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Executives

David Oliver – Vice President, Investor Relations

Craig Herkert – Chief Executive Officer

Pamela K. Knous – Chief Financial Officer

Analysts

Meredith Adler - Barclays Capital

Susan Anderson for Deborah Weinswig - Citigroup

Edward Kelly - Credit Suisse

Simeon Gutman - Canacord Adams

Scott Mushkin – Jefferies & Co.

John Heinbockel - Goldman Sachs

Radina Russell for Charles Grom - J.P. Morgan

Jason Whitmer - Cleveland Research

Mark Wiltamuth - Morgan Stanley

Charles Cerankosky – Northcoast Research

Neill Currie - UBS (US)

SUPERVALU, Inc. (SVU) F1Q10 Earnings Call July 28, 2009 10:00 AM ET

Operator

At this time I would like to welcome everyone to the SUPERVALU first quarter fiscal 2010 earnings call. (Operator Instructions) I will now turn the call over to your host, David Oliver, SUPERVALU Vice President, Investor Relations.

David Oliver

SUPERVALU 's call today is Web cast and will be available for replay on our Web site. Today on the call are Craig Herkert, SUPERVALU 's Chief Executive Officer, and Pam Knous, Executive Vice President and Chief Financial Officer.

As you know, 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 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.

Craig Herkert

Good morning everyone. Let me begin today by stating that it's exciting to come home to the grocery retailer where I began my career more than 30 years ago. And it's terrific to have joined SUPERVALU and those banners where I spent so much of my time learning this business.

In my initial two months with the company I've seen associates with a high level of energy, enthusiasm, and optimism toward the future. A business built on the same core values, standards, fashion, urgency, integrity, and focus that I have embraced my entire career; an outstanding retail asset base with great potential and a sophisticated supply chain supporting not only our retail but many of our country's finest independent retailers. I knew this when I joined SUPERVALU but it is great to get confirmation first hand.

As you are well aware, a large amount of heavy lifting has taken place at SUPERVALU over the past three years. During that time management has expended considerable time and energy on bringing two excellent companies together.

Now our primary focus turns to the customer. The customer is our first priority today and always. Yes, a lot has been accomplished but much still remains to position us to effectively compete in the marketplace.

The good thing is we have the right people, resources, and know-how to address the challenges ahead and part of these challenges can be seen in the results we've just issued and our lower earnings guidance for the year. These numbers are clearly not acceptable and it is our responsibility to make them better.

As I prepared for today's call, I surmised there were two questions we would like to [answered.] First, why were the first quarter results below the expectations outlined in the company's fourth quarter, and what were the additional observations on the business. You will note these two items do not include any longer-term vision for SUPERVALU.

Being on the job for only 64 days now, I am not yet in a position to address the larger question, however, following a comprehensive business review, which includes visiting our stores and supply chain operations, as well as talking with associates, independent retailers, suppliers, and the board, I will have more to say shortly.

My plan is to share a new vision as part of our second quarter earnings call scheduled in October. I can confidently say to you today that this vision will build upon the tremendous assets and associates that make up our business.

This morning we reported diluted earnings per share of $0.53. This weaker financial performance was driven by the continuing difficult economic environment as well as investments we are making in price and higher levels of promotional spending.

Since providing guidance on our fourth quarter earnings call, consumers have become even more value-focused and cautious in their spending, which has made predicting their behavior more difficult.

This prompted us to make heavier than anticipated investments in margin, some of which proved to be ineffective. This is not an excuse for our performance but the facts and events as we understand them today.

Having said that, allow me to provide some additional color on the quarter. First, let's look at inflation, or in this case, disinflation. During the quarter, disinflation occurred at a greater rate over a single quarter than most of us have ever experienced, with inflation moving from over 5% in the fourth quarter to slightly more than 2% in our first quarter.

If you recall, the company had commented that it expected the rate of inflation to decline over the course of the year, however, the decline came much earlier in the year and was much more significant than we projected, and is today actually lower than the 2% we originally expected to reach in the back half of the year.

Our experience tracks with the decline in food-at-home inflation per the Bureau of Labor Statistics, which went from more than 4% in March to less than 1% in June. For the balance of the year we expect inflation will remain around the 2% level.

Second, the continuing recession is wearing on consumers. Unemployment and home foreclosures are at historically high levels and consumer confidence remains at near record lows. The government stimulus efforts have yet to kick in and though potentially beneficial over the long term, will likely be paid for with higher taxes that could further impact business recovery and consumer spending.

Current conditions have made being thrifty cool once again, and we are seeing this in our customers' cautious purchasing behavior. The average number of items per basket is down about one-half item from the fourth quarter and trading-down behavior is changing the composition of the items that remain.

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. If the item is not on sale in our stores, it's far more likely to remain on the shelf. Pam is going to give you more insight on the numbers in her remarks, but the magnitude of the change in consumer spending to buying what's on sale significantly moved our mix of sales to the highest promotional mix we have on record. And this was clearly not anticipated. Considering today's economic headwinds, we foresee no near-term change in consumer spending behavior and we will operate our business accordingly.

Third, we are seeing a heightened competitive landscape as the entire grocer industry reacts to this challenging sales environment. Not surprisingly, this tougher competitive environment extends across the entire country and affects all of our markets.

