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Executives

Kenneth Levy - Vice President of Investor Relations

Craig Herkert - Chief Executive Officer, President and Director

Sherry Smith - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Edward Kelly - Crédit Suisse AG

Jonathan Feeney - Janney Montgomery Scott LLC

John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Ajay Jain - UBS

Karen Short - BMO Capital Markets U.S.

Mark Wiltamuth - Morgan Stanley

Michael Palahicky

Mike Otway - Jefferies & Company, Inc.

SUPERVALU (SVU) Q4 2011 Earnings Call April 14, 2011 10:00 AM ET

Operator

Good morning. My name is Concetta, and I will be your conference operator today. At this time, I would like to welcome everyone to the SUPERVALU's Fourth Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Ken Levy, you may begin your conference.

Kenneth Levy

Thank you, Concetta. I want to welcome everyone to SUPERVALU's Fourth Quarter 2011 Earnings Conference Call. Joining me on today's call are Craig Herkert, Chief Executive Officer and President; and Sherry Smith, EVP and Chief Financial Officer. Following prepared remarks, we will open up the call for your 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 corporate website at www.supervalu.com.

With that, I will now turn the call over to Craig Herkert.

Craig Herkert

Thanks, Ken, and good morning, everyone. I'm pleased to report that SUPERVALU's fourth quarter earnings of $0.44 per share came in stronger than expected and lifted full year EPS to $1.39. While we continued to experience pressure on top line sales, they were in line with our internal forecast. Identical store sales are not what we want them to be, but we have improved the ability to manage our margin and have made steady progress on rightsizing our cost structure.

As you saw in this morning's press release, our margin rebounded significantly from the prior quarter and was generally in line with last year's level. This rebound is the result of early successes that are coming from the business transformation plan we launched late last year. One element of this plan is improving our promotional planning and execution capabilities. We began implementing new tools and processes in the fourth quarter, which helped us correct over promotion that weighed on third quarter results and delivered earnings slightly ahead of our plan.

Q4 IDs were down 5%, about what we expected. Again, this quarter, our Northeast banners weighed down overall IDs. Excluding these banners, IDs were a negative 3.5%. I would also note that results in Chicago were below the corporate average while Save-A-Lot IDs were flat for the quarter. We did see modest amounts of inflation in the quarter and were successful in passing it through to retail prices. We also took advantage of opportunities to forward buy inventory, which helps us lock in lower cost of goods in advance of vendor price ranges. While our IDs were unchanged from Q3, they remain disappointing and are clearly not what we had anticipated they would be when we started the year. Addressing this erosion in our top line is the highest priority for me and my management team. Until we reverse this negative trend, we will not be able to take full advantage of our lower cost structure or capitalize in the many positive operational changes underway at SUPERVALU.

Looking back, I want to underscore that F'11 was an important year for SUPERVALU. We solidified our core leadership, strengthened our culture and instilled a greater operational discipline across the organization. I know we have much work ahead, but I believe it is important to take inventory of the progress we have made.

As with any company in a turnaround, the challenges, pace of change and retooling that is required often get overlooked, so let me take a few minutes to recap our most noteworthy actions this year. First and foremost, we developed a detailed plan for SUPERVALU that aligns traditional retail, Save-A-Lot and supply chain services around the shared vision to become America's Neighborhood Grocer. This plan will turn around our traditional Retail business while also focusing on growing supply chain and accelerating the expansion of Save-A-Lot. It requires us to adopt a new shared culture across SUPERVALU of one company winning for the customers and committed to growth.

To better communicate our strategy both internally and externally, we created what we call the eight plays to win, which I will speak to in more depth shortly. As we developed our strategy, we decided to divest a number of non-strategic assets, selling the bigg's and BRISTOL FARMS retail chains and our traditional retail stores in Connecticut as well as Total Logistics Control. In all, we shed about 80 stores, half by divestiture and half that were closed due to underperformance.

We also accelerated debt paydown, reducing total debt by more than $880 million, which exceeded our original plan by nearly $300 million. Throughout the enterprise, we are streamlining operations and removing duplication. These foundational changes are fostering better coordination and enabling us to improve the overall experience of our customers.

In the past 12 months alone, we removed over $175 million of expenses. These are permanent structural savings and a testament to the tough decisions we are making to rightsize infrastructure and hold business units accountable for their spending. We also took the initial steps to implement fair pricing plus promotion by lowering prices on key items across our network of stores. We have brought management of private brands in-house and improved sales penetration by 145 basis points to 19.3% in Q4.

This year, we also invested in our store directors with new leadership training and empowered them with more control over their stores to drive our hyperlocal strategy. These leaders have now been given control of over 25% of their store end caps, which will increase to 50% later this summer, and now have the authority to tailor the assortment and offering of their stores to best meet the specific needs of their communities.

We also revamped incentive compensation for F12 to motivate our store directors to drive higher sales and earnings. Finally, our merchandising group is now fully aligned behind our hyperlocal strategy and working to support the efforts of store directors to design and implement programs our customers want. Early progress of this realignment in our broader transformation plans were evident in Q4 with our ability to identify funding sources and improve our promotional cadence.

As we begin F12, we have realigned our business operations, improved our execution and focused our corporate culture on the end customer. Still, we have a long road to travel before our business transformation is complete. I have confidence that our execution on these eight plays will finally end the disappointing cycle of negative revenue growth and share losses that shareholders have endured in recent years. I fully expect that F12 will be the bottom of this cycle, and our plan will yield revenue and earnings growth in F13.

