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SUPERVALU INC. (NYSE:SVU)

F1Q 2014 Results Earnings Call

July 18, 2013 10:00 AM ET

Executives

Steve Bloomquist - Director, IR

Sam Duncan - President and CEO

Sherry Smith - Executive Vice President and CFO

Analysts

John Heinbockel - Guggenheim

Meredith Adler - Barclays

Ajay Jain - Cantor Fitzgerald

Scott Mushkin - Wolf Research

Stephen Grambling - Goldman Sachs

Edward Kelly - Credit Suisse

Jason DeRise - UBS

Operator

Good morning. My name is Brian and I will be your conference operator today. At this time, I would like to welcome everyone to the SUPERVALU First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I’d now like to turn the call over to Mr. Steve Bloomquist, Director of Investor Relations. Please go ahead, sir.

Steve Bloomquist

Thank you, and good morning everyone. I want to welcome everybody to SUPERVALU's first quarter fiscal 2014 earnings conference call. Joining me today are Sam Duncan, President, Chief Executive Officer and Sherry Smith, Executive Vice President and Chief Financial Officer.

Following prepared remarks we will open up the call for your questions. So that we can accommodate as many people as possible, I would ask you limit yourself to one question with one follow-up. The information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our most recent 10-K filing. A replay of today's call will be available on our corporate website at www.supervalu.com.

With that, I will turn the call over to Sam.

Sam Duncan

Thanks Steve and let me welcome everyone to SUPERVALU’s first quarter conference call. This morning we reported first quarter adjusted EBITDA, an important internal measurement for cash generation, was 238 million in the quarter which was in line with our plan and keeps us on track to meet our full year target. Pro forma adjusted EBITDA included an $11 million pro forma adjustment for our fiscal period one under the old TSA totaled $249 million.

Today marks the 162nd day on the job for me and during that time most of which covered the first quarter we have made meaningful strides toward better positioning the company for success in the future. We still have a great deal of work ahead of us but the management team and I are laying the foundational pieces that have to be in place for us to attract more retail accounts through our distribution businesses, more licensees to our Save-a-Lot format and more customers to all of our retail stores.

Although sales were down in each of our businesses, I am encouraged by the sequential improvement in sales trend over last year’s fourth quarter that we have seen in each segment. Independent business cut the rate of sales decline in half relative to Q4 in spite of a decline in military volume caused by government sequestration and the loss of a vendor account.

At Save-A-Lot network ID trends improved from a negative 2.6% to negative 1.9% and IDs for corporate stores within the Save-A-Lot network which we will now report going forward improved from a negative 2.0% to a negative 1.2%. Both indications of the favorable impact Ritchie in the changes he’s implementing are having to that format.

For retail food identical store sales trends improved from a negative 4.1% in the fourth quarter to negative 3.0% in Q1, a 110 basis point gain, the first sequential improvement in over a year and one which we plan to build on for the balance of the year.

On our last conference call I spoke about the tremendous amount of support I have seen and heard from our independent retailers and the great loyalty they have shown SUPERVALU through some challenging times.

As I continue to meet more and more of these entrepreneurs, I'm thankful for their support and happy to spend time with them and hear their thoughts on what we can do to better meet their needs.

Along those lines this quarter we hosted the first meeting of our National Retail Advisory Group held in Minneapolis in June. The Group began discussion on a number of industry topics that impact us all irrespective of size or geography, conversations which have given our leadership team direction on the role we need to play to best support our independence.

Perhaps more importantly though was the opportunity for networking amongst our retailers and the chance to meet others who are confronting with the same business issues.

I was also pleased that many of the attendees thought it was an affirmation that SUPERVALU was back and they can now move more confidently forward on their business plan.

We are also working hard on bringing new customers into the SUPERVALU family. This has been a challenging task for the company since last summer when we announced a strategic review process as retail groups were hesitant to affiliate with us given the uncertainty of our future.

Janel and her team have done a great job in maintaining relationships with key retail groups in our operating territories and I have personally visited with a number of companies that I hope to one day call customers.

The affiliation process by its very nature and for a number of valid reasons does not always move quickly, but our discussions have gone well and it is quite evident that we are back on the radar of many potential IV customers.

From an operations perspective, I’m pleased with the many things going on with the Independent Business. One priority for our supply chain and region merchandising teams is focusing on continually improving how we handle new items and the speed with which we make them available to our customers.

With the accelerating pace of innovation in the industry it is critically important that DC’s and stores have the latest items that our suppliers have introduced enabling our stores to be the destination of choice for our customers.

We are working on process changes and communication enhancements, so that the stores we service both independently and corporately operated will have these products on their shelves as they are introduced to the market. We have aggressive goals set throughout the company to measure our progress.