Competitors are featuring hotter ads with more loss leaders on the front page. The messaging is targeted almost exclusively to a value image and we are seeing aggressive promotional activity tied to the first of the month, when the consumer is most capable of a full-basket shop. And we saw competitors that were traditionally non-promotional get into the promotional gates. It takes a bargain today to achieve sales. Also, as is very typical in a recessionary environment, more retailers look to food and consumables to drive incremental sales, so the list of competitors is growing.

Finally, which will be no surprise based on our previous comments, the magnitude to our price and promotional investments in the first quarter was greater than originally anticipated. As the company discussed in the fourth quarter, our price position had gotten out of line in a number of our markets and we actually have characterized fiscal 2010 as a year of investments. The Big Relief price cut program in Chicago and Southern California was part of this investment, as well as other locally-driven activities by the rest of our banners.

However, in response to weaker sales, heightening competitor activities, and the continued dramatic change in consumer spending behaviors, we also increased promotions and sharpened pricing. Looking back at our first quarter pricing and promotional efforts, some efforts did not deliver the expected results.

With regards to our center-led Big Relief program, we are basically where we thought it would be. The program has shown early encouraging results, achieving expected increased unit movements, but we also knew and fully expected that the goals of increasing customer loyalty and building basket size would take time and not materialize until the back half of the year. Overall, these investments generally held customer count at negative 1% level experienced in the fourth quarter.

I am pleased to report that our supply chain business under Janel Haugarth's leadership, performed superbly, achieving almost record operating performance as a percent of sales, despite the ongoing transition of the remaining target business. This confirms not only the effectiveness of our supply chain business but the stellar performance of our independent retailers.

I would like to wrap up my comments on the quarter by again saying that our results were not acceptable and we will not wait until my vision is complete to take actions that will position the company for improving results.

Since joining SUPERVALU I have worked with our leadership team to implement the number of organizational changes that will improve our operations. First, our retail business has been realigned under Pete Van Helden and Duncan Mac Naughton, which streamlines the partnership between merchandising, marketing and operations.

We also consolidated our specialty good grocery banners under Brian Huff, creating another singular point of focus for leadership of these banners, which each have distinctive positions in the markets they serve.

These are early examples that going forward, roles and responsibilities will clearly defined and there will be a heightened level of accountability throughout the company. Other actions we have taken include reducing this year's capital budget by $50.0 million. This decision was driven by inadequate returns in our existing capital program, our reduced earnings guidance, and the need to address other issues in our stores that will improve results.

We have significant sales-building opportunities to address, most notably improving customer service and delivering more effective programs. Our issue is execution and no the physical condition of our stores.

Another action, announced earlier this morning, is our exit from the Salt Lake City retail market with the sales of 36 stores to Associated Food Stores. These locations were deemed non-strategic to our ongoing operations and will be monetized. The company must continually review its asset base and take action to dispose of non-core holdings when deemed appropriate.

Finally, we are executing on a number of initiatives to drive sales, enhance margins, and reduce costs. Our pricing actions and supporting marketing efforts are designed to improve price perception with customers and ultimately drive incremental sales while increasing own brand penetration, reduce shrink, and spend promotional funds more effectively and will benefit gross margin.

We are, of course, actively engaged in multiple programs to manage selling and administrative costs throughout the company, including programs to reduce store labor, occupancy costs, and corporate expense.

Now, let's turn to my observations on the business. During my initial two months, I have been engaged in a comprehensive review of the company that will serve as a basis for forming my long-term vision. Today I would like to share my top ten observations with you, which of course, in this short time frame are somewhat more tactical in nature but will give you some insight into my early thinking.

First and foremost, we must focus on the customer. Every time a customer enters one of our stores, we need to deliver a positive shopping experience. We have to, and will, get this right.

Second, one of our key customers is the independent retailer. I have been very impressed with the caliber of our independents. They are an integral part of our business and I look forward to working with Janel and meeting more of them to understand their growth objectives and the role we can play in their continued success.

Third, there are no immediate fixes for the business issues we are facing. Improving our performance is my responsibility and that of this management team and we are committed to getting it done. We anticipate recent trends and the pressure that the consumer is facing will continue in the near term. And in fact, through five weeks of the second quarter, ID sales have declined approximately 100 basis points compared to Q1 ID sales.

Fourth, our price position has hurt us, particularly in this economy. Briefly stated, our value image is not what it should be. Our retail operations are taking steps to enhance the value position but it will take time for these actions to gain traction. Customer perception doesn't change on a dime. However, the bar must also be raised on our customer service, in-store conditions, merchandising and customer-centric marketing, as all play critical roles in the customer experience and ultimately building loyalty.

Fifth, as a hi-lo operator in our largest banners, we have relied too heavily on our promotional activities. Not surprisingly, we scored very high, better than our competitors, across the majority of our markets on promotions. But in this environment this characteristic is not influencing our customers' overall price perception of us, nor their loyalty to us. We need to be less dependent on deep-discount offerings and be better positioned on everyday pricing. Again, this will take time.

