SUPERVALU, Inc. F4Q09 (Qtr End 02/28/09) Earnings Call Transcript

Apr.23.09 | About: SUPERVALU Inc. (SVU)


F4Q09 (Qtr End 02/28/09) Earnings Call

April 23, 2009 3:00 pm ET


David Oliver - IR

Jeff Noddle - Chairman and CEO

Duncan Mac Naughton - EVP of Marketing and Merchandising

Pam Knous - EVP and CFO


John Heinbockel - Goldman Sachs

Deborah Weinswig - Citi

Meredith Adler - Barclays Capital

Ed Kelly - Credit Suisse

Scott Mushkin - Jefferies

Karen Short - FBR Capital

Mark Wiltamuth - Morgan Stanley

Jason Whitmer - Cleveland Research

Bob Summers - Pali Capital


At this time I would like to welcome everyone to the Quarter Four Fiscal 2009 Earnings Conference Call. (Operator Instructions).

Thank you. Mr. Oliver, you may begin your conference.

David Oliver

SUPERVALU 's call today is webcast and will be available for replay on our website. Today on the call are Jeff Noddle, SUPERVALU 's Chairman and CEO; Duncan Mac Naughton, Executive Vice President, Merchandising and Marketing; and Pam Knous, Executive Vice President and Chief Financial Officer.

This morning I regret to inform you Bob Johnson, our Vice President of Investor Relations, is leaving the company for personal reasons that will preclude him from continuing the IR role at SUPERVALU. We appreciate Bob's contribution while he was here and wish him all the best on an interim basis. I will resume my prior role as Vice President of Investor Relations.

As you know, the information present 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 risk and uncertainties related to such statements are detailed in our fiscal 2009 10-K.

After today's prepared remarks, we have a question-and-answer session. As in prior quarters, I will be available after the call for additional questions.

Here is Jeff.

Jeff Noddle

It's certainly no secret to anybody on the call that we're operating in a challenging economic environment, which is impacting consumer purchasing behavior for the last several quarters. If anything, there has been some weakening in the economy since our last call in early January.

We note that unemployment is at 8.5% and could well exceed 10% at its peak. The March consumer confidence index remain relatively unchanged from February, but was at an all-time low.

Consumer spending has been reduced significantly in response to the many headwinds consumers face, and food inflation, currently around 4%, while high by historical levels, is expected to moderate across our fiscal 2010.

In our near term planning, we don't expect any significant improvements in these trends, although the new stimulus package and recent Fed actions to open the credit market may begin to provide some relief. So it is evident that consumers are under a lot of pressure.

Despite these deteriorating fundamentals, the run rate for our ID sales have been consistent in the past three quarters adjusting for the calendar shift involving the week after Thanksgiving that benefited the third quarter and negatively impacted the fourth quarter.

However, we recognize that ID sales are not yet at acceptable levels and we are taking actions to reengage our customers. We are doing it in a number of ways that Duncan and I will share with you in a few moments.

With that as a backdrop, this morning we reported adjusted earnings of $0.87 per diluted share for the fourth quarter and $2.89 per share for the full year. This compares to adjusted earnings from last year of $0.77 per share in the fourth quarter and $2.97 for the full year.

Pam will be providing details on the quarter, but I am pleased to report that fourth quarter adjusted earnings per share on a comparable basis exceeded last year by 5% in what was arguably a tougher economic environment.

I am also pleased to acknowledge that the completion of fiscal 2009 represents an especially important juncture in our transformation to a different retail business model, one that is predominantly center-led with the achievement of these significant milestones; building a center-led marketing organization with competencies in customer research and analysis and the initial utilization of advanced analytical tools; developing the framework and initiating the transition to a center-led merchandising model, Acme in Philadelphia was the pilot banner and completed the transition at the end of fiscal 2009; Delivering the first phase of our new merchandise IT platform that provides our merchants with state-of-the-art capabilities for category planning and forecasting; and restructuring our own brand offerings with the introduction of mega brands, such as the highly successful wild harvest and Culinary Circle, as well as the consolidation and rationalization of our portfolio of labels.

We also completed the installation of T-squared technology at our Lancaster, Pennsylvania distribution center, creating a fully automated world class distribution facility that will serve our needs well into the future. This facility will be fully operational by the end of fiscal 2010 and is the second of our DC to have this technology.

Converting three additional acquired warehouse facilities to our standardized supply chain system. Half of the acquired facilities have now been converted, which means about 80% of the entire network now is standardized.

We've invested $1.2 billion in the business on top of the additional $2 billion in fiscal '07 and fiscal '08, reflecting our absolute commitment to creating a differentiated shopping experience on our journey to becoming the best place to shop. Last, but not least, we continue to exercise good financial discipline by reducing debt by an additional $350 million or a cumulative decrease in debt of $1 billion, since we completed the acquisition of Albertsons.

The attainment of these milestones reflects our relentless focus on the long-term needs of the business despite the most difficult macroeconomic environment since the '30s. These accomplishments are critical components of paving the way to long-term sustainable sales and earnings growth.

Now, as we begin fiscal 2010, the final year in the transformation of SUPERVALU, our focus has not changed. However, as fiscal 2010 unfolds and reacting to the current environment, you will see some significant changes, changes in how we run our business and implement this new retail business model, how we attract and engage our customers and how the company is positioned to deliver long-term value to our shareholders.

Let me now concentrate on four areas of operational focus that will shape our company's future. First, this will be the year in which we complete our center-led merchandising model and begin to realize the benefits of collaboration between our corporate merchants and those positioned locally in our banners. In this model, we fully leverage our national scale while maintaining local relevance.

Second, we will expand the use of marketing research and analytics to more effectively go to market with the best possible combination of product, price and service based on what our customers want. We're clearly tailoring our marketing programs in a strategic and systematic manner to maximize their impact in each marketplace.

Third will be the continued improvement of the in-store experience that we deliver to our customers. We know that consumers are aware of many factors as they shop such as store cleanliness, courtesy and attentiveness of associates, the variety in selection in our produce department, the ease in which they can find products they are looking for, and the amount of time it takes to check out.

We track these and other metrics in customer satisfaction surveys. We have seen steady progress in the last two years with a 400 basis point improvement over that timeframe. We believe these improved satisfaction scores are clear indicators that we are making steady progress in improving the overall shopping experience.

The fourth area of focus will be all of the aspects surrounding pricing. Although price is just one of the many levers we use to go to market, we know that consumers are giving it greater and greater emphasis. We have a number of programs that are unfolding across the enterprise to provide customers with greater value, as we migrate to this new business model.

