SUPERVALU PREPARING FOR ALBERTSONS INTEGRATION

ELLIOT ZWIEBACH

MINNEAPOLIS - Supervalu here said last week it is in the process of determining how to align its infrastructure and top-level management teams with those of Albertsons, while analysts expressed concern about the company's momentum heading into the acquisition.

Citing several one-time charges, the company, which is acquiring Albertsons' best-performing assets, posted a sharp decline in earnings for the 12-week period that ended Feb. 25 amid weak same-store sales results.

Jeff Noddle, Supervalu's chairman and chief executive officer, said 10 transition teams involving more than 200 people - roughly 100 from each company - are working on identifying best practices to leverage across both organizations in such areas as retail operations, merchandising, marketing, logistics, finance, information technology, human relations and communications.

"Those teams are going to bring recommendations to our steering committee and to myself on what the best choices are [in each of those areas]," Noddle said, adding that he planned to provide more details next month.

He said the core competencies of each company will determine how integration issues are handled. "For example, Albertsons has extensive loyalty card marketing, and we don't.

"Further, Albertsons, as a pure retail entity, has a deeper set of retail systems than Supervalu does, just on an early look, while Supervalu, being more of a supply chain-oriented company, has deeper insight into supply chain technologies and processes. So, it might very well be that we might utilize more Supervalu systems on the supply chain side and more Albertsons systems on the retail side.

"Plus, we've got people working on corporate-level synergies and public company-level synergies - taking a look at whose accounting systems are best, for example, and where is the best place to locate them - and obviously there are a number of IT decisions along the same lines.

"We're not trying to just fly by and pick what looks the best. We've been very quiet about this, but there is a tremendous amount of work going on in both companies that is not evident.

"We've already invested many hours in this process, with our efforts focused on ensuring that Day One of the new enterprise will be smooth, that the right path has been set to deliver the economics of the combined enterprise and that the organization is positioned to harness the collective strength that our combined expertise will offer."

Noddle said Supervalu remains on schedule to complete by mid-June the acquisition of more than 1,100 Albertsons stores, including Jewel in Chicago, Shaw's in New England, Acme in Philadelphia, Bristol Farms in Southern California and the Albertsons-banner stores in Southern California and the Pacific Northwest.

Noddle made his remarks in a conference call with analysts to discuss financial results for the recently ended fourth quarter and year. Net income for the quarter fell 93.5% to $6 million, while sales were down 1.1% to $4.6 billion. For the year, net income dropped 46.6% to $206.2 million, while sales climbed $1.6% to $19.9 billion.

Pam Knous, executive vice president and chief financial officer, said the earnings decline resulted from a host of items totaling approximately $72 million net, or 51 cents per share, including 42 cents from the sale of 26 Cub Stores in Chicago; 6 cents from an impairment charge related to technology investments at 138 Deal$ stores, which were sold in the first quarter; 2 cents from the planned sale of 20 Shop 'n Save stores in Pittsburgh; and approximately 1 cent in incremental costs relating to ongoing efficiency and automation initiatives in the supply chain segment.

She said the flat sales reflected the divestiture of Cub, Shop 'n Save and Deal$ stores, which accounted for annual revenues of $900 million, which were offset by improved sales in the company's supply chain-services segment.

Operating profits in supply chain services during the quarter fell 30.4% to $41.4 million, and sales rose 3.7% to $2.1 billion. For the year, operating earnings in the segment fell 8.6% to $214.4 million, and sales rose 2.6% to $9.2 million.

The retail food segment experienced a fourth-quarter operating loss of $2.2 million, compared with operating profits of $111 million a year earlier, while sales in the segment fell 1% to $2.5 billion and comparable-store sales fell 1.1%, though comps at corporate-owned Save-A-Lot stores were positive. For the year, operating earnings fell 39.8% to $268.8 million, sales rose 0.8% to $10.6 billion, and comps declined 0.5%.

John Heinbockel, an analyst with Goldman Sachs, New York, noted in a report that Supervalu's negative comps were in contrast with the relatively strong results reported by Kroger and Safeway for the fourth quarter.

"We believe this reflects the adverse impact of rising retail gas prices - Kroger and Safeway have more fuel centers - and perhaps the absence of as many clear sales initiatives," he wrote.

He cited concerns about top-line performance as the acquisition approaches.

"Our concern is that 'core' Supervalu lacks operating momentum in the midst of a potentially worsening external environment and ahead of a major, challenging integration," he wrote. "Merger synergies are, correctly, a big focus of management, but from a longer-term perspective, the merger's success will be dependent on the restoration of top-line strength."

Stephen Chick, an analyst with J.P. Morgan Securities, New York, said Supervalu's core business has "hit a wall" and that the company might consider the sale of some assets, such as the Save-A-Lot chain, if the transaction with Albertsons "proves riskier than expected."

Noddle said he has been surprised by the strength of concerns in the market about challenges Supervalu may encounter in integrating Albertsons, given the fact there is no overlap between the two operations. "We are not disrupting and overturning any markets whatsoever," he said.

Knous, commenting on a move a day earlier by Moody's Investors Service, New York, that cut the ratings on Supervalu from investment grade to junk status - with the threat of another downgrade after the Albertsons acquisition is completed - said the company "certainly expected this action, and with the transaction clearly headed toward closing in June, Moody's believed it was appropriate to lower the rating at this time."

But the company has a strong cash-flow position, she pointed out - $686 million at year's end, with additional cash coming from the sale of Deal$, she said.

Noddle said fiscal 2006 included several accomplishments: the launch of Sunflower Markets, a value-priced natural and organic retail format, "whose first store is performing well, with at least three new stores coming on stream by October"; the introduction of Nature's Best, a private-label line of organic products, with nearly 100 SKUs available and 40 more due by the fall; the acquisition of TLC, a third-party logistics company "that is off to a good start, with strong growth expected this year"; and the launch of W. Newell & Co., a produce operation that serves more than 500 customers and ships more than 300,000 cases a week.

4th-QUARTER RESULTS

Qtr Ended: 2/25/06; 2/26/05

Sales: $4.6 billion; $4.59 billion

Change: 1.1%

Net Income: $6 million; $92.9 million

Change: -93.5%

Inc/Share: 4 cents; 65 cents

52 Weeks: 2006; 2005

Sales: $19.9 billion; $19.5 billion

Chang: 1.6%

Net Income: $206.2 million; $385.8 million

Change: -46.6%

Inc/Share: $1.46; $2.71