Let me move on to Save-a-Lot where a number of good things are happening. We again made sequential improvement over Q4 with the Save-a-Lot ID sales trends. But more importantly, we accomplished a great deal in terms of strengthening the format and operating model, which positions us better for future success. Their new President, Ritchie Casteel has taken steps to make the stores and the overall format more appealing to current customers and better able to attract new shoppers.

Let me provide some additional color. As I briefly alluded to you last quarter, we are in the process of bringing a fresh saw cut meat program to all our corporate stores, a result of an analysis we did last year that looked at the operating differences between the licensees stores and corporate stores, as well as the smaller number of corporate stores where we have saw cutting already in place.

This work really showed we have a great opportunity to drive incremental sales and gross profit dollars by adding saw meat cutting each store. This will enable us to better tailor our offerings for each store throughout the month, as well as provide lower retail prices with the same or more margin dollars. Early results in the pilot stores are showing meat department sales are significantly better than the rest of the store depending on the week.

We are currently on track to have this in all of our corporate stores by the end of the fiscal year. Last quarter I said that we had lowered our inside margin by 50 basis points, which was largely focused on about a dozen key items. The unit movement for these items has been up over 25% and consumer price perception improved about 100 basis points based on these targeted reductions alone. We will be taking inside margin down another 50 basis points here in the second quarter, bringing even greater value to our licensees and their customers as we continue to invest dollars for the future. It is critical that a price format such as Save-A-Lot be priced right and I am pleased the team is clearly moving us in the right direction and strengthening the critical relationships we have with our licensee operators.

Another focus at Save-A-Lot is geared toward improving our Fresh departments. We have recently standardized the quality specs of the produce across the network and increased the shelf life of many items by working directly with growers. We have also bought much more discipline to our quality assurance processes at our DCs and we have implemented a rigorous national training program in all of our corporate stores. Every one of our store employees is being trained on best practices, all to ensure our customers are able to purchase the best quality product possible at a great price.

From a presentation point of view, our display standards are becoming more consistent and we are looking at new ways for Save-A-Lot to showcase products. For example, bananas are now being offered for safe on new euro tables and we are testing more appealing ways to display certain bulk products. As a result of these efforts, we have seen stronger sales performance in the produce category especially in our corporate stores.

Better merchandising and more effective product displays are not isolated to Save-A-Lot's perishable departments. We are resetting the center-stores categories and all corporate stores which is scheduled to finish in Q3, creating a cleaner, horizontal sets which are more visually appealing, easier to shop and have greater space allocated to high velocity items. We have eliminated aisle stacks to make it easier to navigate the store and have improved product adjacencies such as placing all beverages in the same aisle and locating non-food and household items next to one another, to better meet the needs and expectations of today's customers.

We are working on other things at Save-A-Lot that I plan to discuss further in coming quarters, all of which are designed to continue to improve sequential ID sales trends and remove costs from the business.

On our last conference call I said that SUPERVALU would be decentralizing its operations and decision making process, and I am pleased with the progress we have made.

With the reductions in force we announced at the end of March now substantially complete and many of the tasks previously performance at our corporate offices have been moved into the retail banners, our five banner presidents have been working to make our banner stores more attractive to their local shoppers. Banner merchants are now fully responsible for coordinating the procurement and promotion of all items carried in our corporate stores, utilizing all available resources within the company to find the items and deals that will appeal most to their customers. This philosophy carries over into both the weekly ads and store promotion space where local merchants select the products and set the price points.

Customers have begun to notice the weekly newspapers inserts have purposely become more focused on our fresh offerings where we still have a great opportunity to increase sales. We are also creating a visually cleaner look to our ads and striving for a less cluttered feel meaning we plan to promote fewer but more relevant items designed to drive customer traffic and start contrast to our pass model geared toward garnering vendor dollars.

As a result of our decentralization we have lowered our cost structure, simplified our business model and placed decision making closer to the customer. More importantly we have a tremendous opportunity to improve our retail food results by implementing basic operating standards that will improve product quality and the shopping experience for our customers. I touched upon this last quarter but I want to reemphasize that the biggest opportunity we have is in improving our operations and not our pricing.

Critical to this is changing our mindset to a culture of selling to not be afraid to move product to focus on selling before shrink in a prudent manner. To ensure all of our store managers know what is expected, all five banners have a model store in each of their districts which will be in place by the end of the second quarter.

These model stores incorporate the key operating changes we want to implement this year. Things like standardizing labor hours, improving the specs within our perishable apartments, making for a more clutter free shopping experience and improving our private label program.

By implementing as many of these desired changes as possible in a limited number of stores, we could be sure of the banners get it right before a broader push into all of our stores. This approach also allows others to see the changes in person and in real-time which will make it easier to make the necessary changes in their stores.

