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SuperValu Inc. (NYSE:SVU)

Q3 2011 Earnings Call

January 11, 2011 10:00 am ET

Executives

Craig Herkert – President, Chief Executive Officer

Sherry Smith – Executive Vice President, Chief Financial Officer

Kenneth Levy – Vice President, Investor Relations

Analysts

Mark Wiltamuth – Morgan Stanley

Edward Kelly – Credit Suisse

Scott Mushkin – Jefferies & Company

John Hachenbacher – Guggenheim

Deborah Weinswig – Citigroup

Neill Currie – UBS

Karen Short – BMO Capital Markets

Ajay Jain – Hapoalim Securities

Operator

Good morning. My name is Latasha and I will be your conference operator today. At this time, I would like to welcome everyone to the SuperValu Third Quarter Earnings conference 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. If you would like to ask a question during this time, simply press star, one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you.

I will now turn the call over to Mr. Ken Levy, Vice President of Investor Relations at SuperValu. Sir, you may begin your conference.

Kenneth Levy

Thank you, Latasha. I want to welcome everyone to SuperValu’s Third Quarter 2011 Earnings conference call. Joining me on today’s call are Craig Herkert, Chief Executive Officer and President, and Sherry Smith, Executive Vice President and Chief Financial Officer. Following prepared remarks, we will open up the call for questions. I would ask that you limit yourself to one question and one follow-up so that we can accommodate as many people as possible.

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 website at www.SuperValu.com.

I will now turn the call over to Craig Herkert.

Craig Herkert

Thank you, Ken, and good morning everybody. As you read in today’s release, SuperValu reported earnings per share of $0.24 for the third quarter, excluding the impact of a number of one-time items. Our results this quarter are not indicative of the earning power you should expect from our Company. Our shortfall was driven largely by disappointing trends in sales and margin.

Our identical store sales of negative 4.9% came in well under plan. The largest headwind came from our northeast banners which, as a group, pulled down corporate IDs by more than 150 basis points in the third quarter. While this was an improvement on a sequential quarter basis, these banners were generally in the negative high single digits. Shaw’s, Acme and Shoppers continue to see strong price competition in each of their markets.

Chicago was another market that continues to see heightened competitive activity. The entry of more discounters has pressured Jewel IDs, which were just slightly above our overall corporate ID sales rate. Our IDs in all other banners as a group improved almost 200 basis points from quarter two, particularly in the west and at Save-A-Lot. At these banners, we believe our progress was a result of improved marketing, customer engagement, and price investments.

With regard to margin, we invested more heavily in promotional activities and continued to make investment in price. Both actions drove basket size at the expense of gross margin. In general, we introduced well-planned holiday programs early in the quarter to capture customers’ attention. However, we executed some ineffective price promotions in other categories such as carbonated beverages, soups and frozen foods which did not drive incremental traffic. Overall, our items sold on promotion were 50 basis points higher than a year earlier and failed to drive profitable margin dollars.

My leadership team and I are disappointed with the current trends and are working diligently to change the trajectory of the Company and realize its inherent earnings power; however, as a result of softer than anticipated results in Q3 and our outlook for the balance of the fiscal year, we believe that it is prudent to take down our Q4 and full-year guidance for ID sales and earnings. IDs are now expected to be negative 6% for the year, and full-year earnings guidance has been reduced to a range of $1.25 to $1.35 per share, excluding one-time items. Sherry will provide more details on this shortly.

Our results continue to reflect a still difficult economic environment and the fact that it will take more time than originally expected to turn around our negative operating trends. November marked the kickoff of our coordinated program to improve SuperValu’s price position and enhance value for our retail customers. This transformation program will roll out in phases and touch every aspect of our business from procurement to merchandising, and customer engagement to administrative costs.

On our second quarter earnings call, I introduced the concept of business transformation to help describe the many changes that have begun at SuperValu as we work to implement our long-term operating plan. A dedicated team is now in place to work across the business line to track key work streams that we’ve identified. This work is being done with the help from a retail consulting firm that we formally engaged in the third quarter. They bring us a deep offering of proven tools that can be implemented at SuperValu with only modest modifications. We are beginning to track progress on these work streams with structure scorecards which measure results based on timelines, efficiency and financial impact. This methodical approach to monitoring and achieving business transformation has a history of success at other companies and will ensure that we remain on course.

To better manage our margins, we recently began implementing advanced promotional analytics and planning tools from this same retail consultant that give us much better insight into the full impact of our weekly ads on both sales and margins. These new tools and disciplined processes went live in mid-December and should help us get a better return on promotional investments.

We have also instituted a more holistic process for planning weekly ads to ensure a good balance between driving trips and managing margins. Finally, the new analytics give us a much better handle on our temporary price reduction program to better determine the proper price point and timeline for these programs, as well as the appropriate vendor funding to support these promotions. We believe that using these tools will help us to make better promotional decisions and will allow us to manage our retail gross profit margins with more precision in F12.

For the Company’s business transformation to be effective, it is imperative that we get the lowest cost of goods going forward based on our Company-wide buying power. We must act as one company with our vendors and leverage our merchandising initiatives. As I assessed our progress to expeditiously achieve this goal, it became increasingly clear that SuperValu must consolidate the leadership of its two merchandising organizations. Accordingly, last week we announced that our merchandising groups for both retail and supply chain segments will now report to Janel Haugarth, who will assume the title of EVP of Merchandising and Logistics. Janel will have sole responsibility for the merchandising activities across our traditional retail and independent businesses, though this does not include our hard discount format, Save-A-Lot.

Consolidating all of our merchandising efforts under one leader is a natural progression in our move to lower our cost of goods and get our fair share of promotional funds. Let me be clear that this is not a change in our strategy; rather, it is a tactical move to accelerate SuperValu’s ability to leverage our scale in negotiating with our suppliers. This broader authority will allow Janel to efficiency leverage procurement, merchandising and vendor programs for our corporate stores as well as our nearly 2,000 independent locations.

Janel will transition some of her responsibilities for our supply chain operations to other members of her team but continue to have responsibility for logistics operations for our organization. With more than 30 years of industry experience, a proven track record of delivering strong results and establishing relationships with our major vendor partners, I have every confidence Janel is the right choice to lead this new organization.

As announced last week, Steve Jungmann has left the Company and I’d like to thank Steve for his contributions to the organization.

While the macro economic environment is showing some signs of improvement, consumer behavior is decidedly mixed. Prices continue to be top of mind for many consumers, and many shoppers remain financially stretched. An astounding 43 million Americans now rely on food stamps to make ends meet. This is about one in every seven households, and EBT usage is up by more than 46% over the past two years. These trends are linked to unemployment, which has been above 9% for 20 consecutive months.

