Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Kenneth Levy -

Pamela Knous - Chief Financial Officer and Executive Vice President

Craig Herkert - Chief Executive Officer, President and Director

Analysts

Edward Kelly - Crédit Suisse AG

Meredith Adler - Barclays Capital

Scott Mushkin - Jefferies & Company, Inc.

Karen Short - BMO Capital Markets U.S.

Ajay Jain - UBS

Mark Wiltamuth - Morgan Stanley

Deborah Weinswig - Citigroup Inc

Neil Currie - UBS Investment Bank

Charles Cerankosky - Northcoast Research

SUPERVALU (SVU) F1Q11 (Qtr End 06/19/2010) Earnings Call July 27, 2010 10:00 AM ET

Operator

Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to SUPERVALU's First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ken Levy, Vice President of Investor Relations. Sir, you may begin.

Kenneth Levy

Thank you, Carmen. I want to welcome everyone to SUPERVALU's First Quarter 2011 Earnings Conference Call. Joining me on today's call are Craig Herkert, SUPERVALU's Chief Executive Officer and President; and Pam Knous, Executive Vice President and Chief Financial Officer.

Following prepared remarks, we will open up the call for your questions. [Operator Instructions]

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 now turn the call over to Craig Herkert.

Craig Herkert

Well, thank you, Ken, and good morning, everybody. As you read in today's release, SUPERVALU reported earnings per share of $0.43 for the first quarter of fiscal '11, which excludes the impact of onetime items. This was a tough quarter for us but one that ushered in positive operational progress.

Despite weak top line sales and expense deleveraging, we controlled our margins well and continued to take cost out of the business. First, let me provide some color on our ID sales. Excluding Shaw's, due to the labor dispute which was resolved earlier this month, ID sales declined 6.5% year-over-year. To put this in context, we're cycling last year's heavy promotional period, and the consumer remained stretched.

Since the beginning of the year, our merchandising, marketing and retail operations teams have worked collaboratively to improve value perception at store level, and our efforts to control margins have begun to show tangible signs of traction. The 10 basis-point improvement to gross margin during the quarter reflects more effective promotional spending, which was partially offset by price investment.

For the quarter, the percent of items sold on promotion was down approximately 100 basis points from a year earlier. Over the long term, we believe this work will help us drive sales, restore customer confidence in our brand position and be more deliberative with our promotional activities. Though much work remains, I do want to provide a candid update of the progress we're making.

In merchandising, we've identified a number of opportunities to better leverage our extensive store network. One particular opportunity that I have spoken to before is SUPERVALU's network-wide promotional events for power sale items. Today, I'm able to provide you an update on two events we completed this past quarter.

In May, we successfully ran a national sales promotion on Soup across our 4,300 store network, including Save-A-Lot and our independent retailers. This promotion drove several million incremental unit sales within the category. In June, this event was followed by a similar promotion in the Cereal category.

Both power sale events went well, met sales targets and serve as an initial marker for our vendor partners that SUPERVALU can execute company-wide programs and move product quickly. Each successful event builds vendor confidence in our company-wide capabilities and should ultimately level the playing field with others in the industry. Our 4,300 store network is a distinct advantage that further differentiate SUPERVALU from its competitors.

Another refinement to our merchandising strategy focuses on everyday pricing in select categories to maximize sales and generate labor efficiencies. Across the store, we have a number of product groups that can best be described as convenience items. They don't necessarily drive foot traffic or incremental store purchases, but our customers have come to expect them as part of the store assortment. These products require a high level of labor maintenance when promoted though their demand profile is relatively inelastic.

Over the next few months, we will begin offering these products at constant everyday prices rather than employing promotional cycles. Pricing will be competitive, and this change will allow us to realize significant incremental labor efficiencies.

To illustrate, today, our store associates spent countless hours changing shelf tags across 140 SKU category throughout our 1,200 store traditional network several times a month. A constant price strategy will eliminate or redirect these labor hours to customer-facing activities. However, brands are another important component of our effort to drive incremental sales.

Last quarter, I talked about our decision to bring SUPERVALU's private brand activities in-house. Additionally, we've corrected pricing and imposed new shelf placement disciplines company-wide. Since making these changes, I'm pleased to point out that our private brand penetration rose above 18%, moving us closer to our year-end target of 20%. For the quarter, unit sales were north of just 20%.

At SUPERVALU, customers are shopping our private brands with increasing frequency. Our entry-level price point offering, Shoppers Value, is also gaining greater traction with the independent retailers we service through our Supply Chain business. Year-to-date, this brand is up 19% with our independent retailers.

As customers discover the quality of our offerings, we are building product loyalty that we believe will outlast the current economic cycle. We estimate that customers can save about $450 per year by selecting our private brands over national brand alternatives.

Moving to SKU rationalization. There's been a great deal of attention and discussion around this initiative, both for SUPERVALU and across the retail industry at large. Today, I want to be clear about what SKU rationalization is for SUPERVALU, how we approach this discipline and what it means to our shoppers. As SUPERVALU executes its SKU initiative, we have a well-defined vision for each center-store category. First, it is to offer variety in each category. Second is to avoid product redundancy and improve shelf space for offerings that are locally relevant. Next is to get the appropriate facings for private brand products. And finally, we seek to enhance labor productivity and curtail excess inventory.

