Supervalu Inc. suspended its dividend earlier this month while it seeks to fund aggressive price cuts aimed at winning back shoppers.

Supervalu Inc., Supervalu, president and chief executive Craig Herkert, Walmart, Kroger Co., Fitch Ratings senior director Monica Aggarwal, Save-A-Lot, Walter Stackow, Manning & Napier, Goldman Sachs, Greenhill & Co., Susquehanna Financial Group grocery analyst Bob Summers

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Inside This Issue - News

Supervalu looks for solutions

July 23rd, 2012

MINNEAPOLIS – Supervalu Inc. suspended its dividend earlier this month while it seeks to fund aggressive price cuts aimed at winning back shoppers.

In light of a dismal financial performance in its first quarter, the company says it is exploring options for overhauling its operation, including selling off one of its ­divisions.

"It is essential that we move even more aggressively to lower prices and anticipate and respond to competitor actions," president and chief executive Craig Herkert said when the first quarter results were ­announced.

"We expect our business transformation to meet our customers’ demands for great quality at lower prices," he noted. "We intend to do this while remaining profitable, continuing to pay down debt, and investing the capital to maintain and enhance our stores and related assets."

Herkert said Supervalu, the nation’s third-largest supermarket company, remains committed to generating operating cash flows of more than $1 billion annually.

"To assure we are evaluating the full range of opportunities available to us to create value for shareholders, the company’s board and management, together with its financial advisors, are reviewing strategic alternatives for our business," he said. "These are bold but necessary moves which will position Supervalu for success in this increasingly competitive environment."

During its first quarter Supervalu, which in recent years has lost customers to lower grocery prices at Walmart and Kroger Co., saw its profit fall by 45%.

While Herkert said bankruptcy is not among the options being weighed at the company, almost everything else is on the table.

Supervalu has been hampered by debt since its $12.4 billion acquisition of more than 1,100 Albertsons stores in 2006.

The poor first quarter results and the company’s possible altering of its business caused Supervalu’s stock to plummet from $5.29 a share on July 12, the day the results were released, to just under $2.50 by July 16.

Analysts say they believe that it is unlikely Supervalu will find a buyer for one of its chains because of its high debt.

Furthermore, they say investors will probably shy away from the low-growth supermarket industry and are unlikely to embrace a company that cannot be fixed quickly.

"The three- to five-year outlook is unclear," Fitch Ratings senior director Monica Aggarwal said in the wake of Supervalu’s announced plans going forward.

Besides possibly of selling off one of the company’s chains, Supervalu executives say the company will replace its senior credit facility with an asset-based lending facility and term loan secured by a portion of its real estate.

It also plans to reduce capital expenditures in fiscal 2013 to between $450 million and $500 million, down from the $675 million originally planned.

Executives are quick to point out that even the reduced capital expenditures will allow the company to invest in its store base, including 40 remodels and the addition of 40 Save-A-Lot locations.

The next fiscal year will also see Supervalu trim more of its debt. Originally planned at $400 million, the company’s debt reduction has been raised to between $450 million and $500 million next year. After that Supervalu expects to pay down at least $400 million worth of debt annually.

While Supervalu’s stores in such key markets as Southern California and the Northeast United States have struggled to compete, analysts and Supervalu executives are quick to say that not all the news is bad. The company’s discount chain Save-A-Lot, they note, continues to be a strong performer.

The 1,280-store chain that has outlets primarily in the Midwest and along the East Coast has remained competitive by offering extremely low prices in a no-frills shopping environment.

Some industry watchers, however, remain skeptical about whether Supervalu’s plans to be more competitive on prices in its other stores will work.

Redoubling its efforts to get its everyday pricing as low as rivals could hamper profitability and potentially make it more difficult to fund loan payments, analysts say. "They’ve clearly acknowledged that they have to lower prices a whole lot more to be competitive and their flexibility is going to be even more limited now," Walter Stackow, an analyst at Manning & Napier, told the Reuters news agency.

Meanwhile, the investment banking firms Goldman Sachs and Greenhill & Co. will start a review of options available to Supervalu, which will include the possibility of a sale.
That could prove difficult.

"Nobody views it as a viable buyout candidate anymore," Susquehanna Financial Group grocery analyst Bob Summers says. "Why pay for them when you’re going to get the market share for free?"