Looking ahead, fiscal '12 will be a year of transition for SUPERVALU as we continue our journey to become America's Neighborhood Grocer. As I reiterated with each call, we need to be locally relevant and focus first on satisfying the needs of our primary customers, those who are closest to our stores. To do so, we must be sensitive to their unique cultural needs, shopping habits and economic circumstances. Clearly, our pricing must not give them a reason to take their dollars elsewhere.

As we seek to improve our sales trends, we're all aware of the macroeconomic headwinds. As the new fiscal year unfolds, strengthening the foundation of our business is a priority. Our guidance this year calls for ID sales to improve but still remain negative for the year between minus 1.5% to minus 2.5%. Full year EPS is forecast to be in the range of $1.20 to $1.40 per share. Sherry will provide more color on our outlook shortly.

As I said earlier, we have begun to implement a detailed transformation plan to fund our price investments, mitigate rising cost and restore local relevance to our retail stores so we can restore topline growth and bottom-line earnings. We have developed the eight plays to win framework to help communicate our strategy both internally and externally. Our business transformation plan specifically includes two plays focused on key growth opportunities and six plays that address our traditional Retail business.

Let me begin with our growth plays, namely expanding Save-A-Lot and growing our Wholesale business. I've talked frequently about Save-A-Lot and the significant expansion potential it offers us. This hard discount format does well in densely populated urban markets as well as in rural communities. It caters to households with annual incomes of $45,000 or less, which amounts to roughly half the U.S. population. As a part of our growth strategy, we see an opportunity to expand Save-A-Lot across the U.S. Over the past year, we've added 92 net new stores, the most in our company's history. Approximately 50% of these are licensed to independent owner operators, demonstrating an ownership model that is truly unique in the discount grocery format and serves as a strong point of differentiation as we look to grow.

As we expand Save-A-Lot, we are also exploring other ways to leverage this format. This year, we formed a joint venture in Texas focused on our Hispanic customers. In South Carolina, we successfully co-branded drugstores with our newest licensee, Rite Aid. We are also aggressively targeting food deserts, where there is a strong unmet need. Just last month, we opened five stores in the south side of Chicago.

We have never been more excited about the prospects for growth at Save-A-Lot and plan to open more than 160 net new stores in fiscal '12. Growing Wholesale through new affiliations is another important opportunity for SUPERVALU and our entering to the West Coast with the recently announced affiliation of C&K Markets demonstrates this.

Combining our existing assets in the West with our proven ability to provide exceptional products and services for independent customers unleashes a new opportunity for SUPERVALU in this market. We expect to add to our independent base in existing and underserved markets, particularly in the West.

The other six plays focus on transforming our business, starting with a focus on our customers. In order to win for them, we must provide competitive value, deliver high-quality fresh, match our offering to the neighborhood and provide a hassle-free shopping experience. To accomplish these, we must simplify and improve our capabilities and fund in advance of price investment.

So providing competitive value means being fair-priced while also running great promotions. Fair-priced is simply having everyday base prices that the customer believes to be fair relative to the competition. We must provide customers with enough everyday value so they feel comfortable filling their carts when they shop our stores. In today's environment with so many shoppers focusing on price, offering them a good value is essential.

High-quality fresh means providing consumers with products that are fresh in the store and fresh at home. It means providing an experience that is exciting. Featuring products that fit the season and that are just as fresh at the end of the day as at the beginning. For produce, this means the right assortment, faster inventory turns to keep products fresh on the shelf and at home. For bakery, it means having fresh baked product throughout the day. For meat and deli, it means having knowledgeable associates that go out of their way to serve their customers.

Matching the offering to the neighborhood is what we call being hyperlocal. It means defining the assortment, pricing, promotions and services that are most appropriate to the neighborhoods we serve. It also means organizing and operating our business in a way that supports a diverse store network and empowers store directors to offer products and services that meet the unique needs of their customers. Rather than seeking to make every store in our traditional retail network look and feel the same, we will embrace the differences among stores by designing, merchandising and operating them to serve the local community.

We will still coordinate national promotions and reduce the workload for our store directors by providing a menu of relevant products and services from which to configure their stores. However, we will do so in a manner that showcases the regional and neighborhood norms in much the same way that our great independent retailers display their passion and commitment to their customers every day.

Finally, a hassle-free shopping experience means products are in-stock, stores are clean, easy to shop and friendly and engaging associates are available to help customers who need assistance. In the pharmacy, the prescriptions should be ready on time. At the deli, oven-roasted chickens should be in-stock during peak shopping hours. And at the checkout, lengthy lines should be immediately addressed and remedied. These four plays define what it takes to win for customers, and my team and I are working hard to strengthen our culture so that every one of our associates relentlessly focuses on what really matters, the customer.

Our next play, simplify and improve capabilities, will enable us to become a more responsive company that is easier to do business with. We are already redefining how we interact with our suppliers, which will drive sustainable improvements across our company. We will continue to lower our cost structure and take out non-value-added activities across the organization.

Our final play is funding in advance of price investment. As I stated earlier, we must improve our pricing. However, we are sensitive to how we go about this, and I think it is prudent to identify funding sources ahead of making investments. Our business transformation plan is designed to capture funding in advance of investment, to enable price investment while also maintaining profitability.

Specific sources of funding are already in place and include initiatives that are currently improving sales and margin through better merchandising and operation capabilities and reducing overhead costs. To make our business transformation and the eight plays a bit more tangible, let me highlight a few areas where we are seeing early wins.

The first is through promotions. As I stated earlier, in Q4, we were able to leverage our improved promotion capabilities to gain better control over our gross margin. This was accomplished through new tools that help analyze and optimize promotions based on historical results. With these, we are now better able to predict the impact of future promotions and manage markdowns and investments with greater precision, which is a big step forward in terms of controlling our margin.