Sixth, we possess strong marketing capabilities today and now must better leverage this expertise across the organization to provide more customer-specific incentives to shop in our store as well as increase the effectiveness of our marketing and promotional spend.

Seventh, we must do a better job building our unique brand identities in various market places and communicating what differentiates us to our customers. This challenge will be one of Pete's top priorities.

Eighth, we must align our organization to be more customer-focused. The changes we've made to our organization will create more informed decisions that will be made in a shorter amount of time and our ability to meet the needs of our customers will be strengthened. This is the first step in generating new roles and responsibilities that will ultimately make us a more focused and efficient operator.

Ninth, regarding our business model, the transition to center-led merchandising and marketing will be crucial to our future and has my full support, allowing us to fully capture the benefit of our national scale and make more sophisticated decisions on how we go to market. It also produces a lower cost model for the vendor community and will allow both our vendors and our sales to participate more easily in national programs. We will no longer be selected against because of the complexity of doing business with us.

And lastly, our own brands have shown steady growth but we still fall short of our competitors and must take our offerings to the next level. We are accomplishing growth through new product introductions and greater penetration of existing labels. This past quarter we introduced Stockman & Dakota, our premium Angus beef brand and Stone Rich Creamy, our premium ice cream line. Total unit movement of on-brand increased in the quarter, although sales penetration remained at about 17.5% due to the unprecedented deflation we saw in certain commodities including milk and eggs.

Organizationally, we have realigned our reporting of own brand under Steve Michelson, chief marketing officer and senior vice president of our own brand. Steve will utilize his expertise in this area and our research capabilities to best define the SKUs and price points that we offer, as well as to communicate to our customers in the most effective manner.

So that's my top ten for now. I look forward to continuing to share my observations with you and our path forward.

Before I turn it over to Pam, I would like to take a moment to acknowledge the contributions of Mike Jackson, president and chief operating officer, Kevin Tripp, executive vice president, and Larry Walstron, president of Shaws, who announced their retirements this month. These three executives have each been with the company for over thirty years and have been major contributors in the years following the Albertson's acquisition. Mike, Kevin, and Larry, we sincerely appreciate your years of service.

With that, Pam will provide some additional color on our first quarter results, financial conditions, and updated guidance. I will return shortly to wrap up the call.

Pamela K. Knous

Today I will be covering our first quarter operating results, financial conditions, and updated fiscal 2010 guidance.

Turning to the income statement, first quarter net sales declined $632.0 million, or 4.7%, to $12.7 billion, compared to $13.3 billion last year, primarily reflecting a $446.0 million decline in retail food segment net sales driven by a negative 3.2% IDs and the closure of previously non-strategic stores.

Total reported operating earnings for the quarter were $362.0 million, or 2.8% of net sales, compared to $456.0 million, or 3.4%, last year, with lower retail gross margins being the primary reason for the decline. I am pleased to report selling and administrative expenses were well managed across the company and were not a contributor to the earnings short fall. This was partially attributable to our cost litigation activities that are on track and have generated meaningful savings.

It was a challenging retail sales environment with only 50% of our stores reporting ID sales better than 2%. Many of these stores are remodels that delivered on average a 6% sales lift in the first year and now are showing only a nominal lift in their second year. In the current environment, remodels open less than one year are delivering a lift of around 4%.

With the closure of non-strategic locations, we now operate 1,237 traditional grocery stores, or 47 fewer stores than just one year ago.

In the quarter, retail operating earnings declined 80 basis points to $311.0 million, or 3.1% of net sales, compared to $399.0 million, or 3.9% in the same quarter last year. This decline principally reflects an increase in gross margins that resulted from the challenging sales environment, heightened competitive activity, and additional investments in price and promotion, some of which proved to be ineffective.

As a frame of reference, we previously commented that customers' promotional buying reached an all-time high during the fourth quarter. In the first quarter, the percent of items sold on promotion rose an additional 150 basis points over the fourth quarter level, placing us at a level 400 basis points higher than one year ago. The magnitude of this unprecedented shift in consumer purchasing mix lowered both transaction size and margins and is primarily driven by changing consumer-shopping behavior.

For the quarter, items per transaction were down by about one-half item as discretionary purchases aren't making their way to the basket as often. Sales for products such as pre-cut fruit, coffee bar, and floral have fallen dramatically and these items typically generate higher margins. Again, consumers are finding more ways to save on their grocery spend. Today, savings is in style, as evidenced by the U.S. savings rate hitting a 15-year high in May.

We believe this trend of finding more and more ways to save has further fueled the trading down phenomena, which we began experiencing more than a year ago. In the quarter, we experienced yet an additional 100 basis points of trading down on top of a similar amount last year. Trading down, other than to own brand changes the sales mix to a higher concentration of lower-priced goods that's typically carried lower margins.

Turning to our supply chain segment, first quarter sales were down $186.0 million from last year, largely as a result of Target's ongoing transition of volume to self-distribution. During the quarter Target transition volume from our southeast region to a target facility operated by SUPERVALU under a 3PL agreement. In the second quarter Target is expected to complete their previously announced move to self-distribution when they begin shipping product from their Cedar Falls, Iowa, facility.