Having touched upon pricing, let me say that we continue to make price investments across the store network. But these incremental dollars are very targeted and modest within the broader context of what we are working to accomplish.

Let me now turn the call over to Sherry Smith, our Chief Financial Officer for some comments on the quarter and our financial condition, Sherry?

Sherry Smith

Thank you, Sam and good morning everyone. As outlined in this morning press release, total sales for the first quarter were $5.2 billion and our adjusted earnings from continuing operations was $34 million or $0.14 per share, which excludes charges and costs primarily related to the transaction which closed in March and the refinancing we did in May.

The capital structure of the company provides for adequate liquidity and a debt maturity profile that allows management to operate the business to drive towards the objective that Sam outlined sales and cash.

On March 21st, the company completed the sale of the NAI banners and issued approximately 42 million shares company investors at a purchase price of $4 per share in cash to the company or approximately $170 million. This resulted in the finalization of a gain/loss on sale which is reflected in the first quarter as part of discontinued operations as well as the finalization of tax matters related to NAI.

In late May, we completed certain refinancings which reduced the overall interest cost to the company and extend the maturity of $400 million of our bonds which were previously due in 2016 to 2021. First, we repriced and amended our existing $1.5 billion secured term loan reducing our all in cost by 125 basis points, a 100 basis point reduction in our spread and a 25 basis point reduction in the LIBOR floor.

We also modified the Accordion feature which increased the incremental loan amount available to us to $500 million. Next, we tendered the $372 million of our 8% 2016 notes, which helps mitigate any potential near-term refinancing risk. With this, we now have approximately $628 million of the May 2016 outstanding.

This tender was funded with $400 million of new eight-year unsecured bonds that bear interest at 6.75%. We were pleased with the timing of all free transactions which allowed us to take advantage of historically attractive market conditions. As a result of these transactions, Standard & Poor’s upgraded our credit rating from B to B plus and moved their outlook on the company from negative to stable.

Moody’s also changed their outlook from negative to stable. As a result of these activities, we incurred the following charges. First, we took $98 million in non-cash charges to write up unamortized financing charges and original issue discount tied to refinancings.

Second, we expensed $71 million in cost and fees related to the term-loan repricing and the issuance of 2021 note. Third, we book an additional 39 million in expense for employee severance and accelerate stock compensation, predominantly tied to the action report announced at the end of March. And lastly, we incurred an additional 19 million in expense that was primarily tied to the impairment of various assets not necessary for the ongoing business.

Before I provide additional color on the quarter, let me give a few comments that provide context around the numbers. First, the reduction in force we announced in late March is now substantially complete with nearly all impacted employees having left the company. As we indicated on the last call, following a transition period, our SG&A will be at a run rate level mid-way through Q2.

Second, we have modified our segment presentation to present the strained pension and all activities related to the transition services agreement or TSA in the general corporate line. As you may recall, I stated last quarter that the single employer defined benefit pension plan will now be predominantly booked into the corporate line in our segment statement. This reflects all inactive employees. Quarterly results for both this year and last year have been recast to reflect both the pension and TSA. Finally, I would point out that we have reordered the sequence of our segments to better reflect the relative size of each.

Let me now move to sales for the quarter. Independent business sales were $2.46 billion, a 60 basis point decline from last year's $2.48 billion. As Sam noted, we did see lower year-over-year military sales and [cost inflation] again ran below low historical norms, which we attribute to the challenging environment since last summer's announcement of the strategic review process. Partially offsetting this was the benefit from some business with our previously owned jewel stores in the Chicago market.

Network ID sales at Save-A-Lot were negative 1.9%, a sequential improvement of 70 basis points from the fourth quarter. ID sales from corporate stores within the Save-A-Lot network, a new metric we will now be disclosing, were negative 1.2%, which represented the third consecutive quarter of sequential improvement for the stores we operate.

Both sales figures include the impact of the 50 basis point reduction in inside margin made early in the quarter. Within our Retail Food segment, ID sales in the quarter were negative 3%, customer comps were down 2.6% while basket size declined by 40 basis points.

Consolidated gross margin was up 30 basis points compared to last year, which was largely driven by lower infrastructure costs, primarily related to the merchandising and marketing functions, which resulted from our cost cutting initiative. And these were partially offset by price investments both at Save-A-Lot and within Retail Food. Cost inflation ran slightly less than 1%. SG&A expense, as a percent of sales and adjusted for non-recurring items, was down 170 basis points from last year. This change reflects the benefit of year-over-year cost savings, including a portion of the reduction in force announced in March as well as TSA payments that covered standard costs included in the fiscal '13 numbers.