The second area where business transformation is having an impact is in reducing fresh shrink. As we reviewed our operations this past year, we realized the enormous opportunity we have to reduce waste. New store-level fresh department forecasting, ordering capabilities and tools are being piloted in a number of stores, which provides stores specific data for sell-through, in-stock and missed sale, enabling store associates to place better orders and adjust space allocation to reduce excess inventory and shrink. Our goal is to reduce shrink by 50 basis points over the next three years.

The third area I'd like to highlight is our work to improve our in-stock position. Additional tools are being piloted that track shelf in-stock position by item and time of day. These tools analyze point-of-sale transaction data to identify out-of-stock opportunities, which allows our store director to take prompt, corrective action. These actions include training associates on how to better prepare orders, working with specific DSD vendors to ensure shelves are properly filled and modifying staffing schedules and restocking procedures to address potential out-of-stocks.

We are implementing these operational changes in both perishable and non-perishable categories. Currently, the perishable program has been deployed in 322 stores while 73 stores are piloting the non-perishables program. We expect both programs to be in all the traditional stores by the end of fiscal '12, though the full benefits will not be seen until early F13 when the programs reach maturity.

Finally, over the past few months, our enterprise merchants have been reinventing our category strategies. At our January Summit, we spoke with our top suppliers about how we can more effectively partner together and explained to them that we can understand profitability at the unit, category and vendor level, information we previously did not have. With this insight, our merchants can negotiate with our vendors with the goal of finding ways to collectively move more units through our stores. We think this is a great opportunity for suppliers who genuinely want to partner with SUPERVALU as we move through the business transformation to do so.

Our early successes with these initiatives provide notable examples of headway we are making in our turnaround. We are rapidly developing new capabilities, placing tools and actionable information in the hands of decision makers and carefully monitoring and tracking the results to make sequential improvements over time. Each of these efforts provides funding, which allows us to improve our pricing while at the same time, augmenting our customer orientation and enhancing earnings management.

It goes without saying that I'm very excited about the tools and initiatives that we are putting in place today. The eight plays to win provide context to our business transformation and help strengthen our decision-making to drive better execution for our customers. We plan to provide more detailed discussion on these items at our Investor Day in early May.

I will now turn the call over to Sherry for a deeper discussion of our financial results, and will return shortly with some final thoughts.

Sherry Smith

Thanks, Craig, and good morning, everyone. Today, I will provide details of our fourth quarter results, review SUPERVALU's financial condition, discuss our guidance for fiscal '12, including some new disclosures that we will report on.

As Craig noted earlier, our fourth quarter results were ahead of expectation. Adjusted earnings per share were $0.44 for the quarter, including $0.02 related to favorable tax planning initiative. This quarter, we benefited from improved operational discipline and new ad planning tools, which improves our promotional effectiveness. To a lesser extent, we also took advantage of forward-buy opportunity while passing through manufacture price increases. All told, the fourth quarter offers good insight into the progress we are making and the incremental impact of improving upon our historical practices.

We demonstrated the ability to generate funding through our new promotional effectiveness tools, which have already allowed us to begin investing in price. Identical store sales were negative 5% for the quarter. Q4 IDs reflected a 4.6% decrease in transaction count and a 40 basis point decline in basket size. We estimate cost inflation ran about 2% in the fourth quarter, with the largest impact coming from grocery, meat and produce, largely driven by higher commodity.

Gross profit rate in the quarter was 23.3% compared to last year's 23.4%. This 10 basis point decline was driven by a higher percentage of sales coming from the Supply Chain segment. Retail growth profit rate was 28.2% this quarter, equal to last year and up from Q3, reflecting better control over promotional spending which helped to offset an unfavorable LIFO variance. This quarter, the percent of items sold on promotion fell by 220 basis points, primarily driven by our implementation of new discipline around promotional effectiveness in the fourth quarter.

Last quarter, I touched upon two priorities as I transitioned into the CFO role. One was to enhance SUPERVALU's business metric to both guide better decision-making and provide investors more information to evaluate our performance. Craig touched upon some of these metrics earlier, and I will provide color on these momentarily.

The other priority is focused on rightsizing SUPERVALU's cost structure, which we continue to make steady progress on. Selling and administrative expenses were 20.4% of sales, 10 basis points higher than last year. Excluding charges in both quarters, S&A expenses were 20.2% of sales this year compared to 19.8% last year. Deleveraging continues to mask the full magnitude of our cost-cutting initiatives. We did deliver on our commitments to reduce expenses and operate more efficiently as we reduced more than $175 million in permanent cost during the year.

In fiscal '11, we removed about $75 million from administrative expenses, reducing over 650 positions throughout the company. An additional $35 million came from lower facility operating costs, and the other big bucket of savings with roughly $25 million came from procurement of items not for resale such as bags, uniforms and store supplies. A number of other expense categories made up the difference.

In spite of the significant progress, negative ID trends pressured our S&A rate. Rightsizing our operation and leveraging our scale are ongoing efforts across the company. And I can assure you, there are more opportunities to lower cost in F12. While many of these savings will be captured through our business transformation initiatives, I would conservatively say that for fiscal '12, they represent an incremental $115 million in permanent cost savings.

Retail operating earnings, before the store closure and employee-related costs, were 3.5% of sales compared to last year's 3.8%. This change from last year was driven by higher LIFO, employee benefit cost including pension, as well as expense deleveraging, which more than fully offset the favorable impact of our early stage transformation initiatives and cost savings.