The discipline with which we have executed this program to date allows us to improve in-stock positions on high-velocity items, continue to maintain a wide assortment of products and create labor efficiencies. To be successful, we have to be flexible. Running an algorithm or a spreadsheet will not tell you how each customer is affected by these changes.

We expect that new sets will need tweaking. It's a normal part of process and a healthy way to better understand and meet the unique needs of each community in which we operate. Whether we've made decisions that are unpopular with a number of shoppers, we go back and fix our assortment. Ultimately, we are confident that our methodical approach will result in efficiently run stores that carry a product assortment customized for the communities they serve.

To illustrate, let me call out one category, Oral Care, from which we removed about 20% of the SKUs. The vast majority of these edits related to tube size and slow-moving flavors. We did, however, remove some tertiary brands within each Oral Care segment. Where there was an impact to our customers, we made adjustments. Let me also add that following the reset, sales in this category improved 2.4%. Through the end of the first quarter, we completely reset 31 center-store categories and touched over 900 stores.

Next, let me provide an update on our project focused on improving the shopping experience in our traditional retail stores. Our goal is to simplify the shopping experience for all of our customers by making our product offering clear and our stores more inviting. Some aspects of this program will be evidenced sooner than others. For example, we've already redesigned shelf tags, improved signage and are communicating our brand position and product selection more clearly. Other aspects will take more time as we fine-tune implementation to appropriately fit the banner and locality store.

Last quarter, we projected that we would complete 300 stores this fiscal year. In addition, with our commitment to ensure we make the right decisions, we are extending the time line for completing these stores by about three to six months. This will provide us ample time to study additional pilot stores that are varying sizes and serve different demographics to improve execution for a broader rollout over the coming years.

Since March, Julie Dexter Berg, our Chief Marketing Officer, has begun to map out a new strategy for SUPERVALU that improves our market position and reinvigorates our emotional engagement with customers. These programs will sharpen the brand position for each of our banner brands and leverage all channels available to us to converse with our customers about who we are and what we stand for. I look forward to shedding more light on these activities on our next call, and I'm confident that at that time, we will have realized improvements in consumer messaging, which will heighten the awareness of our brands.

Across our organization and customer-facing initiatives, information technology plays a key role. I'm very excited about the work being led by our new CIO, Wayne Shurts. Since joining SUPERVALU in April, Wayne has launched activities enterprise-wide that will provide immediate benefits for this fiscal year. With Wayne's leadership, we are taking a closer look at the status of our merchandising system implementation. While a number of foundational applications are already up and running, we're evaluating staffing and other applications to re-prioritize those rollouts that will have the greatest near-term impact.

Over the long term, our priorities for information technology remain the same, to support a centralized merchandising organization while simplifying the business processes for our banners and stores.

As you know, I continue to be very excited about the prospects for growth and innovation within our Save-A-Lot organization. Bill Shaner, President and CEO for Save-A-Lot, has been leading a number of strategic opportunities to extend Save-A-Lot's brand equity in existing markets and better position this hard-discount format in the neighborhoods it serves. The Save-A-Lot model is built on efficiency and harnessing a strong distribution network with limited SKU assortment to offer customers everyday low prices at retail. Still, Save-A-Lot must work in each community to be hyper-local and establish a degree of customer intimacy that drives loyalty and brand recognition.

Structurally, we've done a good job of leveraging resources to improve internal planning capabilities that can help facilitate and accelerate Save-A-Lot's growth. By aligning our Business Development and Real Estate teams into a single organization, we are more effectively identifying new markets, store locations and licensees. Bill and I agree that these are all critical ingredients to Save-A-Lot's growth trajectory.

You previously heard me speak to our cost initiative called, let the building be the building, which allows licensees to open stores with significantly less capital. Another way we're making investment proposition more attractive for licensees is through a new incentive program, which offers upfront cash incentives or rebates based upon anticipated sales. With 100 new locations planned for this fiscal year and about half of these stores scheduled to be opened by licensees, these programs will help to improve the return on their investments.

Going forward, we believe we have significant opportunity to expand our base of licensees beyond traditional retailers. We've added talent to our development teams specifically to attract non-traditional retailers into the Save-A-Lot network, who otherwise might have opted for other franchise-oriented opportunities. Outreach to mainstream entrepreneurs is a significant focus for Save-A-Lot and will help us to double our store count by fiscal 2015.

Our Save-A-Lot plans for this year remained on track and include particular emphasis on Southeastern United States, with over half of this year's stores planned for the Carolinas, Georgia, Alabama, Mississippi and Louisiana. Save-A-Lot will also continue to back drop [ph] markets where we have existing infrastructure to manage this growth and where the Save-A-Lot brand has built a loyal following in cities such as Detroit, Cleveland and Philadelphia. In these particular markets, Save-A-Lot can successfully build nutritional gaps and meet the needs of local consumers for low-priced, high-quality groceries in urban food deserts.

Equally exciting are the new ways Save-A-Lot is developing strategically to serve different population demographics. Let me share with you an example of how we are bringing this vision to life.

Houston and South Texas are relatively new markets for Save-A-Lot and are each defined by their significant Hispanic populations. As Save-A-Lot explored opportunities to customize stores that resonate with this demographic, the Save-A-Lot team decided to enter into a relationship that will allow us to learn about marketing and merchandising to this population.

