Grocery stores operator Supervalu Inc. (SVU) reported Tuesday a 42.2% fall in second-quarter profit, hurt by lower sales and margins. However, quarterly earnings per share topped market projections, while top line missed Street view. Further, the Eden Prairie, Minnesota-based company revised its fiscal 2010 earnings forecast, and trimmed sales view, citing the economic outlook in the second half of the year. The company also announced a cut in quarterly dividend.
Second-quarter net income was $74 million or $0.35 per share, lower than prior year's net income of $128 million or $0.60 per share, which included one-time acquisition related costs of $2 million or $0.01 per share.
On average, 15 analysts polled by Thomson Reuters expected the company to report earnings of $0.33 per share for the quarter. Analysts' estimates typically exclude special items.
Net sales decreased to $9.46 billion from $10.23 billion a year ago, and missed Wall Street analysts' consensus revenue estimate of $9.65 billion for the quarter.
Commenting on the results, Craig Herkert, Supervalu's chief executive officer and president, said, "Consumer purchasing behavior, deflationary pressures, as well as our decision to make meaningful investments in price and promotions significantly impacted our second quarter sales and margins. As a result, earnings were lower than the prior year, generally in line with our expectations, and slightly better than analysts' consensus of $0.33 per share as reported by First Call. Even as we have made these investments which resulted in pressure on our margins, I'm pleased that our total debt has been reduced $340 million since year end."
In the quarter, retail food net sales fell 6.9% year-over-year to $7.41 billion, primarily reflecting the impact of identical store sales of negative 4.8% and previously announced store closures. Second-quarter supply chain services net sales declined 9.5% to $2.05 billion, mainly reflecting the on-going transition of Target Corp. (TGT) volume to self-distribution.
Retail food net sales in the second quarter represented 78.3% of total net sales, compared to 77.9% last year, and supply chain services net sales represented 21.7% of net sales, compared to 22.1% a year ago.
According to the company, the identical store sales performance "primarily results from a challenging economic environment, heightened competitive activity, deflationary pressures and investments in price and promotions."
Gross profit margin in the second quarter declined to $2.1 billion, or 22.1% of net sales, from $2.3 billion or 22.4% last year, primarily reflecting the impact of a higher promotional sales mix and increased investments in price, partially offset by lower LIFO expense. Operating earnings for the second quarter were $245 million, or 2.6% of net sales, compared to $342 million, or 3.3% of net sales a year ago.
In the preceding first quarter, Supervalu reported a sharp decline in net earnings to $113 million or $0.53 per share from last year's net earnings of $162 million or $0.76 per share, negatively impacted by lower sales amid the ongoing difficult economic environment. Adjusted earnings per share were $0.55, down from $0.79 in the previous year, and net sales fell 4.7% to $12.72 billion.
Among peers, Pleasanton, California-based food and drug retailer Safeway Inc. (SWY) on October 15 posted lower profit for the third quarter, as sales slid from last year, reflecting lower fuel sales and a decline in identical-store sales as well as Canadian exchange rate. Third-quarter net income totaled $128.8 million or $0.31 per share, compared to a profit of $199.7 million or $0.46 per share in the year-ago quarter. Quarterly sales and other revenue dropped 7% year-over-year to $9.46 billion.
Supermarket chain Kroger Co. (KR) in mid September reported second-quarter net income attributable to Kroger of $254.4 million or $0.39 per share, lower than prior year's $276.5 million or $0.42 per share, amid increasing rate of out-of-work professionals and deteriorating economic conditions. Quarterly sales, including fuel, decreased to $17.7 billion from the previous year's $18.1 billion. Excluding fuel sales, total sales grew 3.5% over last year.
For the first six months of fiscal 2010, Supervalu's net earnings fell to $187 million or $0.88 per share from $290 million or $1.36 per share a year ago. First-half net sales declined to $22.18 billion from $23.57 billion a year ago.
Further, Supervalu revised its fiscal 2010 earnings forecast, by cutting the top end of previous range. The company now expects fiscal 2010 GAAP earnings per share to be in the range of $1.95 to $2.05, compared to previous guidance range of $1.95 to $2.15 per share. The company said the results would include approximately $20 million in pre-tax charges, or $0.06 per share related to previously announced store closure and cost mitigation activities.
On a non-GAAP basis, full-year earnings are currently projected to be in the range of $2.01 to $2.11 per share, compared to prior guidance range of $2.01 to $2.21 per share.
Commenting on guidance, Herkert stated, "We are taking ten cents off the top of our previous fiscal 2010 earnings guidance range as the economic outlook in the back half of the year and its impact on consumers has become clearer. As we move into the last half of the year, we will place intense focus on in-store execution and merchandising programs. I am confident that our strategy to provide shoppers with enhanced value and other changes we are now making, will allow us to compete more effectively."
Net sales for the 52-week fiscal year are estimated to be approximately $41 billion, lower than previous forecast of approximately $42 billion. Wall Street analysts estimate earnings of $1.89 per share for the year, with estimates ranging between $1.70 and $2.11 per share, on sales of $41.88 billion.
The company expects identical store sales, excluding fuel, to be approximately negative 4% for the year compared to previous guidance of negative 3%. Sales in the traditional food distribution business are expected to decline about 8%, mainly reflecting the final transition of the Target volume to self distribution.
The company also said it expects capital spending to be approximately $700 million, which will include 65 to 70 major store remodels, 25 to 30 minor remodels, 3 new traditional supermarkets and 45 to 55 new hard discount stores, including 20 to 25 licensed stores.
Further, Supervalu said its board of directors voted Monday to revise the company's dividend policy, with the expectation of reducing the regular quarterly dividend to $0.0875 per share from $0.175 per share, effective for the dividend payment to stockholders of record on March 1, 2010.
According to the company, the cut in dividend will provide annual cash of about $75 million that the company expects to utilize to accelerate the growth of its Save-A-Lot banner, as well as support other general corporate purposes.
SVU is currently trading at $17.08, up $0.15 or 0.95%, on a volume of 4.6 million shares. In the past 52 weeks, shares have been trading in a wide range of $8.59 to $20.38.
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