Operating earnings per supply chain were 2.9%, excluding the favorable impact of the TLC transaction. This compares to 3.8% last year, largely driven by the unfavorable swing in LIFO. Corporate expenses increased by $7 million over last year, which included $12 million primarily related to store closures. Softer commercial real estate value drove an increase in higher year-over-year charges for surplus property.

With our lower debt level, interest expense was down $10 million in the quarter. Finally, our tax rate, excluding the impairment and other charges, was approximately 34% of pretax income due to the realization of several tax planning initiatives.

Moving to the balance sheet, SUPERVALU's financial condition remains solid with cash from operations totaling $1.2 billion in the fiscal year. Throughout F11, we returned approximately $75 million to our shareholders through quarterly dividend payments; reduced our total debt outstanding, including capital leases, by more than $880 million, which was $280 million more than our original guidance, primarily from proceeds from asset sales; we pre-funded $65 million to our designed [ph] benefit pension plan for the fiscal '12 plan year; and we invested over $600 million back into our businesses in capital expenditures, which included the early expansion efforts to grow Save-A-Lot.

Year-end borrowings under our short-term revolving credit facility were $197 million, in line with guidance we provided for year end. We remain in compliance with both debt covenants with trailing 12-month EBIT of $1 billion, excluding impairment and certain other one-time items, depreciation amortization for $0.9 billion; and rent expense was $0.3 billion over the same time period. Our year-end leverage ratio as defined in our revolving credit facility was 3.5x compared to a covenant maximum of 4.25x. Our fixed charge coverage ratio was 2.6x compared to a covenant minimum of 2.2x. We remain comfortable with these covenant levels.

Debt reduction remains a priority for the company. Last week, we launched our efforts to extend the $497 million B1 term loan tranche of our credit facility, which had been scheduled to mature in June 2012. When we finalize the amendment and extension of the tranche, the maturity date will extend to April 2018, and we expect to complete this extension prior to our Investor Day. Accordingly, remaining maturities over the next three fiscal years will total approximately $1 billion, and we expect to pay these obligations with cash flow generated from normal operations supplemented if necessary with short-term borrowings on our credit line.

Capital investment, as I mentioned, totaled $604 million in fiscal '11. We completed 78 remodels in addition to opening three new relocated traditional supermarkets and 142 Save-A-Lots. Approximately 40% of our spending this year was on growth initiatives primarily at Save-A-Lot, with the balance on maintenance which includes stores, distribution centers and technology-related items.

Capital spending this year was lower than our original plan, primarily due to the deferral of some retail projects into next fiscal year and strong construction cost management. Year-end FIFO inventories were down slightly from last year in dollar terms, but base supply was up about one day as we captured forward-buy opportunities ahead of an outspend or cost increases.

Store closures and negative IDs resulted in market share losses in our top 20 DMAs during the second half of the year. In the past 12 months, we closed 44 stores in our top 20 DMAs and estimate that SUPERVALU lost 60 basis points of share in these markets, which account for 2/3 of our overall sales volumes.

Looking forward to 2012, earnings per share is expected to be in the range of $1.20 to $1.40, with full year ID sales forecast between negative 1.5% and negative 2.5%. We expect inflation to be around 3% for the full year, although with sustained increases to steel prices might rise closer to 4%.

Save-A-Lot IDs are planned to be modestly positive. Through six weeks, our IDs are on track with first quarter expectations. Next, I will provide color on our guidance. As a reminder, we just finished fiscal '11 at $1.39 per share. So when taking into account our ID guidance of negative 1.5% to negative 2.5%, this will put downward pressure on earnings as will a number of employee-related costs, primarily from three areas. First, health and welfare costs largely driven by existing labor contracts; second, pension expense, where we will see higher amortization of past market losses; and third, incentive compensation, which moves back to a more normalized level. A significant portion of these items will be offset by the $115 million in savings that I mentioned earlier, which includes the closure of the underperforming stores, continued reductions in administrative headcount, labor buyouts and a continued focus on further reducing SG&A cost. We also expect improvement in retail operations and growth at Save-A-Lot. All in, our Retail segment is expected to be down between $0.10 and $0.25.

Next, the Supply Chain segment will not have the same mix of business as we sold Total Logistics in December and completed the final transition of Target to self distribution in February. We do, however, anticipate our incremental new volume, including the C&K affiliation, to offset normal sales attrition. Accordingly, supply chain earnings are expected to decline moderately in F12, including the impact of its share of the higher employee-related costs from pension and incentive compensation. Offsetting the supply chain decline, more or less, will be reduced expenses on the corporate line as we do not foresee the same level of surplus property charges that we have absorbed over the past two years.

Lastly, our guidance includes lower interest expense in fiscal '12. Given our range for debt pay down and variability in rate, we expect to see a $0.07 to $0.10 benefit from lower interest costs. One other area I will comment on is where we see gross profit rate in F12. Overall, we anticipate gross profit rate to be relatively flat this year compared to F11, which did include some ineffective promotions. Improvements in rate from promotional effectiveness and shrink, as well as the favorable shift in the mix of items sold, are expected to offset the impact of investment in price.

Changing the performance of our company is a gradual process, with the timing of financial results pivoting on the pace at which consumers react to our targeted program. Accordingly, we expect our performance to be stronger late in the year. Our business transformation initiatives are designed to generate the requisite funding to make meaningful price investments across our retail networks. These initiatives will also deliver tangible improvements to our marketing, merchandising and retail operations overtime.

Beginning with our first quarter release, SUPERVALU will also introduce new disclosures on a number of recent initiatives that Craig touched upon. Our intention is to provide a scorecard by which you will be able to track our progress on some key operating metrics that we feel are important to our long-term success. These will include ID sales, store shrink improvement, rollout of our in-stock position initiative, as well as Save-A-Lot network IDs and store counts.