Supply chain services reported operating earnings up 2.9% of sales, equaling the performance achieved in the first quarter last year and reflecting the benefit of improved operating efficiencies and cost reduction initiatives. Our supply chain operations have made excellent progress this year with volume in our Lancaster distribution facility ramping up post-installation of the T-squared automation technology. This paves the way to fold our Harrisburg facility into Lancaster beginning in the second quarter.

Our supply chain team installed common systems, or standardizations, at three retail distribution facilities during the quarter. We now expect two additional retail facilities will be standardized this fall, which will leave only our Shaw's distribution centers to transition sometime next year.

Standardization lowers the company's overall cost structure by eliminating duplicate systems and facilitating efficient implementation of company-wide supply chain productivity initiatives.

Turning to our financial condition, in May SUPERVALU completed a $1.0 billion debt and a tender offer on certain near-term debt maturities. The proceeds were used to retire the notes that tendered, as well as to pay down borrowings under our revolving credit and accounts receivable facilities.

Our operating cash flows and out recent debt offering addressed a significant component of the company's debt obligations which were due over the next several years. Our next major scheduled credit event will be our existing credit facility that terminates in June 2011.

Last week you may have noted that S&P affirmed out double-B minus corporate debt rating but moved SUPERVALU's outlook from stable to negative. While we recognize that our credit metrics have weakened as a result of our lower earnings, we remain committed to reducing debt levels and ultimately returning to investment grade.

In terms of liquidity, we finished the quarter with $1.7 billion in total borrowing capacity under our revolving credits and securitized AR facilities, the latter of which was renewed in May with a borrowing capacity of $200.0 million.

I am pleased to report that we remain within our required covenant levels with trailing 12-month EBIT, excluding impairment and other non-operating charges, of $1.5 billion, depreciation and amortization expense of $1.0 billion, net rent expense of $370.0 million, and total debt of $8.4 billion.

Also, our cash flows in the quarter enabled us to reduce overall debt levels by $122.0 million, lowering our debt to capital ratio to 76% from 77% at year end. In the five weeks following Q1 we have reduced debt an additional $75.0 million, bringing our total debt reduction to about $200.0 million for the year.

Turning to our updated fiscal 2010 guidance, as Craig stated, we anticipate the recent trends and the pressures the consumers face will continue in the near term and have reflected this in our outlook for the balance of the year.

Fiscal 2010 net earnings are now expected to be in a range of $1.95 to $2.15 per diluted share on a GAAP basis and $2.01 to $2.21 on an adjusted basis when excluding the costs related to previously announced store closures. This guidance reflects our reduced sales and gross margin expectations.

ID sales are now projected to be approximately negative 3% for fiscal 2010, which with current sales levels, will require some improvement in the back half of the year to achieve.

In this very dynamic environment, tough economic headwinds are impacting consumer purchasing patterns in more ways than ever before, making it very difficult to predict the future. However, I can say that the current guidance range is our best estimate today, based on the information available.

The fact that our guidance entails a $0.20 range reflects the level of uncertainty about the economy and consumer purchasing behavior.

Though our practice is not to give quarterly guidance, I will provide some additional color on the balance of the year. As you may recall, in the fourth quarter we stated that we expected the first half of fiscal 2010 to be considerably more challenging than the second half. This was based on our view of economic recovery, timing of marketing and merchandising initiatives, and cost mitigation activities, with the challenges being particularly evident in the first two quarters.

Yet, we continue to believe the first two quarters will be the most challenged. Consumers are still under significant pressure from the economy and the competitive environment has certainly heated up. On top of it all, this inflation has occurred at an unexpected rapid pace.

We now anticipate that second quarter results will reflect a higher promotional sales mix that will exert further pressure on gross margins. We fully recognize that it will take time to develop the right balance of price investments and promotional offerings to bring greater value to our customers in this environment and yet achieve acceptable overall results. Therefore we now believe Q2 net earnings will be the weakest of the year.

In the third and fourth quarter we continue to expect net earnings will fall below the same quarters last year but we anticipate slightly improved ID sales and gross margin rates relative to the second quarter, as we believe our merchandising and marketing initiatives will begin to gain traction as well as our organization realignment will expedite quicker decision making.

As announced this morning, we are exiting the Salt Lake City retail market with the sale of 36 stores. The transaction, which is subject to regulatory approval, is expected to close this fall and its impact is reflected in our guidance. We estimate the sale will generate approximately $150.0 million in net proceeds.

Over the past three years we have consistently used our cash flows to reinvest in our business and pay down debt. We remain committed to carefully managing our balance sheet while recognizing the capital needs of our store base.

Fiscal 2010 capital spending is projected to be approximately $700.0 million. This last minor reduction reflects fewer remodels and merchandising projects that in today's economic environment are not projected to yield acceptable returns.

Debt reduction is, and will remain, one of our highest strategic objectives and we are holding our debt reduction target for fiscal 2010 at $700.0 million. Our projection reflects our updated earnings guidance, the net proceeds from the Salt Lake City retail market exit, and the revised capital spending plan.

Even with our lower guidance for the year, we will be in compliance with covenants for the year.