A core tenet of our vision is that pricing at SuperValu’s traditional stores to be fair and no longer serve as a disincentive for customers to shop our banners. As I have said before, I believe the thrift consciousness we are seeing in food retail is a secular shift, and we are positioning SuperValu to be a long-term partner of choice for communities we serve.

Inflation is another challenge on the horizon. In the third quarter, we saw 100 basis points of inflation. While inflation has appeared in perishables like meat, dairy and produce, it has been slower to surface in the center of the store. Retail increases through the holiday season were masked in part by promotional subsidies; however, with all of our major vendors announcing their intentions to pass along rising input costs, we expect center store prices to rise throughout this calendar year. The price increases from our suppliers range from 3 to 4% in the low end and 14% in the high end, and we are passing these along to our consumers. Where possible, however, we will leverage our scale to mitigate these increases and negotiate hard to keep prices down.

We recognize the challenges inherent in making targeted price investments during a period of rising inflation. These efforts will take time but we have begun to take deliberate actions to implement new programs, methodically change the way we conduct business, and improve price and value perception in those markets where we have been out of line.

To address the underperformance in our northeast banners, we have acted with a sense of urgency to improve accountability and deliver meaningful improvement. Early in the fourth quarter, we made the decision to close 29 underperforming stores across a number of banners by the end of the fiscal year. Fifteen of these closures are located in our northeast banners. Over the past year, we’ve brought in a number of new talented banner presidents. Each is aggressively pursuing hyper local strategy to restore our relevance and build customer loyalty, especially in the northeast.

In December, we finished negotiations with some of our UFCW locals which provide for buyouts for associated at Acme. We have also recently completed negotiations for a similar buyout with local unions at our Shoppers banner.

On the corporate front, we just launched a number of initiatives to reduce administrative headcount and take better control of our cost structure. This decision eliminates 350 jobs between now and the end of May, and is in addition to the 300 corporate positions that were eliminated earlier this year. These moves together represent approximately 10% of our total corporate headcount and will allow us to right-size our workforce for today’s business needs.

We estimate that these initiatives will benefit F12 incrementally by approximately $60 million, which we will include as part of our F12 planning to both fund additional investment in price and cover the anticipated increases to administrative costs. I want to underscore that we are systematically restructuring all aspects of our business to support our primary focus on our retail and wholesale customers.

Our recent strategic decisions about corporate structure and leadership are important to the Company’s long-term sustainable growth, but it is the day-in and day-out actions that will turn our results in the meantime; and believe me when I say we are addressing these items right now. Let me share with you some specific updates in merchandising, marketing and operations during the quarter.

Our merchandising groups have seen success in a number of fronts this quarter, in part because we are now allocating more appropriate marketing support to these programs. We’ve begun to put in place our Fair Price Plus promotion strategy network-wide in produce. This quarter, sales performance in our fresh departments outpaced trends in the rest of the store, with fresh IDs significantly outperforming overall corporate IDs. At the heart of this improvement was our renewed focus on hyper local assortments, promotion to private brand, and value with everyday fair pricing.

From fruits to vegetables, we have begun to assort produce at store level to ensure that we are responsive to customer preferences. In private brands, we have stepped up our assortment of dinner solutions with rotisserie and grilled chicken and guarantees that these meals will be in-stock during peak business hours. On the value side of the equation, we have recently rolled out just-baked breads which are $1.49 every day. In meat and seafood, we’ve reduced our everyday prices on several key value items by more than 30%. These include a three-pound pack of farm-fresh chicken breast and a two-pound bag of shrimp. These actions put prices in line with competition and we’ve begun to see favorable sales and margin trends on these items.

We are very encouraged by the response we have seen in our fresh departments. This will be a key differentiator in our stores and an important stepping stone in bringing customers back to shop with us. Strong price points coupled with a commitment to a quality, fresh assortment of products will allow SuperValu to further differentiate its service and offerings from other food retailers.

We are also expanding our efforts to focus on the center store, which requires significant vendor negotiations. As part of our business transformation, we will restructure the value proposition of each category in a coordinated manner with meaningful input from our suppliers. To kick this business transformation work stream off, we will host a vendor summit later this month with our top 400 manufacturers to establish winning partnerships that allow us to offer more appropriate retail prices that move more units. In many cases, we are the third largest customer for our vendors, and this summit will be a good venue for Janel to discuss ways in which our suppliers can invest with us to win.

For all the effort that goes into procurement, merchandising and marketing, these efforts are for naught if our store directors don’t execute effectively. We have focused our retail operations team on in-store execution, operating their stores efficiently and satisfying the needs of their local clientele. SuperValu store directors are business leaders tasked with balancing hyper local decision making with structured merchandising programs. Their efforts must be coordinated, consistent, and support the plans developed by our enterprise team.

At store level, we’ve taken deliberate steps to assess the talent of our store directors and implement training and development to ensure their success. Our retail organization has begun to provide store directors more flexibility to set the stores – namely, assortments, displays, and end caps and signing – to the unique needs of their local communities. Great store directors with deep local knowledge of their neighborhoods surrounding their stores can and will provide SuperValu with a sustainable competitive advantage. I cannot overemphasize the role that shopper engagement will play in SuperValu’s future success.

Finally, I’d like to talk a bit about our progress at Save-A-Lot. During the quarter, we opened 41 new stores, bringing our total to 79 stores for the year, which keeps us on track to realize our goal of adding 100 new stores by the year end. For those who have not visited a Save-A-Lot store, I want to be clear about what this format is. Save-A-Lot is a limited assortment food store that carries about 1,800 SKUs including grocery products, fresh produce, meat, frozen foods, and dairy. Over 60% of our sales from this format come from private label products that are priced to save our customers up to 40% compared to traditional grocery retail prices. A family can do a full shop at Save-A-Lot, which is a very different experience from a convenience or a dollar-type store.

We’ve seen good sales momentum at our Save-A-Lot stores over the past few months. We believe the increased focus on sharpening prices, improving in-store merchandising, and the customers’ experience along with more aggressive marketing programs have been impactful. In September, we introduced a network-wide media campaign and we also started circulating mid-month mailers across our corporate network in November. This latter strategy allows us to modify merchandising and emphasize more value-oriented products during the back half of the month when many of our customers are most financially vulnerable. Network-wide IDs were up over 200 basis points on a sequential quarter basis, resulting in flat IDs as we ended the quarter.

