WALL STREET POUNDS SUPERVALU STOCK AFTER DISCLOSURE

MARK HAMSTRA

MINNEAPOLIS -- Supervalu here learned the hard way last week how unforgiving Wall Street has become in the wake of the recent series of corporate scandals.

The company's stock fell nearly 22% after it disclosed that it would take a charge of $19 million to $21 million because a controller admitted to deliberately misstating the value of the cost of goods sold in Supervalu's 120-unit pharmacy division for at least the past four years. Supervalu said the charge "does not materially affect the financial condition or results of Supervalu as a whole."

The retailer and wholesaler, which reported revenues of $20.9 billion last year, had seen its stock climb steadily in recent months as investors were enamored of what they described as the company's solid management and its strategies for growth. Analysts were optimistic that those qualities continue at the company, but they pointed out that the timing of last week's announcement -- the day before WorldCom revealed that it would have to revise its earnings to reflect $3.8 billion in expenses that had been improperly recorded -- might have contributed to the downward pressure on the stock.

"The timing, in this market, coming on the same day that WorldCom announced a $3.8 billion restatement, is just bad luck," said Chuck Cerankosky, analyst, McDonald Investments, Cleveland. "Investors are concerned about potential terrorist attacks, war, the economy, management issues... so it's a bad time to have an issue such as this come to the fore."

In a conference call with analysts, Jeff Noddle, chairman and chief executive officer, Supervalu, agreed that the company's "timing isn't the best with what's going on in the world with corporate problems and governance problems."

He said the company discovered the inventory misstatements while preparing for a scheduled internal audit.

Yolanda Scharton, vice president, corporate communications and investor relations, Supervalu, told SN that the controller "stepped forward, confessed and resigned. She's cooperating with us, and that's very important right now."

She declined to identify the controller.

Noddle said the employee understated the cost of goods sold in the pharmacy division, which had the effect of inflating the division's profits. He said it was not clear what her motivation was, given the fact that her bonus was such a small part of her overall compensation.

Although Supervalu said the incident was isolated, analysts said investors are concerned that any earnings restatements could indicate that the company lacks sufficient controls and that problems could be more widespread.

"In this market, with any kinds of earnings adjustments that were not projected, investors kind of head for the hills because they've seen disasters elsewhere," said Steve Chick, analyst, JP Morgan Securities, New York. "Probably it was a little bit of an overreaction, but you don't know why it happened or what the risk is of its happening elsewhere in the company."

Scharton said Supervalu researched its controls with its external auditor, KPMG, "and determined that this was an isolated situation."

Noddle explained that the pharmacy division, which supplied stores with prescription and over-the-counter products, had operated somewhat independently from the rest of the company, which facilitated the circumvention of the company's financial policies and control procedures.

Chick pointed out that although he thought the stock was reacting primarily to the earnings restatement, investors also may have been concerned about the company's same-store sales trends. Supervalu said it expected same-store sales to be down about 1% for the first quarter, and Chick said the company faces some tougher comparisons in the second half of the year.

Supervalu was scheduled to release its first-quarter earnings this week, at which time Scharton said the company "probably would have more to say" on the accounting charge.

The company said it was reviewing the situation with its auditors and would know by this week whether or not it would have to restate prior-year earnings.

After closing at $21.95 the day after the announcement, down $6.11 from the previous day's close of $28.06, Supervalu's stock rebounded slightly on Thursday. The stocks of other wholesalers, including Fleming and Nash Finch, also declined in midweek trading.