Supervalu Charts New Strategy, Reviews Strategic Alternatives
In conjunction with another tough quarterly performance report for Q1 that saw profits slide on lower sales and margins that sent shares plunging 22 percent, Supervalu Inc. unveiled a series of transformational steps aimed to accelerate its turnaround strategy, including a review of strategic alternatives and suspending its shareholder dividend.
Among the other significant issues outlined by Supervalu CEO Craig Herkert is a plan to pursue “deeper and more structural cost savings initiatives” via a “fair price plus” promotion strategy. This is essential to move the company “even more aggressively to lower prices, and anticipate and respond to competitor actions. We expect our business transformation to meet our customers’ demands for great quality at lower prices,” continued Herkert, adding that the Minneapolis-based company intends to do this “while remaining profitable, continuing to pay down debt and investing the capital to maintain and enhance our stores and related assets.”
The company’s transformation plans also call for adopting more flexible financing facilities and reducing near-term capital expenditures, in addition to the items outlined above.
In terms of its most recent financial performance, Supervalu posted Q1 net sales of $10.6 billion and net earnings of $41 million, or 19 cents per diluted share, sales of $11.1 billion and earnings of $74 million for the year-ago period. The company blamed the drop in sales on the disposition of most of its fuel centers and a decline in same-store sales (down 3.7 percent), which it attributes to “intense price sensitivity on the part of consumers and aggressive promotion and price actions by competitors.”
Overall, Q1 retail food net sales were $6.83 billion compared to $7.33 billion last year. Q1 sales at Supervalu’s Save-A-Lot stores were $1.29 billion, up from $1.28 billion last year, credited to 53 new stores offsetting a 3.4 percent drop in same-store sales chainwide. Q1 independent business net sales were $2.48 billion, compared to $2.50 billion last year.
“Supervalu continues to be a profitable company, with cash flow from operations of $227 million in the first quarter of 2013,” affirmed Herkert, adding that while the company’s first fiscal quarter results slid “well below our expectations, we must wage a more forceful response to the competitive challenges we face.”
Supervalu recently launched its "fair price plus" promotion at its Chicago-based Jewel-Osco banner, supported by a comprehensive media campaign. With additional efforts this year, about half of the company’s stores are expected to be "priced appropriately to competitors" by the end of fiscal 2013, with remaining stores joining them in fiscal 2014.
“While near- and medium-term operating profit margins will come under pressure as price reductions initially outpace cost takeouts and volume improvement, the acceleration of these price investments is expected to create a path to improved longer-term performance and market share growth,” Herkert said.
Intensifying Focus on Expense Reductions
Supervalu is also aiming for an additional $250 million in administrative and operational expense reductions over the next two years by focusing intensely on companywide efficiency and productivity. The company expects the program to result in a leaner, more efficient organization. The savings expected to be achieved from these efforts are incremental to the $75 million in cost reductions the company targeted for fiscal 2013. The company noted that it has exceeded its expense-saving targets in each of the past three years.
Further, Supervalu is implementing measures to enhance its already strong liquidity position and balance sheet and provide further flexibility to invest in price. These steps include:
• Replacing its senior credit facility with an asset-based lending facility and term loan secured by real estate, which will remove restrictive covenant concerns and increase financial flexibility. To that end, the company has underwritten commitments with banks, expected to close in August.
• Reducing capital expenditures in fiscal 2013 to a range of $450 million to $500 million from $675 million. Store investments will continue, including 40 remodels and the addition of 40 Save-A-Lot locations in fiscal year 2013.
• Suspending the quarterly dividend, with continued annual review.
• Increasing debt reduction to a range of $450 million to $500 million in fiscal 2013. The company plans to pay down at least $400 million of debt annually thereafter; it has less than $1 billion in aggregate debt coming due for fiscal years 2013 through 2015.
Review of Strategic Alternatives
Supervalu's board, management and financial advisors are reviewing "strategic alternatives" to create more shareholder value. Wayne Sales, the company's non-executive chairman, will oversee this process so management can concentrate on the accelerated business plan. The company said "There can be no assurance that such a review will result in any transaction or any change in the company’s overall structure or its business model."
In addition, Supervalu is suspending same-store sales and earnings-per-share guidance, and withdrawing any previous guidance given for fiscal 2013. It will continue to provide forward-looking information on debt reduction and capital expenditures.
Herkert issued a memo to associates outlining the company's new plans, details of which can be found here.