We’ve been happy with the sales improvements that Rite Aid has seen in their cobranded Save-A-Lot Rite Aid stores. This is a promising relationship for us with both great store locations and demographics. These stores each have about 6,000 square feet allocated to Save-A-Lot’s hard discount format and appear to be resonating with Rite Aid’s customers.

I continue to be excited about our joint venture in Texas where we have established El Ahorro Save-A-Lot. Sales for this group of Hispanic-focused stores that have completed remodeling efforts and hosted their grand reopening have doubled as a result of their tremendous service meats case, fresh baked items, and in-store tortillarias, all tailored expressly for the Hispanic customer.

To highlight the impact of the economy on our Save-A-Lot customer, this quarter 40% of Save-A-Lot sales came from customers using EBT compared to 27% just two years ago. These shoppers at the low end of the socio-economic spectrum are more stretched today than ever before, and they are making value-oriented choices. Save-A-Lot offers them a fresh assortment of ingredients to nutritiously feed their families, all at tremendous savings. I continue to believe that Save-A-Lot is a great solution for food deserts and for families in need. It also provides SuperValu an ROIC in excess of 30%. That is why we have plans to continue to accelerate new store openings in F12.

I’d now like to turn the call over to our Chief Financial Officer, Sherry Smith, to provide some comments on our third quarter performance and SuperValu’s financial condition. I feel extremely fortunate to have Sherry as a strategic partner to lead this organization as we navigate the current environment and address our market position. She brings a deep understanding of the industry and our business to this position, having worked in various finance capacities at SuperValu for her 25-year career.

Let me now turn the call over to Sherry.

Sherry Smith

Thank you and good morning everyone. I am looking forward to working with you in my new capacity as Chief Financial Officer. As Craig mentioned, I’ve been a member of the SuperValu team for almost 25 years and have an intimate knowledge of the Company, including our organizational strengths as well as our challenges. I believe this foundation will enable me to act quickly and decisively.

I have already established several key priorities in my new role. These include a review of the following: the allocation of our $1.3 billion of cash from operations between capital expenditures, debt pay down, and returning dollars to shareholders; aligning our expense structure with our business transformation and growth strategy; determining accountable business metrics to guide our internal decision-making; and providing you better transparency to help you understand our business.

From my vantage point as Chief Financial Officer, it is clear that SuperValu has significant earnings power which is not reflected in our results. Craig has been taking decisive actions to transform our merchandising, marketing and operational ability to address a changing competitive landscape and our own operational issues. There are no sacred cows. I will be working closely with him to make sure that the right financial goals are established, our progress against those goals measured and reported, and ensuring appropriate accountability for the results.

I realize that driving earnings and cash flow potential of the businesses entrusted to our care is my first priority. An important component of this is balancing the allocation of free cash flow among investing in our businesses, reducing our leverage, and returning cash to shareholders through quarterly dividends and share repurchases. I am in the process of assessing past practices and will give you more detailed guidance in the near future.

Let me just say for now, while SuperValu remains committed to reducing debt and ultimately returning the Company to investment grade, it is obvious to me that the best way to deleverage our balance sheet and create shareholder value is to grow earnings and cash flow. This requires maintaining our store base and investing to improve our competitive position. We are also diligently pursuing cost savings so that we have the proper expense structure to match our sales base. I have been engaged in this initiative and know we have additional opportunities beyond the 160 million expense reduction goal for F11 that we previously announced.

SuperValu has talked of basis point mentality, and I intend to rigorously continue this process as reducing our cost structure is a critical precursor to further investments in price. I have begun taking a deeper dive into each of our businesses and engaged with members of our leadership team to identify the key metrics that are necessary to effectively manage this Company. As you can appreciate, SuperValu has vast amounts of data and my focus is now on how we can most effectively report and act on the information that is available and establish clear accountability across the organization. I plan to provide you with updates in the coming quarters.

Moving to the results for the quarter, we reported adjusted net earnings of 50 million and diluted earnings per share of $0.24, which was below our plan and a result of trends in both sales and margin. As Craig stated, sales were softer than planned, specifically in the northeast and Chicago, and we invested in price and promotional activities this quarter which did not deliver the results we expected.

In the third quarter, net sales were 8.7 billion compared to 9.2 billion last year. The 5.9% decline was driven by a 4.9% decline in identical store sales and the impact of previously announced submarket and store exits, including Salt Lake City, Connecticut, Cincinnati, and our Bristol Farms banner. Breaking down ID sales, we saw a 4.2% decline in customer count and a 70 basis point decrease in transaction size. Customer count was about the same as the second quarter while basket size improved 170 basis points, including the 100 basis points of inflation that Craig referred to earlier.

Gross profit rate in the quarter was 21.5% compared to last year’s rate of 22.4%, a decline of 90 basis points. About one-third of this rate variance is due to the business segment sales mix change between retail food and supply chain. Retail food gross profit rate in the quarter was 26.8% compared to 27.4% last year, or a decrease of 60 basis points. The rate decline was primarily from ineffective promotional spending.

Excluding the store closure and exit costs, severance and labor buyout costs in the quarter, and the gain from the Salt Lake City retail market exit in fiscal ’10, the selling and administrative rate was flat year-over-year as our business mix shift and savings from cost reduction activities offset the deleveraging impact of lower sales.

Supply chain services delivered another strong quarter as a result of its focus on expense management and improved productivity. As noted last quarter, corporate expenses remain somewhat volatile due to the timing of surplus property activity. This quarter’s variance to last year was due predominantly to about 3 million in net gains from property sales compared to last year when we absorbed over 10 million in expense for similar items.

Across the Company, we have continued to streamline and take a holistic approach to business operations. Through the third quarter, we have removed 125 million of costs across the Company and will have permanently removed 175 million by year-end, which is 15 million higher than our original goal of 160 million.

Among the areas where we are generating the most savings are staffing, where we have streamlined the organization and found ways to be more efficient in staffing no value work streams; facilities – we have reduced office space, invested in technologies to lower utility usage, and levered our scale to better negotiate national contracts for items such as landscaping and snow removal; and lastly in procurement of goods not for resale. We have continued to take advantage of our combined purchasing power in obtaining goods and services for our stores, offices and warehouses.

Over the long term, we will continue to emphasize the basis point mentality and align our cost structure with our sales base, fully leveraging this capability once we turn our sales trends.

