Supervalu stock tumbles as it shops for buyer

  • Article by: MIKE HUGHLETT , Star Tribune
  • Updated: July 12, 2012 - 9:07 AM

The Cub Foods parent hired Goldman Sachs to explore "strategic alternatives" after profit came in far less than expected. It also will stop paying a dividend.

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A Supervalu truck in the Supervalu distribution center in Hopkins.

Photo: Glen Stubbe, Star Tribune

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With Supervalu Inc.'s financial performance spiraling from bad to worse and its stock at historic lows, the company said Wednesday it has put itself up for sale and has suspended its dividend payment.

The Eden Prairie-based supermarket operator, owner of the Twin Cities' Cub Foods chain, Wednesday reported earnings that were about half of what Wall Street expected.

Reacting to Wednesday’s announcement after the market closed, Supervalu’s stock Thursday morning tumbled $2.32 or 44 percent, trading at $2.97.

The company, which has already suffered rounds of layoffs, also told employees to brace for another wave of big cost cuts -- $250 million over two years. Those savings will be plowed into an accelerated effort to cut Supervalu's prices, which are regularly higher than those of its key competitors, particularly discount grocers.

Looking ahead, the company said in a statement that it has retained financial advisers Goldman Sachs and Greenhill & Co., who along with the company's board and management are reviewing options to "create value for the company's shareholders."

"This review is not something we take lightly," Supervalu Chief Executive Craig Herkert said in a letter to employees. "Strategic alternatives will be broad-based and include looking at the sale or other disposition of all or part of the company."

One of the nation's largest supermarket operators, Supervalu owns major chains in Chicago, the East Coast and Southern California.

Supervalu's stock has been trading at or near 30-year lows in recent months. As the stock has sunk, there's been speculation a private equity group might make a run at the company. However, some of Supervalu's operations are weak enough that it's not clear whether they would fetch an acceptable price for the company's shareholders.

In a conference call with stock analysts, Herkert acknowledged that "there can be no assurance" that any sort of transaction will take place.

One move by Supervalu seems highly unlikely: bankruptcy, which two other major grocery chains have sought in the past few years. Bankruptcy "is not part of our strategic review," Herkert said in reply to an analyst who asked whether such an option was "100 percent off the table."

Herkert noted that Supervalu is profitable and still has a cash flow that's projected to be more than $1 billion this year.

The firm's strategic review will be overseen by Wayne Sales, Supervalu's nonexecutive chairman, so management can focus on executing the company's business plan.

Supervalu has been hammered by increasing competition from low-price rivals like Wal-Mart and Target, set against the backdrop of a weak U.S. economy. The company's same-store sales, which account for newly opened stores, have been declining for three consecutive years.

Supervalu said Wednesday that in its first quarter, same-store sales fell again, this time 3.7 percent -- results well below its own expectations. Even Supervalu's Sav-A-Lot banner, a discount chain akin to Aldi, saw same-store sales fall 3.4 percent during the quarter.

"We did not move quickly enough to respond to intensifying competitive conditions in our industry," Herkert told analysts.

Supervalu reported fiscal first-quarter earnings of $41 million, or 19 cents per share, down about 45 percent from a year ago. Analysts polled by Thomson Reuters had been expecting a profit, on average, of 38 cents per share.

Supervalu, which is still saddled with debt from its $12 billion acquisition of Albertsons in 2006, said it's suspending its quarterly dividend of 8.75 cents per share. The company has paid a dividend for more than 60 years.

Also, the company will reduce capital expenditures -- money to improve its stores -- to a range of $450 million to $500 million for its current fiscal year, down from $600 million.

Then there's the new $275 million round of operational cost cuts, which are in addition to already planned $75 million in cuts for this fiscal year.

"From administration to retail stores to distribution centers, we are identifying opportunities to become leaner and more efficient," Herkert said.

The company said nothing about new layoffs, but that's always a possibility when large cost cuts are at hand. Earlier this year, Supervalu said it would eliminate about 800 corporate jobs, including about 200 in the Twin Cities.

In June, the company said it eliminate 2,500 jobs, or up to 13 percent of the workforce, at its Albertsons chain in southern California and Nevada. And last year, about 200 part-time workers were laid off at Cub, while 900 part-time workers were axed at Supervalu's Acme chain in Philadelphia.

Much of the company's cost cuts will be will be used to accelerate its goal of lowering prices, a program that has already been in effect for several quarters. "We're taking the steps necessary to move this along much faster," Herkert said.

However, the company acknowledged the potential trade-off in accelerating its price reductions.

As price cuts kick in before cost reductions -- and before customers change their behavior to shop at Supervalu more regularly -- the company's near-term and medium-term profit margins will come under increased pressure.

Mike Hughlett • 612-673-7003

1st quarter FY2013, 6/16

2013 2012 % chg. Revenue $10,590.0 $11,113.0 -4.7 Income 41.0 74.0 -44.6 Earn/share 0.19 0.35 -45.7

Figures in millions except for earnings per share.

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