Moving to the segment results, both independent business and Save-A-Lot had essentially flat operating margins relative to last year adjusting for the non-recurring item. At Save-A-Lot, the incremental investment in price was offset on the expense side.

For Retail Food, the improvement in operating income both in dollars and as a percent of sales was driven primarily by admin cost reductions which were reflected in both higher gross margins as I mentioned earlier and lower expenses, partially offset by the investment in price.

Within our corporate segment, as noted earlier, we are now including the expenses and fees related to the transition services agreement as well as pension expense associated with the inactive and corporate participants. Excluding charges, corporate expense this year was $29 million compared to $102 million last year. This change reflects the benefit of year-over-year TSA fees that covered administrative costs remaining in continued operations. What you may think of [SG&A] costs.

Earlier I outlined the various financings we completed in the quarter. As a result of these, outstanding debt obligations at the end of Q1 were a $1.5 billion term loan secured by a portion of the company's real estate equipment and an equity pledge from Moran Foods, the legal entity behind Save-A-Lot. Again, this facility was also upsized to allow us to access an additional $500 million.

An asset base revolving credit facility with a borrowing base that should range between $900 million and $1 billion fluctuating with seasonal inventory levels, $628 million in senior notes maturing in May of 2016, $400 million in senior notes maturing June of 2021, capital leases totaling about $320 million and industrial revenue bonds of about $30 million. The company’s upcoming scheduled debt maturities are small, with only $70 million coming due through the end of fiscal 2016, excluding capital lease obligation.

As I mentioned earlier, our large maturity is $620 million of bonds which come due in May of 2016, our fiscal 2017. Capital expenditures during the quarter total less than $20 million which was predominantly spent on maintenance items across our stores and distribution centers. Our folio plans remain unchanged at about $150 million, as our focus remains on operation and execution.

Finally, our share comp for the quarter included three of four periods at the new level of approximately 258 million shares, including the 42 million shares issued to Symphony Investors, and one period at prior level of approximately 230 million shares. Keep this in mind, as you think about model, our share comp for the balance of the year.

With that, let me turn the call back to Sam.

Sam Duncan

Thank you, Sherry. Needless to say there is a lot happening at SUPERVALU and much more still do. We’re clearly in the process of improving our operations, but I am pleased with our first quarter results.

When I became CEO, I said I would run this company with sales and cash as my top priorities. Although we have made progress on improving our sales trends, our focus remains on generating positive ID sales and we will make the necessary investment to achieve this goal.

I am continually challenging our people to explore other opportunities where we can more broadly use the expertise, experience and knowledge that we possess to accomplish our goals. I believe we still have great opportunities to leverage the skills and talent already residing within the company.

We’ve made great strides on breaking down the silos in which we operate, but the more I learn about the company the more I think even greater potential exists to do things faster, better and cheaper by more effectively utilizing our existing infrastructure.

Looking back the past 16 weeks, it is clear the company has a new found sense of urgency and I look forward to updating you again next quarter on the progress that we have made.

With that, we are now prepared to take your calls.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of John Heinbockel with Guggenheim.

John Heinbockel - Guggenheim

So, I’ve two issues, one on retail EBIT, there was no year-over-year benefit I take from your comments from the new TSA in retail EBIT, is that fair?

Sherry Smith

That’s correct, John. We’ve moved all the TSAs down in general corporate and as we’ve said, essentially that agreement is there to help cover the cost of the company incurred in providing those services.

John Heinbockel - Guggenheim

But there was though a pension reclassification benefit in retail EBITDA, is that not right?

Sherry Smith

Well, if you compare the prior year.

John Heinbockel - Guggenheim

Yeah.

Sherry Smith

But we’ve recast the prior year is also on a comparable basis now.

John Heinbockel - Guggenheim

Yeah.

Sherry Smith

So all of the pension costs that are related to inactive associates are really inactive employees that are no longer with the company, we’ve moved that cost down into general corporate as well. Therefore, the retail food operating earnings are truly representing the operations of the business.

John Heinbockel - Guggenheim

Okay. So, as I guess there was a real core growth in retail EBIT this quarter and most of that was driven by cost reduction, is that right?

Sherry Smith

Yes. Excuse me, yes, that is right. With all the decentralized moves, there was obviously significant reductions particularly in the merchandising and marketing areas.

John Heinbockel - Guggenheim

All right. And then just on Save-A-Lot, so two issues there from a merchandising standpoint, Sam. Maybe number one, what's your current thought on the private brand architecture there and what you may want to do with that? And then secondly, is there any merit to treasure hunt element to merchandising, similar to say what Alby does? Or is that not really appropriate for Save-A-Lot?