In the third quarter, a number of moving parts impacted results, so I’d like to draw a clear picture of the charges we absorbed this quarter as well as some related items that will hit in Q4. In Q3, we completed our fair value estimate for our goodwill and intangible assets and took an additional $0.99 non-cash charge. This completes the impairment review that began in the second quarter. The remaining charges of $0.20 were primarily related to activities that support our long term efforts to improve operating efficiency and banner performance. It is comprised of $0.14 of expense for store and market exit costs including the sale of Bristol Farms and initial estimates for the closure of an additional 29 stores in the fourth quarter that have already been announced and which span a number of retail banners. And it includes $0.06 primarily for employee-related charges. The majority of the employee-related charges are tied to the labor buyout at Acme with the balance associated with severance, which will further right-size our administrative function.

Looking to the fourth quarter, at the end of the December we closed on the sale of Total Logistics and received approximately 200 million in proceeds, which was then used to pay down debt. This increases our projected debt pay down guidance to 850 million for the year. We will record a one-time gain of $0.31 per share related to this transaction. We also expect approximately $0.22 of expense in Q4 related to the additional labor buyouts, severance and store closures that Craig outlined, meaning the fourth quarter will include approximately $0.09 in net favorable adjustments.

Moving to our balance sheet, we have reduced total outstanding debt on a fiscal year-top-date basis through last week by nearly 700 million. We continue to manage working capital well with both retail and supply chain taking out about one day’s worth of inventory this year. We will retire the remaining 392 million of Albertson’s 7.5% bonds, which mature in February, and we expect to end fiscal ’11 with less than 200 million drawn on our credit lines, which total 2.3 billion of available capacity.

In fiscal ’12, our bank debt and public bond maturities are only about 300 million. The Company remains in compliance with out debt covenants with trailing 12-months EBIT of 1.1 billion, excluding impairment and certain other costs. Depreciation and amortization were 0.9 billion and rent expense amounted to 0.4 billion for these same 12 months. Our revolving credit facility requires the maintenance of two financial covenants – a leveraged covenant and a fixed-charge covenant. Looking forward to the end of F11, we would expect the leveraged covenant as defined in our revolving credit facility to be approximately 3.5 times with a covenant maximum of 4.25 times, and the fixed-charge coverage covenant to be approximately 2.6 times with a covenant minimum of 2.2 times.

We still expect fiscal ’11 capital expenditures to total about 700 million and believe this remains an appropriate level for fiscal ’12. Today, we announced our fiscal ’12 capital plan. This plan will keep our store portfolio in good physical condition and continue to prioritize our investment in Save-A-Lot. Next year, Save-A-Lot accelerates store openings which we expect will be evenly split between corporate and licensed stores, and adds a new distribution center in North Carolina to service much of the mid-Atlantic region. We will also continue to upgrade our existing store base with plans to remodel approximately 55 stores in fiscal ’12. We have no new stores scheduled for our traditional banners.

We are excited about our Save-A-Lot growth strategy and believe we have the fundamentals in place to increase the number of new stores opened in fiscal ’12 from fiscal ’11. During F11, the stage has been set to growing existing licensees, attract new licensees, and enter into new ventures such as Rite Aid and El Ahorro.

In closing, I want to reiterate that we are disappointed with our Q3 results, but we do still anticipate traction to build in Q4, albeit at a slower pace than initially expected. Our full-year guidance for ID sales and adjusted earnings per share, as outlined in our press release, have been lowered. ID sales are now expected to be approximately negative 6% for the year. Adjusted EPS is forecast to be in the range of $1.25 to $1.35 per share, reflecting our current trends in ID sales, which is similar to Q3, and the pressure on gross margin as we manage our promotional spend and invest to bring the right items at the right price to our customers.

Let me offer the following as a road map to take you from our prior guidance to our current guidance. Starting with the midpoint of the previous guidance of $1.50, the 50 basis point change in ID sales, again reflecting Q3 results and what we see today, equates to roughly $0.08. Next, we lowered our retail margin expectations from our prior guidance by about 40 basis points, which equates to around $0.16. Offsetting these two items will be the higher level of cost savings of 15 million that I discussed earlier, which adds about $0.04; therefore, the net change from these items is approximately $0.20 compared to our previous guidance and is in the midpoint of the adjusted annual guidance of $1.25 to $1.35 per share, and adjusted Q4 earnings are estimated at $0.30 to $0.40.

I hope you find that our increased level of disclosure today helps to better understand our business. We will work to provide more relevant commentary with each subsequent call. Over the coming quarter, I look forward to meeting with many of you and discussing the steps we are taking to transform this Company and improve our financial results.

I will now turn the call back to Craig.

Craig Herkert

Thank you, Sherry. Before I open the call for Q&A, I want to address market perceptions. Unlike other well-respected food retailers that have reorganized in recent years, let me assure you that we are in a distinctly different position. We have leading market positions across our retail network of 1,140 stores and own about 40% of this real estate. Our cash from operations remains strong at 1.3 billion on a trailing 12-month basis. We have a great deal of liquidity. We also enjoy a diversified business model which serves nearly 2,000 independent stores through 29 distribution centers and warehouse facilities beyond our retail network, and we operate a growing hard discount format of 1,236 Save-A-Lot locations which grew retail square feet by 8.5% over the last four quarters. Finally, we have already developed and begun executing on a detailed plan to transform our business and compete better in this economy.

SuperValu is a company in transition and we have covered much ground since my arrival almost a year and a half ago. Since May of 2009, we have paid down more than $1 billion of debt. We have begun to drive unprecedented growth in our Save-A-Lot banner. We have made significant strides to align priorities and instill greater accountability. We centralized our merchandising and marketing functions. We’ve gotten more aggressive on our cost structure by removing duplicative headcount and centralizing not-for-sale procurement and streamlining back office operations. We’ve sold traditional retail stores that were underperforming and non-strategic assets such as Salt Lake City, Connecticut, Bigg’s, Bristol Farms, and Total Logistics Control. And our private brands have increased penetration by more than 200 basis points.

Each of these milestones is helping us build a stronger foundation for our Company and turn the fortunes of this business. Our Company remains in control of its future and is now aggressively addressing the operational issues that have led our customers to divide their basket and select against us. I recognize it will take time to win back a greater share of wallet in our once loyal shoppers, but we are intently focusing our energies and efforts on these steps, metrics and accountabilities that will deliver improved performance.

With regards to asset sales, because I know this is on your mind, we are mindful of returning value to our shareholders and, quite frankly, today’s market is a buyer’s market, not a seller’s. We continue to look at strategic sales but only act if the economics make sense such that it would enhance our performance metrics and provide us with greater operational flexibility.

The restructuring we are in the midst of will improve our execution, fortify our customer base, and stabilize our market share. As I have noted before, this end-to-end transformation will refine the way that we plan, staff and execute our business operations. Trends do not turn on a dime, and the significant changes we are making to our business operations will be measured in quarters, not months. My goal is meaningful progress, and I’m committed to providing you regular updates on our efforts with each passing quarter.