As an example today, today our center-led marketing and merchandising team is coordinating a new pricing program in Chicago designed to sharpen our price position in one of our largest markets. We chose Chicago because it is a top tier market for us; our store fleet has seen significant capital investment over these last several years and is in very good shape.

The competitive landscape shifted in the past several years as both Wal-Mart and Meijer have expanded in the market. Likewise, we have chosen this timing as we now believe we have enough elements of our new business model in place to implement a comprehensive set of actions that will strengthen our competitive offering and build market share.

Without sharing all the details, this program will deliver noticeable changes on everyday pricing on high velocity known value items where price is top of mind with customers. These known value items play a large part in influencing customer perceptions of our pricing and our overall value equation.

We are supporting the rollout of the Chicago initiative with a very impactful marketing campaign to make sure consumers across the entire market are aware of these actions. We are excited about this effort and believe it is a major step forward in being able to more effectively and strategically address pricing and capture a larger share of the consumer's grocery spend.

As we look to the future, our pricing programs will fully utilize our data mining efforts to deliver value that is the most relevant to our customers. This data gives us a much stronger understanding of how an item's movement will respond to changes in price, thus allowing us to very methodically position prices across the store while strengthening that overall price perception.

This lets us target our spending towards those item that matter most to our customers and making our price investments work harder for our customers and our business. Again, our programs going forward will be coordinated by our center-led teams and will utilize all of our available resources. Enhanced pricing programs are just one example of what our center-led teams will be utilizing in the future in how data will be at the heart of our marketing and merchandising decisions.

I will now turn the call over to Duncan to discuss some of the new merchandising and marketing initiatives in greater detail.

Duncan Mac Naughton

We've have previously talked about assembling world class teams of merchandising and marketing professionals. These teams are now complete, and this morning I want to update you on some of the key programs and initiatives that we have underway.

Let me start with an update on the rollout of our center-led merchandising model. As we have discussed previously, under this model we'll have a collaborative approach that will allow to us leverage the national scale of our organization, while maintaining local relevance.

When complete, the lion's share of product will be coordinated and merchandised out of our Minneapolis office. The remainder will represent products that are managed and merchandised locally by the banners that address regional taste and brand preferences.

We completed the transition of the Acme banner to center-led merchandising and marketing at the end of February, and we are pleased with the initial results that we have seen. We are now in the process of converting our Cub, Jewel, Farm Fresh and Intermountain West Albertsons banners with Southern California and Shaw's scheduled to begin within the next few months. All banners will be converted by the end of fiscal 2010.

While we know that there will undoubtedly be some bumps along the way, we are proceeding at a measured pace that allows us to read and react, which mitigates the risk. As Jeff discussed, we know that price is a key component in a value equation and where consumers choose to shop. Today more than ever, competitive pricing is a must have.

As a retailer, we pay close attention to pricing versus our competition every day in every market. We recognize that in certain markets and against certain competitors, we need to strike a more competitive balance, including the proper balance between shelf and promotion, which is tailored by each market.

I am pleased to tell you that today SUPERVALU has the tools in place to make more strategic and impactful pricing investments to connect with consumers, things we have not had in the past. These resources coordinated by the center-led organizations are the cornerstone of changes to our merchandising and marketing initiatives.

Armed with specific data around individual shopping trips, we can now tailor specific promotions for our best customers and offer enhanced overall value throughout our stores. We can also look at the importance of key product categories or items by store or market to determine assortment and placement as well as price elasticity. This is a major advance for us and we believe it will significantly increase the effectiveness of our merchandising and marketing programs.

As a point of reference I would like to summarize our three goals and objectives related to pricing and promotions. We have developed specific metrics around these, which we are using to measure our performance and the effectiveness of our efforts.

First, we need to improve promotional efficiency, reinvesting the inefficient spend back into pricing to ensure all customers, particularly those that are price sensitive, consistently receive good value.

Second, we must ensure our ads work effectively to attract customers into the store. We do this by defining the target customer, allocating the right balance of space to each product category and providing the right products at the right price to impact those target customers.

Third, we must use display space as a key lever to move customers to categories they do not normally shop, expanding their shopping trip across the entire store.

Pricing is one way we create value for our customers. A second example of creating value is our Fuel Rewards program. With expanded strategic alliances, we can now drive cross promotions across a much broader store base. The discounts that customers earn inside the store can significantly lower their fuel costs, while also building greater loyalty. We look at this as a great opportunity to provide value and a clear win-win situation and have seen gallon increases across our programs, which is counter to the national trends.

Another value program we just launched is Simply Good Meals. Simply Good Meals creates new, easy to recognize branded destinations within our stores, where consumers can go to find complete, easy to make meal solutions in one spot. It was launched earlier this month across all of our traditional grocery banners.

One component of this is called "4:15." The "4:15" provides complete meals for a family of four for under $15.00 and has been well received by our customers. It takes the guesswork out of deciding what's for dinner by providing everything mom needs to prepare a real meal she can be proud to serve. The "4:15" meal solutions change every other week, ensuring a variety of different menus for busy on-the-go families.

We've also previously talked about the center-led marketing team efforts related to a direct mail program, which again utilizes our new customer analytics capabilities. We continue to be pleased with customers' responses to this program. We have now completed four mailings to our best customers and banners that have loyalty programs, completing several thousand unique offers to-date.

As a reminder, these mailings provide different product offerings based on the individual customer's buying patterns and shopping history. The response rate to these direct mail offerings have all exceeded previous levels and the sales benefit achieved relative to cost is well above company average and previous non-analytic based efforts.

We are still in the very early stages of leveraging our research and analytics capabilities, and believe as we move forward, the benefits derived will allow us to significantly improve our ability to understand and tap into customer behaviors in a sophisticated and strategic manner.

Last, but not least, our own brands continue to outperform. In the fourth quarter, our private label sales penetration increased to nearly 18% from just 15% two years ago. Compared to the fourth quarter 2008, our sales penetration has increased approximately 150 basis points as a percentage of sales. We have significant opportunity to increase the sales penetration of our own brands and expect this part of the business to grow to around 19% in fiscal 2010 and into the 20% to 25% range over the next several years.

These are only a few of the initiatives that we're working on. All are focused on creating value for consumers through differentiated offerings and leveraging the talents and capabilities of our merchandising and marketing teams.

I will now turn the call over to Pam.

Pam Knous

Today, I will be covering fourth quarter operating performance, an update on our financial condition and earnings guidance for fiscal 2010. Before I do that, however, let me make a few comments about recent trends that are impacting our sales results.