In summary, the balance of fiscal 2010 will be challenging by the difficult sales environment which are addressing. Management also remains committed to completing the five major initiatives that we have previously outlined as key components to long-term sales growth, raising the bar on in-store execution and customer service, delivering innovative merchandising, as well as leveraging our scale, building our own brand, becoming more customer-centric in our marketing, and prudently investing in our stores. And of course, getting our price and value message right for our customers.

Focusing on these foundational items will place us in a better competitive position, regardless of when the economy improves or how consumer spending patterns change in the future.

With that, I will turn the call back to Craig.

Craig Herkert

I want to reiterate our commitment to growing top line revenue and becoming a lower cost organization whose primary focus is the customer. With our customers at the forefront of everything we do, we must make every effort possible to understand and to anticipate their ever evolving needs, to communicate in meaningful ways with them, and to maintain their loyalty by having the products they want at the prices they expect.

By placing our focus on our customers, we will drive our business and achieve the returns our shareholders expect. This will not happen overnight but it will happen. Based on my preliminary review of our operations and having met with many of our talented associates throughout the country, I am confident that SUPERVALU will meet this challenge.

Pam, David, and I will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Meredith Adler - Barclays Capital.

Meredith Adler - Barclays Capital

Operator

Your next question comes from Susan Anderson for Deborah Weinswig – Citigroup.

Meredith Adler - Barclays Capital

I would like to just start talking a little bit about your comments about store execution and operations and maybe you could talk about changes in how you're going to hold the operating folks accountable. Are there new incentives, or how do you communicate to them that you're raising the bar?

Craig Herkert

I think we've started with the organization realignment I spoke of earlier and having all of the operations ultimately of our traditional retail banners reporting up to Pete. So I think just getting clarity in reporting relationships will help.

And other than that I don't know that I want to say more at this point since that is a work in progress that we are embarking on. I am confident, however, as I said earlier, that we will increase and improve our ability and our speed with which we can make these decisions operational.

Meredith Adler - Barclays Capital

I know that the company has been working hard to improve its relationship with vendors and to get more support from them. Has that gone backwards at all, given how weak the sales are? Or are you making progress the way you wanted to with vendors?

Craig Herkert

I don’t think it's gone backwards. I would say to you, based on our early reviews, it probably hasn't progressed at the speed with which we would have like and you will see us address that in the very near future.

Meredith Adler - Barclays Capital

I know you haven't come up with your sort of long-term vision yet, but it's not clear why the Salt Lake City market was non-core to you. Maybe because your market share position wasn't good, or does it have something to do with the fact that it doesn't really fit in to the sort of dense urban, suburban definition of many other markets where you operate?

Craig Herkert

I think it's more the former than the latter. The interesting thing about our company is we can actually perform really well in small markets and really dense urban markets. We have successful formulas for both. I think the Salt Lake City issue is more one of market share.

Meredith Adler - Barclays Capital

Tied to that, is there a deleveraging issue of some of the fixed costs in the intermountain region by closing those Utah stores?

Pamela K. Knous

I guess I would say if you look at our past history that we are very quick to respond to making sure that our administrative infrastructure is appropriate for our revenue base and so that's something that we just address normal course.

Meredith Adler - Barclays Capital

Including distribution?

Pamela K. Knous

Yes.

Operator

Your next question comes from Susan Anderson for Deborah Weinswig – Citigroup.

Susan Anderson for Deborah Weinswig - Citigroup

Can you talk a little bit about giving some more of an EDLP pricing strategy? Can you talk a little about where you are with price investments you are making, and then would you say that you're about a third way there or there is a lot more that needs to be done?

And then also can you talk about the new pricing program in Chicago? How is that going and have you found any learnings there that you think you can apply to other markets?

Craig Herkert

First of all, other than stabilizing, we are not an EDLP operator. So I would not use the term EDLP when you refer to our traditional supermarket banners across the country. Save-A-Lot clearly is primarily an EDLP operator and a very successful EDLP operator, has been and will continue to be. So there's not a change there.

The other one is what Pam and I both spoke of, which is getting the ratio of our promotional investment more in line with what the consumer needs so that our regular prices are more acceptable to her today. But that is not an EDLP strategy and I want to be clear and I don't want to mislead you with regards to that.

And finally, regarding Chicago, I think it's already been discussed, we are at where we thought we would be at and we knew when we embarked on bank relief in both these markets it would be a longer-term strategic play and we are sticking with that.

Susan Anderson for Deborah Weinswig - Citigroup

And a follow up to the 36 Albertson's stores in Utah. And also how can we get [inaudible] expectations for store closures for this year and beyond. I think previously you had said about 20 to 25 annually. Basically I'm trying to figure out can we apply any of the factors that distinguish these 36 as non-strategic to other stores that would expected to be closed.

Pamela K. Knous

I think each store is somewhat unique in its way. I think you should just stick with the standard assumption that was given, that we would close about 25 stores per year.

Clearly the decision to exit a market increases that for that year. So I think that this is just part of kind of normal course that you could consider as similar to all other store closures.

Operator

Your next question comes from Edward Kelly - Credit Suisse.

Edward Kelly - Credit Suisse

Your ID guidance assumes that the environment gets better despite the fact that IDs are still deteriorating. So what gives you the confidence that down 3% is really the right place to be right now?