In addition, we will show you how our business transformation impacts store operations during our investor day in the first week of May.

With that, let me take your questions.

Question and Answer Session

Operator

At this time I would like to remind everyone, in order to ask a question, press star, one on your telephone keypad at this time. Again, that is star, one if you have any questions.

And your first question comes from the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth – Morgan Stanley

Hi, good morning. Craig, could you just walk us through how you’re going to navigate the inflation as it approaches, because the costs will be moving up and you’re going to be making some price investments. How do you balance those two?

Craig Herkert

Yeah, it’s a great question, Mark. Let me kind of discuss it with a very practical thing that we addressed in the script, and that would be—what we’re working on is getting away from aggressively high-low. We are still, in our traditional retail banners – most of them – a high-low retailer, and we will remain a promotional retailer. Mark, what we’re trying to do is to minimize that delta we have between our regular price, which I think we referred to as insult pricing in some cases—get that regular price back in line with where consumers expect it to be and yet still be a promotional merchant. So I talked about 30% price reductions on things like chicken and shrimp, which has been meaningful, and we immediately see a fairly significant uptick in customers’ willingness to buy that merchandise at everyday retails. In far too many cases, Mark, we’d priced our everyday retails out of line with the market and therefore customers select against us on our everyday retail. We certainly do fine on promotional retail, so it’s really that fine mix of renegotiating with our supplier partners and making sure that we have the appropriate amount put against everyday retail while still being promotional. That’s a big part of what Janel and her team will be discussing with our manufacturers later this month.

Mark Wiltamuth - Morgan Stanley

Okay. And just—if you could talk a little bit about what’s going on in the market today. We’ve had a major freeze in Florida December 15; we’re getting snow down in the south again, major rains on the west coast. How are things looking on the supply chain for fruits and vegetables? Have you had any out-of-stock problems and what do the prices look like on some of those items right now?

Craig Herkert

Well, we haven’t had any out of stocks to date, although I think some of the things you mentioned will be future impacts. What we have seen, because not only what you mentioned happening recently but certainly we’ve seen significant changes globally in a lot of commodities – I mentioned in the call that we have from a low of 2 to 3 point increases, but there are some commodities like cooking oils where we’ve seen pricing in the low double-digit percent increases. So we are seeing significant price increases, I think, based on the things you mentioned and other things. This is going to be a challenging year going forward to manage inflation. It’s just a fact and we believe these inflationary measures are going to impact consumers, not only here at SuperValu but across the food channel.

Mark Wiltamuth – Morgan Stanley

And for Sherry, she’s talking about more transparency. Are we going to see Save-A-Lot broken out in the year ahead? Is that in the plans?

Sherry Smith

What we provided for you today was the ID sales around Save-A-Lot, and we will continue to give you information around that and more on their growth strategy.

Craig Herkert

And certainly, Mark, I would hope to have a significant part of our investor day in May be focused on Save-A-Lot and what that opportunity is as well.

Mark Wiltamuth – Morgan Stanley

Okay. I’ll yield for some others for questions. Thank you.

Operator

And your next question comes from the line of Ed Kelly from Credit Suisse.

Edward Kelly – Credit Suisse

Hi, good morning.

Craig Herkert

Good morning.

Edward Kelly – Credit Suisse

Thanks, by the way, for the increased transparency. It actually, I think, is—I think it’s helpful here. As we think about your capital spending guidance, as you talked about on the press release, you highlighted plans to continue to think about shedding non-core assets. Craig, how do you define non-core when you talk about that?

Craig Herkert

Well, let’s just kind of look in arrears, Ed, and the things that I mentioned that we have gotten out of. They’ve either been markets where we were significantly outflanked in market share – that is, we were below number three in market share – and really, we would look at it and say there was no chance that we could improve that. So if we saw an opportunity where the market needed to be consolidated, that’s certainly one measure of why we might get out of it.

Something’s that not core to our business, and I think I would argue Bristol Farms is not core to what we do—it’s a wonderful business and I think it will do well as an independent company, but it was not core to what we do. Likewise, a great business was Total Logistics Control. The team that runs that has had fantastic results, but I think it will do really well as part of Ryder. We’re sorry to see it go, but it’s not core to what we are. And then finally is some really hard decisions that we announced last week, which would be simply closing some assets because whether they were bad decisions in the first place or just because the market changed and these stores were no longer an appropriate fit for our Company, we do make decisions to close stores. So I think those are the three things, Sherry, that we continue to look at.

Edward Kelly – Credit Suisse

And Craig, I think if we thought about this and said, you know, okay, well what are the real core assets of SuperValu at this point, I think it’s probably fair to say that you would consider Save-A-Lot within that. Would you consider wholesale still as part of that?

Craig Herkert

We love the wholesale business. Our independent customers continue to perform extraordinarily well in this economy. As I mentioned in prior calls, our corporate strategy is to act as one company with the hyper local focus of our great independents. I believe this move with Janel coming in to lead our combined merchandising and logistics teams is just a great move forward in that previously-stated goal of leveraging the size but continuing to learn from our great independents on how you operate in this economy. So yes, I think it is core and I think it’s a big part of the success of our business going forward.

Edward Kelly – Credit Suisse

What about something like—I mean, you started mentioning some of the banners like Shaw’s and Acme, and there’s been plenty of rumors about those banners. But even Jewel, which doesn’t seem to be performing as well as it has historically – there is increased competition in that market. I think I read something about furloughing some employees for a little while. As you think about these retail banners and banners like Jewel, are banners like that a possibility now for divestiture?

Craig Herkert

Let me not speak to a specific banner. What I have said in the past is we will always look at our asset base and make appropriate decisions for our shareholders. If we can get a return by either divestiture or acquisitions that are appropriate for our shareholders, we will always look at those.

Let me speak specifically to the banners that you mentioned. Clearly there has been a change to competitive activity in many of those markets, which is why we are focused on our business transformation. That business transformation, we believe, will better position us to win going forward; but we do recognize that value continues to be an important driver in all of our markets and we need to make sure we are addressing consumer needs. So we believe our business transformation program will help better position us in each of those banners that you highlighted.

Edward Kelly – Credit Suisse

Right. And then last question for you just on the pricing front. You talk about investing in price and sort of fixing the gap between your everyday price and your competitors’. I guess the question that I have is can you do that without taking bigger hits to the EBITDA? So this quarter, I think, raises some questions about that, right? Because the gross margin was down by a bigger amount than what we would have thought. The EBITDA decline actually accelerated from the prior couple of quarters. Can you execute on that without having a more meaningful drop in EBITDA?