In the fourth quarter, we saw overall food inflation decrease to 5% from 6% in the third quarter, driven primarily by deflation in certain categories, such as milk, eggs, and produce. Sales pressure from trading down continues as customers substitute less expensive in our private brands to maximize value in their grocery spend.

In the fourth quarter, the sales impact of trading down was approximately 100 basis points, which, as you may recall, is consistent with our run rate during this past year. However, important to note, in the fourth quarter we were cycling the prior year quarter in which we experienced approximately 100 basis points of trading down or 200 basis points on a two-year stack, reflecting the weaker economic environment.

Additionally, coupon usage and the level of promotional buying were at an all-time high, which are other indicators of consumer bias towards value.

Turning to a review of the quarter, starting with the income statement, total retail sales for the fourth quarter, excluding the extra week, were down approximately 2% from last year, primarily reflecting the impact of store closures and negative same-store sales. Same-store sales were negative 1.2% when adjusted for the unfavorable impact of the Thanksgiving calendar shift between the third and fourth quarters.

While our same-store sales and customer counts remain negative, they are basically similar to what we have experienced for most of fiscal 2009. The number of stores reporting ID sales of 2% or better also remains consistent with recent quarters. Many of these stores are offensive remodels that continue to deliver on average a 6% sales lift in the first year and now an additional 3% sales lift in the second year.

Retail food operating income excluding all impairment and one-time charges was 4.5% of sale to the quarter, down approximately 10 basis points from the prior year. This change primarily reflects an approximate 40 basis point decline in retail gross margin rate, partially offset by an approximate 30 basis points decrease in selling and administrative expenses, reflecting cost mitigation activities.

The 40 basis point decline in retail gross margin as a percent of sales primarily reflected higher levels of investment in price and promotional spending as well as higher LIFO expense. These investments in gross margin were partially offset by a higher penetration of owned brands and lower shrink. In each quarter of fiscal 2009 we experienced improved shrink performance over the prior year, with shrink being one of our key cost reduction initiatives.

Our supply chain services segment had another strong quarter reporting operating earnings of 3.3% of sales, which equaled last year's record fourth quarter performance. Supply chain results reflected the benefit of efficiency initiatives and the pass-through of food inflation offset by the impact of Target's transition to sales distribution this past year.

In the third quarter, as you recall, we disclosed that the fourth quarter would include the final true-up of non-cash charges related to goodwill and intangible impairment. The true-up recorded in the fourth quarter was $274 million pre-tax or $1.17 per share, bringing the full year charge to $15.71 per share.

We also disclosed an estimated range of $150 million to $200 million pre-tax, primarily for store closures and cost mitigation charges. Upon completing our analysis of non-strategic locations and cost mitigation activities, the final charge is now estimated at approximately $220 million of which $20 million or $0.06 per share will be incurred in fiscal 2010 due to timing. In total, 38 stores were closed in fiscal 2009, with 13 remaining for fiscal '10.

We also took actions to reduce approximately 500 administrative positions throughout the company. These actions positively impact operating earnings in fiscal 2010.

Excluding the impact of the impairment charges, the fourth quarter fiscal 2009 effective tax rate was 35.4%. This lower effective rate reflects a fourth quarter benefit of $0.02 per diluted share, attributable to a permanent reduction in the statutory rate and $0.04 per diluted share from favorable state tax filings. Our annual effective tax rate excluding the impact of impairment charges was 37.4% in fiscal 2009 compared to 39.2% in fiscal 2008.

Turning to our financial condition, the company's total debt at the end of fiscal 2009 was$ 8.5 billion, a reduction of approximately $350 million since fiscal 2008 and over $1 billion since the acquisition. We achieved our $400 million fiscal 2009 debt reduction target on March 5, one week after yearend. The company's debt to total capital ratio was 77%, a 600 basis point improvement since the acquisition when adjusting all periods for the impairment charges.

We are in full compliance with the metrics prescribed by our debt covenants, including the two financial covenants in our credit facility. None of these are impacted by the charges taken in the third and fourth quarters. As we have noted, our covenants currently require a leverage ratio of not more than 4 times and an interest coverage ratio of not less than 2.25 times.

During the trailing 12 months, we generated $1.6 billion of EBIT excluding $3.8 billion in impairment and other non-operating charges. For the year, depreciation and amortization was $1.1 billion and rent was $0.4 billion.

Turning now to our fiscal '10 guidance, we believe that the challenging economic conditions we have discussed today will continue to put spending pressure on consumers. As a result, our fiscal 2010 earnings per share guidance incorporates our assessment of the economic environment and its impact on consumers, the plans and activities Jeff and Duncan described to bring greater value to consumers by leveraging new marketing and merchandising competencies, a renewed focus on cost reduction and the final year of our acquisition-related initiative.

Now, I would like to provide some of the specifics on our adjusted earnings per share guidance of $2.50 to $2.65 per diluted share for fiscal '10, which is below the preliminary view provided on our third quarter call. This earnings guidance now reflects the added insight into recent trends as well as further weakening of the economy since early January.

The consumer environment is soft, and as a result, we expect fiscal 2010 net sales of approximately $43 billion, which reflects the impact of our recently announced store closures, ID sales assumptions of negative 1% to plus 1%, as well as an estimated 5% decline in supply chain services sales, primarily reflecting the final transition of the Target business to sales distribution.

As we start fiscal 2010, we see ongoing evidence of consumers trading down, looking for the best prices, comparing promotions and finding ways to stretch every dollar.

Inflation continues, but it is less than we saw in the fourth quarter, driven primarily by deflation in dairy and produce. We expect inflation levels to moderate to around 2% in the back half of fiscal 2010 from about 4% today.

The width of the range of the ID sales guidance of negative 1% to plus 1% reflects the challenges of predicting consumer spending behavior and determining when we will see traction from our new merchandising and marketing initiatives, which are designed to improve customer traffic overtime. These initiatives will exert pressure on ID sales in the first half of the year, but should lead to improved sales and traffic in the back half. We expect first quarter ID sales to be the low point for the year with sales somewhat below our adjusted fourth quarter run rate.

Similarly, our market share positions, while significantly impacted by ongoing closure of non-strategic stores as well as competitive openings, are expected to improve as our merchandising and marketing initiatives unfold.

Retail gross margins will reflect our merchandising and marketing investments, partially offset by benefit from lower shrink. As I mentioned previously, this is a key area of focus and an area where we expect further improvement in fiscal 2010, and increased own brands sales penetration. We also expect inflation levels to moderate, generating lower LIFO costs in fiscal 2010.

