Supervalu last month reported second quarter fiscal 2011 net sales of $8.7 billion and a net loss of $1.470 billion or $6.94 per diluted share, including non-cash goodwill and intangible asset impairment charges ($1.516 billion after-tax, or $7.16 per diluted share) and certain other costs ($13 million after-tax, or $0.06 per diluted share) primarily related to the impact of the labor dispute at Shaw’s and employee-related costs. This impairment charge was triggered by a required reconciliation of Supervalu’s stock price to book value per share. When adjusted for the non-cash goodwill and intangible asset impairment charges and certain other costs, second quarter fiscal 2011 net earnings were $59 million or $0.28 per diluted share. In the second quarter of fiscal 2010, the company reported net sales of $9.5 billion and net earnings of $74 million, or $0.35 per diluted share.
Craig Herkert, Supervalu’s chief executive officer and president, said, “Our sales performance continues to reflect a difficult operating environment. As the company moves into the next phase of its business transformation, we remain focused on our customers and taking actions that will better meet their needs. I remain confident that we have the correct strategy in place to achieve long term success.”
Second quarter retail food net sales were $6.7 billion compared to $7.4 billion last year, a decrease of 9.7 percent, primarily reflecting the impact of identical store sales of negative 6.4 percent and previously announced market exits. Excluding Shaw’s, which was impacted by a labor dispute settled early in the quarter, identical store sales were negative 5.9 percent. The identical store sales performance resulted from a continued challenging economic environment and heightened competitive activity. Retail square footage decreased 3.1 percent from the second quarter of fiscal 2010. Excluding the impact of market exits and store closures, total retail square footage increased 0.9 percent compared to the second quarter of fiscal 2010.
Second quarter supply chain services net sales were $2.0 billion compared to $2.1 billion last year, a decrease of 4.2 percent, primarily reflecting Target’s transition to self-distribution and the loss of Ukrop’s as a customer due to acquisition by a competitor.
Retail food net sales in the second quarter of fiscal 2011 represented 77.3 percent of net sales compared to 78.3 percent last year. Supply chain services net sales in the second quarter of fiscal 2011 represented 22.7 percent of net sales compared to 21.7 percent last year.
Gross profit margin in the second quarter was $1.9 billion, or 22.3 percent of net sales, compared to $2.1 billion or 22.1 percent last year. The increase in gross margin as a percent of net sales primarily reflects more effective promotional spending partially offset by targeted investments in price.
Selling and administrative expenses in the second quarter were $1.7 billion, or 20.0 percent of net sales, compared to $1.8 billion, or 19.5 percent last year. The increase in selling and administrative expenses as a percent of net sales primarily reflects reduced sales leverage and variance in surplus property expense that more than offset the savings achieved from ongoing cost reduction initiatives.
Goodwill and asset impairment charges of $1.6 billion pre-tax were recorded in the second quarter and reflected in the retail food segment operating earnings. The non-cash impairment charges are subject to finalization of fair values, which the company expects to complete in the third quarter.
Second quarter retail food operating loss was $1.441 billion. When adjusted for the $1.600 billion impairment expense and $17 million in pre-tax charges primarily related to the impact of the labor dispute at Shaw’s as well as employee-related costs, retail food operating earnings were $176 million, or 2.6 percent of net sales. Last year’s retail food operating earnings were $188 million, or 2.5 percent of net sales. The increase in retail food operating earnings as a percent of net sales reflects improved gross margins partially offset by the impact of reduced sales leverage on expenses. Supply chain services operating earnings were $69 million, or 3.5 percent of sales, compared to $63 million, or 3.0 percent of sales last year. The increase in supply chain services operating earnings as a percent of net sales reflects strong expense management and improved productivity.
Net interest expense for the second quarter was $129 million compared to $131 million last year. The company remains in compliance with all debt covenants.
Supervalu’s income tax benefit was $56 million, or 3.7 percent of pre-tax loss in the second quarter compared to income tax expense of $40 million, or 35.1 percent of pre-tax income in last year’s second quarter. The tax rate for the second quarter of fiscal 2011 reflected the impact of the impairment charges, the majority of which is not deductible for tax purposes. Excluding the impact of the impairment charges, the tax rate for the second quarter of fiscal 2011 was 37.5 percent.
Capital spending for the second quarter was $139 million compared to $158 million in the prior year. In the second quarter the company completed 24 major remodels, 2 minor remodels and 1 new traditional supermarket, as well as 18 new Save-A-Lot locations. Year-to-date capital spending was $312 million compared to $396 million in the prior year.