Craig Herkert

Yes. Let me be clear on the answer – yes. When we look at it on a very specific item-by-item basis, when we do this right – so when we do it right, we actually are able to not only lower our regular retails but maintain our profitability on an item level. I would tell you what I mentioned in the call – our bigger part of the traditional retail miss in gross margin was ineffective promotions, and I just have to fall on the sword there. We had ineffective promotions in the third quarter. That is the bigger issue there. It is not our price investments in right-sizing our fair pricing that had the big impact to us. If there is a piece of good news in here, it’s that we have a fantastic consultancy agreement now where we have already begun utilizing tools. These are not things we have to develop. These are tools that are in place. We began using them in the middle of December to better manage that promotional mix between driving traffic and managing our gross margins. So I’m not proud of how we handled the third quarter promotional program. I am pleased that we have different tools going forward—different processes going forward.

Operator

And your next question comes from the line of Scott Mushkin from Jefferies & Company.

Scott Mushkin – Jefferies & Company

Hey guys. Just a couple housekeeping items first off. Did I hear you right that you said the Save-A-Lot comp is now flat, so it was negative? Is that correct?

Craig Herkert

Yes, that is correct.

Scott Mushkin – Jefferies & Company

Okay. So—gosh, that’s a whole can of worms, there. But I also wanted to say—ask if Shaw’s and Acme were EBITDA-positive during the quarter?

Sherry Smith

We don’t disclose that level of information by banner.

Scott Mushkin – Jefferies & Company

Okay. Going along the same, I guess, kind of road with Acme and Shaw’s, and maybe even looking at Jewel, what makes you think that the problems at these banners are actually fixable?

Craig Herkert

Well, it’s what we talked about before. We actually—within each of these banners, within each of our formats, we have very, very successful stores where we have the programs in place. We have examples of the hyper local thing that we know works, and we also have leading market shares in each of these banners. Now clearly in some parts of these banners we have some challenges, but in each of these banners we have leading market shares. So I think at a granular level look, we know this works. We also know this works because we see it working certainly across other banners and across our independent network, as I mentioned a moment ago.

Scott Mushkin – Jefferies & Company

So looking at that hyper local, it works. I mean, are there stores you can point to? Can we see these as analysts? I mean, I’m in a lot of your stores and I haven’t seen anything, so I’m just kind of curious where we can maybe see some of this that’s working?

Craig Herkert

Yeah, it’s a great question, Scott, and let me say that first of all in May, we’ll talk about that; but it’s a good challenge for me and Sherry to think about how we help you with that transparency. I do see it—as you guys know, I travel every week to the stores and I actually see a lot of good things that are going on out there. Clearly, not at the level that we need to or we would have better results right now, but I’m very pleased with the progress we’re making. The engagement we get at store level, Scott, right now from our store directors and our department managers with this newfound authority to do things locally that matter, it’s really powerful and I look forward to sharing that with you when we get together in May.

Scott Mushkin – Jefferies & Company

Okay, then. And I think Ed asked a similar question, but I want to just try to understand a little better. Your answer to his question was actually pretty good, but when we run through the numbers, it’s hard to understand in certain banners how you can price with competitors and just not have a very difficult time. Even though you invested in price last quarter, which we saw in some of our survey data, it’s still your price is more in line with competitors. You’d narrowed the gap. So I’m just trying to understand how you win people back to places like Acme and Shaw’s without just pricing actually below your competitors to invite people back in. And if it takes that sort of investment, how does my EBITDA maybe not jeopardize—you’re not there yet, but how do we look at your covenants if you have to make that type of investment?

Craig Herkert

Well, let me say what I said last quarter. We are not going to invest ahead of getting the cost out. So Step A is we’re not going to invest ahead of being able to pay for it. Step B, and I think it’s a great question and we’ll talk more about it in May, is a very thoughtful process of fixing things granularly. What I mentioned in the last call is we are not going to take broad swaths of the business, whether that’d be a banner, and just sort of do some big really price cut. What we are doing is being very thoughtful, very methodical, item by item, sometimes category by category, and getting our prices in line. The great news is – and there is good news in here – we have a lot of customers coming through our stores every day, yes at Acme, yes at Shaw’s. And what we’ve found is as we get those prices in line and be very specific—you know, selling fresh-baked bread at $1.49 or shrimp or chicken, we do see that they are willing to buy that product from us on a regular basis. So the good news is we have customers in our store. As we lower the prices, we are communicating it very clearly in our stores that we’ve done something different, and we are seeing customers respond to it.

Scott Mushkin – Jefferies & Company

Okay, I’m going to give up the floor. Appreciate you answering all my questions. Thanks.

Operator

And your next question comes from the line of John Hachenbacher (sp?) from Guggenheim.

John Hachenbacher – Guggenheim

Craig, a couple of things. If you look at the consolidation you announced last Friday, (a) when do you think you start seeing some benefit from that; and (b) order of magnitude, how big is that opportunity that you left on the table?

Craig Herkert

Yeah, both great questions. So I would say that it will—none of it happens overnight, as you know. This business is something that moves with time, so I would say we’ll see benefit in F12, clearly. Let me not tell you when in F12, but we clearly will see benefit in F12. And what’s the size of the prize? That’s not something I want to disclose, but let me say it’s a significant prize and it’s not just in how we communicate with our vendor partners. It’s, I think, also just in SG&A and how we continue to march down to acting as one company. So I think it is a sizeable prize and that’s why we made the decision we did.

John Hachenbacher – Guggenheim

All right. And then secondly, you talk about ineffective promotions, and we hear that a lot from companies – promotions don’t work. I often think it’s something that people can learn from, but is it that – something didn’t work, trial and error – or is it more just structurally the promotions don’t work in this environment, in this macro, in this competitive set? You know, which one is it, if it leans more one way than the other?

Craig Herkert

You know, it’s a great question. I’m not sure it’s one or the other, John. I think it’s a little bit of both. I think old habits die hard in probably any business, and certainly here. And so oftentimes we do things just because we have, or because we’re responding to sort of competitive pressures. The good news is, is we have new tools and new processes to really be much more thoughtful and say which of these promotions actually cause customers to come into our stores and actually improve their basket and improve their loyalty, and not just come in and buy those specific items on promotion and then go and do their whole basket trip elsewhere. It ties directly back, I think, to the comment earlier on Fair Pricing Plus promotion. It’s not good enough to simply have great cover items and then the customer comes in and sees that our regular shelf price on some items – you know, go back to the chicken – is outrageously priced three weeks out of four. It’s great on the fourth week, but if in three weeks out of four it’s out of line with where the market is, she’s simply going to take and split her basket and go somewhere else.