Retail selling, general, and administrative expenses will also be pressured from lack of sales leverage and substantial cost increases in employee costs. We will be absorbing significant pension increases and above inflation level increases in health and welfare expense, and we expect incentive accruals at a more normalized level compared to fiscal 2009.

In addition, duplicate staffing costs will persist in merchandising and marketing throughout fiscal '10 as we finalize our center-led model. To reduce the impact of these items, we will execute on a number of cost mitigation initiatives. In addition to shrink, areas of focus in fiscal 2010 will include labor productivity, reducing energy use in our stores and warehouses as well as lowering administrative costs.

We also expect reduced maintenance costs, driven by our recent investments and store remodels. Further, depreciation and amortization expense is anticipated to decline due to the impact of reduced capital spending, recent store closures and asset retirements.

Supply chain will complete the transition of the Target business to self distribution that began in fiscal 2009. As a result, sales and operating earnings will be lower than the prior year, but efficiency initiatives are expected to provide EBIT operating margins at comparable levels.

Turning to the balance sheet and liquidity, we continue to generate strong, stable cash flows. However, in light of the economy, we are postponing certain store investments and will further reduce debt. Our fiscal 2010 capital plan is now $750 million and our debt reduction target has increased to $700 million.

We view our updated fiscal 2010 capital plan to be at a prudent level for today's economy. As a reminder, our capital spend was elevated in recent years to address deferred spending in the acquired Albertsons properties.

Including the $100 million in additional debt reduction, we now expect to reduce long-term debt by $1.3 billion over the next two years from internally generated cash flow. Combined with the $1.5 billion currently available under our revolving credit facility, we estimate approximately $2.8 billion of liquidity to service about $2 billion of debt, maturing through fiscal 2011 of which nearly 40% is due in February 2011.

As previously noted, while our revolving credit facility is an available option for refinancing debt maturities, we are actively engaged in evaluating appropriate timing for accessing the debt markets, which has shown improvement in recent weeks. Our adjusted EPS guidance anticipates an early fiscal '10 debt offering at market rate. We also expect to renew our accounts receivable securitization program, which expires in May of this year.

In summary, our adjusted guidance for fiscal 2010 earnings per share is $2.50 to $2.65 per diluted share in contrast to fiscal '09 adjusted earnings per share of $2.89 per share, which included a $0.06 per share benefit in the fourth quarter from a 53rd week. This reflects a cautious economic outlook, the implementation of meaningful, foundational marketing and merchandising initiatives that will provide benefits over the long-term, as well as anticipated cost increases and mitigation activities.

We expect the first half of fiscal '10 to be considerably more challenging than the second half based on our view of economic recovery, timing of marketing and merchandising initiatives and cost mitigation activities. The effect of the decrease in annual earnings per share guidance on a quarterly basis versus fiscal '09 will be reduced earnings per share results each quarter of fiscal 2010 compared to the same quarter in the prior year, with this being particularly evident in the first two quarters.

We believe these are the right steps and investments to make now. We will then be well positioned as the economy improves to deliver sustainable, operating performance going forward.

I will now turn the call back to Jeff.

Jeff Noddle

As you've have heard, fiscal 10 will be a year of further investment in SUPERVALU. We know consumers are placing a greater emphasis on price and value and we are taking the actions necessary to improve our competitive position.

While these actions do have a short term impact on profitability, they build a better value proposition for our consumers in this environment, and certainly provide a foundation for future sales and earnings growth.

As Pam indicated, our adjusted EPS guidance of $2.50 to $2.65 per share reflects the initiatives that we have shared with you today, as well as our expectations for what is shaping up to be another challenging year for the economy.

We remain steadfast in our commitment to enhance liquidity and strengthen our balance sheet by reducing our debt. We believe that by both building upon the existing milestone and successfully executing our fiscal 2010 initiatives, we will position SUPERVALU to compete effectively for the long-term and generate meaningful returns for our investors.

We will now open the lines for questions.

Question-and-Answer Session


(Operator Instructions) Your first question is from John Heinbockel of Goldman Sachs.

John Heinbockel - Goldman Sachs

Pam, I may have missed this, but did you give a magnitude of what you thought retail gross margin would be down in 2010 or just say you thought it would be down?

Pam Knous

We just said that it would be pressured because of price investment that we did, but we did have some partial mitigating items in shrink, LIFO, et cetera.

John Heinbockel - Goldman Sachs

Do you think it would be less pressure than the fourth quarter or similar or worse or what color do you have on that?

Pam Knous

I'll just say we didn't give specific guidance on retail gross margin by quarter. So I can't be any more specific.

John Heinbockel - Goldman Sachs

Maybe Jeff and Duncan, can you talk about in this new model how you think about price investments and the magnitude between the guys centrally in Minneapolis, the guys out in the field, and balancing, not investing too much versus too little. How does the process work?

Jeff Noddle

John, the point we tried to make this morning is that we think we have enough components in place of our new business model. We've been talking about moving toward this now for well over two years. We think we have enough in place now that we can properly coordinate both the leverage that comes from the central organization and the need to be close to a customer.

Inherent in that coordination is also understanding the sales impacts, selecting the items. These are competencies you can't replicate at every location around the United States. So the ability for us to coordinate means that we can coordinate the costs, we can help coordinate the items selection, and along with that local flavor of understanding our customers at each market, we can do this so much more smarter and intelligent than we would have been able to do it in the past.

It's one of the reasons why we have chosen the timing to wait until we had important components in place. So if we leave with any assumption from this call today, you should leave with the fact that we now feel we have enough in place to do this in a much more intelligent and smarter fashion. That's in fact what we have begun in a couple of markets today.

Pam Knous

We did comment that the first two quarters are going to be more impacted, so I think you could draw the conclusion, if you want, around gross margins related to my total comments for the company.

John Heinbockel - Goldman Sachs

So the idea that if you're going to invest, whether it's is Chicago or some other place, you're going to invest in a certain pricing initiative, there is a good likelihood that you will pullback on something else. Maybe you're too low priced on certain things or you're wasting money in the circular some place and you will pullback on that to mitigate the cost of whatever you are doing proactively?

Jeff Noddle

I think we are still on balance going to deliver more value, but there will be a rebalancing of promotion, there will be a rebalancing of some of the places where we've spent money that's been more blanket and not targeted, and now that we target we're going to get more out of it. Every dollar should giver us more impactful sales.