Sam Duncan

First on the private brand, on Save-A-Lot, the vast majority of our items there are private brands and that continues to be our focus and reaching this team or making pride on that. The big key to Save-A-Lot is the inside margin that I talked about and reducing that, which we are making great progress on. And so the way that we are going to grow our private brand sales there is continue to drive down that inside margin and to continue to gain back the confidence of our licensees which are all great people. Regarding Alby I'm not sure what you mean by treasure hunt, so you might add some color to that…

John Heinbockel - Guggenheim

I mean more the general merchandise that they have, they have a pool, they'll have a generator, they'll have work boots, a lot of the general merchandise products in the center of the store.

Sam Duncan

John that's a great question. I guess I would answer that by saying that we have more than to keep us busy right now.

John Heinbockel - Guggenheim

Yeah.

Sam Duncan

And as we continue to make progress in the organization we will definitely look at other opportunities. Now whether it's going to be that type of stuff, I don't know, but we will definitely have an open mindset to it.

John Heinbockel - Guggenheim

What I meant by private label architecture was not so much the categories but more is there merit to brand consolidation, and not having so many brands but having more power brands or more brands under the same name?

Sam Duncan

Well that's what we are working on. One of the things we are working on, on all of our company is, three parts of it, is coordinating things with private label and a lot of other things. We have an incredible private label organization in our company. And what was not done in the past for reasons I don't know is all three parts of the organization working together on private label coordination and many other things. And that's something that we're really focusing on now and we're going to see some good things about that in the future.

John Heinbockel - Guggenheim

Okay. Thanks.

Operator

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

Meredith Adler - Barclays

Hey, congratulations and thanks for taking my question. You've talked a lot Sam about inside margin and I guess the question would be do you have some expectation about how much sales have to improve to justify cutting the inside margin? Are you there yet or how long do you think it will take? And is there the potential or is there something that you've already got planned out that says if these improvement in sales don't happen, then we're going to have to make some adjustments to the inside margin?

Sam Duncan

Well we already -- we're seeing good progress on the things that we are doing. Meredith, so much of the issue that we had, on the licensee side, was a lack of confidence for a couple of reasons. One of course was the strategic alternatives and the other one was the inside margin itself had gotten too high. And we basically forced the licensees to buy around us because of that inside margin getting too high. And what Ritchie and his team has done is -- and I mentioned about that, the 50 basis point reduction was really in about a dozen items. Well Ritchie and his team were very smart in what they did. They got the input from the licensees and saying okay, what items would you like to see lowered to drive some volume? So we got the participation of the licensees, which is a big [deal] because now they feel like they are involved in the solution. And we had great success in first kicking that off, but still we heard our relationship with our licensees for a long period of time and we are not going to get that back overnight. It is up to us to gain our confidence back. And we are working on that very diligently.

We are going to continue. The key is as we drop the inside margin, it is to see what the results are and you just don’t keep dropping it day after day after day. And what Ritchie and his are doing, they are earning what they are investing. Okay. They are going to invest as we did a 50 basis points in margin and we are going to drive the sales, okay and it’s going to pay for the future reductions.

And how long is it going to take, you know, time will tell. But we are going to get better each time. Ritchie and I talked about what we think it will take. I don’t want to talk about that right now because it is very early. But it is something we are going to continue to focus until we get where we need to be but we are very happy with what we are seeing as we are doing the reductions today.

Meredith Adler - Barclays

And then I don’t think you have commented really on inside margins so much for your -- in your independent business. Fairly you have spoken about perishables and having more clarity about the future for SUPERVALU as the distributor, but is there also an opportunity to lower the inside margin and again how would you sort of be measuring the benefit of that?

Sam Duncan

Well we do look at that. I -- Janel and the team and myself are comfortable with where it’s at and we take a look at that of course every time we look at signing an existing customer or going out there and bidding on a new customer. But as of right now, we feel comfortable with where we’re at and don’t see any changes at this point.

Meredith Adler - Barclays

And then my final question is about the retail banner scores. I mean, I am hearing things about changes in the competitive environment in some of the bigger markets. And do you feel that you have to really make any changes in the way you go to market to be able to deal with some of those competitor pressures. I mean, I have been hearing about Wal-Mart in Minneapolis really going after Cub, any comment about how you address that?

Sam Duncan

Well, I hope that you are hearing some of those competitive changes because of us doing some things right. We are making some great changes in our retail banners in a lot of ways, and one thing I would like to remind everybody the deal closed on March 21st. And when the deal closed, we just didn't flip the switch and turned everything over to the retails banners.

There was a process that we had to go through, a very detailed process. And we had a 16-week quarter and our banner presidents and their teams really did not take over the total operations of the banners until week 9 and 10 because there was already deals and process that have been put into place prior to the deal closing because you got to keep going because you never know if the deal is going to close or not.

