SuperValu Inc. (SVU)

SVU 
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SUPERVALU Inc. (SVU)

F3Q10 Earnings Call

January 12, 2010 10:00 am ET

Executives

Kenneth Levy – Vice President of Investor Relations

Craig Herkert – President and Chief Executive Officer

Pamela K. Knous – Executive Vice President and Chief Financial Officer

David Oliver – CFO, SUPERVALU Supply Chain Services

Analysts

Deborah Weinswig - Citigroup

John Heinbockel - Goldman Sachs

Meredith Adler - Barclays Capital

Edward Kelly - Credit Suisse

Scott Mushkin - Jefferies & Co.

Neil Currie - UBS

Mark Wiltamuth - Morgan Stanley

Presentation

Operator

Welcome everyone to the SUPERVALU third quarter earnings release. (Operator Instructions) Now I would like to turn the call over to Ken Levy, Vice President of Investor Relations. Sir you may begin your conference.

Kenneth Levy

Thank you. Good morning and welcome to SUPERVALU’s fiscal 2010 third quarter conference call. I am pleased to have recently joined SUPERVALU as the Vice President of Investor Relations and look forward to working with you in the future.

With me on today’s call are Craig Herkert, SUPERVALU’s Chief Executive Officer and President; Pam Knous, Executive Vice President and Chief Financial Officer and David Oliver, CFO OF SUPERVALU Supply Chain Services. Following prepared remarks from Craig and Pam, we will open up the call for a question and answer session. Thereafter Craig will return with some closing remarks.

As you know, the information presented and discussed today includes forward-looking statements which are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our fiscal 2009 10-K. Today’s call will be available for replay on our website at www.Supvervalu.com. David and I will be available after this call for any additional questions.

I will now turn the call over to Craig Herkert.

Craig Herkert

Good morning. Thank you for joining us today. With the start of the New Year I want you to know that I am approaching fiscal 2011 optimistically. This isn’t because I see a robust pick up in the economy because frankly I don’t. It is because I believe SUPERVALU is running its business better and that means we are in control of our own destiny.

Let me be specific here. The work streams we previewed with you in October are showing traction and that makes me confident that they will deliver meaningful and visible results in the year ahead. I am pleased to announce that SUPERVALU reported net earnings of $0.51 per diluted share on net sales of $9.2 billion for the third quarter, exceeding the consensus estimate. These results were achieved against significant economic headwinds and consumer spending trends which have heightened competition throughout our industry.

You have heard me say that grocery retail is a simple business and I believe that our results show we are getting back to basics. Clearly defined areas of accountability are helping to fuel more intelligent data driven decision making throughout our organization. Today SUPERVALU’s associates understand better their respective roles and responsibilities and I am proud of their accomplishments and dedication to improving the shopping experience for our customers.

This quarter’s earnings performance reflects our progress on initiatives we set into motion early this year. Our margins held up well which is the direct result of improved communications and stronger relationships between our corporate merchants and our banners. In general we saw more effective promotional spending which helped to stabilize gross margins and we also benefited from good expense controls.

Even with this meaningful progress work still remains. 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. My objective is to position the company for long-term, sustainable growth.

While Pam will discuss details of our financial performance shortly I do want to touch upon four items that I view as particularly important to the quarter.

First, the quarter was a tough quarter and one in which we made difficult decisions 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.

In contrast to the first two quarters our third quarter retail gross margins were off by only 10 basis points relative to the prior year. At our very core we remain a promotional retailer as our promotional mix increased by 350 basis points compared to last year. However, we will not sacrifice margins for promotional activities which we do not believe will influence long-term customer loyalty. Rather, our goal is to offer everyday pricing that customers believe to be fair and merchandise that is relevant to the local markets we serve.

Second, we are making progress in narrowing the gap between our regular shelf price and our promotional pricing. I can say this because our pricing surveys validate this effort. To date, price improvements have been driven through 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 at SUPERVALU and I am pleased with the progress we have made this quarter.

Third, it is important to note that segment EBIT margins improved in the third quarter relative to the prior two quarters. Third quarter retail EBIT excluding the benefit of Salt Lake City was 3.5% compared to 3.9% last year but well ahead of the 2.5% last quarter and the 3.1% in the first quarter. Our supply chain business also achieved its operating goals even after fully transitioning to target business delivering 3.1% compared to 3% a year earlier. I recognize that one quarter is not a winning streak but I am starting to count.

Finally, SUPERVALU is fulfilling its long-term commitment to reduce debt and regain financial flexibility. With our exit of the Salt Lake City market the company reaped $150 million in after-tax proceeds. These funds have been applied to outstanding debt and through the end of Q3 debt is down over $300 million. We remain on target to pay down $700 million in fiscal 2010.

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