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Supervalu experiences rough start to fiscal '10.

MINNEAPOLIS -- As management had warned, both sales and profits for the first quarter of fiscal 2010 declined at Supervalu Inc., but adjusted results exceeded Wall Street's expectations. However, management reduced its full-year earnings guidance (see accompanying story), and the company's share price slipped 1% on the day the results were issued.

Net earnings for the grocery wholesaler and operator of supermarkets, food/drug combination stores and limited-assortment grocery stores tumbled 30.2% to $113 million, or 53 cents per diluted share, for the quarter ended June 20. Results for the most recent period include after-tax costs related to store closures totaling $3 million, or 2 cents per share, while the fiscal 2009 quarter reflected onetime acquisition costs of $6 million, or 3 cents per share.

Backing out onetime items, adjusted net income fell 31% to $116 million, or 55 cents per diluted share, exceeding the consensus estimate of 53 cents per share from analysts polled by Thomson Reuters, which typically excludes special items.

Total net sales slid 4.7% to $12.72 billion. Consolidated gross margin shrank 57 basis points to 22.39%, while selling, general and administrative expenses were essentially flat at 19.54% of sales. With that, operating earnings dove 20.6% to $362 million. The company's operating margin contracted by 57 basis points to 2.85% of sales.

Lower borrowing levels and interest rates enabled Supervalu to trim 6.8% from net interest expense to $190 million, but pretax earnings still plunged 30.5% to $185 million.

"As we noted in our press release of June 24, 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," said president and chief executive officer Craig Herkert in a statement. "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."

During a conference call with analysts Herkert was blunter in his assessment. "These numbers are clearly not acceptable, and it is our responsibility to make them better," he said.

In Supervalu's retail food division, sales dipped 4.3% to $9.90 billion. The results reflect the impact of past store closures that reduced retail square footage by 3.2%, as well as same-store sales that declined by 3.2%. Retail sales made up 77.9% of consolidated revenues, up from 77.5% a year ago.

Management blamed the continued deterioration of identical-store sales on the macroeconomic environment, intensified competitive activity, and additional investments in pricing and promotions.

According to Herkert, the average number of items per basket was down about one-half item from the fourth quarter of 2009 while trading down is changing the mix of the items that remain in the basket. "For many, what was an essential just a few quarters ago is now more likely a discretionary purchase, and trade-down continues at a higher year-over-year rate than originally expected," he said. "If the item is not on sale in our stores, it's far more likely to remain on the shelf."

Operating income for the retail food unit plummeted 22.1% to $311 million. Management blamed the decline in operating profit on the issues impacting the top line, namely, economic factors, competitive pressure and intensified promotional activity.

As of June 20 Supervalu fielded about 2,500 owned and licensed stores, including 900 in-store pharmacies.
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Title Annotation:MONEY
Date:Aug 24, 2009
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