SUPERVALU REVAMP CUTS NET 77%

ELLIOT ZWIEBACH

MINNEAPOLIS -- Supervalu here said restructuring costs, including charges for its Advantage project, resulted in a severe earnings drop for the year ended Feb. 25 and the company's first decline in pretax operating earnings in 20 years. The company said the restructuring costs are necessary for long-term growth while some analysts expressed doubts about the long-term benefits from the project.

Net income for the year was $43.3 million, representing a decline of 76.6% after a one-time pretax restructuring charge of $244 million, taken during the third quarter, and a decline of 12.6% prior to that charge.

Net income for the fourth quarter was also $43.3 million, virtually identical to year-end results, representing a drop of 17.7% from the previous year's fourth quarter. Sales rose 4.4% for the year to $16.6 billion and 5.4% for the quarter to $3.9 billion. The company said pretax operating earnings fell 61.4% for the year to $153.2 million and 8.3% for the quarter to $93.6 million. Michael W. Wright, Supervalu chairman, president and chief executive officer, said fiscal 1995 was a difficult year, "but it remains a year of significant achievement in terms of making the appropriate investments for future success. "We view last year as a transition year and believe the actions we are taking will get us back on the growth track."

Wright said the food industry is changing dramatically, "and we have taken the actions necessary to keep Supervalu in the forefront

of these changes by embarking on a new business strategy, including facility consolidations, that we believe will offer significant advantage to our key shareholders.

"In the short term, these changes are having a negative impact on our earnings, but in the long term, their successful implementation will have a very positive impact on our growth strategies."

Wright said the negative impact on earnings from the company's efforts to consolidate facilities is diminishing and "we are beginning to realize the resulting efficiency improvements."

He also said one positive trend during the year was the strengthening of gross margins during the fourth quarter. However, company officials declined to discuss specific margin numbers.

Gary Giblen, managing director of Smith Barney, New York, attributed the stronger margins to Supervalu's ability to "continue to engage in forward buys and diverting, though those opportunities are declining." Some analysts expressed skepticism about the long-term success of Supervalu's investments.

According to Gary Vineberg, a securities analyst with Merrill Lynch, New York, "Supervalu is trying to do things that will give it a future in the business, but the numbers are not good in terms of generating value-added economies. And considering the earnings momentum generated by the Wetterau acquisition on a temporary basis, fiscal 1995 was a real letdown. "Supervalu is obviously addressing some of the core wholesale issues, as is Fleming Cos. But I have some doubts that the Advantage project will revive wholesaling and bring in more business from self-distributing chains, as Supervalu hopes," Vineberg told SN. "The onus is on management to show positive results because the acquisitions and the capital spending it's done over the last few years have not generated the kind of returns that were promised. "This company has spent money on acquisitions and various capital projects during that period that are not generating the earnings gains that were anticipated, so management may not deserve the benefit of the doubt -- though I'm not sure anyone else has a better idea how to re-engineer the economics of food wholesaling or knows how to run the business better than Supervalu management does," he said.

Giblen said Supervalu's program has raised some doubts concerning future financial results.

"The Advantage program is dilutive, and it's unclear when it will start contributing to positive results. The investment community is not convinced results will be positive during the next year.

"And there's a concern that Supervalu is spending all this money just to stay in place and protect its business, which is not an attractive situation in which to run up costly expenses that make earnings lower." Giblen acknowledged that the company is doing what it has to do in the wake of changes within the wholesaling industry that are forcing wholesalers to pass on manufacturer deals rather than making money on them. "It's a whole new world, and one that's more hostile to food wholesalers," he said. "So Supervalu has to do what it's doing -- but it's a maintenance strategy, not a growth strategy." The Advantage project, which accounted for the bulk of the company's earnings decline, is Supervalu's attempt to restructure its operations to improve food distribution. Wright said that, when it's completed, "the Advantage program will fundamentally realign the company's wholesale business to achieve new efficiencies and growth."

4th-QUARTER RESULTS

Qtr Ended 2/25/95 2/26/94

Sales $3.9 billion $3.7 billion

Change 5.4%

Net Income $43.3 million $52.6 million

Change -17.7%

Inc/Share 61 cents 73 cents

52 Weeks 1995 1994

Sales $16.6 billion $15.9 billion

Change 4.4%

Net Income $43.3 million $185.3 million

Change -76.6%

Inc/Share 61 cents $2.58