Today, Save-A-Lot has formed an affiliation with Rafael Ortega, a grocer with more than 24 years of experience serving shoppers in South Texas through multiple grocery retail enterprises. Mr. Ortega has a deep understanding of the need and expectations of this rapidly growing Hispanic community and a developed business model that is highly compatible with the Save-A-Lot format.

As part of this relationship, Save-A-Lot has re-branded six stores in Texas as El Ahorro Save-A-Lot. The stores will showcase Save-A-Lot's hard discount pricing and easy to navigate floor plan. The shopping experience will be enhanced with hyper-local product selection that is fundamental to Mr. Ortega's retail experience.

In an El Ahorro Save-A-Lot, Save-A-Lot will supply center-store items while Ms. Ortega will source the specific meats, cheeses and produce to satisfy the unique taste of these communities. This is a very exciting partnership for us and one that will allow SUPERVALU to learn more about the Hispanic community. It should also help Save-A-Lot continue to deliver an overall return on invested capital of greater than 30% to our company.

With that, let me now turn the call over to Pam Knous, our Chief Financial Officer, who will provide some comments on our first quarter performance and SUPERVALU's financial condition. I will then follow up with some closing remarks.

Pamela Knous

Thank you, Craig, and good morning, everyone. Today, I will be covering our first quarter operating results, our financial condition and updated fiscal '11 guidance.

Starting with our income statement, quarter one net sales were $11.5 billion compared to $12.7 billion last year. This 9.2% decline was primarily the result of three items. First, identical store sales declined by 7.2%. Excluding Shaw's, which was impacted by a labor dispute for much of the quarter, IDs were negative 6.5%. Second, the impact from previously announced retail store closures, including the submarket exits in Salt Lake City, Connecticut and Cincinnati, and finally, Target's transition to self distribution.

Our ID sales were driven by a 3.5% decline in customer count and a 3.0% decrease in average transaction size. Customer count declined modestly from the fourth quarter. Compared to Q1 last year, we did cycle the introduction of Big Relief in Chicago, Southern California and Las Vegas in addition to a period of ineffective promotions which all drove traffic last year.

In contrast, transaction size improve modestly from the fourth quarter. On a year-over-year basis, the first quarter reflected favorable trends in both trade-down and inflation, which were offset by additional investments in price and fewer items per basket. In quarter one, for the first time in the past 10 quarters, trade-down was essentially flat, representing a 100 basis-point improvement from quarter one fiscal '10. Cost inflation ran about 90 basis points.

We also made price investments in the quarter that included: A price cut program at Cub Foods, where we reduced everyday prices on thousands of items across the store; Save-A-Lot, where we lowered prices on a number of items, most notably in dairy; company-wide adjustments to private brands as price spreads were corrected in the fourth quarter of fiscal '10; and our broader initiative to bring reasonable everyday pricing to our customers as we continue to migrate away from an extreme high-low strategy. The balance of the change in average ticket was driven by customers buying fewer items per visit, which was again down by nearly one-half item per order. We attribute this decline to cycling the Big Relief and our promotional efforts from last year.

Moving to operating earnings before onetime items, retail food was 3.0% of sales compared to 3.1% last year. This decline was driven primarily by lower sales and the impact of deleveraging on expenses. It is important to note that we have removed over $40 million in cost from our business since the beginning of the year and plan to finish the year achieving savings of roughly $160 million. Note that this savings estimate does not include cost of goods initiatives.

Supply Chain services delivered an operating margin of 3.0% sales compared to last year's 2.9%. We remain pleased with the contributions of our Supply Chain business, which continues to aggressively manage expenses and produce stable earnings.

Though small, I do want to mention corporate expenses. Corporate expenses were $29 million this quarter compared to $26 million in the prior year, excluding onetime items. In the current quarter, we absorbed $9 million of charges related to non-operating properties.

For the quarter, reported earnings per share was $0.31 per diluted share and included $0.12 in onetime charges, with $0.07 related to our market exit in Connecticut and Cincinnati and a nickel attributable to the impact of the labor strike that affected Shaw's.

Turning to our financial condition. We finished the first quarter with total debt outstanding of $7.4 billion, down by roughly $235 million from year end and a debt-to-total capital ratio of 72%. Inventory days supply fell by almost a full day compared to last year's quarter one, partly due to the benefits of SKU rationalization. We remain in compliance with our debt covenants with trailing 12-month EBIT of $1.2 billion, excluding impairment and other non-operating charges.

Depreciation and amortization was $0.9 billion and rent expense amounted to $0.4 billion. Recall that with the April 5 amendment and extension of our senior credit facility, the two covenants related to our credit agreement reset to less-restrictive levels. For fiscal '11, our interest coverage ratio must be greater than 2.20x and our leverage ratio must be less than 4.25x. Current year maturities are $611 million, which will primarily be repaid from internally generated funds.

I would now like to provide two brief comments on performance of our store remodels and customer satisfaction surveys. With regard to the performance of recently remodeled stores, our first-year remodel showed an average lift of nearly 3% when compared to other stores in their respective markets. Stores cycling their one-year opening were up close to 200 basis points in their second year. In our competitive customer tracking study, our customer satisfaction scores improved in eight out of the nine banners we track. Let me provide some comments on our fiscal '11 guidance.

