On January 11, Eden Prairie, MN-based Supervalu, Inc. posted a third quarter net loss of $750 million on total net sales of $8.3 billion and a net loss of $750 million, or $3.54 per diluted share, including non-cash goodwill and intangible asset impairment charges of $800 million after-tax, or $3.78 per diluted share. Identical store sales plummeted to 2.9 percent (last quarter’s ID sales were negative 1.8 percent).
Despite the poor and somewhat unexpected results (SVU posted a $50 million profit last quarter), the retailer/wholesaler’s CEO Craig Herkert remained optimistic about the company’s ongoing turnaround effort.
“Supervalu continued to execute on its business transformation this quarter and remains on plan with its ‘8 Plays to Win strategy’,” Herkert said, “Even with the ongoing difficult economic environment and pressured consumer, we continued to make progress against our plan, allowing us to invest in price to deliver everyday value and hyper local choices that meet the needs of our customers in the diverse neighborhoods we serve.”
Supervalu also said that when adjusted for the non-cash goodwill and intangible asset impairment charges, third quarter fiscal 2012 net earnings were $50 million or $0.24 per diluted share. In the third quarter of fiscal 2011, net sales were $8.7 billion and the company reported a net loss of $202 million, or $0.95 per diluted share, including charges of $252 million after-tax, or $1.19 per diluted share.
In its third quarter, retail food net sales were $6.3 billion compared to $6.6 billion last year. The company said change in net sales primarily reflects identical store sales of negative 2.9 percent and previously announced market exits. Total retail square footage was 63.6 million, a 1.5 percent decrease from the third quarter of fiscal 2011 primarily as a result of fiscal 2011 market exits. Excluding the impact of market exits and store closures, total retail square footage increased 1.5 percent compared to the third quarter of fiscal 2011.
Third quarter independent business net sales were $2.0 billion compared to $2.1 billion last year, a decrease of 5.4 percent, primarily attributed to Target’s transition to self-distribution and the divestiture of Total Logistic Control.
Gross profit margin for the third quarter was $1.8 billion, or 21.7 percent of net sales, compared to $1.9 billion or 21.5 percent of net sales last year. The increase in gross margin as a percent of net sales reflects the benefits of promotional effectiveness, which were partially offset by retail price investments and a higher LIFO charge.
Selling and administrative expenses in the third quarter were $1.6 billion, or 19.3 percent of net sales. This compares to $1.7 billion, or 19.9 percent last year, including $63 million in pre-tax costs related to store exit, severance and labor buyout costs. Excluding these items, last year’s selling and administrative expenses were $1.7 billion, or 19.2 percent of sales. The increase in selling and administrative expenses as a percent of net sales reflects the impact of sales deleveraging as well as increases in surplus property costs, which were partially offset by savings achieved from cost reduction initiatives. The company expects savings from cost reduction initiatives to continue.
Goodwill and intangible asset impairment charges of $907 million pre-tax were recorded in the third 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 fourth quarter.
Third quarter retail food operating loss was $759 million. Excluding the goodwill and intangible asset impairment charges, retail food operating earnings in the third quarter were $148 million, or 2.3 percent of net sales. Last year’s retail food operating loss was $153 million and included goodwill and intangible asset impairment charges of $240 million pre-tax and $59 million in pre-tax costs related to store closure and exit, severance and labor buyout costs. When adjusted for these charges, last year’s retail food operating earnings were $146 million, or 2.2 percent of net sales.
Independent business operating earnings in the third quarter were $66 million, or 3.3 percent of sales, compared to $69 million, or 3.3 percent of sales last year. Independent business operating earnings, as a percent of sales, were impacted by the divestiture of Total Logistic Control and a higher LIFO charge offset by savings achieved from cost reduction initiatives.
Net interest expense for the third quarter was $119 million compared to $124 million last year, primarily attributed to reduced borrowing levels. The company remains in compliance with all debt covenants.
Supervalu’s income tax benefit was $77 million, or 9.3 percent of pre-tax loss, compared to an income tax benefit of $21 million, or 9.2 percent of pre-tax loss, in last year’s third quarter. The tax rate for the third quarter of both fiscal years reflects the impact of the impairment charges, the majority of which was not deductible for tax purposes. Excluding the impact of the impairment charges, the tax rate for the third quarter of fiscal 2012 was 37.4 percent. The tax rate for the third quarter of fiscal 2011 was 37.9 percent, excluding the impact of the impairment charges and the sale of Bristol Farms.
Diluted weighted-average shares outstanding for the third quarter were 212 million shares compared to 212 million shares last year. For the third quarter of both fiscal 2012 and 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 December 2, 2011, Supervalu had 212 million shares outstanding.
Year-to-date net cash flows from operating activities were $518 million compared to $651 million in the prior year, primarily reflecting changes in working capital as forward-buy inventory levels increased. Year-to-date net cash flows used in investing activities were $285 million compared to $310 million last year, primarily reflecting lower capital expenditures. Year-to-date net cash flows used in financing activities were $209 million compared to $366 million last year, reflecting higher levels of forward-buy inventory.
Year-to-date capital expenditures were $412 million compared to $454 million for the same period last year.
Supervalu’s full-year earnings guidance is now a loss of $2.58 to $2.48 per diluted share on a GAAP basis. Excluding the goodwill and intangible asset impairment charges recorded in the third quarter, full-year earnings guidance is $1.20 to $1.30 per diluted share, in line with our previous GAAP guidance.
In addressing guidance, Herkert commented, “As we enter the last quarter of fiscal 2012, I am pleased to affirm our full-year adjusted earnings guidance. The tools we have implemented are beginning to improve retail execution and position us to deliver greater value to our customers in fiscal 2013.”
Supervalu’s fiscal 2012 guidance includes the following assumptions: Net sales for the 52-week fiscal year are estimated to be approximately $36.1 billion; identical store sales growth, excluding fuel, is projected to be approximately negative 2.5 percent to negative 3.0 percent; sales in the independent business are expected to be down approximately 4.5 percent for fiscal 2012, primarily reflecting the divestiture of Total Logistic Control and the transition of Target Corporation to self-distribution; debt reduction is estimated to be approximately $525 to $550 million; capital spending is projected to be approximately $700 to $725 million, which includes 80 to 90 store remodels. Save-A-Lot will increase its store count by approximately 50 to 60 stores, including licensed locations; the effective tax rate is estimated to be approximately 37.4 percent in the last quarter of the fiscal year, exclusive of any impairment charge adjustment; and weighted-average diluted shares are estimated to be approximately 213 million for purposes of non-GAAP earnings per share.