, and because Bob's Save Mart stores are right next door to our stores with very little overlap, there were a ton of synergies that he could have. Bob pushed hard to buy them and he will do a terrific job with them. And we never talked with anyone else about selling them.”

Miller has spent 41 of the past 46 years in the food industry, capping a long career at Albertsons as executive vice president, retail operations, before joining Fred Meyer Inc. as chairman and CEO in 1991. He left Fred Meyer in 1999 to join Rite Aid as chairman and CEO before moving in 2004 to Wild Oats as chairman.

Miller, 62, said he has a two-year contract to run the stores, “and once that contract is up, I'm not sure what I'll do. But I'm having a lot of fun right now, and I expect I'll probably stay longer than the two years.”

After the Save Mart deal closes, Albertsons LLC will continue to supply its stores from five warehouses: in Denver, Phoenix, Dallas-Fort Worth, Plant City, Fla., and Ponca City, Okla.

It will continue to contract with Supervalu to receive information technology and accounting services, Miller said, “and we go to market to procure many categories, including private label, together. They leverage our total volume with theirs to get the best price.”

Albertsons LLC has a two-year contract with Supervalu, “and we're negotiating an extension because it makes sense for both of us,” he pointed out.

Asked what it felt like to come back to Albertsons, Miller said it was a comfortable transition “because I knew so many people here.”

He also recognized a lot of the stores he took over “because as executive vice president of retail operations at Albertsons, I approved all store sites, many of which were still in the mix, and there were still a lot of good stores I'd been involved with before I left and a lot of people at store level that were still around.”