Our first quarter sales were softer than we had anticipated, but with new leadership within our marketing and merchandising teams, we do have plans in place to help drive volume during the balance of the year. Our updated full year guidance for identical store sales now stands at approximately negative 5%. This puts total sales at approximately $38 billion for the year. Our capital plan of $700 million remains unchanged, although we have decided to extend slightly the time line for our in-store merchandising initiative, initially planned for 300 stores since fiscal '11. These projects were back-end loaded in our initial plans, and the completion of our pilot store testing will now delay a broader rollout into fiscal '12. However, as Craig mentioned, we now see a 50-50 mix of corporate to license stores for our new Save-A-Lot. So our capital spending will remain at approximately $700 million.

Our debt reduction goal also remains unchanged at $600 million and assumes capital spending of $700 million. This would place our debt-to-capital ratio under 70%, an important step on our path to returning to investment grade. So while first quarter sales were slightly softer than we had expected, we believe the plans we have in place around sales, margin and expenses will keep us on pace to deliver earnings per share guidance for other onetime items and achieve our debt reduction goal. We now anticipate $0.07 per share in charges for the Connecticut and Cincinnati market exits and $0.07 from the labor dispute for a total of $0.14 for the year.

As we stated with our initial guidance, we expect the first half of fiscal '11 to be considerably more challenging than the second half based on our view of the economy and the building of our marketing, merchandising and operational initiatives.

Before I turn the call back to Craig, I want to share with you my decision to leave SUPERVALU in order to pursue new career interest. Craig and I have discussed this over the past year and believe that now is an appropriate time to make this transition since we are both comfortable that SUPERVALU has the proper financial systems, policies and procedures in place, and we have taken the steps necessary to ensure the company's financial flexibility for the long term. From all perspectives, now is an ideal time to make this move.

As you will recall, over the past year, we have issued $1 billion of public notes, rightsized our dividend policy, amended and extended our revolving credit facilities, as well as introduce Craig and his strategic vision to our many stakeholders. Having served SUPERVALU for almost 13 years, I am ready for new challenges and have much left to accomplish in my career. I have greatly enjoyed my time with this company and feel privileged to have played a leadership role in transforming SUPERVALU from a predominantly supply chain enterprise into a major supermarket retailer.

In that regard, the acquisition and integration of Albertsons and the SUPERVALU family will always be one of my proudest professional accomplishments. I have enjoyed working with Craig since his arrival and wish Craig and his team the very best. I remain confident in his leadership and vision and know the company is in excellent financial shape for the long term.

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

Craig Herkert

Well, thank you, Pam, and really, I want to thank you for your many years of service to SUPERVALU. I'm especially grateful that you delayed your decision to depart until I had a deeper appreciation of the organization and its various components. Your presence and stewardship over the past year were especially important as I focused on the operational issues.

On a personal note, I understand the decision Pam made, and I wish her well. She's been a part of the company and has been the company's face for the financial community and has been instrumental in providing leadership and a strong financial discipline for this company during her tenure.

With regard to her successor, the company has already retained a search firm and expects to fill the CFO position by the time of our second quarter call. I'm pleased to say that Pam will be available to us to provide a smooth and seamless transition. Thank you again, Pam.

To wrap things up, I did want to address our outlook for the balance of the year. First, we are revising our guidance on identical store sales to negative 5% for the fiscal year. Full year sales are now projected to be at $38 billion. Second, we have accelerated our time line to achieve 50 basis points of savings from S&A. These savings will be realized by year end and help offset ongoing cost increases, including healthcare and pensions. Finally, I remain comfortable with our prior adjusted EPS range of $1.75 to $1.95 per share before onetime items. I would reiterate that earnings should continue to firm throughout the balance of the year.

In closing, let me say that we are gaining positive momentum across our organization as we continue to write our course. We have a lot of work in front of us, but I have confidence in my team and we know where we must go. This effort will take time, but when it's completed, it will be fundamentally altering the course of this company and the trajectory of our earnings.

With that, I'd now like to open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

I wanted to dig in a little bit on cost-cutting initiatives. In order for you to deliver this level of operating margin, you must have had some significant cost savings to offset the operating deleverage from that negative seven comp. So if you could just give us some highlights there.

Craig Herkert

Yes, briefly, I would say it's a broad-range approach, Mark, across the enterprise. A lot of it has been because we've gotten our arms around inventory, there are significant benefit to that really across the enterprise as we've gotten our arms around inventory. Lots of opportunity for improvement still in front of us there, but I don't know that I want to go into detail other than to say that in every part of this organization, we are focused on it. Our Senior Vice President of Finance, Sherry Smith, has been leading a team who's really tracking this and holding us accountable to it, so I do feel good about that. The other part your question really is about gross margin stabilization. And when Steve Jungmann arrived here earlier this year, one of the first things we did was we actually centralized the accountability for our retails. And as that's taken hold, we've really seen a nice stabilization of gross margins. I'm actually very, very pleased with the performance that group has put behind that effort and really gives us now the opportunity to focus on our promotional plans and making sure that we're driving effective promotions for our consumers.

Mark Wiltamuth - Morgan Stanley

I mean, ultimately, seeding market share and showing a comp of negative seven isn't really sustainable. So what really turns the dial? Is it just the re-merchandising effort?