From a cash flow perspective, fiscal '12 is expected to generate approximately $1.1 billion in cash from operations. Our capital plans call for spending of $700 million to $750 million and reflects the timing of projects we had planned to complete in F11 and the additional remodels and Save-A-Lot growth [ph].

As noted in the press release, we plan to complete 55 to 75 traditional remodels and more than 200 new Save-A-Lots, which include both corporate and licensed locations. We also broke ground on a new Save-A-Lot distribution center in North Carolina in January and expect to complete this facility late in the fiscal year.

We remain comfortable paying our $0.35 annual dividend, which will return roughly $75 million to our shareholders during the year. Finally, we do plan to remove one day of inventory as a result of our new planning tools, improved store level operations and a renewed focus on working capital across the enterprise while still taking advantage of forward-buy opportunity that's appropriate. Overall, this plan will allow us to reduce total debt by $500 million to $550 million.

As Craig stated, we have begun to implement a detailed business transformation plan that will strengthen our competitive position. We believe our plans for F12 appropriately addresses the challenges associated with our recent performance and incorporates the initiatives we have in place to improve our results and will allow us to build from this phase going forward.

Now I will turn the call back to Craig.

Craig Herkert

Thank you, Sherry. I hope that our remarks today have provided you with a good understanding of the path that SUPERVALU is taking to address our business challenges and improve our long-term performance.

As a company, we must provide customers with a clear and compelling reason to shop our stores. And I believe that our business transformation plan will do just that. The eight plays we described are already having a tangible impact on our cultural discipline and enhancing our processes to drive results. While there are no quick fixes, progress on our transformation plan is progressing well and over time will improve our price position and customer satisfaction.

Our Investor Day on May 3 will provide another opportunity to provide more detail on the initiatives we have mentioned today, including a deeper dive into the analytical tools we are now using to manage our business more effectively. As part of that day, we will visit a Jewel store to see our business transformation initiatives firsthand and visit a Save-A-Lot store to discuss the growth opportunities that this format provides. I hope you'll be able to join us for this event.

Now I'll be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Meredith Adler with Barclays.

Meredith Adler - Barclays Capital

I would like to try to get a better understanding when you talk about funding your price investment. Are you primarily talking about getting money from vendors? Or is there something else that you're talking about?

Craig Herkert

Yes, it's really all the above. There is clearly an initiative to make sure that we're using the new information we have to better partner with our vendors and find some funding there. But there are many other things that we are doing. I think all the things I articulated on the call this morning, operationally, to help us run our stores better, and clearly as we take cost out of the business, and Sherry has talked about that. So it's a little bit of all the above. But really, clearly, I want to be clear. We are not putting this burden on our vendors. It is part of the solution, but it's just part of the solution.

Meredith Adler - Barclays Capital

Okay. And then I have a question about -- I know you've talked about another $115 million of structural cost cuts for next year. There was a time though, you were also cutting cost at the stores. You had very significantly negative comps. I was just wondering whether you feel that you've cut all you can cut. Do you have to be concerned about volume picks up a bit and you don't have the right service in the stores? Maybe you could just talk about that a bit.

Craig Herkert

Yes, it's part of our process, so I would say there is no event that you'll see. But what we are doing as part of our business transformation is simplifying processes. A key among that is how do we make the job different and more effective at store level so that we can redeploy our associates at store level to customer-facing initiatives. So I'm not concerned that we don't have enough, and there are a lot of initiatives we have in place and underway going forward to change how we actually get product on the shelves and allow us to interact with our customers in a different way. And I think you'll be hearing more about that as the years progress with those.

Meredith Adler - Barclays Capital

Okay. And then I'll be greedy but this is a question, fixed income, people like to know. You have $1 billion of maturities, assuming you do this extension for the next three years, but I think a big chunk of that is in 2011. Sherry, can you talk a little bit about exactly what your plans are for the debt maturities this year?

Sherry Smith

Actually, this year, Meredith, we will only have $300 million maturing. And as you heard me say, we are going to pay down $500 million to $550 million of debt. So that would allow us to pay that maturity as well as what was on our revolver at the end of the year.

Operator

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

Mark Wiltamuth - Morgan Stanley

I wanted to ask a little bit on your outlook on traffic. When do you think the traffic can start to turn? Because if you're putting through inflation of 3%, that would kind of imply traffic is still going to be running like negative five-ish for the year.

Craig Herkert

Well, we're looking as it picks up as the year progresses, and we're not really giving traffic guidance so we just give ID guidance. Our initiatives, Mark, are really built around providing a better value for our customers so that the traffic that we get, we do want to make sure we get traffic, is traffic that comes in and fills more -- does more of their shopping in our stores. So it's a holistic program that we have to both drive traffic, drive loyalty and get our customers to spend more. And beyond that, I think we're just giving ID guidance.

Mark Wiltamuth - Morgan Stanley

Okay. And for this quarter that you just announced here, did you make progress on the price reduction campaign, or were you really just trying to get the gross margins kind of back on track?

Craig Herkert

Yes to both. The gross margins on path, I think, was to a large degree, because we were able to implement some of these new tools, particularly the promotional effectiveness tool, which is a big deal for us. And I think I talked about that in the third quarter. But in conjunction with that, we continue at a nice pace to implement fair pricing plus promotions across some key items. There are no broad-based things that you will see. But across the store, Mark, in the fourth quarter, we continued to find opportunities to take key items customers want and get them to fair pricing plus promotion.

