SUPERVALU LAUNCHES REVIEW OF ALBERTSONS POSITIONING

ELLIOT ZWIEBACH

MINNEAPOLIS - Supervalu here said last week it is assessing the merchandising, branding and pricing positions of the 1,124 Albertsons properties it acquired last month and expects to announce an action plan this fall.

The only market group singled out at this time for a change in pricing position was Shaw's in New England. "Shaw's was extremely price promotional this past year, which negatively impacted its earnings, and we are now taking a more balanced approach, [with expectations of a] much improved earnings performance," said Jeff Noddle, chairman, president and chief executive officer.

He declined to pinpoint any other specific markets where changes are likely to occur. "We're about halfway through a really deep dive into assessing each acquired property," he said. "We might make decisions in some markets to change some pricing structures, and in other markets we might not. You might begin to see some changes of promotional and pricing planning in the fall.

"But we're assessing the situation, measuring consumers' perceptions, doing a lot of research, doing our own work and assessing the competitive situation in each market. So expect some changes."

Noddle said Supervalu's assessment has turned up approximately 25 stores in the Albertsons network that will be closed over the next several months. However, he did not identify any of their locations.

Noddle said the company has earmarked approximately $1 billion for capital investment in its new retail store base "to invigorate and position that store fleet," with priority going to investments in the in-store experience rather than store-level technology that the former owners of Albertsons preferred.

In addition to opening 80 new stores, Noddle said Supervalu plans to remodel approximately 80 stores this year. "Our strategy is to allocate capital based on expected return-on-invested capital, and clearly remodeling is an excellent path to that end," he said.

He cited three remodeling projects that he said are representative of what Supervalu hopes to do:

A 56,000-square-foot Shaw's in Cambridge, Mass., that will see significant increases in its perishables offering plus a pharmacy expansion and a better customer-service area. The remodel will cost about $3 million, Noddle said, and although the store's current ROIC is very strong, "we anticipate incremental ROIC to approach 40% following the remodel."

A 30,000-square-foot Jewel near Wrigley Field in Chicago that will be expanded into a two-story, 52,000-square-foot Jewel-Osco combination store, with parking underneath.

A 63,000-square-foot Albertsons store in Fullerton, in Southern California, that serves a mix of college students, Hispanics and high-income customers. Noddle said Supervalu will invest $3 million in the remodel to adjust product categories "to better meet the needs of those specific groups," with expectations of an incremental increase to ROIC of over 40%.

Noddle also mentioned that Supervalu plans to convert several Albertsons stores in Southern California back to the Lucky banner, featuring an everyday-low-price format "that reinforces our multi-format strategy," Noddle said. Three of the stores were scheduled to open under the new banner last week.

(Grocery Outlet, a Northern California operator based in Berkeley, which had been using the Lucky name and EDLP format at a single store, was enjoined last month from using the name - a decision executives at Grocery Outlet said they would appeal. Grocery Outlet has no stores in Southern California.)

Noddle made his remarks in a conference call with analysts to discuss financial results for the first quarter that ended June 17 - results that do not include operations of the Albertsons stores Supervalu acquired two weeks before the end of the quarter.

Net income for the quarter fell 4.4% to $87 million, including net after-tax charges of approximately $17 million, or 11 cents per share - $9 million due to one-time transaction costs for consulting services and approximately $8 million related to adoption of rules related to stock option expensing.

Sales fell 3.2% to $5.8 billion, reflecting the divestiture of 176 stores, including 26 Cub Foods stores in Chicago, 14 of 19 Shop 'n Saves in Pittsburgh and 138 Deal$ stores. Identical-store sales declined 3.2%, which was due primarily to intense competitive activities in Cincinnati and Fort Wayne, Ind., Pam Knous, executive vice president and chief financial officer, pointed out.

Supervalu said identical-store sales for its combined retail network - as if the acquired stores were in the store base for more than a year - are projected to be flat for the balance of the year, with the acquired operations slightly positive - "something under 1%," Noddle noted.

In Supervalu's retail food segment, operating earnings for the 16-week quarter were flat at $128 million, while sales fell 9.4% to $2.9 billion due to the store divestitures. Identical-store sales fell 1.8%, but were slightly positive at corporate-owned Save-A-Lot stores.

In the supply chain services segment, operating earnings rose 7% to $76 million, and sales increased 3.6% to $2.9 billion, which the company attributed to new business growth, partially offset by normal customer attrition.

According to Knous, financial results for the Albertsons properties acquired by Supervalu for the quarter that ended May 4 showed net income up 43.8% to $174 million and sales down 1.7% to $11.7 billion.

Asked whether Supervalu's retail customers have reacted negatively to the acquisition of the Albertsons properties, Noddle said, "With very, very few exceptions, people have said they understand the need for [Supervalu to acquire] the size and scale. There are a few markets where we have some overlaps where there might be a little more concern, but I think we will very quickly prove to them this is a positive transaction for them."

1ST-QUARTER RESULTS*

Qtr Ended: 6/17/06; 6/18/05

Sales: $5.8 billion; $6 billion

Change: -3.2%

Net Income: $87 million; $91 million

Change: -4.4%

Inc/Share: 57 cents; 64 cents

*Excludes operations of Albertsons, which were acquired two weeks before the quarter ended.