Q1 2012 Earnings Call

July 26, 2011 10:00 am ET


Kenneth Levy - Vice President of Investor Relations

Craig Herkert - Chief Executive Officer, President and Director

Sherry Smith - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


Edward Kelly - Crédit Suisse AG

John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Scott Mushkin - Jefferies & Company, Inc.

Karen Short - BMO Capital Markets U.S.

Mark Wiltamuth - Morgan Stanley

Deborah Weinswig - Citigroup Inc



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Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2012 first quarter conference call. [Operator Instructions] I would now like to turn today's conference over to Ken Levy, Vice President, Investor Relations. Mr. Levy, you may begin your conference.

Kenneth Levy

Thank you, Ashley. I want to welcome everyone to SUPERVALU's First Quarter 2012 Earnings Conference Call. Joining me on today's call are Craig Herkert, Chief Executive Officer and President; and Sherry Smith, EVP and Chief Financial Officer.

This quarter, we have prepared some supplemental information to accompany prepared remarks, which is available on SUPERVALU's investor relations website under the Presentations and Webcast section. Following prepared remarks, we will open up the call for your questions. So that we can accommodate as many people as possible, I would ask that you limit yourself to one question and one follow-up.

The information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our most recent 10-K filing. A replay of today's call as well as the supplemental information will be available on our corporate website. With that, I will now turn the call over to Craig Herkert.

Craig Herkert

Thank you, Ken, and good morning, everyone. This morning, SUPERVALU reported first quarter fiscal 2012 earnings per share of $0.35 on identical store sales of negative 3.9%. We are making good strides on our 8 Plays to Win strategy and most importantly, remain on plan to deliver our full year guidance.

Today, I'd like to share with you observations about the consumer, provide some highlights from the quarter and give you an update on our business transformation activities around hyperlocal merchandising, private brands, in stock and shrink reduction. As you recall, our 8 Plays to Win strategy is not a one-quarter plan, it is a winning strategy to reposition our business for growth and long-term relevance.

In Q4, we began rolling out new tools to manage promotions in markdowns more effectively and have added these into the first quarter, along with additional reductions to SG&A. With each new initiative, we are seeing tangible progress, which helps us fund meaningful price investments in select items, categories in certain markets. In general, I am pleased with the progress we are making to generate funding in advance of price investments and deliberately balance today's consumer need with our internal financial objectives.

In the first quarter, we saw inflation in many categories, produce cost peaked early in the quarter and have moderated, while dairy and meat prices remain elevated. In all but a few highly sensitive categories, we did pass along these increases to retail. In certain fresh categories such as meat and dairy, we focused on being right priced in our markets to be sensitive to consumer needs and maintain our relevance. We protected penny profit versus margin on some items and looked at ways to better mix up the category as a whole to manage our margin.

For example, as beef prices rose this quarter, there were certain retail price points that we held while we promoted fresh chicken with more frequency, which delivered a lift to both sales and gross margin.

The pace of recent inflation and price increases posed a practical challenge for most financially fragile customers. To help these shoppers stretch their food dollars, we are executing our fair price plus promotion, enhancing our product selection to provide greater everyday value and offering affordable meal solutions.

Today, we are leveraging new analytical tools and more timely information to balance our offerings at a more appropriate spend level, to deliver our gross margin while also addressing consumer needs. And I can tell you that our shoppers are responding to the value-oriented programs and new dollar price points that we have implemented.

SUPERVALU remains committed to delivering fair pricing that meets consumer's everyday expectations. In the first quarter, the number of items sold on promotion decreased as we managed our promotional spend more effectively. We expect to see this trend continue as we invest in everyday shelf price and promote in ways that are meaningful to our consumers and steadily build loyalty and basket size.

ID sales this quarter were down 3.9%. While still negative, IDs are improving according to plan, and all markets other than Chicago showed sequential improvement over Q4. In Chicago, there's been a steady inflow of new competition from gourmet operators to discounters. Over the past 24 months, retail square footage has increased by 4.5% or over 2 million square feet while our footprint has remained largely unchanged. We are responding to these changing market dynamics by taking more aggressive actions, including expanding Save-A-Lot and adding to our independent retail relationships and completely revamping our competitive response to new entrants.

In recent months, our promotional strategy has been revised to present a better customer proposition inside our stores as we have stepped up investment in our facilities. Our store directors at Jewel-Osco have also embraced hyperlocal retailing and are focused on meeting the needs of the broad range of rich ethnicities for which Chicago is known. With the progress we are making, we fully expect our performance to rebound, and I am encouraged by the steady improvements that have taken place in each of the months as we have moved to the first quarter and into Q2.

At our hard discount format, Save-A-Lot, network IDs were positive 3% and benefited from new marketing and merchandising programs designed to bring even greater value to customers. 5 weeks into the second quarter, we are continuing to see sequential improvement in IDs at Save-A-Lot and across all of our markets.

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