Craig Herkert

It's a little bit of all of the above. The things we've talked about over the last few quarters, it's clearly the focusing on the shopping experience, the re-merchandising effort, the in-stock position, the value proposition quite frankly, a combination of the things that I spoke of. Certainly, our private brands which we're very proud of, and we're really trying to show our customers those, some of the initiatives, Steve and the group are leading, on getting us to a fair pricing plus promotions are sewing nice traction. The power sale light has been a very, very cool event for us as we begin to demonstrate to the vendor community that we can actually move product in real, real significant volumes, leveraging the scale listing. And then Pete Van Helden, his team just doing a great job of focusing on customer satisfaction. So there's no sort of one magic bullet. There's a lot of streams of work going out here that I think our goal is to build the momentum.

Mark Wiltamuth - Morgan Stanley

Just on the remodel program, it's still only seeing about at 3% lift there. Anything you're doing there to kind of improve that productivity?

Craig Herkert

Yes, we continue to work on it. We're happy with the performance of our stores that we've done over the last years as we really try to focus on customer phasing initiatives more than sort of physical plant initiatives, and we like what we see, but we continue to learn.

Operator

Your next question is from the line of Deborah Weinswig with Citigroup.

Deborah Weinswig - Citigroup Inc

Craig, in your data, are there any markets where your -- or banners where you're gaining share? And if so, what's unique about this market either merchandising or marketing initiatives that you can take other banners?

Craig Herkert

Well, we don't really disclose what's happening in a particular market. So let me not refer to that. What I would say though, your question is good. There are different things going on at different banners or even in submarkets quite frankly, that we're learning from. And while it's too early to talk about them on this call, let me say that there is some really fun things going on that I think are getting traction, and we will learn from those things and we will be talking about them going forward. But there are several sort of initiatives happening in our company that I just want to hold close yet while we continue to learn and modify. And then, as quickly as we can, roll those out across the enterprise

Deborah Weinswig - Citigroup Inc

And then if CapEx, I'm just trying to understand, if CapEx is holding constant for Save-A-Lot is now, 50-50 license versus 30-70 before, what's being adjusted from a CapEx perspective?

Pamela Knous

Sorry, Deborah, if I wasn't clear on that. But that's really the impact of delaying the rollout of the capital associated that was tied to the in-store experience and merchandising initiatives. So those really just offset each other. Recognizing that the merchandising initiatives has just been moved into fiscal '12, it hasn't been canceled, but just was the pilot in the learnings, we just pushed that rollout out a little bit.

Craig Herkert

One of the things I wouldn't mind talking about, too, Deborah, is just whilst we're pushing back in delaying a bit, by said three to six months of the complete rollout of that store remodel, there are many things happening in our stores today that we're very, very happy with, that we will continue to rollout, most notably how we communicate with our customers, the stuff that Julie and her team have been working on from very simple things like signage. We will continue to rollout regardless of particular remodel program. So there are several initiative that will continue to happen regardless of a remodel program.

Operator

Next question comes from the line of Meredith Adler with Barclays.

Meredith Adler - Barclays Capital

I'd like to go back to Mark's question, starting up talking about expense cost. I know there's a lot of different things going on. Do You actually address corporate separately? And I believe you still have a large group of people working in Boise. What are the plans for those people? Is there anything different that's going to happen?

Craig Herkert

Let me answer your second one first. Let me not speak to particular -- we have people working not just in Boise, but we have great associates working all over our country. And in a broad way, we're very comfortable with the fact that there might be perfect reasons for us to have associates working in different parts of our country. And so we are okay with that. What we are focused on, however, is being a much more efficient organization corporately, and frankly, simplifying a lot of processes. So that's we're focused on as opposed to focus on any particular market where we might have some people. We are focused, to answer first part of your question, I think, Meredith, both on in-store labor and that's kind of a really interesting thing because it's not just Pete and his team. It's really a combination of we have to buy right. So I talk about the SKU rationalization. I believe we went into some detail in the last quarterly call. We had one really significant category where I think we had 90 SKUs where we could not fit a full case on the shelf at a time. Of course, when that happens across the 1,200 stores, that means that you're just putting massive labor out there each time you have to stop that shelf. So as we correct those initiatives, that actually makes it easier for the operating team to control their expenses. And as we correct those initiatives, it helps with Janel and her team in supply-chain to more efficiently and effectively run the distribution centers and build the trucks. So it's sort of on all-encompassing program that we look at to really get at store level savings. And that's really a different stream than the corporate stuff that I spoke of earlier. So we have the two streams going at the same time.

Meredith Adler - Barclays Capital

I guess I'm also trying to figure out some of the initiatives you talked about in terms of SKU rationalization seem to be moving along, but not necessarily comprehensively covering the entire store base. Have you done enough to have, I mean, first of all, credit to you for cutting expenses. But I'm still trying to understand how you've accomplished so much of a cut in so many initiatives that are still in the early stage?

Craig Herkert

Lots of work. Have we done enough? Yes and no. None of us here are patient people. We would love to see us do more quickly. However, what we have to do is do so thoughtfully. So I really like the pace at which we're working, particularly as regards to SKU rationalization. We've done, as I mentioned earlier, a lot of categories and a lot of stores. Steve and his team have focused first on some really big categories that were high cube and high tonnage, and we really are happy with the results there. What we're doing though is taking a thoughtful analytical approach, and then working back with the operations team and the marketing team to make sure we're listening to our customers, and making corrections as we go. So gosh, what I'd like to tell you that we could do everything tomorrow, absolutely. But I think we have an obligation to our consumers to do so in a very thoughtful planful manner. And that's sort of where we are going here.