So, once it close, we had a lot of work to do in reorganizing the banners. The banners had to get there, the corpus field of human capital inside the banners. So there was a lot of blocking and tackling done in Q1. And after they got there then we could start focusing in on the ads like they talked on some pricing and -- so we have got all of that done.

And the past few weeks is when we really made some changes in our ads. And so my hope is that, our name is brought up in a very near future about being very competitive and doing some great things. And you got to remember too, when we -- the point where we started from, we had a heck or lot to improve on, but we are making great strides in that and I feel very comfortable with where we’re at.

Meredith Adler - Barclays

Thank you. That’s very helpful and I will also wish for the same thing that we hear about you roughing them all up.

Sam Duncan

That’s our intention.

Operator

Your next question comes from the line of Ajay Jain with Cantor Fitzgerald.

Ajay Jain - Cantor Fitzgerald

Hi. Good morning. I think in the past, it’s been suggested that your retail banners are much less in need of price investments compared to Albertsons. And it look like you did make some price investments in Q1. So Sam, I think you indicated in your prepared comments that it's definitely a priority to reverse the negative ID. So I'm just wondering how quickly you might think it takes to get to positive IDs in both retail and at Save-A-Lot and if you feel like you need to take a lot more action on pricing at this time.

Sam Duncan

Again, I made the comments that -- and I am very sincere when I say this -- pricing was not our biggest issue in our operations. It was the operations itself. And I could go through a litany of things that cause that but I'm not going to do that. We have worked very hard in getting our operations right, because if we were to have just went out there and made a lot of investment and pricing without changing the operations, it would have really been a waste of money, and we couldn't do that. So we had to work on fixing the operations first. We are not where we need to be.

The investment that we made in pricing was modest and that's how we modeled it. But with the things that we are doing we are starting to see it, some good things happen just with the operations. Cleaning up the stores, getting rid of aisle stacks, side stacks, specs and produce. Things like making sure that we're buying on quality and not price and produce, how we handle product and produce, totally re-merchandising the produce department, the meat department, bakery departments, better fried chicken programs. I mean I could go on and on and on. And we are going to do the right things where people come in and we're going to build the sales on having great fresh departments. And pricing, yes, we will make some investments but that's not the biggest thing that we're going to focus on.

Ajay Jain - Cantor Fitzgerald

Okay great. And on Save-A-Lot, I think it was previously suggested that -- and correct me if I'm wrong but the corporate owned stores, corporate owned Save-A-Lot banners were doing worse from an execution standpoint than the licensees. And now it looks like the corporate stores are comping better than the licensees. So my question is whether you think you've addressed the main sort of remedial operational issues at Save-A-Lot, both on the corporate side and also with the licensees or is there still a lot more work to -- still a long way to go there?

Sam Duncan

We have identified and are working on the main problems. And first of all, I'm very happy with what we've done in the corporate stores, as we indicated with the numbers. Our overall comps, IDs improved from 2.6 to 1.9. And as you saw the numbers, the corporate stores are 1.2, so they are performing better. The whole meat cutting program is going to make a big difference in our stores and already we are seeing that. And the merchandising changes that we're making there are really great. What Ritchie and his team are doing the horizontal merchandising, gives the store a whole different look. And the full cut meat program it's just -- it adds so much atmosphere to the store. And our licensees have told me and they tell us that their business is depending on having great meat departments, which they already have full meat cutting and that's what we are focusing on.

And also the produce things that we -- produce differences or the changes that we are making in merchandising in a big difference. I can't explain to you how much better it is when you have -- when you're selling bananas, off of euro tables instead of boxes, cardboard boxes and how we were doing it. But we're making great changes there and we feel very good about where we're at on the corporate stores and the future.

Ajay Jain - Cantor Fitzgerald

Great. Thank you.

Operator

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

Scott Mushkin - Wolf Research

Hey guys, thanks for taking my questions. So I just wanted to take a stab at the retail banners again a little bit because I actually agree with you. I think pricing is not your biggest problem. I'm not sure that's a good thing. So I wanted to get your take on kind of the relevance of the banners in their markets, if you feel like they are where they need to be. Do you think they are rescuable with the sales being as negative as they have been for a while? I also want to talk about the condition of those stores, specifically maybe even Shoppers. And then I wanted to touch on what Meredith did and kind of bring it all together on the competitive climate, which does seem to be deteriorating, get your thoughts on there. And how we can think of bringing all these things together on the path to sequentially improving costs and is it even thought to get them positive in the next 18 months?