John Heinbockel - Goldman Sachs

Are you finally seeing product costs coming down from being private label or branded manufacturers or that's yet to come?

Duncan Mac Naughton

Obviously, Pam talked about some of the dairy deflation that we have seen reflected in the commodities. We've seen that pass through relatively quickly. We have seen some prices come down.

I will tell you that the suppliers are also conservative as they look ahead to fiscal 2010 because of the recent volatility of commodity input costs. We are seeing them bring us more promotional offers to drive near term sales and spend against their brands in that way, which fortunately because of all the work we've done in our customer centered business model we're ready to capture those funds and invest them appropriately by market.

Jeff Noddle

I think there is a number of manufacturers who, in fact, had hedged at higher levels as we got into this year on commodity costs. As those burn off, I think I agree with Duncan, you will see more promotional. Some are going to be reluctant to reduce list pricing, unless they get real close to commodities. Certainly fluid, milk, and eggs are an example of that.


Your next question comes from the line of Deborah Weinswig with Citi.

Deborah Weinswig - Citi

Pam, you talked about the opportunities with regards to shrink and labor productivity in 2010. Can you maybe give us update in terms of where you are now and how much farther have you to go?

Pam Knous

Well, I can give you some color on that because as you well know shrink is a continual challenge for all retailers, and it has been a key item of focus for us. I think we've shared with you previously that the Albertsons banners had experienced higher levels of shrink than had been typically experienced in the SUPERVALU legacy banners.

So part of this has been bringing of best practices and things that we are aware of, skill sets that we had in-house to the Albertsons organization, but just continuing to work every year towards just really tightening up systems, tightening up procedures and all of these things manifest themselves and improve shrink.

So I would say to you that in many respects shrink is sort of a constant battle for a retailer. I don't think we would ever see it going away, but we've made good progress and I think that we would expect that we would continue to make good progress in fiscal '10.

I would say the same thing on the labor productivity as well. Clearly, we were somewhat challenged this year with a little bit of the lack of the sales leverage to bring the hourly requirements at store level into line as quickly as we could. If you recall, we talked about that in the second quarter, but we saw a good improvement in that in Q3 that continued to improve in Q4.

So I think that those processes and procedures are pretty well engrained as we look across F'10. So we should be experiencing favorable year-over-year comparisons on labor productivity for most of F'10.

Deborah Weinswig - Citi

Duncan, can you dive into the some of the details on the Fuel Rewards Program?

Duncan Mac Naughton

Sure. As you know, we have still over about 124 of our own fuel stations that tie directly to our store fleet in the acquired properties as well as in Farm Fresh in Virginia. We have expanded that by building strategic alliances with third-party purveyors.

For instance, in Minneapolis we use a partner here, Holiday, that allows our Cub customer to get the benefit of lower fuel prices at the pump. It's a deliberate focus on creating value and building loyalty across our stores, and then reflected at the pump. We built some of those relationships across our networks today and we're in talks to expand that aggressively in the balance after this year.

Deborah Weinswig - Citi

Jeff, you talked about a key focus for 2010 being the in-store experience. Is there any change with regards to how store managers are compensated to align their incentives with it?

Jeff Noddle

There has been some minor changes into how we're implementing our compensation system, but basically, no, there is not any significant change to that. We have two different metrics we use now to measure customer service, but we've only made minor revisions to the incentive program.


Your next question is from the line of Meredith Adler with Barclays Capital.

Meredith Adler - Barclays Capital

A couple of questions. I would like to start maybe if we could just talk a little bit about pension expense because I must admit I am a little confused as to how you deal with it for the multi-employer pension liabilities, some of the costs is included in those hourly labor costs.

How do you negotiate that and how do you deal with it when the contract is already in place and the labor cost is set?

Jeff Noddle

Let me make some preliminary comments and Pam can add anything to it. In terms of negotiating strategy, historically, and I think this is going to continue to be true, we have decided on a basket of value that we can deliver into a new contract, and that takes into account where are they in terms of health care, where are they in terms of pension, relative to competitors, and certainly we try to bring some reference to nonunion competitors in key markets.

What we'll do then is you can move those chairs around on the deck, if you will, and obviously more and more is going to have to go into pension unless the equity markets and investment returns improve significantly over the next couple of years. More and more is going to have to go into pension, which means they'll be less available for wages, less available for health care.

At the same time, we think we can deliver some health care structural improvements into those plans as well, and we worked very hard on that in Southern California and other places. It's kind of where do you want to put the powder, and the powder will have to go more into pension unless investment returns improve.

Meredith Adler - Barclays Capital

Pam, did you want to add anything?

Pam Knous

I would just say as I commented in my materials, we do expect that pension costs will be a component of the increase in costs that we are going to have to absorb. Pension costs are increasing on the defined benefit plan side.

I would also comment that those plans are basically frozen in the SUPERVALU organization, and so might be less impactful than some other places because we've pretty much moved our ongoing state to a 401(k) plan, and all of our employees that are not covered by a collective bargaining agreement are active today in a 401(k) plan.

So yes, it is a sizable increase. It is well above the inflation rate, but we have build that increase into the guidance that we gave you today.

Meredith Adler - Barclays Capital

I have another question about the impact of inflation on the wholesale business. I think I assume that some of the impact would have happened sooner than it did in the fourth quarter. But do you think that there is more negative impact on gross profit dollars on the wholesale side than on the retail side, when you actually have deflation in a category like dairy or produce?

Jeff Noddle

As you well recall, Meredith, we changed significantly our pricing models in wholesale a number of years ago in the late 90's. Today, one of the reasons we did, it was to take out those short-term swings and impacts of inflation or deflation. So today I think in the wholesale business, the impacts are moderate from inflation and deflation.

I always think it's more of an issue for retail simply because you're in a competitive environment, you have sensitive prices on items, who has moved, who hasn't, who is promoting during a given time period, who hasn't. So I am just saying it's always going to be more complex to pass through inflation or deflation for that regard at retail. So I would leave it at that.

Meredith Adler - Barclays Capital

I just have two more questions. Customer satisfaction has improved quite nicely over the last two years. Did you see a steady improvement or did it kind of plateau out in the last 6 to 12 months?

Jeff Noddle

I think we have seen a fairly steady improvement since we began measuring and we began looking at it very early in the integration after the acquisition. The service scores certainly have improved steadily. But also this information helps us target to where we need to take action on price and some of the other things we talked about today.

So there is a number of measurements there and customer service certainly is one. And there are others that have helped us to be more intelligent about where we put our investments, as we've talked about this morning.

