SUPERVALU SELECTED TO RUN 2ND KROGER WAREHOUSE

ELLIOT ZWIEBACH

MINNEAPOLIS -- Supervalu here said last week Kroger Co. has selected it to manage its new nonfoods distribution center in Phoenix -- Supervalu's second outsourcing arrangement with the Cincinnati-based retailer.

Supervalu has been managing Kroger's dry grocery warehouse in Livonia, Mich., since June 1998, "and the new contract is based on our results managing that facility," said Jeff Noddle, president and chief operating officer of Supervalu.

He said Supervalu believes it can pick up similar arrangements with other self-distributing chains. "We think that could be a growth business for us, and we have discussions going on all the time with companies about longterm plans for their distribution assets," he said.

Supervalu has been managing the 330,000-square-foot Kroger facility in Arizona since it opened in July. According to Noddle, the assets, including inventory, building and equipment, are owned by Kroger and the employees work for Supervalu, with any cost increases passing automatically to Kroger. "And we have incentives to be efficient, because the more efficiently we operate, the more fees we get as the third-party manager," he said.

Noddle made his comments in a conference call with securities analysts last week following release of Supervalu's financial results for the second quarter ended Sept. 9, which showed record sales and per-share earnings.

In other remarks during the call:

Noddle said Supervalu will begin supplying D&W Food Centers, Grand Rapids, Mich., within two weeks. D&W had used Spartan Stores, Grand Rapids, as its supplier, "but it looked at its supply situation and determined we had the capacity to help them grow in terms of both operations and opportunities."

Noddle said he will be leading a reassessment of the company's strategy and an evaluation of its organization over the next few months, in addition to naming his successor to oversee the company's food distribution segment.

Noddle said Supervalu is conducting a pilot program with some of its independent chain customers to increase center-store sales, "and the early results are positive." However, the company declined to discuss details of the program when queried by SN.

Mike Wright, chairman and chief executive officer, said the distributor is replacing its on-line ValuNet service for retailers with a new Internet-based program called SVHarbor that will provide the same kinds of services -- including accounts payable interface, general ledger interface, time-and-attendance, labor scheduling and pricing -- but with greater speed, content capabilities and other enhancements moving forward.

Discussing the company's financial results, Wright said sales and earnings are continuing to benefit from the acquisition of Richmond-based Richfood in August 1999 and from Supervalu's year-old supply contract with Kmart Corp., Troy, Mich.

Sales for the 12-week quarter rose 28.7% to $5.3 billion and net earnings increased 25.9% to $57.3 million, or 43 cents per share -- the 14th consecutive quarter of record sales and per-share earnings.

For the half, sales rose 30.2% to $12.3 billion and net income was up 13.4% to $127.3 million, or 96 cents per share.

The company said operating cash flow rose 40% to $219.2 million, or 4.1% of sales, for the quarter and 39.7% to $490.2 million, or 4% of sales, for the half.

In the retail food segment Supervalu said sales rose 25.6% to $2.1 billion for the quarter, reflecting the addition of 102 retail stores from last year's acquisition of Richfood and 132 new store openings, including 103 Save-A-Lot limited assortment stores. Sales increased and 30.6% to $4.8 billion for the half.

Same-store sales fell 3% during the quarter and 2.1% for the half, which the company said was caused by self-cannibalization that began in the first quarter as a result of accelerating store openings, as well as by more intense competitive activities, particularly from supercenter openings by Wal-Mart and Meijer, in several key markets.

Operating earnings in the retail segment rose 32.6% to $86.4 million for the quarter and 35.7% to $195.7 million for the half.

In the food distribution segment, Supervalu said sales rose 30.8% to $3.2 billion for the quarter -- driven by the addition a year ago of nearly 800 distribution customers from Richfood and incremental volume, primarily from Kmart. Sales increased 30% to $7.4 billion for the half.

Operating earnings in the distribution segment rose 51.9% to $62.6 million for the quarter and 46% to $137.5 million for the half.