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Supervalu on track.


MINNEAPOLIS -- Reported net income for the second quarter and first half of fiscal 2008 grew by double digits at Supervalu Inc. despite comparisons against a prior-year quarter that included an additional week's contribution from the stores acquired from Albertsons Inc. Results edged past analysts' consensus forecast, and management reconfirmed its full-year earnings forecast despite mediocre same-store sales growth.

The bottom line for the 12 weeks ended September 8 escalated 12.1% to a record $148 million, or 69 cents per diluted share, just beating the average forecast of 68 cents per share from analysts polled by Thomson Financial. Total sales, though, dipped 4.8% to $10.16 billion, reflecting the 13 weeks of operations in the prior-year period from some 1,100 supermarkets and combination stores purchased in June of 2006.

Net results for both the fiscal 2008 and 2007 quarters were shaped by special items, including onetime acquisition-related costs of $19 million, or 5 cents per share, in the most recent period and $16 million, or 4 cents per share, in the prior-year quarter. The most recent onetime items include Eastern-region supply chain consolidation costs, retention expenses and consultant fees. In addition, the sales impact of one less week of acquired operations in the fiscal 2008 quarter is estimated at $450 million, or 3 cents per share.

Adjusting for the extra week in the year-earlier period and the acquisition-related charges in both years, diluted earnings per share rose 18.5% to 77 cents from 66 cents, well ahead of the 13.2% increase in reported earnings per share.

On the operating line consolidated profit for the second quarter gained 3.8% to $406 million, or 4% of revenues, marking a 33-basis-point improvement in operating margin. Consolidated gross margin contracted 11 basis points to 22.96%. However, during a conference call with analysts, chief financial officer Pam Knous pointed out that the decline mainly reflects the decrease in net sales for the retail food segment resulting from one week less of acquired operations in the quarter than in fiscal 2007.

"When adjusted for one less week of acquired operations in the quarter, our gross margin was up approximately 20 basis points, primarily reflecting the benefits of merchandising programs, including certain cost-of-goods synergies," she said.

Supervalu managed to cut selling, general and administrative expense by 44 basis points to 18.97% of sales, largely due to lower employee-related expenses (including health and welfare, workers' compensation and pension costs) and lower depreciation expense--all of which more than offset store-closure expenses. Net interest expense, furthermore, dipped 7.4% to $163 million as a result of lower debt levels, lower borrowing rates and one less week of the acquired operations, propelling a 13% jump in pretax income to $243 million.

Net income for the first half soared 35.2% to $296 million, or $1.37 per diluted share, bolstered by a full 28 weeks of combined operations compared with just 13 weeks in the fiscal 2007 half. Total sales similarly vaulted 42.6% to $23.45 billion. Onetime acquisition costs pared 13 cents from earnings in the most recent span and 10 cents in the prior-year half.

Consolidated operating income for the 28 weeks escalated 56% to $872 million, or 3.72% of total sales, up from an operating ratio of 3.4% in fiscal 2007. Net interest expense, however, ballooned 91.1% to $386 million, cutting into pretax income, which consequently grew at a slower pace than sales, rising 36.1% to $486 million.

"Through the first half of fiscal 2008 we are on track, delivering the fifth consecutive quarter of double-digit earnings-per-share growth, on the heels of our record-setting results during fiscal 2007," noted chairman and chief executive officer Jeff Noddle in a statement. "In year two of our three-year journey, we are implementing programs to improve our long-term sales performance and deliver our synergies while operating our business from day to day."

Turning to Supervalu's two major business segments, retail food turned in a 6.6% increase in operating income even though sales slid 6.4% to $7.98 billion--again, a result of the extra week of operations at the acquired Albertsons properties in the prior-year period. The retail unit contributed 79% of total sales for the quarter, and operating margin expanded 59 basis points to 4.83% of sales.

Management attributed the improvement to the lower employee-related costs described above, lower depreciation expense from recently completed purchase accounting valuations and the benefits of merchandising programs, offset by store closures.

Of greater concern was a tepid 0.5% uptick in identical-store sales, particularly when Noddle indicated during the conference call that identical-store sales growth for the year would be at the low end of the 1%-to-2% range but would have no impact on earnings growth.

"Sales softened as we finished our first quarter," he told analysts. "Deflationary pressures in our pharmacy business from increased sales of generics continued in the second quarter, causing a 30-basis-point decrease in identical-store sales year over year. In addition to competitive challenges in several markets, we did not adequately plan for and cycle prior-year promotional activities.

"However, identical-store sales improvement is one of our top priorities, and we're confident that as we continue to invest in remodels, implement our merchandising and marketing program, and execute at the store level our banners will be well positioned for success."

With only 13 weeks of combined operations reflected in the fiscal 2007 half, year-to-date operating income for the retail segment skyrocketed 70.6% to $834 million on a 60.7% leap in sales to $18.4 billion.

As of September 8 Supervalu fielded 2,463 stores, including about 877 food/drug combination stores, 403 food stores and 1,183 limited-assortment grocery stores (858 of which are licensed). During the first half the company opened one combo unit and closed nine food stores and seven limited-assortment outlets.

Supervalu's wholesale operations, now dubbed supply chain services, posted a 12.5% boost in second quarter operating profit to $63 million, far outpacing a 1.8% gain in sales to $2.18 billion, or 21% of the consolidated top line. Operating income benefited from lower employee-related costs and greater operational efficiencies. Year-to-date operating profit, though, slipped 1.5% to $130 million, despite a 1.1% lift in sales to $5.05 billion.
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Title Annotation:SPOTLIGHT
Date:Nov 12, 2007
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