Meredith Adler - Barclays Capital

My final question is just about the charges that you're taking, obviously the goodwill impairment charge is very obvious. Is it possible to just give us any more color on what might be beyond the store closure charges, what else? You said you're going to layoff some folks in corporate. Is the rest of it severance or what?

Jeff Noddle

There is severance. There is a few other minor items related to cost initiatives. Most of them are people-related costs.

Pam Knous

In addition to the costs associated with store closures.

Jeff Noddle

Yes, it's what she said, in addition to the store closures. Store closures are still the lion's share of the charge.


Your next question comes from the line of Ed Kelly with Credit Suisse.

Ed Kelly - Credit Suisse

Jeff, could you provide some color on where your IDs are running so far in the first quarter? It sounds like maybe from the commentary that they might be a little bit lower than where they were in the fourth quarter. Is that fair?

Jeff Noddle

Yes, I think, Pam made comment that, so far, we see a slightly weaker trend in IDs for the quarter. I will tell you that if you take the two weeks of Easter and compare it to Easter a year ago, it actually looks pretty good. It's the weeks around it that were weaker.

But remember, this also is a four period 16-week quarter for us. So this extends all the way into June. So we got ways to go yet, and as I said we're also expecting, as we mentioned and talked about some of the price initiatives, that those certainly in the near term could dampen ID sales with some price reductions. That's why we've given a fairly wide range, if you will, on IDs for the year. We expect those investments to earn business certainly in the latter half of the year.

Ed Kelly - Credit Suisse

Okay. Could you elaborate on the planned price actions for the upcoming year? How you made the decision on Chicago? What other markets are really going to be your area of focus this year?

Jeff Noddle

Well, I am going to limit my comments to Chicago for the moment. We gave the reasons on the call that we chose Chicago. Chicago, as you know, adds a major market for us. We have the largest share in Chicago. We have well over 200 stores in the greater area. We spent a lot of capital remodeling stores. It has been one of our primary targets for remodeled capital over the last couple of years.

We think Chicago is ready. As I said, our new business model is in line enough where we can really utilize the tool box that we've worked hard to create over the two years. I really think that it's our share of the market, the fact that most of our stores, our store fleets in very good shape. There have been changes in that market as they have in other markets. So it was a logical choice for to us address first and that's what we've talked about this morning.

As the year unfolds, it will be more evident where other places that we think we need to take similar actions, but all of them will be tailored somewhat to their own individual needs in markets.

Pam Knous

We didn't want to leave the impression that there aren't pricing initiatives going on in Acme or Shaw's or any of our other banners. Those programs are continuing and the local teams are responsible, and addressing the consumer issues today. So you shouldn't think that this is sort of just a one-market focus at this time. All of our markets are actively engaged in delivering greater value to their customers.

Ed Kelly - Credit Suisse

Pam, last question for you. Could you provide some detail on the non-operating items within the guidance next year? I mean if I look at depreciation, it looks like it's coming down pretty meaningfully. Interest expense is going to come down. The LIFO charge is coming down.

By my math, those three things combined could be $150 million, which obviously translates into a big number on an earnings per share basis. Is that the right way to think about it? Can you provide us with some more color there?

Pam Knous

Well, we did call those items out as we walked through the fact that these would be items that mitigate the other things that we're doing, and the other things that we are doing as we are investing in price. The other thing that we are doing is we are in effect covering higher pension expenses. We are also covering higher health and welfare related expenses, and also higher incentive level accruals.

So I think that there are lots of pluses and minuses that go into that commitment. I really think around your comments on depreciation, I think from the reduced capital spend and knowing that we've closed a lot of stores, you can get pretty comfortable with what that number might be around interest expense, we have given you our goal, as well as told you that our guidance does anticipate an issuance sometime soon in the public debt market.

Then I truly hope that LIFO does happen. I mean we've said to you we finished the year at five, and we're hoping next year it will be around two. So I think that could give you a pretty good proxy for you to kind of back into those numbers.

Jeff Noddle

Ed, I would only add and reiterate that the employee incentive side of it is an important number. We've anticipated a normal return to a normal rate of employee incentive costs. That was not the case last year, because our results certainly did not warrant it. That's the way this should work. It is an important item, including the others that Pam has mentioned.


Your next question comes from the line of Scott Mushkin with Jefferies.

Scott Mushkin - Jefferies

I was hoping to get some more clarity around the centralization process you're going to go through in the beginning of year, because clearly, there is some risk involved there. I think you said you flipped a switch at Acme as of February. Just wondering if you had any detail you can give us as far as sales at Acme, out of stocks positions.

As you look at your guidance, have you guys, in the first couple of quarters, as you go through the whole chain of doing this, kind of padded that number a little bit? I know other companies that have done this have seen problems that are obviously solved and it's a good thing, but they have seen disruptions as they flip to switch in different banners.

Jeff Noddle

Well, we're not going to comment specifically on any one banner sales. Acme was right at the end of the fiscal year. Certainly not enough time has gone by to evaluate anything in our view, but it has been not certainly disruptive to our operations, and out of stocks, and things like that have been very normalized. So, no, we have not had that experience.

Have we anticipated that there could be some disruption cause to this? We think that our plan is such that we should have minimal disruption. We've been planning for this for two years. We have replicated some costs. We've had this merchandising cost bubble that Pam referred to in her comments that we've also talked about for the last year, and that was done to preclude some of this disruptive activity.

As Pam indicated, there is a just lot of moving parts, Scott. That's one that's moving on us. By the end of the year, we should start to be able to get out some of those costs and anticipate those duplicative costs, and should be able to do it. We think we have got a good plan. We put a lot of extra effort into ensuring end costs that we don't have those kinds of disruptions. I think frankly, that the last year or so, we've had more impact from the fact that we've been planning this than, in fact, getting on and executing it now, frankly.

Scott Mushkin - Jefferies

I had one other and thanks for that answer, Jeff. Something I kind of poke on most quarters, but I think you guys said your customer satisfaction is up 400 bps, yet traffic continues to trend down. So I was wondering if you guys had done any work around that.

Of course, you've invested in price. You've invested a lot of money in the stores. But what are customers saying that maybe aren't shopping you any more that are leaving? Are you doing any polling on why you seem to be losing customers with all the work you've done?

Jeff Noddle

There is no question the whole food industry has lost some customers through this economic downturn to mass merchants. We see the evidence. They're splitting our businesses more. They are shopping around and cherry picking values where they can.