So the good news is we have customers in our store. As we get things fair priced, we’ve already seen that she will respond and buy those products in our store. But I think if it was an easy answer, John, we would have certainly solved for it already. The good news is I like what I see right now, a lot of these tools and processes and the management changes we’re making to better manage that going forward.

John Hachenbacher – Guggenheim

All right. And then finally, what work have you guys done, if any, on demand elasticity, to look at these price increases coming and what may happen to demand, where you can pass through, where you can’t. Have you looked at that historically?

Craig Herkert

Well, we have; but one of the things—let me respond sort of by dodging the question a little bit and say we’ve got a great private label team here, and I mentioned that since I’ve arrived we’ve grown private label penetration by over 200 basis points in our traditional banners. You will continue to see us do some really great things in private brands, both in our main tier and our value tier. So what we look at is as the customer needs to find value products, we want to be that retailer where they can find value products or branded products. So there are going to be price increases, but we plan on making sure that our customers have a range of offerings on the shelf to suit her needs, depending both on where they are or what time of the month it is, and how they need to complete their shopping trip.

Sherry Smith

And John, I might add we also have a sophisticated tool around our forward buy, and so as we look at the pricing and as we anticipate where those increases are coming, how do we try to take advantage of that, too.

John Hachenbacher – Guggenheim

Are they limiting you in terms of how much you can buy, or no?

Sherry Smith

It depends, generally. Sometimes there are limits on that, but we (inaudible) that.

John Hachenbacher – Guggenheim

Okay.

Operator

And your next question comes from the line of Deborah Weinswig from Citi.

Deborah Weinswig – Citigroup

Just wanted to kind of understand – you were talking about holding the regions accountable. Just kind of trying to understand what metrics you plan on using and how you plan on focusing on that?

Craig Herkert

Well, the obvious, most important one would be sales, and there are other ones within there; but let me just say that sales would be the key metric. But each of our leaders, whether they be the banner presidents or our merchants, everybody in this business has very specific metrics that they are accountable to.

Deborah Weinswig – Citigroup

Okay. Is that the same as with the overall Company, or is there specific ones for each region?

Craig Herkert

No, no. Regions have their own very specific metrics everybody in the Company is held to, so each president would be held to the same metrics, not the same number. So whatever the metrics that Pete Van Helden and the group are holding presidents to, they’re the same for every president. It’s a different number depending on where you are, clearly, because as I mentioned in the call, we have wildly disparate performances depending on where we are in the country.

Deborah Weinswig – Citigroup

All right. And then just once again, just trying to understand – what kind of expectations should we have for promotional activity next quarter?

Craig Herkert

I’m not sure I understand the question. Sherry?

Sherry Smith

Well I think, as we mentioned, we did adjust our guidance partially for our margins in both the Q3 and Q4. So as we brought in the new tool set – they came in mid to late December – so we will try to get more control of our margins, but there will be some variance there so we’ve moved our plan about 40 basis points.

Operator

And your next question comes from the line of Neill Currie from UBS.

Neil Currie – UBS

Good morning. Thanks for taking the question. I wonder if I could ask a question about vendor allowances. First of all, what your expectations are for this fiscal year with regards to vendor allowances versus last year’s rate? Do you hope to hold them flat? And then secondly, as we go through the next 12 months or so, what’s the risk that if you don’t start to see better promotional effectiveness and better volumes, that suppliers move to more of a pay-per-performance type of deal on allowances?

Craig Herkert

Well frankly, we’re probably too reliant on pay-per-performance allowances today, so one of the things that Janel and I agree on is the big challenge is moving away from that kind of performance. Certainly that’s a big discussion for our meeting later this month. What Janel’s got a strong track record of doing, she and her team, is actually working with our supplier partners and developing programs that reward growth. So we are focused on that, and while I know a lot of the discussion this morning has been on some of the more challenged environments we operate in, please bear in mind that there are big chunks of this business that are improving their sales dramatically, while still not at the levels that we would be expecting. We continue to see very nice improvements period on period and quarter on quarter in big chunks of this business, and vendors are in fact working with us to do that.

So long answer, but I think what we’re looking at is to hold our allowances flat this year and an opportunity to increase them next year, but not to increase them because of the fact that we’re somehow negotiating harder but that we’re negotiating differently and negotiating for growth.

Neill Currie – UBS

Good luck with the summit. And I just wondered if I could also ask you on inflation – you mentioned a range in the center store of 4 to 14% on center store price increases, which seems very high compared to what we’ve seen in the past. Now, many people in the industry have talked about very low single-digit inflation being manageable and being able to pass through. This sounds like a very unmanageable range. How do you expect to pass this through without seeing a significant change in customer buying behavior, whether it be trading down or trading away?

Craig Herkert

Most of the products would be in that lower single digit range. There are a few key commodity-type items, very select, that are clearly in the low double digit range. I don’t’ want to overstate – that’s not the whole center store. I would argue that most of the center store, and I have looked at this category by category, is in the low single digit range; but note that there are some commodity items that you ought to all know about because of what’s happened in the global markets that are seeing double-digit increases.

Will people select away from those? I don’t think so. Some of these commodity items are sort of core things that people use to cook every day, and I think it’s just a fact that they’re going up. We’ve certainly read about this globally, happening all over the world right now. I don’t think it’s unmanageable but it’s certainly going to be noticeable.

Neill Currie – UBS

Thanks. And then finally on—you mentioned about the produce performance being better, but there’s been a lot of inflation in produce as well; so can you maybe talk to the volume performance that you’ve seen in produce for fresh foods in the areas that you’ve addressed pricing?

Craig Herkert

Yeah. First of all, our improvement is actually interesting because we’ve been able to improve our sales performance and RAD in fresh and in produce whilst taking down retails. So we’ve had self-imposed deflation, if you will, but in fact because we’re able to do what I mentioned earlier, which is get our consumers to buy the products every day and not simply to select against us until we’re on sale, we’ve actually seen significantly improving trends. You might ask, well, if that works why don’t you just do everywhere, and it’s very complicated in branded goods because we have significant vendor negotiations we have to go through on how we allocate funds. In fresh foods, quite frankly, it’s a decision we get to make because they’re commodity prices and, generally speaking, you pay what you pay and you’re not negotiating on various levels of vendor funding, whether that be for shelf placement or ad placement or slotting, or any number of things that happen in the industry. The great news is we know it works, we know the consumers respond well, and now we can take that learning and work it with our vendor partners to change our trajectory in the center store.

