Lower food prices add to challenges at Supervalu

Supervalu Inc. stumbled into summer as it contended with lower prices for staples like milk and eggs and intensifying competition with grocery store rivals.

The Eden Prairie-based company on Wednesday reported lower across-the-board sales and a drop in net profit for the April-to-June period, and executives said they expected the difficulties to extend through the year.

Supervalu shares fell 12.5 percent, the second-biggest drop this year after a 15-percent drop on Jan. 13.

"We expect Supervalu will continue to cede share within the retail food category," Morgan Stanley analyst Vincent Sinisi wrote after the company's results announcement.

In the Twin Cities, the company's Cub Foods chain has seen new competition from Hy-Vee as well as new outlets for niche grocers like Trader Joe's and Fresh Thyme.

And lower food prices have eroded already-thin profit margins. Milk prices have fallen around the world this year, and egg prices in the U.S. are near a 15-year low. Beef prices are down about 10 percent this year, and pork prices have also fallen.

Supervalu's challenges extended into the company's wholesale division, its largest by revenue, which saw a nearly 8 percent decline in sales. Supervalu is trying to replace business it lost as a supplier to some Albertsons, Haggen Food & Pharmacy and Gordy's Markets. It recently made a supplier deal with Marsh Supermarkets, which has 70 stores in Indiana and Ohio, and bought 22 Food Lion stores with an aim of spinning them off but keeping them as wholesale customers.

Supervalu said its profit fell 25 percent to $47 million, or 17 cents a share. Adjusted for costs related to a debt refinancing and the potential spinoff of its Save-A-Lot stores, its profit amounted to 19 cents a share. Analysts had forecast profit of 22 cents a share.

Revenue for the quarter, which ended June 18 and was the first of its fiscal year, fell 4 percent to $5.2 billion.

Even with the wins at Marsh and Food Lion in the wholesale business, Supervalu's profit before taxes is expected to be down 1.5 percent for the fiscal year, Chief Operating Officer Bruce Besanko told analysts.

Supervalu's retail stores unit, which includes Cub, experienced a drop in sales of 2.9 percent to $1.43 billion. Sales at stores open at least a year fell 4.5 percent.

Gross identified several improvements to turn things around — lower prices and more promotions, revised bakeries and delis, e-commerce, home delivery and greater store differentiation based on the income, ethnicity and incomes of its customer base.

Save-A-Lot CEO Eric Claus said deflationary prices on ground beef, milk and eggs alone pulled down same-store sales. "Without those, we would have had positive comps," or comparative results, he said.

The company is still expected to spin off Save-A-Lot in the second half of the fiscal year. In a research note published after Supervalu's earnings call, Oppenheimer analyst Rupesh Parikh said Supervalu's near-term outlook was challenging. "It is still too early to play a potential turn in the Supervalu story," he wrote.

John Ewoldt • 612-673-7633