And then as you think about your guidance in that $0.20 range, you have a sort of a point estimate for ID. So what are the variables that lead you to lower end and the upper end?

Craig Herkert

I'll take the first one. I don't know that we said we thought the environment was going to get better. I don't think we gave you that indication at all. I think what we are saying is we expect our performance within that environment to get better and we outlined some of the things that we've done organizationally and from an accountability standpoint that lead us to believe that. There is a good chunk of the year yet in front of us. But our goal is perform better in this environment, not to hope that the environment changes.

Pamela K. Knous

We think that negative 3% as guidance for the whole year is our best estimate at this time. The first quarter was just slightly under that. We commented how we're tracking behind that in the current quarter. But as Craig just said, we expect that some of our own initiatives will allow us to have improvement in the back half.

So I think that we're not seeing significant improvement from the first quarter run rate but that there will be dynamics that are going to play out across the quarters.

Edward Kelly - Credit Suisse

Just in terms of that $0.20 range, what's the big variable there? Is it sales where a down 3% ID is sort of in the middle or is it how you stand on promotions and the margins?

Pamela K. Knous

As I said in my comments, we said it reflects the uncertainty about the economy and consumer purchasing behavior. Those are the two things that are very difficult to predict.

Edward Kelly - Credit Suisse

You indicated that SUPERVALU's issues seemed to be more on the execution side and maybe not the assets. Could you elaborate on that? Does that mean that more meaningful divestures are unlikely in the new strategy?

Craig Herkert

I don't think we want to comment on that. What I would say is having visited many of our divisions over the last two months, I am very pleased with the physical plants that I visited and also with the leadership teams that I have been able to meet with. So beyond that, I don't think I want to comment.

Edward Kelly - Credit Suisse

Save-A-Lot is a business that the company has not really talked about much, I would say over the last year. Could you just give us your thoughts on that business? Do you like the license model of it? Does it fit the portfolio? Is it a growth business? Just your initial thoughts would be great.

Craig Herkert

I would just answer yes to all the previous things you said about Save-A-Lot. Make that an easy answer.

You might have noticed that in our reorganization Save-A-Lot president, Bill Shaner, reports directly to me. I think we have an opportunity with that business. We are pleased with that business and we would like to see that as being part of the growth strategy for SUPERVALU.

Operator

Your next question comes from Simeon Gutman - Canacord Adams.

Simeon Gutman - Canacord Adams

From a strategic perspective and you kind of touched on this, given that your background comes from both EDLP formats and conventional, how do you sort of balance the tactical today with the asset base that you have longer term?

Craig Herkert

I think you can do things simultaneously. I think this company is actually organized the right way to do that in that you have a distinct operating structure with the Save-A-Lot business in St. Louis, under Bill Shaner, who is the protector of that brand.

And so frankly, I see no conflict with being able to run multiple formats.

Simeon Gutman - Canacord Adams

How do you think premium fresh and healthy stacks up versus other conventional formats? Maybe right now it's not just about formats but curious about your initial thoughts.

Craig Herkert

I don't know that I have any initial thoughts on that. I visited a lot of our stores. I think that's probably more detailed and more specific than I'm prepared to answer. I'm sorry.

Simeon Gutman - Canacord Adams

And just lastly, from an organizational standpoint, you mentioned in some of your comments just tactically things that are important to the business regarding the independent customers. But is there, or how much synergy is there between the distribution business and retail does there need to be.

Craig Herkert

There are amazing synergies, many of which we are leveraging today, many more which we believe we can leverage in the future.

Operator

Your next question comes from Scott Mushkin – Jefferies & Co.

Scott Mushkin – Jefferies & Co.

I just wanted to get into the two areas, one is the idea that maybe you can see some improvement, not necessarily in the environment but in your performance in the back half of the year and why even contemplate putting that into your EPS guidance when you may want to use some of that money to invest in price and have optionality there, if it indeed happens. I just want to understand a little bit more the thought process there, given it seemed like you kind of an open window. I think the rumors out there were $1.90 to $2.00, so you had some more downside. So that's number one.

Craig Herkert

All I would say is I think Pam and I both identified, it is a dynamic environment both macroeconomic and then internally, as we work to find what is that right mix. We believe the guidance that we provided allows us the opportunity to serve our customer the way that is going to be appropriate.

Scott Mushkin – Jefferies & Co.

And then second question is the question I was asking your predecessor quite a bit and I would like to hear your initial thoughts. If you look at some of the assets, in particular in the Northeast, you went through a process of investing a lot of money. Or the company did, not you. The company investing a lot of money in the store base and you also ended up invested a decent amount of money in price over time, yet market shares continued to decline and you're now below 20 share in some of these markets and seem to be losing some market share relevance. So I guess one the reasons is why do you think that's taking place and how do you get that market share relevance back without dropping your prices meaningfully below competitors?

Craig Herkert

I think the question you asked is really too detailed for me to address at this session this morning regarding that very specific market in the Northeast. I don't know Pam if you have any comments there but it's probably a little bit too detailed given the scope of what we're talking about.

Pamela K. Knous

I would just say that we have made progress in that market. Clearly, as you know, that that was a market that was underinvested in for years. It had been acquired many times over the last recent years and as well . . .