Diluted weighted-average shares outstanding for the second quarter were 212 million shares compared to 213 million shares last year. For the second quarter of fiscal 2011, diluted loss per share is computed using the basic weighted-average number of shares outstanding and excludes all outstanding stock options and restricted stock as their effect is anti-dilutive when applied to losses. As of September 11, 2010, Supervalu had 212 million shares outstanding.
Year-to-date net cash flows from operating activities were $754 million compared to $840 million in the prior year, primarily reflecting reduced earnings partially offset by favorable changes in working capital. Year-to-date net cash flows used in investing activities were $211 million compared to $369 million last year, reflecting reduced capital expenditures and higher proceeds from asset disposals in the current year. Year-to-date net cash used for financing activities were $551 million compared to $442 million last year, primarily reflecting higher levels of debt reduction in the current year.
Commenting on guidance, Herkert stated, “It will take longer than originally anticipated to realize the benefit of the marketing, merchandising and operational initiatives that we continue to build upon. Accordingly, we are adjusting our guidance to better reflect this outlook.” Identical store sales, excluding fuel, are now projected to be approximately negative 5.5 percent for the year compared to previous guidance of negative 5 percent and debt reduction is expected to total approximately $650 million. Management now expects a net loss in fiscal 2011 in the range of $(5.94) to $(5.74) per diluted share on a GAAP basis and adjusted earnings of $1.40 to $1.60 per diluted share when excluding non-cash impairment changes and certain other costs.
Supervalu’s fiscal 2011 guidance includes the following assumptions:
Net sales for the 52-week fiscal year are estimated to be approximately $38 billion;
Identical store sales growth, excluding fuel, is projected to be approximately negative 5.5 percent;
Sales in the traditional food distribution business are expected to decline approximately 3.5 percent, primarily reflecting the transition of the Target Corporation volume to self distribution and the loss of Ukrop’s as a customer due to acquisition by a competitor;
Consumer spending will continue to be pressured;
Goodwill and intangible asset impairment charges are estimated to be $1.6 billion pre-tax, or $1.5 billion after-tax, subject to finalization of fair values which the company will complete in the third quarter;
Fiscal 2011 will include approximately $0.18 per diluted share in charges primarily related to the completion of retail market exits in Connecticut and Cincinnati and the impact of a labor dispute at Shaw’s, which was resolved in July;
The effective tax rate is estimated to be approximately 37.4 percent, excluding impairment charges;
Weighted-average diluted shares are estimated to be approximately 213 million for purposes of non-GAAP earnings per share;
Capital spending is projected to be approximately $700 million, including 60 to 75 major store remodels, 30 to 40 minor remodels, 2 replacement stores, and approximately 100 hard-discount stores, including licensed locations; and
Debt reduction is estimated to be approximately $650 million.
The Great Atlantic & Pacific Tea Company on October 21 provided an update on its comprehensive turnaround plan to strengthen its operating and financial foundation and enhance its customers’ experience, and announced fiscal 2010 second quarter results.
Sales for the second quarter were $1.9 billion versus $2.1 billion in last fiscal year’s second quarter. Comparable store sales decreased 6.6 percent.
For the second quarter, reported loss from continuing operations was $143 million versus last year’s second quarter reported loss from continuing operations of $62 million.
EBITDA was negative $45 million for the second quarter versus $42 million for the last fiscal year’s second quarter.
Excluding certain non-cash and non-operating items (detailed on Schedule 3), adjusted EBITDA was $8 million versus $65 million for last fiscal year’s second quarter.
Availability under the company’s credit facility was $181 million at the end of the second quarter.
By division, the results were broken out this way:
In A&P’s “Fresh” division, which includes A&P, Waldbaum’s and Super Fresh, the retailer continued to experience a decline in sales due to decreasing customer count, attributable to increased competition, particularly in alternative channels. For the quarter, sales in the company’s fresh division declined from $1.04 million to $976,952 and earnings slid from $32,768 to $10,255.
The Pathmark division, which also includes Save-A-Center stores, also continued to experience declining sales, primarily due to decreased customer counts. Sales were down from $898,655 in 2009 to $816,304 in the same period in 2010. Earnings went from negative $15,313 in 2009 to negative $27,771 in this year’s quarter.
The Food Emporium division, which the company identifies as its “gourmet” sector, the trends also were down. The stores, located in Manhattan, saw sales decline from $56,010 to $55,122 and earnings fall from $3,311 to $2,371.
The remaining stores, including Food Basics, Best Cellers and A&P liquors, experienced a slight increase, attributed to the fact that the retailer’s beer, wine and spirits business continued to perform well. As a group, the “other” stores in the company saw sales rise from $67,683 in 2009 to $69,901 in 2010, although earnings dropped from $734 to $254.