Sam Duncan

Well, let see, if I can remember all your questions. First of all on the conditions the assets themselves, I started working on this project year ago. In fact, this weak a year ago is when I got the call from Bob about coming a Board and soon after that I started going out and looking at all the assets, all the banners. And the thing that pleased me the most was that the assets themselves in an aggregate were in great shape. The buildings, the parking lots, equipment and all of that, I was very, very pleased with.

There are some -- there is going to be some outliers out there and I get that. But in reality the assets were in excellent shape. When it comes to talking about pricing versus merchandizing opportunities, what you have to look at and when I looked at in these retail banners, where is the most opportunities if you counted it without a numbers.

The opportunities in merchandizing, there were so many of them that far outweighed what the opportunities are in pricing. Now that very well could have been reverse, but it’s not and our biggest opportunities are in the merchandizing.

Now pricing we did make investment. We are starting to. We are going to continue. And when I say they were going to make the necessary investment to achieve the positive ID sales, not I mean that. The investment could be in equipment for better merchandizing, it maybe more pricing, but already with the 110 basis point improvement in Q1, that’s a good indication. What you can do, with just by making some changes and we are going to continue to work on that.

The comparative climate, we -- the competitive climate, I think they kind of forget about us, maybe I don’t know and they may eat up because, we are finally starting to run better stores and running better ads and those type of things. I don’t know. Time will tell. But we are going to focus on what we are going to focus on and do the best we can and make the investments that to achieve the positive ID sales in this company.

Now how long will that take? My hope and I’ve said this before, is that the year, by-year end to get a turn and we’re going to continue to be focused on that. But we have plenty to work, in my opinion, on the merchandizing side that to get the results that we wish.

Scott Mushkin - Wolf Research

So thanks for that. Just two quick follow ups. Number one, are the comps in both Save-A-Lot and retail banners still improving? And then the second one, you can touch on was inflation which looks like it’s going away?

Sam Duncan

Well, I would just say that I’m happy with what I’m seeing, I’ll make that comment. An inflation below 1%, I don’t know what we’re going to see in the future. This might be a year where we have basically no inflation, time will tell.

Scott Mushkin - Wolf Research

Thanks very much. I really appreciate it.

Operator

Your next question comes from the line of Stephen Grambling with Goldman Sachs.

Stephen Grambling - Goldman Sachs

Thanks for taking my question. Just the follow up and I think it was AJ’s question. What is holding back licensees purchases? I would have thought the PCI would have started to recover.

Sam Duncan

Well, the licensees, they are always going to be delayed on the corporate stores simply for the fact that we can initiate changes faster the corporate stores, of course we own them, and we can make things happen there quicker.

On the licensees, there is always going to be a delay because the licensees, of course, they have the facilities and basically own them, and please remember that we’re working very hard to gain their confidence back. We cannot gain back in one quarter what was lost over six, eight, 10 years. It’s just not going to happen.

But the licensees are already making great comments about how they feel much better about the organization and how much better they feel about Ritchie being at the helm and his people and what they are working on. But there’s always going to be a delay no matter what just because of the nature of the way the structure is. But we are getting a lot of great comments from the licensees and that’s Ritchie’s goal and his people and our goal is to make sure that we continue that and so much of it is by communication and getting out -- and getting in front of those licensees face to face. And that’s what Ritchie has done going out and attending their share group meetings, high [net-worth] in the very beginning when I came to the company. So again we are working very, very hard to gain their confidence back that put many years to lose.

Stephen Grambling - Goldman Sachs

And as we think about that confidence coming back, can you maybe elaborate on when you think or when we should start seeing growth accelerating in terms of store growth in that segment?

Sam Duncan

The licensees have already told us that their -- the biggest thing was having the deal to close and so now that could be, they could get set off of their mind and now they are starting to see that, we’re really excited about what we are doing in Save-A-Lot now and getting their confidence back -- now that they are —now they are starting to open up their wallets and start looking at building new stores. And so we will start seeing that progress here as the year goes along and it won’t be this big number right away but we have to continue to do the right things to garner their confidence. And that’s where our focus is.

Stephen Grambling - Goldman Sachs

One quick one if I may, which is just to confirm the comment that you made earlier about being on target for the year. Is that in relation to the tender offer has been?

Sam Duncan

No, that’s in relation to the EBITDA goal that was out there, that was put out about when the deal closed, I believe.

Operator

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

Edward Kelly - Credit Suisse

I have just a quick follow up on Save-A-Lot and the growth there. When you think about ultimately returning the growth, what’s your preference on how you do that corporate owned versus ultimately license stores, it should have puts and takes to it. So maybe you could just talk about your preference there.

