Supervalu Shares Rise on Q1 Profit

Shares of Supervalu rose nearly 17 percent after the company’s new CEO relayed a more hopeful outlook for its future.

“We have made meaningful strides toward better positioning the company for success in the future,” Sam Duncan, Supervalu’s president and CEO, told investors during its first quarter fiscal 2014 earnings conference call July 18, which he noted marked his 162nd day at the helm of the Minneapolis-based retailer/distributor. “We still have a great deal of work ahead of us but the management team and I are laying the foundational pieces that have to be in place for us to attract more retail accounts through our distribution businesses, more licensees to our Save-a-Lot format and more customers to all of our retail stores.”

Although Supervalu’s sales were down in each of its businesses, Duncan told investors he is “encouraged by the sequential improvement in sales trend over last year’s fourth quarter that we have seen in each segment. Independent business cut the rate of sales decline in half relative to Q4, in spite of a decline in military volume caused by government sequestration and the loss of a vendor account.”

Business at its Save-A-Lot division, meanwhile, improved slightly, from a negative 2.6 percent to negative 1.9 percent, while same-store sales for corporate stores within the Save-A-Lot network, which will be reported separately going forward, improved from a negative 2 percent to a negative 1.2 percent.

Comparable retail food sale trends also showed signs of improvement from a negative 4.1 percent in the fourth quarter to negative 3 percent in Q1, which represents a 110 basis point gain and the first sequential improvement in over a year, “and one which we plan to build on for the balance of the year,” said Duncan, who discussed the state of Supervalu’s independent business and related initiatives with investors, an excerpted transcript of which follows:

“On our last conference call I spoke about the tremendous amount of support I have seen and heard from our independent retailers and the great loyalty they have shown Supervalu through some challenging times. As I continue to meet more and more of these entrepreneurs, I'm thankful for their support and happy to spend time with them and hear their thoughts on what we can do to better meet their needs.

“Along those lines this quarter we hosted the first meeting of our National Retail Advisory Group held in Minneapolis in June. The group began discussion on a number of industry topics that impact us all irrespective of size or geography, conversations which have given our leadership team direction on the role we need to play to best support our independence. Perhaps more importantly though was the opportunity for networking amongst our retailers and the chance to meet others who are confronting with the same business issues.

“I was also pleased that many of the attendees thought it was an affirmation that Supervalu was back and they can now move more confidently forward on their business plan.

“We are also working hard on bringing new customers into the Supervalu family. This has been a challenging task for the company since last summer when we announced a strategic review process as retail groups were hesitant to affiliate with us given the uncertainty of our future.

“Janel [Haugarth] and her team have done a great job in maintaining relationships with key retail groups in our operating territories and I have personally visited with a number of companies that I hope to one day call customers. The affiliation process by its very nature and for a number of valid reasons does not always move quickly, but our discussions have gone well and it is quite evident that we are back on the radar of many potential…customers.

“From an operations perspective, I’m pleased with the many things going on with the independent business. One priority for our supply chain and region merchandising teams is focusing on continually improving how we handle new items and the speed with which we make them available to our customers.

“With the accelerating pace of innovation in the industry it is critically important that DCs and stores have the latest items that our suppliers have introduced enabling our stores to be the destination of choice for our customers.

“We are working on process changes and communication enhancements, so that the stores we service both independently and corporately operated will have these products on their shelves as they are introduced to the market. We have aggressive goals set throughout the company to measure our progress.

“Let me move on to Save-a-Lot where a number of good things are happening. We again made sequential improvement over Q4 with the Save-a-Lot ID sales trends. But more importantly, we accomplished a great deal in terms of strengthening the format and operating model, which positions us better for future success. The new president, Ritchie Casteel, has taken steps to make the stores and the overall format more appealing to current customers and better able to attract new shoppers.

“As I briefly alluded to you last quarter, we are in the process of bringing a fresh-cut meat program to all our corporate stores, a result of an analysis we did last year that looked at the operating differences between the licensees stores and corporate stores, as well as the smaller number of corporate stores where we have saw cutting already in place.