Neill Currie – UBS

Thanks, and good luck with that.

Operator

And your next question comes from the line of Karen Short from BMO Capital.

Karen Short – BMO Capital Markets

Hi there. Thanks for all the detail on the call. Not to continue going back to this and beat a dead horse, but I guess what confuses me is when I look at Safeway’s EBITDA margins, and I would say excluding Canada and Blackhawk, and then Kroger’s EBITDA margins, you know, your retail EBITDA margin is still well above both of those companies. So I guess that has to imply to some extent that your pricing is higher and that you have kind of a long way to go to get more in sync with at least some of your conventional competitors. So I guess kind of help me understand what gives you the confidence that you can win back the customer with the higher prices.

Craig Herkert

Well, let me be clear, and I think I mentioned this last quarter – we agree with you. We have a journey. Our business transformation is a multi-year journey. We need to take significant cost out of this business, not just what Sherry articulated for this year, but our business transformation has us taking a lot of cost out of this business. We have to be much more efficient. We have very detailed, specific work streams with metrics against it to get that done. We need to do what we did last week, which is consolidate the merchandising areas. We need to have a different conversation with our vendors and how we invest for growth in this Company. So yes, let me be clear – this is not something we solve overnight, and we agree with you. We know that the long-term journey is to get all of our prices in line with where our customers expect them. We’re doing so granularly. Where we’ve done so, we see positive movement. There’s a long way to go; don’t disagree. And we know what we have to do and we have the metrics and the tools to get it done. But it won’t happen overnight. This is a multi-year journey, as I mentioned last quarter.

Karen Short – BMO Capital Markets

So just following on that – I mean, Sherry commented that cost-cutting would be a precursor to price investment. But it doesn’t appear that that was the case this quarter. And I understand you are early stages in finding cost cutting, but looking—I guess when do you think that cost-cutting journey will be effectively in place to offset some of the price investments? Is it a couple quarters, or—

Sherry Smith

It’s very much an ongoing effort, and so as we said, certainly this year it’s 175 million and we’re continuing to work on our F12 plan for the goals for that. But I think—remind you, though, this quarter again that it wasn’t necessarily price investment. It was the ineffective promotional spend, and so those are things that we can correct; and so the funding will go towards the price investment in the future.

Karen Short – BMO Capital Markets

Okay. And then just wondering if you could maybe give a little bit more details on the timeframe from seeing the benefit on the merchandising consolidation? And I guess the other, following on that, is do you actually have the systems in place to be able to benefit from that consolidation?

Craig Herkert

So two questions here. Let me address your second question first. You know, I mentioned that a few months back we were able to recruit here an outstanding CIO, Wayne Shurts. And one of the things that Wayne has done in his short tenure here is to really radically re-look at the system support that we have for this business. I keep coming back to this but I think it’s important – we’re not waiting for perfect systems solutions. What we are doing today under Wayne’s leadership, as well as our business transformation group, is we’re looking for off-the-shelf solutions that we can quickly tie into our business. We have today business solutions, processes, IT solutions that we did not have before Wayne arrived here. This is a big deal to this Company, so to address whether or not we have the systems to do it, my answer is yes. These are not perfect systems; these are not life-changing systems, but they are systems that allow us to do what we need to do. I believe we have the leadership team to do this – the merchandising leadership team, both in the supply chain business and the traditional store business. We have an outstanding group of people in both those businesses now led by a single executive, Janel.

I would tell you by May, when we get together in May, we will have things that we can share with you on the merchandising front where we can be more specific about how we’re utilizing these tools and leveraging the talents of these people, and we’ll talk more specifically about how we’re doing with some of our vendors because we’ll have had a number of months post the January vendor summit.

Karen Short – BMO Capital Markets

Okay. And then, sorry, last question – just on the northeast comps, is it fair to say that the basket in the northeast was down by about the same order – I mean as an actual number – as the consolidated comps? So, you know, negative 1-ish, and that the rest is traffic?

Sherry Smith

We’ve provided the information around the comps, and so to help you just to understand the pressures overall in the marketplace.

Karen Short – BMO Capital Markets

Okay, thanks.

Craig Herkert

And Operator, we have time for one more question.

Operator

Yes, sir. And your next question comes from the line of Ajay Jain from Hapoalim Securities.

Ajay Jain – Hapoalim Securities

Yeah, hi. Good morning. Thanks for taking my question. Craig, I know you mentioned there was some regional variability in your performance; but if we take kind of a high level view, can you comment on how much of the gross margin performance during the quarter was sort of self-inflicted from the ineffective promotional activity? So, I’m just wondering if there’s any breakdown of the gross margin impact between the poorly executed promotions and the price investments that you were planning on making anyway.

Craig Herkert

Yes, there is. Now, first of all, I think we can say about a third of the margin miss was simply a shift in business to supply chain. And then of the rest of it, I would say with very—not to share it with you exactly, but with specificity we know where we did it, and it is not broad-based. There are specific places where we did not run promotions effectively. There are other places where we ran effective promotions and, quite frankly, ran both positive—not positive, much better IDs than what we’re talking about in the northeast. We believe we’ve reached a low point in IDs several periods ago, and so it is specific. We know where it’s at and we have taken aggressive actions to deal with those specific misses.

Ajay Jain – Hapoalim Securities

But can you quantify it any further? Like, would the strategic prices investments account, for example, 20 to 30 basis points of gross margin impact, or--?

Craig Herkert

Not at this point, Ajay.

Ajay Jain – Hapoalim Securities

Okay. And as far as the rate of strategic price investments or the planned price reductions for center store, is that expected to be more broad-based this quarter on a sequential basis?

Craig Herkert

No.

Ajay Jain – Hapoalim Securities

Okay. All right. That was helpful. Craig, if I could ask just one final question – in terms of some of the recent media reports with Shaw’s, even after accounting for the proceeds from the sale of TLC, do you feel like asset disposals are more of a strategic priority right now? I mean, is the sale of a major regional banner something like you feel like you really have to do to avoid a potential issue with your covenants in fiscal ’12?

Craig Herkert

No, I think—hopefully as Sherry was able to share with you earlier, we do not feel stressed that we have to do anything. What we will do is look if there are opportunities to do something that are beneficial, we will certainly evaluate them. But we do not feel under pressure that we must divest of any particular asset at this point.

Ajay Jain – Hapoalim Securities

Okay, thank you very much.

Craig Herkert

Sure.

Kenneth Levy

Well, thank you very much for joining us today. A replay of this call will be available through January 25, and as always I will be available for any questions you may have. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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