Mark Wiltamuth - Morgan Stanley

Okay. And just a little bit on the operating margin for the year ahead. So you're talking about the Retail business is going to be down $0.10 to $0.25 a share. It sounds like supply chains under some downward pressure, and you're making up a lot of it on interest expense. What do you think overall operating margins are going to be for the year ahead?

Sherry Smith

Well, I think, obviously, if you look at where we were in fiscal '11 and you know, generally, our guidance is to be slightly down -- but so there's -- you should be able to model through between the two segments.

Operator

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

Karen Short - BMO Capital Markets U.S.

I like to start with a couple of clarification questions. You said that your comp trends in the quarter-to-date are in line with 4Q? Or in line with your expectations? I wasn't really clear on that.

Craig Herkert

With our expectations for this quarter.

Karen Short - BMO Capital Markets U.S.

For the year, you mean?

Craig Herkert

For the year. They're in line with our expectations for where we expect them to be this quarter to achieve our results for this year.

Karen Short - BMO Capital Markets U.S.

Got it, okay. And then just on your corporate average, you said Chicago was less than the corporate average. Was that less than the 5% or the 3.5%?

Craig Herkert

We're not giving guidance on that specific number.

Karen Short - BMO Capital Markets U.S.

Okay, but you did say corporate average so...

Craig Herkert

Right, but we are not giving a specific number on Chicago.

Karen Short - BMO Capital Markets U.S.

Okay. And then I was wondering if you guys could provide the full year retail gross profit for this year and for last year, seeing that you're now giving us -- you gave us the two quarter's worth?

Sherry Smith

Sure. So the gross profit for retail this year, as we said, we're going to be about flat, '11 to '12.

Karen Short - BMO Capital Markets U.S.

No, no, I wanted just what the actual percent was in retail for fiscal '11 versus last year, if you'd be willing to provide that.

Sherry Smith

Yes, the retail growth profit for the full year was 27.5%.

Karen Short - BMO Capital Markets U.S.

Okay. And last year?

Sherry Smith

Last year was about 27.4%.

Karen Short - BMO Capital Markets U.S.

Okay. And then, I guess, just wondering if we could talk about two bigger-picture things. Maybe just talk a little bit about what gets you from negative 2.5% to negative 1.5%? Like, what are the swing factors? And then also wondering if you could give us some color on when you like the rollout or the timing of the benefit from centralizing the merchandising?

Craig Herkert

Well, we centralized merchandising a year ago, that's not new news.

Karen Short - BMO Capital Markets U.S.

Well, under Janel, I mean.

Craig Herkert

Well we're seeing benefits, it's just a leadership change. But we're certainly seeing benefits today, partially, certainly, because of leadership and partially because of some of the new tools and processes we have. I would say we are really, really happy with the team that is running merchandising today, not just here in Eden Prairie, Minnesota, but our merchants across the country. There's this great, great energy and alignment about what we need to do here as part of our business transformation. Karen, we just had a meeting last week with this whole group, and I feel better today than I've ever felt about where this group's going. So I think we were -- as we said in our call, we'll continue to see improvements as the year progresses. I'm not giving specific period-by-period or quarter-by-quarter expectations externally for that, but I think as the year progresses, we'll continue to see improvement. And I forgot your first question, I'm sorry.

Karen Short - BMO Capital Markets U.S.

Well, just the kind of what's -- when you think about an ID coming in at negative 1.5% versus 2.5%, how do you get from one to the other?

Craig Herkert

Well, we're in the beginning part of the year, Karen. There's a lot of moving parts here, so part of it might be external factors, and a lot of it will be how quickly we can implement some of these process changes that we talked about in the call today.

Operator

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

Michael Palahicky

This is Shane Palahicky on behalf of Deborah. Just want to kind of talk about your private label and how you guys plan on using that to mitigate some of the inflation, the inflation that's going through this year and -- well, how do you guys plan on using private label this year?

Craig Herkert

Yes, I think we'll talk a little bit more about private label at our Investor Conference, but we're excited that we were able to move 145 basis points up in penetration this past year. The team is completely focused. I think moving this thing in-house was a big deal. We're integrated, it's part of our category business planning, the private brands are part of it. And it's a multi-tiered strategy that will really focus on offering consumers a broad range of private brands. So yes, I think it's a key part of our opportunity. I think our customers have shown a great willingness to buy our very good private brands. And I think if you come on the third, we'll talk even more about where we're going.

Michael Palahicky

Okay, great. And then just a quick follow-up. Some other food retailers have been focused on mobile and different Internet technologies. And just to kind of understand what you guys are doing to kind of compete in that area?

Craig Herkert

Yes, we've got some great stuff going on in that area. Again, if you come on the third, I think our Head of Marketing, Julie Dexter Berg, and her team will be able to give you some insight. But we've got some great new web platforms that we've been rolling out, including, and this is all public, we just rolled out to all the Albertsons banners this past week, and we've got it in several of our bigger banners today. And if you come on the third, I think you'll hear more about the really cool sort of capabilities that this new platform provides for us and how beautifully this ties into our hyperlocal strategy, serving each neighborhood. So actually some cool stuff going on there.

Operator

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

Mike Otway - Jefferies & Company, Inc.

This is actually Mike Otway standing in for Scott. Just a quick clarification question. And I may have missed this earlier, but of the $115 million expense reduction that you guys are planning for fiscal '12, how much is SG&A or corporate reduction? And how should we think about kind of the cadence of SG&A reduction over this year and maybe heading into next year as well?

Sherry Smith

So as I mentioned, of the $115 million, some of that is what we had mentioned in Q3, and it's related to the charges we took in Q4. So the majority of that is going to come in ratably over the year here. So we took steps late in Q4 to assure that we would be able to deliver on that, and we'll continue to look at further ways that we can beat that number.

