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Supervalu Q1 Profit Falls 30%; Trims FY10 EPS View; To Sell Majority Of Albertsons Stores In Utah - Update

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Tuesday, grocery stores operator Supervalu Inc. (SVU) reported a sharp decline in first-quarter profit, negatively impacted by lower sales amid the ongoing difficult economic environment. Adjusted earnings per share also fell from last year, yet topped the market projections, while net sales with a 4.7% decline missed Wall Street view. Further, the company trimmed its fiscal 2010 earnings forecast. Separately, Eden Prairie, Minnesota-based Supervalu said it would sell majority of Albertsons stores in Utah to Associated Food Stores, resulting in net proceeds of about $150 million.

Net earnings for the first quarter fell to $113 million or $0.53 per share from last year's net earnings of $162 million or $0.76 per share. The latest quarter results included costs related to store closures of $3 million or $0.02 per share, while prior year's results included one-time acquisition related costs of $6 million or $0.03 per share.

Excluding one-time costs, adjusted earnings per share for the quarter were $0.55, down from $0.79 in the previous year. On average, 12 analysts polled by Thomson Reuters expected the company to report earnings of $0.53 per share for the quarter. Analysts' estimates typically exclude special items.

In late June, Supervalu had stated that it anticipates first-quarter earnings to be "substantially" below the then consensus of Wall Street analysts, as a tougher-than-expected business environment, investments in price and higher levels of promotional spending battered same-store sales and net earnings in the quarter. Analysts' then projection for quarterly earnings was $0.65 per share.

Net sales for the first quarter fell to $12.72 billion from $13.35 billion in the year ago quarter, and missed nine analysts' consensus revenue estimate of $12.82 billion.

Commenting on the results, Craig Herkert, Supervalu's chief executive officer, said, "As we noted in our press release of June 24th, our first quarter results reflected the continuing difficult economic environment as well as investments we are making in price and higher levels of promotional spending. As a result, sales and margins in the first quarter were weaker than originally expected. We anticipate no near-term change in consumer spending patterns and we will operate our business accordingly."

In the first quarter, retail food net sales dropped 4.3% to $9.90 billion from $10.35 billion last year, primarily reflecting the impact of identical store sales of negative 3.2% on challenging economic environment, heightened competitive activity and additional investments in price and promotions, together with previously announced store closures.

Net sales from supply chain services were $2.82 billion, down 6.2% from prior year's $3 billion, primarily reflecting the on-going transition of Target Corp. (TGT) volume to self-distribution. In the quarter, Retail net sales accounted for 77.9% of total sales compared to 77.5%, while supply chain services accounted for the remaining 22.1% of total sales compared to 22.5% a year ago.

Gross profit was $2.85 billion or 22.4% of net sales, down from $3.07 billion or 23% of net sales in the previous year, mainly due to increased investments in price and promotional spending. Operating earnings for the first quarter were $362 million or 2.8% of net sales, compared to $456 million or 3.4% last year.

In the preceding fourth quarter, Supervalu's net loss was $201 million or $0.95 per share, as a result of higher operating costs and a goodwill impairment charge of $274 million. Non-GAAP earnings were $0.87 per share, with net sales of $10.82 billion. Identical store sales decreased 2% year-over-year.

Among peers, Kroger Co. (KR) last month posted a 12.6% growth in first-quarter net income of $435.1 million or $0.66 per share, helped by strong cost controls, despite a 1.5% decline in quarterly sales to $22.80 billion. However, excluding fuel sales, the Cincinnati, Ohio-based grocery chain operator's sales rose 3.9% from last year.

Last week, Pleasanton, California-based food and drug retailer Safeway Inc. (SWY) reported a slight growth in second-quarter profit to $238.6 million or $0.57 per share from last year's $234.3 million or $0.53 per share aided by a tax benefit, despite a 6.5% decline in revenue to $9.46 billion.

Further, Supervalu lowered its fiscal 2010 GAAP earnings outlook to a range of $1.95 to $2.15 per share from the prior outlook of $2.44 to $2.59 per share. The fiscal 2010 earnings are projected to include approximately $20 million in pre-tax charges, or $0.06 per share related to previously announced store closure and cost mitigation activities.

Excluding costs related to store closures, non-GAAP earnings for the year are currently projected to be in a range of $2.01 to $2.21 per share, lower than the prior outlook of $2.50 to $2.65 per share. Analysts expect the company to report earnings of $2.15 per share for fiscal 2010, with estimates ranging between $1.90 and $2.35 per share.

Net sales for the 52-week fiscal year are estimated to be approximately $42 billion, while Wall Street analysts estimate sales of $42.57 billion.

Identical store sales, excluding fuel, are now projected to be approximately negative 3% for the year compared to previous guidance of negative 1% to plus 1%. Sales in the traditional food distribution business are expected to decline about 5%, primarily reflecting the final transition of the Target volume to self distribution.

Commenting on updated guidance, Herkert stated, "We anticipate recent trends and the pressures the consumer is facing will continue in the near term. This is reflected in our outlook for the balance of the year."

For the year, capital spending is projected 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 limited assortment stores, including 30 licensed stores.

In a separate statement, Supervalu said it reached an agreement to sell 36 Albertsons stores in Utah and their respective pharmacies and fuel centers to Associated Food Stores, with the exception of three St. George-area stores which will remain Albertsons and continue to be operated by Supervalu. The deal, which is subject to regulatory approval, is expected to close this fall, and the company will realize approximately $150 million in after-tax net proceeds from the sale.

The company noted that Associated Food Stores intends to rename the 36 purchased stores, and expects to interview and offer employment to most Albertsons associates. Founded in 1939, Albertsons, which employs more than 3,000 associates throughout the state of Utah, was acquired by Supervalu in 2006.

In connection with the deal, Supervalu said it is also seeking a buyer for its two Albertsons stores in Orem, Utah and two Albertsons stores in West Jordan, Utah, and will continue to operate those stores while a buyer is identified.

Herkert noted, "While this was a difficult decision due to the impact on our associates and the Utah community, the sale of these stores will allow the company to focus on our greatest growth opportunities while at the same time monetize non-strategic assets for debt paydown."

SVU is currently trading at $15.07, up $1.10 or 7.79% on a volume of 733K shares. In the past 52 weeks, shares have been trading in a broad range of $8.59 - $28.66.

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