Sam Martin, president and CEO, said, “Our second quarter financial results are disappointing. But, we have developed a comprehensive turnaround plan and have quickly begun to implement it. The first step in that plan is the formation of a new management team. With our talented and deeply experienced new team now in place, we have begun to execute against the other steps in the plan on an accelerated basis.”
The Tea Company said its turnaround plan consists of five key building blocks, which include: Installing a strong management team; strengthening liquidity; reducing structural and operating costs; improving the A&P value proposition for customers; and enhancing the customer experience in stores.
Since the end of the last quarter, A&P made a series of executive appointments that complete the leadership team under president and CEO Sam Martin and enable the company to accelerate the implementation phases of its turnaround plan.
The new management team includes: Martin, who has more than three decades of management experience in the food retail industry with direct operational responsibility. He joined A&P from OfficeMax, where he was COO. He also held senior management roles at Wild Oats Markets, Inc., ShopKo Stores, Inc., and Fred Meyer;
Jake Brace, chief administrative officer, who is overseeing the finance and accounting, real estate, and information systems departments. He brings 25 years of strategic and financial expertise and successful turnaround and operational experience. He served as EVP and CFO as well as chief restructuring officer of United Airlines.
Tom O’Boyle, EVP of merchandising and marketing, is leading A&P’s merchandising, marketing, supply and logistics departments. With more than 25 years of retail experience in merchandising and marketing at Jewel Food Stores, Albertsons and Sears, one of his top priorities is to develop a synergy among these three critical functions.
Paul Hertz, EVP of operations, is leading field operations and brings more than 20 years of senior retail sales management and operations experience to A&P. He has held senior posts at OfficeMax, Wild Oats Markets, Inc., and ShopKo Stores, Inc.
Carter Knox, SVP of human resources and communications, brings extensive expertise to the leadership of the company’s human resources, labor relations and corporate communications. He has held senior HR and communications management positions in retail for more than 30 years at OfficeMax and Fred Meyer.
Chris McGarry, SVP and general counsel, as been with A&P’s legal services for five years and currently oversees legal services and risk management. He previously held general counsel and other related executive positions with The Grand Union Company, Tibbett & Britten Group and Exel.
The company said it is negotiating an agreement with its existing banks and several new lenders to add a new-money term loan to its existing asset-backed facility. The new term loan is expected to be backed by, primarily, leasehold assets and other collateral not currently contained in the borrowing base. The complex structure of the new loan has pushed the closing off several weeks. A&P believes, however, that it will be able to close and fund the transaction. In addition, in an effort to bolster liquidity and shed non-core assets, the company contracted to sell seven stores in Connecticut for an estimated $22.8 million. That transaction was scheduled to close November 1, just after Food World presstime.
A&P also said it continues to pursue additional financing initiatives including sale-leaseback transactions and sales of additional non-core and/or non-performing assets, as well as reviewing our store portfolio for additional opportunities.
The retailer said it has identified significant opportunities for reducing its structural and operating costs by working with its key operating partners, rationalizing its store footprint A&P has recently closed 25 underperforming stores and said it is in active talks with several key operating partners to seek ways to lower its structural operating costs. In addition, the company is in discussions with its labor union partners to identify opportunities to reduce its store costs.
The company said it is also pursuing collaborative improvements to existing contracts with all of its business partners, such as C&S Wholesale Grocers. In the company’s 10Q statement, it said, “We are partnering with C&S to rationalize our supply chain to ensure that the structure of the distribution network is more closely aligned with the needs of our business. We anticipate that this will result in significant cost savings by 2011 and will provide a foundation for our continued discussions with C&S, but there can be no assurance that these efforts will be successful or will result in any savings or improvements.”
The 10Q filing also addressed A&P’s stance going forward regarding labor unions. “We believe that we have good relationships with our labor union partners and continue to engage them in discussions about working collaboratively to address contract issues impacting our company through our turnaround plan.” The retailer currently has two open labor union contracts and four labor union contracts covering approximately 1,780 employees scheduled to expire in fiscal 2010 and are therefore subject to negotiation. “We cannot assure our stakeholders that our labor negotiations will conclude successfully or that work stoppage or labor disturbances will not occur,” the filing concluded.
Finally, A&P has completed the first phase of a talent assessment and taken steps to flatten its organization to lower general and administrative costs, improving the efficiency within its corporate headquarters. The company said it has reduced headcount, saving roughly $10 million annually. In addition, A&P has other G&A initiatives under way, targeting an overall G&A reduction of approximately $40 million per year.