Mike Otway - Jefferies & Company, Inc.

And Sherry, was that the $60 million that you talked about on the corporate expense side in the third quarter?

Sherry Smith

Yes.

Mike Otway - Jefferies & Company, Inc.

Okay. So the balance would be different buckets, SG&A and cost of goods, et cetera?

Sherry Smith

Really all SG&A, continuing to look at ways that we're able to streamline our cost structure.

Operator

And your next question comes from the line of Ajay Jain with Hapoalim.

Ajay Jain - UBS

Craig, in terms of your guidance, it looks like you're expecting a pretty significant recovery [ph] in IDs. And I guess that type of sales momentum didn't seem like it was reflected in these latest results. I think the two-year trends declined again slightly in Q4. So I'm just wondering, are you seeing any improvement in the current quarter that causes you to be optimistic about the ID sales outlook? And the second question is if, for example, IDs end up being down in the 4% to 5% range this year, do you think that the earnings guidance is still achievable by managing margins better as you did in this latest quarter?

Craig Herkert

Yes. Well, part of the reason that I think this team feels very confident that we can get to our guidance range is due to the fact that we've actually changed the way we run the business. So it's not just, "Gee, we hope things are going to get better, we sort of think we might have a plan." So there's confidence because, as I've articulated in the call this morning, we've got the eight plays. We've got significant new tool that allow us to drive more value. We have a detailed time-bound specific plan today on how we're going to make sure we achieve these eight plays. And it is pretty aggressive even for this year, and we've got some comfort based on history that these things will in fact have an impact on customer behavior, so as we go down the year. Beyond that, I don't know that I want to say anything more than we've said about our IDs are on-trend for what we said -- what we expect this year. But I will tell you, there is confidence in this team, that we have a plan in place and the process tools and the leadership to actually achieve the goals we've articulated this morning.

Ajay Jain - UBS

And you said earlier that IDs in the current quarter were in-line with your expectations. Can you give any confirmation on what those expectations were just so we can better understand it?

Craig Herkert

No. No, we're not giving that.

Ajay Jain - UBS

All right. And just my last question is on the interest expense, implications from your amend-and-extend effort with the term B loan. It sounds like net interest expense will be down based on a planned debt reduction. But I assume that if you get the flexibility that you're looking for to push out those maturities, then you're still going to have higher interest expense on the floating rate debt portion. So I'm assuming that, that's all factored into your guidance. But I was just wondering, Sherry, can you comment further on the interest expense outlook just for I guess for the LIBOR-linked debt specifically?

Sherry Smith

Yes, it is all factored into our guidance. And so again, that maturity was due June of 2012 and so it's extending it out to 2018. And it is a slightly higher LIBOR plus that we're looking at there but not significant to the overall interest.

Operator

And your next question comes from the line of Edward Kelly with Crédit Suisse.

Edward Kelly - Crédit Suisse AG

My question is on traffic. Traffic deteriorated, I guess, in Q4 versus Q3. What I am curious about is, I know you won't talk about where the IDs are so far in Q1, but has traffic stabilized? Is it still deteriorating? Where do we stand there?

Craig Herkert

Yes, I think, again, we're not giving that information. So I want to be careful with that. But what I would say is the -- what we're looking for here as we think of traffic is our promotional effectiveness. We're trying to drive appropriate traffic. We want to make sure that people who come into our stores, not all of them obviously, but more and more of them come in and shop the full range of what we have. Traffic in and of itself is not necessarily all that we want to do with this company. We've been down that path before, certainly in some of our calls last year which we will all remember. Having traffic driving promotions that don't build basket and don't fill profitability are not healthy for us. So it is a combination of all of the above that we're shooting for. And I will say that our promotional mix was significantly changed in the last quarter. It was over 200 basis points better than the prior year. So as we kind of use these tools, use our processes to really think about how we drive the right mix between traffic, basket, customer satisfaction, I think that's what we're looking for this year.

Edward Kelly - Crédit Suisse AG

Right. And Craig, could you maybe just help us just understand how you improve your price perception this upcoming year? In an inflationary environment, right, which, number one, is kind of hard to do to start, but also with guidance that really doesn't seem to assume much decline in gross margin at all. So...

Craig Herkert

Sure. And again, we've talked about this a bit in the past. But one of the things we do is we just have to renegotiate -- we have to negotiate differently with our vendor partners to make sure that we get away over time from ridiculously high regular prices and very, very good promotional prices to fair prices plus promotion. And again, I've talked about this the last two quarters so I don't want to go into that more. But we continue to look at how we do that sort of thing. So that's number one. And then the other part is everybody is dealing with inflation. So the consumer perception is really how we are priced relative to our peer group, not just how we are priced relative to last year. So if in a particular category there is a price increase, the entire market has to deal with the price increase. And it's how we deal with it relative to our peers that I think will help us challenge and change that perception.

Edward Kelly - Crédit Suisse AG

How receptive have the vendors been to that, that change in strategy?

Craig Herkert

Really receptive. I think the vendor community still looks at SUPERVALU. We are a significant reseller of their products, and they want us to succeed. They need us to succeed, and so I think they've been very receptive and open to looking at how they can sell more products through our stores. Their interest, interestingly enough, are mostly aligned with ours, which is they like to sell more things to more people.

Edward Kelly - Crédit Suisse AG

Final question for you, Craig. How is the competitive landscape today? We hear that things are rational. Is that really true out there across the board?

