Supervalu Outlines Objectives

MINNEAPOLIS — Supervalu here outlined a series of initiatives last week designed to continue to move the company forward, but industry analysts offered different opinions on the company’s long-term prospects.

Craig Herkert, president and chief executive officer, said fiscal 2013 will be “a year of focused execution,” with three priorities: Improving the company’s value proposition, intensifying its hyper-local approach to serving individual neighborhoods, and driving growth.

Ajay Jain, an analyst with Cantor Fitzgerald, New York, said he believes Supervalu is on the right track. “It still has a long way to go in executing its turnaround, and it remains a major work in progress, but the latest [fourth quarter] results offer validation that the business is not fundamentally broken and that Supervalu is not in a financially distressed situation.

“It’s clear management is making significant price investments while leveraging operating expenses.”

Meredith Adler, managing director for Barclays Capital, New York, was also fairly upbeat, “though a meaningful sales improvement may be more than a year away, in fiscal 2014 or later,” she pointed out. “Supervalu is moving methodically to ensure customers see lower prices as long-term and sustainable. But it will take several years before price investments have a significant impact on customer perception or sales.”

John Heinbockel, managing director of Guggenheim Securities, New York, said he expects Supervalu to be negatively impacted by “an ongoing difficult economic environment marked by disinflation and the cycling of the payroll tax cut,” which he said will pressure identical-store sales and operating income.

Although fourth-quarter IDs in Supervalu’s retail segment were negative 1.9% — an improvement over the negative 2.9% in the third quarter — “this was partially the product of sizable price investments, with gross profit declining 5%, down from a 2% drop in the third quarter, which suggests the business has yet to really stabilize.”

Karen Short, managing director for BMO Capital Markets, New York, said she is “extremely comfortable that liquidity is ample and that covenants will not be breached” — a concern among the analyst community prior to last week’s announcement of financial results for the fiscal year that ended Feb. 25.

For the 12-week fourth quarter, the company reported a net loss of $424 million, compared with net income of $95 million a year ago. The loss included a non-cash charge of $492 million for goodwill and intangible asset impairment and a $13 million charge related to an 800-person workforce reduction in February.

After adjusting for charges in the quarter for both years, net income for the fourth quarter declined 14.7% to $81 million, with sales down 5% to $8.2 billion.

While ID sales in the retail segment were negative 1.9% in the fourth quarter, Herkert declined to comment on ID sales for the early weeks of the first quarter, citing the Easter shift.

For the year, the net loss was $1.04 billion — including a non-cash charge of $1.3 billion for goodwill and intangible asset impairment and the $13 million charge for the work force reduction — compared with a loss of $1.5 billion a year earlier; excluding those charges in both years, net income fell 10.5% to $265 million, while sales were down 3.8% to $36.1 billion and IDs in the retail segment declined 2.8%.

Talking about the company’s initiatives for the current fiscal year, Herkert said the top priority is “delivering value and investing in price. The good news is, we have better analytical capabilities that are helping to fund our fair-price-plus-promotion strategy.”

Supervalu used analytics to lower everyday retail prices in produce during the third quarter, “and unit volumes improved by over 300 basis points and have outpaced unit movements in the rest of the store,” he told analysts.

The company plans to move forward with a similar pricing strategy across categories, items and specific markets, including Chicago, Herkert said.

Supervalu will continue to pre-fund investments through a combination of operational efficiencies, promotions and vendor support, he added. “We are aligned on strategy, and our suppliers are stepping up to play an important role in the actions we take this year,” Herkert said.

In terms of hyper-local retailing, he said Supervalu is focused on sharing best practices “and scaling learnings to similar profile stores for maximum application.”

The company also intends to take a localized approach to store remodels “that incorporates input from store directors, customers and banner management to ensure our remodels are right for the store and meet the unique needs of the neighborhood,” Herkert said.

Supervalu anticipates opening three new traditional stores this year and remodeling 100 locations, compared with 83 remodels last year; and adding 50 new Save-A-Lots, compared with 52 last year.