Operator

Next question comes from the line of Ajay Jain with Hapoalim Securities.

Ajay Jain - UBS

Craig, I think that shortly after you came on board last year, you mentioned that SUPERVALU's pricing was obviously not where it needed to be at that time. But in terms of the gross margin improvement in this latest quarter, I know it was attributed in the release to more targeted promotional spending and reduced trade down relative to last year. But if you look at the operating environment compared to last year, back when you were involved in some of those regional price investment initiatives, as part of the Big Relief, would you be able to confirm whether average shelf price per item was lower or higher as compared to a year ago?

Craig Herkert

We are trying to get much more thoughtful on making price investments in those areas that resonate with our consumers. We have had some success as I mentioned in the call, a very targeted items where we worked towards getting into what we've been calling a fair price plus promotions. The challenge we have is to make sure that when we lower our prices, we do so in a way that is in coordination with our vendor partners, and in coordination with the cost that we take out of our business. We want to make sure that we can, in fact, pay for our price reductions that we do, and we want to do so in areas that matter to our consumers. We feel better about that today than we've ever felt in our past, and I think we have great plans going forward

Ajay Jain - UBS

I guess, and in keeping with your more thoughtful approach on price reductions, can you just comment on what's sort of implied in your gross margin outlook for the rest of the year? I know there's a wide range on the EPS guidance, but assuming that ID sales are down in the mid- to high-single-digit range, are you assuming the gross margins are going to continue to improve for the remainder of the year or not necessarily?

Craig Herkert

I don't really want to comment on the gross margin outlook for the year. What I will comment on is I'm very, very comfortable that we will continue to improve our value proposition with our consumers in a very targeted way, and that includes both shelf pricing and certainly in our promotional spend.

Operator

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

Scott Mushkin - Jefferies & Company, Inc.

One of the things I wanted to explore a little bit, and I know Mark talked about this earlier on, but Craig, maybe if you could give a little bit more granular, I know you tried it on the expense control so much on beat the dead horse here, but maybe if you could just put like the three biggest buckets and not even dollars, but the buckets, just try to so we can maybe judge how sustainable some of expense controls are, is that possible?

Pamela Knous

Yes, well, I don't think I'd answer any different than Craig. Clearly, labor is a big component of that. Lots of initiatives at store level, again, productivity changing behaviors. I think that's a lot of what Craig is trying to communicate that it's not just a question of a cost reductions, but by changing behaviors, changing our approach to business, we streamline processes, we become more efficient and that attracts to labor [ph] the store, supply-chain, et cetera. The next area of the cost reduction would be around simplifying our business processes. He didn't want to be specific about corporate administrative-type items. But clearly, we're looking at ways to simplify those business processes. We have been investing in systems. And with Wayne on board, we should be able to -- we're continuing to make progress on moving to common systems and platforms, which will eliminate a lot of the complexity out of our business. And then I think the other things that we talked about in the past, shouldn't be a surprise to you, but which really is expenses at both store level and at distribution, whether it be utilities, whether it be maintenance, whether it be repairs, you can see that we have been able to not fully offset the impact of the sales mix, but have come long way towards mitigating some of it.

Craig Herkert

Scottie [Scott], I guess, I would say, I am very confident that the cost reductions we've been able to deliver are sustainable. That is, we have not made short-term decisions that we're going to have to undo in the future quarter in order to run our business. We are making long-term sustainable cost reductions. A lot of it, as I think through your question, comes back to the change in strategy that we articulated last year, we're instead of thinking about our company at sort of three different divisions that run independently of each other, remember we talked about, we're America is neighborhood grocery, we run 4,300 stores, some of which are independently owned, some are licensees, some are hard discount, some are traditional. And as we think about our business that way, we've been able to leverage a lot of back office expenses that were redundant in the past, and that could be things like goods that for resale under Janel's leadership, we've seen some real nice savings, a very talented group of people who work in her organization, driving out cost in goods that for resale because now we're talking as one as opposed to as a whole different group. As we look at all kinds of supply-chain initiatives, as we look at under adhering organization, when we look at store development, we now look at that holistically. So we get some savings there under Julie's organization, we now look at marketing, holistically. So it's just simple things like how we negotiate with our partners who are working with us on buying media and paper and things of that nature, significant savings because we look at our business differently and we have people centrally who are empowered now to drive those savings. And I must tell you, I feel really good that these are long-term savings.

Scott Mushkin - Jefferies & Company, Inc.

The second, I get two question, so I should take my second one which is the sales side of the equation. When you look at it, if I was going to be, again, a little bit skeptical year, I'd say, gosh, you're doing a couple of things that normally, I think, would hurt your sales, SKU rationalization, and then changing the way you're promoting into the market. Why do you think, as we look at the back half of the year, those items won't drive sales significantly? And what gives you confidence that we can actually see sales or maybe traffic go in a different direction than when we saw, I think Pam said, sequentially, we were actually customer count was down again? What makes you think you can turn that shift?