Craig Herkert

Yes. I think it's a challenging landscape. But I think, as I've said last year, it's the new normal. This is a challenging time for American consumers, and I think it will remain so for a long time. So it just is what it is. And our team now is focused on how we make sure we put together an appropriate value for consumers in each of our formats and in each of our neighborhoods. One of the things we actually like about the business we find ourselves in is that our stores are in the neighborhoods. And as we see challenging economic things like very high gas prices, our stores are easier to get to. And as we provide a more compelling value for customers, we think that actually is in our favor.

Operator

And your next question comes from the line of John Heinbockel with Guggenheim.

John Heinbockel - Guggenheim Securities, LLC

A couple things. A lot of vendors have talked about cutting trade spend, maybe shifting over to ad spend. Are you seeing that? Do you think that will happen? And is that a negative in terms of funding or not? Maybe you pick up share from some others?

Craig Herkert

Different vendors have approached this economic environment differently, John. And what I would say is our merchants are armed with data today to sit down and have substantive negotiations with vendors as to how they approach SUPERVALU. So rather than giving you a one-size-fits-all answer, I think our merchants are prepared today in a way they've ever been prepared before to actually talk about what is the most appropriate way to deal with this vendor-by-vendor, category-by-category.

John Heinbockel - Guggenheim Securities, LLC

But you're not concerned the trade funding goes down meaningfully over the -- it's not that impactful to your strategy this year?

Craig Herkert

No.

John Heinbockel - Guggenheim Securities, LLC

All right. Secondly, you talked about the analytical tools that have helped you do a better job with promotions. How well do those tools work on predicting consumer reaction to passing inflation through and getting a sense of demand elasticity on that side, increases as opposed to cuts?

Craig Herkert

It's really not a tool that does that. It's a great question, but no. This tool is very specifically geared towards promotional effectiveness, and so it doesn't have that. We use different methodologies regarding pass through and how we do that. But this tool that I have mentioned is really specifically about promotion.

John Heinbockel - Guggenheim Securities, LLC

All right. And then finally, from a gas price perspective, as you look across all of your banners, formats, et cetera, what kind of correlation work have you done to see impact of gas prices, say, above $3 on traditional supermarket banners, Save-A-Lot? Is it good for Save-A-Lot, maybe your independents? How does that look by banner?

Craig Herkert

We don't have that data by banner. I would say that from a strategic standpoint, we, again as I said a moment ago, we think the fact that our stores are local, are in the neighborhood, is actually a positive thing for us as we see rising gas prices. But I want to be clear that we don't think that alone is good for us. It means we need to have a compelling reason for customers to want to come into our stores. There are, as you well know, other stores that are also located in people's neighborhoods. We are working to make sure our stores are the best, most hyperlocally focused with the finest fresh food proposition so that consumers choose our stores.

John Heinbockel - Guggenheim Securities, LLC

Do you think it's good or bad for Save-A-Lot, or we don't know?

Craig Herkert

I think it is what it is, quite frankly. I think we've been in a period of high gas prices for some time. I think it stresses the American consumer across a broad range of income levels. Our team at Save-A-Lot is and continues to be focused on providing values to their customer base, ensuring that they're 40% or more lower than traditional grocery stores, and I think that's a great place to be.

Operator

And your last question comes from the line of Jonathan Feeney with Janney Montgomery.

Jonathan Feeney - Janney Montgomery Scott LLC

Craig, I wanted to -- and I know -- I'm not sure how much granularity you want to give here. But what I'm trying to get at is how -- you mentioned Chicago being below average. When you think about profitability across the many different banners without getting specific about any one, I mean, can you give us a flavor if there's any pockets where there's real outliers, either positive or negative, when you talk about profitability? The reason I asked that question is just trying to understand like if you fix one or two things, do you see a step function in profit and/or comp, would be my first question. Can you give us any color around that?

Craig Herkert

No. I will tell you though, what we are doing is we are focusing on the enterprise. We had a great Store Directors Summit here about mid-March, and we brought, for the first time ever, all of our traditional store directors together in one place at one time and laid out in really granular detail the tools that we're providing to them, the new rules of engagement that we're providing to them, the new incentive program that we're providing to them. And this was everybody and it was regardless of which banner, and they were all here. And so we're trying to think of this business holistically. And clearly, making sure that if there are banner-specific marketing initiatives that we still do that, we still have banner leadership, it is part of our being hyperlocal. But we are not picking and choosing who wins and who loses in this race.

Jonathan Feeney - Janney Montgomery Scott LLC

Okay. And I guess just last question. A lot of importance you've placed on this particular plan, these eight plays. And I guess at a couple of junctures in the past, since the beginning of your tenure, Craig, you've had plans that sounded pretty reasonable to me. It sounded pretty good and with a strong likelihood of success. What would you say are the like one or two principles you've sort of learned on the job here to respond to the environment that makes this plan different? Forget about the specifics of the plan, and just what are the -- what have been the biggest learnings you've had about how to go to market differently that have affected the way you've crafted this plan as opposed to the past one?

Craig Herkert

Sure. Well, two things. One, I would say I don't think this plan is different. I think this is the same plan, only with detail and meat on the bone. So I would argue that this is the plan we've been articulating for several years. The a-ha to me is that the best plans in the world are not going to be effective if you don't have the tools and processes in place to enable your people to execute against it. We've got great people in our company, and I think we've had the right plan. We did not provide them with the right tools and processes to go ahead and get after it. Today, we have that. And that's the big difference. That's the big a-ha.

Kenneth Levy

Thank you very much for joining us today. If you have any follow-up questions, please feel free to reach out to Investor Relations, and we'll look forward to catching up with you at the Investor Day.

Operator

This concludes the conference. You may now disconnect.

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