One of the reasons why we've waited until now to really address some more aggressive actions that we described this morning is because we can do this now in a much more intelligent way, and prevent people from having to shop multiple locations.

We needed the analytics. We needed the understanding down to a local market of what that meant. I think the biggest factor has been that there has been a migration to mass merchants, even though that's not as convenient a shop, and now we're going to give people more reason to return to a convenience shop, locally with us.

Scott Mushkin - Jefferies

Well, thanks, and good luck over the next six months, guys.


Your next question comes from the line of Karen Short with FBR Capital.

Karen Short - FBR Capital

Just a couple of questions on, well, first starting with LIFO. Could I assume that fiscal '08 is a good run rate from LIFO charge perspective? You show it at $30 million. I know I'd asked the question, but just trying to dig down to that a little bit more.

Pam Knous

As I say, LIFO is a measurement on the exact day at the end of the year what inflation you have at the end of the year, will the end of F'10 be, quote, equal to F'08, very hard to call, Karen. I think I would just say that it's probably easier to think about the fact that we are at about 5% rate for fiscal 2009, and we are expecting to be around 2% at the end of F'10.

Karen Short - FBR Capital

So now just looking to the comp a little bit more. Could you maybe give some split between traffic and basket in the fourth quarter? Then talk about, I didn't catch what you said about what has gotten worse in the first quarter, was it traffic or basket?

Jeff Noddle

We didn't comment. Traffic has generally been fairly stable over these quarters. We've seen some trends in some of our banners on less items. I know in some of our more discount-oriented banners, we have seen some reduction in item count, but traffic has been more consistent.

The trade down effect that Pam referred to continues. You have got kind of a year-over-year stack now on trade down. And the fact that we were up 150 basis points in owned brands fourth quarter over fourth quarter alone is quite significant. Now we're starting to see the impact of fluid, milk and produce and eggs that we also mentioned. So traffic has been relatively consistent. The consumer is really evident that the consumer continues to be very conservative and pull back where they can.

Karen Short - FBR Capital

I don't know if you have looked at this, but could you maybe just comment on the cadence of consensus EPS throughout 2010, because it looks like second quarter is only down a little bit, first quarter actually gets worse throughout the back half. I don't know if you had a chance to look at it, but...

Pam Knous

I think I would just comment, Karen, that we're hoping that the comments we made today will allow the individual analyst to tune up their models. Clearly, we had not given any specific commentary on quarter prior to today's call.

Now with describing the launching of the marketing and merchandising initiatives in the front half of the year and the fact that some of the costs reduction activities are not going to kick in until the later part of the year, we have emphasized that we will be down on a quarterly basis each quarter with more emphasis in the first two quarters. I think that that will allow the analysts to appropriately tune up their quarterly look.

Jeff Noddle

Of course, being cautious that we had a 53rd week in fiscal 2009 in our fourth quarter.

Pam Knous


Karen Short - FBR Capital

I assume that the stores that were closed were not included in the identical store base this quarter. Can you just quantify the benefit of removing those?

Pam Knous

We have not just publicly disclosed that. It is not that significant in the fourth quarter.

Karen Short - FBR Capital

My last question is just back to Chicago and actually to include New England in that, can you maybe quantify, well, in Chicago, how many Wal-Marts and Meijers you compete with now, and where you see that going in 2010 and 2011? Then also, if you could maybe make the same comments related to New England?

Jeff Noddle

We have those numbers. We look at them all the time. I don't have them in front of me. If you want to talk to David Oliver after the call, he will give you those specifics.


Your next question is if the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

I wanted to ask about the deflationary categories. It's kind of up to you how fast you cut your prices in those areas. I'm curious if you are giving it all back to the consumer, or if you are keeping some margin for yourself? Where you are seeing those deflation numbers? Is there a volume response? Is there some price elasticity that you can talk about?

Jeff Noddle

Well, of course, the pricing actions we're taking, we're not trying to anticipate price reductions. But if you are talking about those categories, we're pretty much passing through those categories, fluid, milk, egg, and fresh produce for the most part. But produce is so volatile, it changes almost day-to-day anyway. The second part of the question?

Mark Wiltamuth - Morgan Stanley

Was there a volume response where the prices have fallen, so in fluid, milk and others?

Jeff Noddle

I think our fluid, milk tonnage is up since prices have declined. I was surprised that fluid, milk volumes went down some, when prices went up, but now they are returning somewhat when prices have gone down. Now whether that's going to hold to other categories, but I think in fluid, milk that's true. It's too early to know on the others.

Mark Wiltamuth - Morgan Stanley

Second question is on your cuts to the CapEx. Clearly, you are holding back one of the levers you have to go after same-store sales by putting some of that CapEx money towards debt pay down. Right now your offensive remodels are still only getting about a 6% lift. Is there anything that you are doing to see if you can get that number higher? Once you are through the debt financing, do you think you will get back to putting more money towards remodels?

Jeff Noddle

Well, Mark, we have done a number of what I would call the first tier remodels. Those are the ones who certainly we thought we would have the best opportunity. I said on the last quarter's call, I said it's just a tougher environment to try to make the returns because of the trading down that's going on.

Even though we're getting some of these certainly the characteristics we expected in the remodels, we are not getting enough of them because the consumers are reacting in a different way.

We have done enough of what I would call the first tier to do some of the pricing actions that we've done. We've got a number of initiatives; I could spend another hour on the phone here, I am not going to do that, of how we're addressing improving near-term ID sales in remodeled units.

I am not going to take you through that step by step, but I think it's just prudent for us in this environment to not move as aggressively into what I would call tier-two remodels until we see some improvement in the economy, and that we improve our like store sales in our existing store base. So that's what we are going to really focus on right now.

Mark Wiltamuth - Morgan Stanley

So those tier-two's were probably getting less of a lift. They are more marginal. That's the rationale on backing off.

Jeff Noddle

I don't want to call them marginal. We're going to still do remodel this year. We are going to do 70-some. That's down from 140 or 150 or so last year, but we're still going to do some that fall in those categories. But you're right, those that we're a little less sure about, we are going to delay those. They should not have in the near term a significant impact.

Do we expect, as our a cash flows improve in the future, to finish that remodeling? Yes, but they also might be done in a more tailored way to those markets. We're learning a lot as we go along in our new business model.

Mark Wiltamuth - Morgan Stanley

Okay. We'll watch for how your price investments go in Chicago. So, thank you very much.


Your next question comes from the line of Jason Whitmer with Cleveland Research.