Craig Herkert

Well, I will start with the phase I have in the team that we've assembled here. We've been talking probably each quarter. We've ended up adding some new people and what's really flawed, and unfortunately, you don't necessarily have visibility to this, is watching this group sort of coalesce and come together, and figure out how we're going to work together differently than maybe we would have been in the past. I really, really tell you that this group is coming together in a nice way where we can leverage all the stuff that we've talked about to improve our value proposition. And importantly, the communication of our value proposition to our consumers. I actually do feel good about the prospects for improving our performance at the latter part of the year. And I think that's indicated by our same-store sales guidance for the full year when you compare it to where we are right now. So I'm actually very upbeat about what this team can deliver going forward as we communicate through our customers differently.

Scott Mushkin - Jefferies & Company, Inc.

Is there any banner that's turned yet, Craig?

Craig Herkert

Again, I don't really break out banner specific, so let me not answer that, sorry.

Operator

The next question comes from the line of Ed Kelly with Crédit Suisse.

Edward Kelly - Crédit Suisse AG

Craig, back on sales here, what's the breaking point in your ID's that you think would cause you to more aggressively address the issues in your business? And I guess, maybe, specifically there's issues being priced in kind of rebates hearings. I mean, if you look at your two-year stack at this point, it's down 10%. I mean, it's pretty big market share loss. It looks like your guidance assuming that the stacks bottoms out this past quarter, but what if that doesn't happen? I'd just appreciate hearing your thoughts on that.

Craig Herkert

I will tell you, we are being as aggressive as I think we should be, were all the things that I spoke about are all about focusing our initiatives on improving our overall proposition to our customers. That's inclusive of price, Ed, but I want to be careful. I think we know definitively that if we just do price and we don't make sure that we got a lot of things working in coordination together, it doesn't necessarily change our trajectory. So we continue to focus, as I told you in the past, on our Fresh proposition, which we think is already good. And so we're doing somethings that we think will make that better, particularly as we look at how we're running produce today. So Fresh is something we're really proud of. We need to make sure we continue to focus on that. We're really proud of our associates in our stores and the service they give our customers. We want to continue to improve that and communicate that to our consumers. So the convenience aspect of shopping at our stores is the vital by the part of it. The assortment, and certainly the price. But I wouldn't want to leave you with the impression that it's price alone and nor would I want to leave you with the impression that we sort of are taking a wait-and-see approach. We, all of us, are focused right now on how we continue to get all those things working together to deliver the sales punch that we want.

Edward Kelly - Crédit Suisse AG

And Craig, what's the progress of the centralization and procurement at this standpoint? Is the rollout still on schedule for the fall? And does that rollout impact into the timing of potentially accelerating other investments?

Craig Herkert

I actually feel really good about where we are in centralization. Without getting too granular on internal machinations here, bringing this team together with Pete, Janel, Julie and Steve on the operating side has just been great. And I think we are, if anything, we're ahead of where we thought we would have been on defining roles and clarity for most of our large banners. So I'm actually very comfortable with where we are right now.

Edward Kelly - Crédit Suisse AG

Where do you think your share at this point is going? I mean, is it going to other conventional like Clover or other channels? And what's the risk that these competitors, snow blood in the water and go out after it a bit more impressively?

Craig Herkert

I can't answer the first question. I think in this environment, everybody is working diligently to get consumers in their stores. So I would expect all of our competitors are doing the same thing we're doing, which is striving everyday to make sure that they are improving their value proposition. We think we have some unique capabilities here that will allow us to win in the long-term. We are in this for the long haul. We're very, very happy with our progress, and we think our outlook is good.

Operator

Your next question comes from the line of Neil Currie with UBS.

Neil Currie - UBS Investment Bank

I just wanted to ask Ed's question again about the two-year stack trend, which was down to about 10%. And I think he said that, "if you look at your assumptions for the remainder of the year, it assumes that, that's six-quarter decline in the two-year trend will stabilize from this point." So first question is what gives you the confidence? Is there anything that you're seeing the numbers that lead you to believe that you're stabilizing in position here?

Craig Herkert

Yes. Our performance certainly leads me to believe that, and so I think that's public record. So stabilization, I feel very good about. And then, as I said earlier, what gives me confidence in the future is the team of people that we've assembled here and what we've got in the plans going forward. So those two things make me feel confident about where we're heading as the outlook for the rest of the year.

Neil Currie - UBS Investment Bank

And did you see any improvement in the comps as the quarter progressed?

Craig Herkert

Let me not speak to that. Let me just say that I think your assumptions about the outlook of the year are correct, and I feel confident that we can deliver against it.

Neil Currie - UBS Investment Bank

If that isn't the case and if we sort of we continue to see these sort of negative comps, is it a point at which suppliers -- or we need to start questioning the level of support you're getting from suppliers, you did refer earlier to, coordinating promotional campaigns better. So if some of the work you're doing that could offset any volume where is that supplies might have?

Craig Herkert

Yes, I would say suppliers are increasingly happy with what we're doing with our centralization program with what we're able to deliver. So again, I would just say my sense talking to suppliers is they're with us, and they love the fact that we are beginning to demonstrate that we can move real tonnage here. And that's recent history, and that's working. That's not a hope and prayer. We've got several events under us now that we have actually been able to prove that we can move real tonnage in this company by behaving differently. So I'm pretty optimistic.

Neil Currie - UBS Investment Bank

So you said they are more concern on execution rather than just pure volume?