A&P said it continues to work on many fronts to drive loyalty and engage new customers with the goal of enhancing the value it offers in its stores. The company is focused on refining its product mix, pricing and promotion initiatives, and it continues to improve the way it cares for and serves customers both in stores and through its company-wide customer service operations. A&P is also offering customers additional variety and value by enhancing and expanding its private label brands, including America’s Choice, Food Basics and The Food Emporium Trading Company.
Resulting from the talent assessment mentioned above, A&P said it is now moving forward with a series of training initiatives designed to improve the overall customer experience across all stores.
The retailer plans to identify target customer segments and clusters through data analysis of its loyalty card shoppers to ensure it offers the most relevant assortment and value. At the same time, it is augmenting the in-store customer experience with traditional and new tools to provide individualized offers and a more customer-relevant shopping experience.
“Since I joined A&P in late July, we have moved quickly to implement our comprehensive turnaround plan,” Martin added. “Although we clearly have a lot of work ahead of us, we have already made solid initial progress. I want to thank all of our talented associates for their dedication and commitment to improving A&P’s performance and enhancing the value we provide to our customers.”
Christian Haub, executive chairman, said, “The board and I are encouraged by the initial actions taken by Sam and his new executive team to strengthen A&P’s operating foundation. The board and the company’s major shareholders, Tengelmann and Yucaipa, have full confidence that this team will continue to make significant, incremental progress in executing our turnaround plan for the benefit of all our stakeholders.”
Safeway Inc. last month reported net income of $122.8 million ($0.33 per diluted share) for the third quarter of 2010 compared to $128.8 million ($0.31 per diluted share) for the third quarter of 2009. Results for the third quarter of 2010 include $12 million ($0.02 per diluted share) of employee severance charges, offset by a lower tax rate compared to the third quarter of 2009.
“Our third quarter results were in line with our expectations,” said Steve Burd, chairman, president and CEO. “The trend in price per item improved during the quarter. We expect this trend to continue as we anniversary the price investments we made in the second half of 2009. We continue to tailor our offerings to the changing needs of our customers, with innovative consumer brand launches of Refreshe beverages and In-Kind personal care products, while offering lower everyday prices and attractive club card specials.”
Total sales were $9.4 billion in the third quarter of 2010, down slightly compared to $9.5 billion in the third quarter of 2009. A 2.0 percent decline in identical-store sales, excluding fuel, and reduced sales from store closures were partly offset by a higher Canadian exchange rate and higher fuel sales. The decline in identical-store sales was due to a decline in price per item.
Gross profit declined 13 basis points to 28.14 percent of sales in the third quarter of 2010 compared to 28.27 percent of sales in the third quarter of 2009. Excluding the 13 basis point impact from fuel sales, gross profit margin was flat. Investments in price carried forward from the second half of fiscal 2009 and $12 million of employee severance charges were offset by reduced advertising and improvement in shrink.
Operating and administrative expense was $2.4 billion in the third quarter of 2010, essentially flat compared to the third quarter of 2009. Operating and administrative expense as a percentage of sales increased 23 basis points to 25.56 percent in the third quarter of 2010 from 25.33 percent in the third quarter of 2009. Excluding the 14 basis point impact of higher fuel sales in the third quarter of 2010, operating and administrative expense margin increased 37 basis points. This increase was largely the result of deflation coupled with expected increases in wages and benefits, partly offset by lower losses from the combination of property disposals and impairment.
Interest expense declined to $69.4 million in the third quarter of 2010 from $78.3 million in the third quarter of 2009 due to lower average interest rates and lower average borrowings.
Income tax expense was 31.0 percent of pre-tax income in the third quarter of 2010 compared to 36.0 percent in the third quarter of 2009, resulting in a $0.02 improvement in diluted earnings per share. The income tax rate in 2010 was lower due to benefits from several individually immaterial items.
For the year, earnings per diluted share and non-fuel ID sales are expected to be toward the lower end of guidance of $1.50 to $1.70 and -1.0 percent to -1.5 percent, respectively. The company expects cash capital expenditures of approximately $900 million and free cash flow in the middle of the range of $0.9 to $1.1 billion.
During the third quarter of 2010, Safeway purchased 8.8 million shares of its common stock at an average price of $20.81 per share and a total cost of $182.5 million (including commissions). The remaining board authorization for stock repurchases at quarter-end was approximately $0.8 billion.
Safeway invested $170.7 million in capital expenditures in the third quarter of 2010. The company completed two new stores, completed nine Lifestyle remodels and closed 12 stores. For the year, Safeway plans to open approximately 15 new Lifestyle stores and complete approximately 60 Lifestyle remodels.