Herkert Reveals More Management Additions During Supervalu Q3 Investor Call

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Herkert Reveals More Management Additions During Supervalu Q3 Investor Call

During a conference call on Tuesday to review results of its third-quarter financial results, Supervalu chief executive Craig Herkert revealed that two more executives from outside the company have joined the retailer, including former Home Depot and General Electric executive Chuck Golias as group VP of strategic planning, and Keith Wyche, who most recently led U.S. operations for Pitney Management Services, as president of Cub Foods.

As previously reported earlier this week, former Kraft and Solo Cup Co. executive Steve Jungmann has joined the Minneapolis-based retailer as its new EVP of merchandising, a position which Herkert said will draw heavily on “his deep knowledge of consumer behavior and corporate planning” to assist his oversight role for the company’s fleet of retail banners.

During the analyst conference call, Herkert said the new management team additions fall in step with one of his “primary responsibilities to build a leadership team that will execute on Supervalu’s new vision,” among which, he said, “was my decision to operate our multiple, distinct businesses as one cohesive entity,” and which, he noted, is “a new operational paradigm” the represents a departure from how the company has historically viewed itself.

Along these lines, Herkert told investors that “the work streams … previewed ... in October are showing traction,” and thus “make me confident that they will deliver meaningful and visible results in the year ahead,” citing Supervalu’s third-quarter net earnings of 51 cents per diluted share on net sales of $9.2 billion that exceeded the consensus estimate.

Supervalu’s third-quarter earnings performance also “reflects our progress on initiatives we set into motion early this year,” said Herkert, noting that “margins held up well” as a direct result of improved communications and stronger relationships between corporate merchants and the company’s banners.

Among the key results of Supervalu’s third quarter ended Dec. 5, net sales declined 9.4 percent year-over-year to $9.2 billion primarily due to declines in the retail food and supply chain services segments, the latter of which were down to $7 billion from $8 billion a year ago because of a 6.5 percent adverse impact from same-store sales, the exit from the Salt Lake City retail market and previously announced store closures. Net sales in the supply chain services segment, meanwhile, declined 8.7 percent year-over-year to $2.1 billion, due to the impact of previously announced plans by Target to transition some of its volume to self-distribution.

A challenging economic environment, heightened competitive activity and deflationary pressures again dogged Supervalu’s same-store sales performance, while total retail square footage at the end of the third quarter of about 67 million was also down 5.3 percent from a year ago.

Selling and administrative expenses in the third quarter rang up $1.8 billion, or 19.0 percent of net sales, including a $22 million pre-tax net gain from the Salt Lake City retail market exit and $4 million in pre-tax costs related to previously announced store closures. Excluding these items, selling and administrative expenses were 19.2 percent of net sales. In the third quarter of fiscal 2009, selling and administrative expenses were $1.9 billion, or 18.9 percent of net sales. The increase in selling and administrative expenses, as a percent of sales, was largely attributable to reduced sales leverage that more than offset the savings achieved from ongoing cost reduction initiatives.

During the analysts’ call, Herkert acknowledged, “I am not satisfied with the same-store sales performance, but believe that our company is gaining momentum on key initiatives and behavioral changes that are designed to improve sales in fiscal 2011 and beyond as they are implemented across our company.”

Herkert also singled out four specific items for investors that he said were particularly important during the third quarter, particularly “the difficult decisions [made] in terms of striking the right balance between sales and promotional investment. I am pleased to report we achieved the appropriate balance, and our results validate these decisions. As you may recall, our retail gross margins were off 60 basis points in the second quarter and 80 basis points in the first quarter when compared to last year. Clearly, our promotional activities during the first half of the year were costly and did not produce the sales and margin results we had hoped for.”

However, Herkert said the company “will not sacrifice margins for promotional activities, which we do not believe will influence long-term customer loyalty.” While Supervalu remains “a promotional retailer” at its core, “[o]ur goal is to offer everyday pricing that customers believe to be fair and merchandise that is relevant to the local markets we serve.”

Second, Supervalu is “making progress in narrowing the gap between our regular shelf price and our promotional pricing,” said Herkert, citing recent pricing surveys that validate the effort. Price improvements have come about “as a result of centralized decision-making; the consolidation of vendors, sometimes even leading to exclusive providers; and leveraging the scale of our 4,300-store network. Fair pricing is top of mind,” he affirmed.

Segment EBITDA margins were also among the strides made in the third quarter vs. the prior two quarters, said Herkert, as is Supervalu’s making good on “fulfilling its long-term commitment to reduce debt and regain financial flexibility.” Following its exit from the Salt Lake City market, the company reaped $150 million in after-tax proceeds, funds of which have since been applied to outstanding debt. “Through the end of Q3, debt is down over $300 million,” he said, noting, “We remain on target to pay down $700 million in fiscal 2010.”

Supervalu’s fourth-quarter earnings, he noted, will “[fully capture] the competitive retail climate and today’s thrift-conscious consumer. We entered the fourth quarter with many headwinds, including weak sales trends. However, we continue to focus on the basics of food retailing, placing the customer at the center of everything we do. We remain comfortable with the earnings guidance previously provided for fiscal 2010 of diluted earnings per share within a range of $1.95 to $2.05.”

Herkert summed up his comments to investors by noting that with its goal of executing against a vision of “America’s neighborhood grocer, we will improve on our return on invested capital by maximizing the value of our diverse store network and asset base. We will diligently review our existing portfolio and will take action to monetize assets where it makes sense.”