Craig Herkert

No, they're getting both. They're getting pure volume, clearly, they're getting huge volume and they're getting execution against that's why we're getting the volume. The execution leads to the volume, but we are executing and they are getting big volumes. So yes, we're actually demonstrating to our vendor partners that we can move products, which is good news.

Neil Currie - UBS Investment Bank

And just finally, I wonder if I could ask about the environment for disposals. Last year, you made some disposals of individual stores and some small batches of stores in markets which you felt that you didn't have a lot of exposure to. How was the environment? Did they continue to be a really stable environment for those sorts of deals? And how about environment for maybe larger deals like maybe disposing, say, the whole division?

Craig Herkert

Well, obviously, I can't speak to any specifics. What I will say is what I've said in the past. I think this company will always look, and I mean always, not just this year, but always, look at what are the markets we should be in, where should we be investing, where should we be divesting. And so as we've talked about the group under Andy, that's done the very extensive submarket reviews, we may or may not continue to see us look at optimizing our store network either on the growth or divestiture side. But beyond that, I won't comment.

Operator

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

Karen Short - BMO Capital Markets U.S.

Not to beat a dead horse here, but I just want to make sure I understand something correctly as it relates to your same-store sales. So traffic got worse sequentially first quarter from the fourth quarter, right? I mean, down 3.5% versus down 3% in the fourth quarter? And basket got better, only down 3% versus down 3.8% in the fourth quarter. But this quarter, you also had inflation benefit of 90 basis points versus deflation in the fourth. Do I have those numbers right?

Craig Herkert

Yes.

Karen Short - BMO Capital Markets U.S.

Could you let me just talk a little bit about what's happening in volume, units per basket because if you mention that I didn't really catch it.

Pamela Knous

Yes, we did say that we were down about a half item per basket, which has been somewhat the run rate that we have been out so that trend has continued. And some of that is just tied to the consumer being pressured and just putting a half an item low in the basket in an average shop.

Craig Herkert

The risk, Karen, of giving the information that you guys already know, we do track a consumers, and what's happening in America. We continue to see a very, very challenged economic environment in America today. We track things like EBT usage across our network, and it is at highest levels since we've been tracking it, particularly across our Save-A-Lot network, we see unbelievable growth numbers and consumers who are requiring government assistance to feed their families. We see a huge increases in coupon usage across our enterprise. We continue to see, as you all know, a massive unemployment, but also underemployment. And particularly, in some of the big markets where we are, it's certainly more challenged than in the country as a whole if you think about Southern California. Again, this is public information. You're all aware of that. But we do track our consumers and we are working diligently to make sure we are addressing the consumers needs in this very tough economic environment that we're in. And of course, we believe that we will continue to be in for some time. We are not optimistic that somehow, the economic environment turns the corner anytime soon. So we're operating in a tough economic environment. We just need to deal with economic reality.

Karen Short - BMO Capital Markets U.S.

And then, I guess, just turning to Shaw's for a second, if I do the math, I get kind of a shop comp, down about 11% in the quarter. It seems high, I mean, I understand that there was a strike, but it was distribution, so maybe you could just address that a little bit?

Craig Herkert

No, we don't talk about banner specific IDs.

Karen Short - BMO Capital Markets U.S.

And then maybe within retail, can you just decompose the components of operating margins, the growth versus SG&A?

Craig Herkert

No.

Karen Short - BMO Capital Markets U.S.

And then I guess the last question, in terms of the CFO replacement process, Pam's right to see you're going, can you kind of discuss where you are in the process like very beginning, have you narrowed it down to a few candidates?

Craig Herkert

No, we're in the early stages of the process.

Operator

Your final question comes from the line of Chuck Cerankosky with Northcoast Research.

Charles Cerankosky - Northcoast Research

Well, in looking at the projection for the full year of comps or guidance of down 5%, Craig, can you talk about how you're looking at the challenges of delevering operating cost alongside of where you want gross profit margins to be?

Craig Herkert

Yes, I think, it's really just about, I think, we have significant opportunities yet to take cost out of this business. So clearly, there is a deleveraging challenge, which we address here in this call. I don't think we're done, in fact, I'm confident we're not done in taking cost out of this business. So I think we can continue to do that whilst we are kind of improving our sales performance and our value proposition.

Charles Cerankosky - Northcoast Research

So in general terms, with the cost reduction activities are offset the deleveraging and gross profit margins sort of stay the same?

Craig Herkert

And let me now speak to that with specificity, let me say that we believe we can deliver against the guidance that we articulated earlier.

Charles Cerankosky - Northcoast Research

Could you talk about the level of competitive intensity in the most recent quarter compared to the fourth quarter?

Craig Herkert

It remains extraordinarily competitive out there. We expect it will continue to be extraordinarily competitive. That's retail and that's the world we're in. So our assumptions are it will continue. Again, I think it starts with the economic environment, American consumers find themselves in. So our assumption is it will be a hotly competitive market, and it is different, literally town by town depending on who you're competing with. But we don't expect it to lighten up anytime soon.

Kenneth Levy

Well, thank you very much for joining us today. A replay of this call will be available on SUPERVALU's corporate website through August 10.

Operator

Thank you for participating in today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SUPERVALU F1Q11 (Qtr End 06/19/2010) Earnings Call Transcript
This Transcript
All Transcripts