Jason Whitmer - Cleveland Research

Jeff, when you reflect on the last three years and you're getting a little closer to the end line here for your integration, when the dust settles and all that, what do you think as you look out maybe in the next three to five years? What is your long-term game plan in trying to really define the SUPERVALU story? Do you have any specific benchmarks and/or targets you're already starting to look at, or is it still too far out to really start thinking about the bigger picture?

Jeff Noddle

Well, Jason, you said when the dust settles. I don't know, it doesn't seem like in our world today the dust ever settles any more. But our story has always been about, we knew that at the time as we entered in traditional SUPERVALU, that as a retailer, we were the 10th or 11th largest retailer. We knew we'd either need to get larger in retail or not be in retail. Obviously, you see the choice that we made.

Frankly looking back, I think that being in the position we were in would have been even much more difficult in this environment than it is now ,even though this is quite challenging. But it's always been to us about improving our return on invested capital.

As you recall, in the old traditional SUPERVALU, we actually got as high as between 17% and 18% return on invested capital, and we know we reset that significantly down to the 11% or so. It's higher now because of the impairment. But if you neutralize all of that out, we're still running in that kind of a range. It's always been about getting back to 15% and eventually migrating back to that kind of 17% or 18% number.

And so we think that's our job. In over three to five years I expect us to certainly make progress on that. We know we need to do that. You are not going to do that unless you improve your underlying sales rate on your core business. We knew we'd have to close a lot of stores.

We ended up closing more stores than we anticipated three years ago, Jason, primarily in the west, primarily in the southwest, and Las Vegas, and Southern California. That's simply because those economies certainly are much different today that were housing-driven than they were three years ago.

Other than that we knew we would have to call through items, close stores. We knew we'd have to migrate, all the things we talked about today, and we finally think we're in the latter stages of that and now we can really focus on our sales, focus on our returns and making sure our asset base is fresh and will make a return.

Eventually, I think there is always going to be opportunities for, particularly, in-market acquisitions. We're always looking at our asset base and making sure that we've got an outlook that will give us returns. But if anything I would focus on is getting our return on invested capital to the levels that we envisioned several years ago.

Jason Whitmer - Cleveland Research

One other quick question. As you look to make more aggressive pricing investment seems like the entire end market is starting to go in that direction, partially from the consumer. But as things are just getting more competitive in general out there, are you worried about maybe a moving target, as others respond or others kind of do a similar strategy within the other traditional grocery arena or in those mass merchants?

Jeff Noddle

Everybody has been, for quite some time now, more aggressive, certainly in every form or fashion of pricing and promotion. Our reasons for doing this are not competitive-driven. Our reasons for doing it are what the consumer is telling us, and what our research and analytics shows. Our reason for timing of this, doing it, is in the fact that we can do it more intelligently as I have spoken to.

So I am expecting we are going to get competitive responses any time you do, but one of the reasons we did what we did is because Albertson's had outstanding real estate locations. They are convenient locations that you just can't replicate, whether you're talking about Boston, Chicago, the greater L.A. area and so forth.

We think that if you can create a price perception that has improved upon where they are today, that you give every reason for people to want to shop locally, and at the same time people are returning more to the supermarket and away from restaurants on a continuing trend. We think that that's going to last some period of time. So we're going to have competitive responses, but ours is tailored to the consumers in each market, and we're going to stay to that as our guiding lighted.

David Oliver

Operator, we have time for one last call.


Your final question will come from the line of Bob Summers with Pali Capital.

Bob Summers - Pali Capital

I guess I want to leverage off that last question a little bit, and I think you gave part of the answer. I am sitting here trying to reconcile the idea or prior comments, that you were priced at parity I think at something like 70% of your markets against the price investment that you're talking about today.

It sounds like the primary move has been that the consumer in the way that they shop has changed. I mean is that the answer? You're not as well-positioned, given the current environment, as you might have previously thought?

Jeff Noddle

No, I don't think much has changed in that regard. Bob, it's interesting to me that all these discussions we have on price, people seem to exclude the discussion around Save-A-Lot, and the number of chains that we do have that are every day low price value chains.

Save-A-Lot, obviously, is very well-positioned. We have a number of our banners such as Cub's, such as St. Louis, such as Washington, D.C. Baltimore, who are very much value leaders compared to traditional competitors in their market.

What I think we're seeing, that I tried to comment on, is looking at broad trends as we see a migration to more mass merchants, people responding to promotional offers, or on a very short-term basis. We want to build more loyal customers. We think we can get people who are already shopping with us and sharing business with others, to spend more with us.

I use programs that are really targeted towards the consumer's change in that regard. This is about building loyalty. It is about building bridges to customers that say, you could get a pretty good value if you take in account all of our programs, not just straight price, too, we talked about Fuel Rewards. Recently, we ran a program to add additional benefit to gift card sales, which just ended around tax season.

When you add up, and I can't detail all the programs here, the value proposition is rather significant. They don't get picked up by people who do very limited price checks, frankly. But they don't get picked up by competitors too, and we have a pretty good understanding of how the whole value proposition works.

We think we need to rebalance between every day pricing and promotion in some markets. The items maybe different by market, and now we can intelligently do that by market. So what we said before is still generally true, in where we're at parity with traditional competitors, but it is driven by the consumer's changing trends we see.

Bob Summers - Pali Capital

Second question I think this is more for Duncan. The prior owners had a very technology-based sort of approach to the business that I think we were at a point we were looking at SKU velocity, looking at adjustments, ways to eliminate costs, ways to re-invest back into the high velocity SKUs in a very consumer-centric way.

I listened to what you outlined today in terms of high velocity items, promoting the value equation, marketing more, and doing it in an effective and structural way. I am trying to understand like what the real difference is? What am I missing because they sound pretty similar?

Duncan Mac Naughton

I can tell you that the focus with our initiatives here is the customer is king, and we are placing our bet where the customer is telling us she is going. So we do have center store optimization initiatives going on, as Jeff challenged us to improve our ROIC, is how can we get the most for every dollar we invest.

Part of that is going to be about section sizes, so expanding those that are growing, anticipating needs, de-selecting from some categories, perhaps in non-food that aren't relevant to our customer any more, taking available funds and investing them in price or in promotion or in service standards.

So I would tell you that we have a unique opportunity to understand our customer's behavior and each shop understand the shopping behavior. So I would tell you this is much more about our customer's satisfaction and delighting her rather than it is about the infrastructure.

David Oliver

Thank you. I will be available later today for calls, and we'll talk again.


This does conclude today's conference. You may disconnect at this time.

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