“This work really showed we have a great opportunity to drive incremental sales and gross profit dollars by adding meat cutting each store. This will enable us to better tailor our offerings for each store throughout the month, as well as provide lower retail prices with the same or more margin dollars. Early results in the pilot stores are showing meat department sales are significantly better than the rest of the store depending on the week.

“We are currently on track to have this in all of our corporate stores by the end of the fiscal year. Last quarter I said that we had lowered our inside margin by 50 basis points, which was largely focused on about a dozen key items. The unit movement for these items has been up over 25 percent and consumer price perception improved about 100 basis points based on these targeted reductions alone. We will be taking inside margin down another 50 basis points here in the second quarter, bringing even greater value to our licensees and their customers as we continue to invest dollars for the future. It is critical that a price format such as Save-A-Lot be priced right and I am pleased the team is clearly moving us in the right direction and strengthening the critical relationships we have with our licensee operators.

“Another focus at Save-A-Lot is geared toward improving our fresh departments. We have recently standardized the quality specs of the produce across the network and increased the shelf life of many items by working directly with growers. We have also bought much more discipline to our quality assurance processes at our DCs and we have implemented a rigorous national training program in all of our corporate stores. Every one of our store employees is being trained on best practices, all to ensure our customers are able to purchase the best quality product possible at a great price.

“From a presentation point of view, our display standards are becoming more consistent and we are looking at new ways for Save-A-Lot to showcase products. For example, bananas are now being offered for safe on new euro tables and we are testing more appealing ways to display certain bulk products. As a result of these efforts, we have seen stronger sales performance in the produce category especially in our corporate stores.

“Better merchandising and more effective product displays are not isolated to Save-A-Lot's perishable departments. We are resetting the center-stores categories and all corporate stores which is scheduled to finish in Q3, creating a cleaner, horizontal sets which are more visually appealing, easier to shop and have greater space allocated to high velocity items. We have eliminated aisle stacks to make it easier to navigate the store and have improved product adjacencies such as placing all beverages in the same aisle and locating non-food and household items next to one another, to better meet the needs and expectations of today's customers.

“We are working on other things at Save-A-Lot that I plan to discuss further in coming quarters, all of which are designed to continue to improve sequential ID sales trends and remove costs from the business.

On our last conference call I said that Supervalu would be decentralizing its operations and decision making process, and I am pleased with the progress we have made.

“With the reductions in force we announced at the end of March now substantially complete and many of the tasks previously performance at our corporate offices have been moved into the retail banners, our five banner presidents have been working to make our banner stores more attractive to their local shoppers. Banner merchants are now fully responsible for coordinating the procurement and promotion of all items carried in our corporate stores, utilizing all available resources within the company to find the items and deals that will appeal most to their customers. This philosophy carries over into both the weekly ads and store promotion space where local merchants select the products and set the price points.

“Customers have begun to notice the weekly newspapers inserts have purposely become more focused on our fresh offerings where we still have a great opportunity to increase sales. We are also creating a visually cleaner look to our ads and striving for a less cluttered feel meaning we plan to promote fewer but more relevant items designed to drive customer traffic and start contrast to our pass model geared toward garnering vendor dollars.

“As a result of our decentralization we have lowered our cost structure, simplified our business model and placed decision making closer to the customer. More importantly we have a tremendous opportunity to improve our retail food results by implementing basic operating standards that will improve product quality and the shopping experience for our customers. I touched upon this last quarter but I want to reemphasize that the biggest opportunity we have is in improving our operations and not our pricing.

“Critical to this is changing our mindset to a culture of selling to not be afraid to move product to focus on selling before shrink in a prudent manner. To ensure all of our store managers know what is expected, all five banners have a model store in each of their districts which will be in place by the end of the second quarter.

“These model stores incorporate the key operating changes we want to implement this year. Things like standardizing labor hours, improving the specs within our perishable apartments, making for a more clutter free shopping experience and improving our private label program.

“By implementing as many of these desired changes as possible in a limited number of stores, we could be sure of the banners get it right before a broader push into all of our stores. This approach also allows others to see the changes in person and in real-time which will make it easier to make the necessary changes in their stores.

Having touched upon pricing, let me say that we continue to make price investments across the store network. But these incremental dollars are very targeted and modest within the broader context of what we are working to accomplish.”

Additional information about Supervalu’s first quarter performance can be found here.