Craig Herkert

The other thing that might be of note is that we did settle an outstanding labor contract in Philadelphia this month which we're pleased with and we think helps to position us to invest in that business.

Pamela K. Knous

But as we're making investment in price and looking to balance promotional and pricing decisions, those are actions that are impacting all of our banners and so we actually do see that some progress is being made.

Scott Mushkin – Jefferies & Co.

One final thing, it's actually a request for more information on Save-A-Lot, if you want to. I think people would love to see it. I know it's been an issue that's out there for a while, but love to see more numbers on that business.

Craig Herkert

Okay, we'll take [inaudible] .

Operator

Your next question comes from John Heinbockel - Goldman Sachs.

John Heinbockel - Goldman Sachs

There seems to be a sort of dichotomy, you think you're too promotion, you'd like to start to move away from that, but the consumer seems to be reacting to promotions today, maybe less to shelf price changes. Given that, does that slow the transition down to being less promotional? Do that anyway and maybe the sales come under a little more pressure. How do you thread that needle?

Craig Herkert

I'm not sure I would have framed it the same way you framed it. It's not that we're too promotional, it's that the gap between our promotional price and everyday price has become unsustainable. And we did say in our call this morning that we're seeing the consumer respond when we lower our everyday prices. We are seeing very positive movement by the consumer when we get our prices in line. I'm referring now to the Big Relief program in Southern California and in Chicago.

So I don't want to leave with you with the idea that we're going to become a less promotional merchant. We are a promotional merchant. What we're working towards is fixing the value proposition so that our everyday prices are more meaningful to her.

John Heinbockel - Goldman Sachs

Now do you find, if you do this right, if you sell less on promotion, more at the regular price, that the average selling price in the categories that you do this in can actually go up and there really is not much of an impact on margin if you do it right, or no?

Craig Herkert

That would be our expectation, is that we will do this right. Let me say that our guidance on both sales and earnings would anticipate that we do this right. And that our goal here is not to decrease our earnings as we go forward.

John Heinbockel - Goldman Sachs

You talked about some promotions that didn't work. Is there any commonality as to why they didn't work? You know, wrong categories, wrong markets, or just competitive noise?

Craig Herkert

Again, can I say yes to all the above.

John Heinbockel - Goldman Sachs

No one stood out?

Craig Herkert

No.

John Heinbockel - Goldman Sachs

And does that influence, as you go forward, I assume—is there a sort of an inability to invest with the higher ROI as we go forward.

Craig Herkert

Again, our clear expectation, we reference earlier, one of the strengths of our company is we have really good consumer insight, we have a very good marketing and research department. We believe we have an opportunity to use that information to more clearly define our promotional strategy in a very particular manner.

John Heinbockel - Goldman Sachs

It looks like, just from the numbers you gave out, it seems like that .5 item, the number of items per basket, probably was down 4% to 5%, to get you to the comp that you quoted. Is that about right?

Pamela K. Knous

That's correct.

Operator

Your next question comes from Radina Russell for Charles Grom - J.P. Morgan.

Radina Russell for Charles Grom - J.P. Morgan

I wanted to touch back on the gross margin investment this quarter one more time. In Q4 you mentioned that you had made about 40 basis points of gross margin investment in the retail division. Can you quantify the level of investment this quarter and two, maybe break apart how much of that was an ongoing price investment and how much of that was promotional?

Pamela K. Knous

We are not going to break that apart. We did comment on a total basis point mix and we said that it was the combination of a variety of items, with the most notable being the change in the mix, driven by the higher level of purchases on promotions.

Radina Russell for Charles Grom - J.P. Morgan

You obviously spoke to the second quarter a bit but as I look at the back half, am I expecting to see maybe this level of price investment through the back half or are we expecting it to kind of fall off a bit?

Pamela K. Knous

As I said in my comments, we do expect the second quarter to be the weakest and then some slightly improved performance compared to Q2 in quarters three and four.

Operator

Your next question comes from Jason Whitmer - Cleveland Research.

Jason Whitmer - Cleveland Research

Obviously you've got a lot of things on your agenda. If you were to focus in on just the top two or three most urgent items, to address here over the near and medium term, how would you prioritize those?

Craig Herkert

Hopefully it was in my list of ten. And frankly, number one is to make sure that we put our focus on the customer. We've done a lot over the last three years with the integration of the two companies and our management team now wants to get our focus externally on the customer and away from our internal self.

So number one is get our focus on the customer. And the other thing I mentioned in my notes this morning would be that we have to really amp up the accountability. And I think our organizational structure begins to enable that but we want to amp up accountability, again, to focus on the customer and get our value proposition right.

Jason Whitmer - Cleveland Research

Do you have any wish list of tools or resources that you'd like to have day one coming into the office that would make you more efficient within your role or things you want to do to address within your organization, is there anything you would like to bring into the company?

Craig Herkert

I'm actually comfortable with the tools that the company has. I'm comfortable with the management team we have assembled. So I am not waking up every morning wishing I had something else.

Jason Whitmer - Cleveland Research

On centralization and/or systems, just the timing and progress you've made to date and where you expect to take that next step going forward.