Sam Duncan

I really don’t have a preference on which we grow first are more of the -- a lot of it though is -- if you go into an area, or an area that we are already in, and you look to expand stores, a lot of times it’s easier and smarter for us to go in there and open up corporate stores and then you go out and you look for licensees either existing or potential new. So in reality, it’s easier, quicker to open up corporate stores and turn them over to licensees eventually. So that is the one aspect that we look at and we will continue to look at. But we hope that the licensees, existing licensees as we gain their confidence back, they will be ready to open up new stores and there already is some talk of that. But in reality, I guess I would say is easier for us to open them as corporate and then turn them over to licensees, some point down the road.

Edward Kelly - Credit Suisse

And a follow-up on your distribution business, could you maybe just talk a little bit about the landscape out there from a competition standpoint, your ability to return this business to growth and how much of that actually comes from taking on new customers versus just taking a larger share of wallet of your existing customers?

Sam Duncan

That’s a great question. And first of all, our wholesale business I absolutely love it. As ever day goes by, I just appreciate our wholesale operations so much and our people so much, it’s just a great operation. We are going to get back to the roots of what we are great at. We are going to be a great wholesale company. And that’s what we are and we will continue to focus on. Again because of these strategic alternatives, there was a lot of question mark, like we saw about what was going to happen to SUPERVALU. Now that, when the deal closed in March, we got out and met and talked with a lot of the wholesale customers, which our wholesale customers are just terrific. We have some amazing customers and they are very happy about SUPERVALU going back to its roots of being a great wholesale operator. And we are gaining the confidence back there, I will tell you. It is just like the licensees.

We have -- we got to work hard to go back and gain their confidence, but our -- Janel and her team had already done a phenomenal job in keeping the confidence, I should say, more than anything. But we are going to love to grow that operation because that is what we are darn good at and that is going to be our team. And we’ve got a lot of things in the pipeline right now that we are looking at, as I said in my comments, potential new customers.

Is that going to come to fruition, I don’t know. But we are in the stages where we have some opportunities and I hope we can show those customers that we are very capable of supplying them and being a great supplier. But I will tell you, I am thrilled with our wholesale operation and so much of that is because we have great people and great customers.

Edward Kelly - Credit Suisse

Great. Quickly, any chance that we are going to get restated quarters for 2012. I know numbers have been moving around a lot here. It makes it difficult to forecast?

Sherry Smith

Yeah. In regards to the recast, so for fiscal '13, we will provide an 8-K on that in the next two weeks.

Edward Kelly - Credit Suisse

Okay. Thank you.

Sam Duncan

And we will take one more question before we wrap the call up.

Operator

Your final question comes from the line of Jason DeRise with UBS.

Jason DeRise - UBS

Hi. It’s Jason DeRise from UBS. I just wanted to ask about the balance sheet of free cash flow, just with the lack of that quarterly disclosures, a little hard modeling, I just want to get a sense of free cash flow came in, were you expected CapEx was very late. Just want to get your comments relative to your own expectations?

Sherry Smith

Yeah. It did come in while we expected. Clearly, we knew the first quarter we had a lot of different costs, inflows and outflows in regards to the deal as well as certainly doing, financing related to the margin and the refinancing in May. So, we believe we are definitely on track with our cash flow for the full year and our debt pay-down that we have planned.

Jason DeRise - UBS

Okay. Thank you. And then also one other question, there was a comment about cleaning up the store and doing the reset of the stores, I think, mostly about stable outfit. I think it also applies to traditional. Is this SKU count changing if they are going up or down and how is that decision being made?

Sam Duncan

The SKU count is made up the banner level. And there has been some increase in SKUs in categories where we saw the that we were -- our SKU count was not what it needed to be compared to our competitors. So we are making some additions there. It is not going to be a massive number, but all in all it will be an increase in SKU count.

Jason DeRise - UBS

And at the same time cleaning up the presentation and streamlining, I guess, can you reconcile that?

Sam Duncan

In what?

Jason DeRise - UBS

I just say, a comment you made earlier, was that you are trying to clean up, the stores clean up the presentation mutually, it sounds like an SKU reduction. So you are saying it is going up, so how are you going to do both those things at the same time?

Sam Duncan

When I talk about cleaning up the stores, that has nothing to do with SKU count, absolutely nothing. When I talk about cleaning up the stores, I talk about eliminating pallet displays in the stores, aisle stacks which block customer flow, stripping and waxing floors, cleaning the equipment, the produce racks, the dairy cases, those type of things. That has nothing to do with SKU count.

Jason DeRise - UBS

Okay. Thanks for clarifying. There’s obviously a very large player about five to six years ago that was talking about the same things and that’s good to hear that clarification on the SKUs.

Sam Duncan

Thanks. No problem.

Steve Bloomquist

With that, we’ll conclude the call. Thank you everybody for joining us. I will be in my office later today if anybody has follow-up questions.

Sam Duncan

Thanks for your time.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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