SUPERVALU (SVU)

Q2 2012 Earnings Call

October 19, 2011 10:00 am ET

Executives

Craig R. Herkert - Chief Executive Officer, President and Director

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

Kenneth B. Levy - Vice President of Investor Relations

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles Edward Cerankosky - Northcoast Research

Charles X. Grom - Deutsche Bank AG, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Karen F. Short - BMO Capital Markets U.S.

Deborah L. Weinswig - Citigroup Inc, Research Division

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Meredith Adler - Barclays Capital, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Presentation

Operator

Good morning, and welcome to the SUPERVALU Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Ken Levy, Vice President of Investor Relations.

Kenneth B. Levy

Thank you, operator. I want to welcome everyone to SUPERVALU's Second 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 our prepared remarks, which is available on SUPERVALU's Investor Relations website under the Presentations and Webcasts section. Following prepared remarks, we will open up the call for your questions. So that we accommodate as many people as possible, I would ask that you limit yourself to one question with 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 at www.supervalu.com. With that, I will now turn the call over to Craig Herkert.

Craig R. Herkert

Thank you, Ken, and good morning, everyone. As you saw this morning in our press release, SUPERVALU announced earnings of $0.20 per share on identical store sales of negative 1.8%. These results are in line with our plan and indicative of the traction we are gaining with our 8 Plays to Win.

The sequential improvement to our IDs was aided by inflation but also reflected operational changes that led to improved traffic trends. With 2 consecutive quarters of improved sales, we are starting to see the impact of a methodical application of our 8 Plays strategy. I am pleased with the progress we are making. We are transforming our retail operations through hyperlocal retailing, rolling out new, engaging marketing programs and delivering on key initiatives such as lowering shrink and running more effective promotions.

With recent headlines about the ongoing challenges facing today's consumer, it comes as no surprise that shoppers continue to show signs of thrift. Consumer confidence remains low and unemployment remains high. As long as Americans continue to express broad financial concerns, personal spending will be constrained. We cannot change this macro trend, but we can and will position our business to respond.

SUPERVALU continues to expand its selection of value-oriented products. Into the second quarter, we have devoted more displays and shelf space to these items, including 10-for-$10 merchandise and entry-priced private label brand offerings like $1 pizzas. By the end of the fiscal year, we will have added 80 new items under our Shopper's Value label. As I have said before, SUPERVALU is moving to offer fair price plus promotions. We will remain a promotional retailer and continue to provide customers with a wide assortment of products and kind of strong service that had been the hallmark of our business.

Understanding the importance of price and value in today's environment, we are committed to narrowing the relative price gap that has evolved in some of the markets where we compete. Accordingly, we continue to invest in price on select items, categories and across specific markets, such as our new produce initiative in the Chicago market. Consistent with our strategy, these investments are all prefunded and are helping us move closer to our goal of fair price plus promotion.

As we continue towards becoming America's Neighborhood Grocer, we are changing the way we do business every day to better meet the needs of the customers we serve. I will provide more detail on our transformational activities and hyperlocal strategy shortly. But first, Sherry will comment on our second quarter financial performance, our financial position and SUPERVALU's outlook for the balance of the year.

Sherry M. Smith

Thank you, Craig, and good morning. Our second quarter sales were $8.4 billion, and earnings per diluted share were $0.28. These results were consistent with our internal plan, and we remain on track with our business transformation strategy. Our identical store sales were negative 1.8% this quarter, an improvement of 200 basis points from quarter 1, with sequential improvement coming in both traffic and basket size.

Customer counts improved to negative 3.8%, though the challenging economic environment continues. The sequential improvement in traffic levels was driven by gains in several major markets, as well as the initial rollout of customer-centric marketing initiatives like Sizzlin' Summer Giveaway, which ran in 2 banners this summer. The impact of these new marketing programs was partially offset by a reduction in our promotional sales. As we noted last quarter, our new planning tools help us optimize our promotions, balancing both sales and margin. In all, the price investments we have been making, coupled with a more disciplined approach to managing promotions, led to a decline in the percent of items sold on promotion.

Basket size increased 200 basis points on a year-over-year basis, driven by product cost inflation of 4.5%, which was partially offset by a 2.5% decrease in the average number of items per transaction. On a sequential basis, basket size increased 150 basis points over the first quarter, with higher inflation contributing 100 basis points and improvement in items per basket accounting for the other 50 bps. Although units were down, they were flat with the first quarter.

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