Pamela K. Knous

We're pretty much proceeding on plan. We did comment that we're starting to move to some of our larger banners, to our center-led merchandising effort and that we are going to proceed in a cautious manner, but we're basically tracking on plan.

Operator

Your next question comes from Mark Wiltamuth - Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

I wanted to focus a little more on your breadth of price investment. Are you really going just market by market, or are you doing some chain-wide investments today?

Craig Herkert

We are trying to be very specific and we're trying to focus on things that matter. So there is no chain-wide program. There is a market-specific program that's in place and that will continue to be rolled out.

Mark Wiltamuth - Morgan Stanley

And if you look across your markets, how many do you feel like you're a little bit out of bounds on price? Because when we do our price surveys you kind of come out middle of the road, not the highest not the lowest, but often middle of the road. What's your view of where you stand on pricing?

Craig Herkert

I don't know that I want to be that specific on where we see each of our markets. We operate in so many different markets.

Mark Wiltamuth - Morgan Stanley

As performance is weak here, you're going to have more stores pulled into the red and maybe not attractive from a cash flow position. Do you think you could amp up more store closures over time?

Craig Herkert

I wouldn't comment beyond what Pam said earlier.

Mark Wiltamuth - Morgan Stanley

And lastly, you had the marketing organization under one roof for some time now. You mentioned earlier that there were maybe some difficulties for suppliers in dealing with SUPERVALU. Is that all in the past or do you still have some work to do on connecting with your suppliers?

Craig Herkert

It is a work in progress but we are focused on it. We are somewhere down the path, we are not where we need to be.

Operator

Your next question comes from Charles Cerankosky – Northcoast Research.

Charles Cerankosky – Northcoast Research

If you're looking at this current quarter versus a year ago, what percent of sales are being done on credit cards versus last year?

Pamela K. Knous

I actually don't have that at my fingertips. Why don't you follow up with Dave on that.

Charles Cerankosky – Northcoast Research

When we look at some of the guidance numbers you put out there regarding cash flow, and add in that about $150.0 million from proceeds from the Salt Lake City stores, it looks to me like you could pay down more than $700.0 million in debt. Am I missing something here? Is D&A dropping year-over-year?

Pamela K. Knous

We're just giving conservative estimates and clearly that's a goal that we are committed to achieving. And so you should presume it will be about the $700.0 million.

Charles Cerankosky – Northcoast Research

When you say conservative, can I read that as minimum?

Pamela K. Knous

I think that you can take it is that our guidance is for $700.0 million of debt reduction this year.

Charles Cerankosky – Northcoast Research

Do you have a guidance number for depreciation and amortization?

Pamela K. Knous

We do not.

Charles Cerankosky – Northcoast Research

Do you see the possibility of any retail divisions becoming wholesale customers over time?

Craig Herkert

I wouldn't want to comment on that publicly.

Charles Cerankosky – Northcoast Research

Do you have any criteria when you look at store groups to determine whether they're going to have a long-term [inaudible] with the company? Can you share those with us?

Craig Herkert

Certainly we have criteria here and no, I can't share those with you.

Charles Cerankosky – Northcoast Research

And last question, were the Salt Lake City stores profitable?

Craig Herkert

Yes.

Operator

Your final question comes from Neill Currie - UBS (US).

Neill Currie - UBS (US)Operator

Craig, you had a great job at Walmart and coming to SUPERVALU obviously entailed some due diligence on your part before you took the job. What was it about taking the role at SUPERVALU that you thought was most attractive? What did you think was most challenging? And has anything surprised you either way since you came aboard?

Craig Herkert

I love the supermarket business. I have been doing this—many of you know, I started with this company at a store outside of Chicago when I was 16 years old and spent over 20 years with the elements of this company. So it's in my blood. I was very happy. It's just what I know; it's what I love to do.

So why did I come here? Part of it was that. I also saw an opportunity to grow this company. I think what Jeff and the team built is a very different company that existed four years ago. I think there is a great opportunity to grow this company and to be a great grocer in the United States of America. And I love working with a growth company. And I like a challenge and I think there are a lot of challenges here.

And no, there are no surprises from what I thought before I came versus what I think today.

Neill Currie - UBS (US)Operator

Clearly there are different models that can survive and thrive within the food retailing business. There are alternative formats and there are conventional formats. But some of the more conventional supermarkets, the ones that are doing well right now really addressed their business model issues seven, eight, nine years ago. And you're coming into this sort of quite late on the day. What's the risk that the work that you're intending to do with SUPERVALU, even if you execute well in it, helps just to stop the company going backwards rather than actually move the company forwards and it becomes more of a cost of doing business?

Craig Herkert

I don't know what that risk is. I'm more optimistic than you in that I believe we have great physical assets. We have really good market shares in many great markets in this country and we have a really strong leadership team that knows how to do this. So I would be much more optimistic that we can, in fact, position our SUPERVALU to grow.

David Oliver

Thank you. And after the call today I will be available for questions. Thank you for your time.

Operator

This concludes today’s conference call.

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Source: SUPERVALU, Inc. F1Q10 (Qtr End 07/28/09) Earnings Call Transcript
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