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SUPERVALU (NYSE:SVU)

Q1 2012 Earnings Call

July 26, 2011 10:00 am ET

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

John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Scott Mushkin - Jefferies & Company, Inc.

Karen Short - BMO Capital Markets U.S.

Mark Wiltamuth - Morgan Stanley

Deborah Weinswig - Citigroup Inc

Operator

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2012 first quarter conference call. [Operator Instructions] I would now like to turn today's conference over to Ken Levy, Vice President, Investor Relations. Mr. Levy, you may begin your conference.

Kenneth Levy

Thank you, Ashley. I want to welcome everyone to SUPERVALU's First Quarter 2012 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.

This quarter, we have prepared some supplemental information to accompany prepared remarks, which is available on SUPERVALU's investor relations website under the Presentations and Webcast section. Following prepared remarks, we will open up the call for your questions. So that we can accommodate as many people as possible, I would ask that you limit yourself to one question and one follow-up.

The information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our most recent 10-K filing. A replay of today's call as well as the supplemental information will be available on our corporate website. With that, I will now turn the call over to Craig Herkert.

Craig Herkert

Thank you, Ken, and good morning, everyone. This morning, SUPERVALU reported first quarter fiscal 2012 earnings per share of $0.35 on identical store sales of negative 3.9%. We are making good strides on our 8 Plays to Win strategy and most importantly, remain on plan to deliver our full year guidance.

Today, I'd like to share with you observations about the consumer, provide some highlights from the quarter and give you an update on our business transformation activities around hyperlocal merchandising, private brands, in stock and shrink reduction. As you recall, our 8 Plays to Win strategy is not a one-quarter plan, it is a winning strategy to reposition our business for growth and long-term relevance.

In Q4, we began rolling out new tools to manage promotions in markdowns more effectively and have added these into the first quarter, along with additional reductions to SG&A. With each new initiative, we are seeing tangible progress, which helps us fund meaningful price investments in select items, categories in certain markets. In general, I am pleased with the progress we are making to generate funding in advance of price investments and deliberately balance today's consumer need with our internal financial objectives.

In the first quarter, we saw inflation in many categories. Produce cost peaked early in the quarter and have moderated, while dairy and meat prices remain elevated. In all but a few highly sensitive categories, we did pass along these increases to retail. In certain fresh categories such as meat and dairy, we focused on being right priced in our markets to be sensitive to consumer needs and maintain our relevance. We protected penny profit versus margin on some items and looked at ways to better mix up the category as a whole to manage our margin.

For example, as beef prices rose this quarter, there were certain retail price points that we held while we promoted fresh chicken with more frequency, which delivered a lift to both sales and gross margin.

The pace of recent inflation and price increases posed a practical challenge for most financially fragile customers. To help these shoppers stretch their food dollars, we are executing our fair price plus promotion, enhancing our product selection to provide greater everyday value and offering affordable meal solutions.

Today, we are leveraging new analytical tools and more timely information to balance out our offerings at a more appropriate spend level, to deliver our gross margin while also addressing consumer needs. And I can tell you that our shoppers are responding to the value-oriented programs and new dollar price points that we have implemented.

SUPERVALU remains committed to delivering fair pricing that meets consumer's everyday expectations. In the first quarter, the number of items sold on promotion decreased as we managed our promotional spread more effectively. We expect to see this trend continue as we invest in everyday shelf price and promote in ways that are meaningful to our consumers and steadily build loyalty and basket size.

ID sales this quarter were down 3.9%. While still negative, IDs are improving according to plan, and all markets other than Chicago showed sequential improvement over Q4. In Chicago, there's been a steady inflow of new competition from gourmet operators to discounters. Over the past 24 months, retail square footage has increased by 4.5% or over 2 million square feet while our footprint has remained largely unchanged. We are responding to these changing market dynamics by taking more aggressive actions, including expanding Save-A-Lot and adding to our independent retail relationships and completely revamping our competitive response to new entrants.

In recent months, our promotional strategy has been revised to present a better customer proposition inside our stores as we have stepped up investment in our facilities. Our store directors at Jewel-Osco have also embraced hyperlocal retailing and are focused on meeting the needs of the broad range of rich ethnicities for which Chicago is known. With the progress we are making, we fully expect our performance to rebound, and I am encouraged by the steady improvements that have taken place in each of the months as we have moved to the first quarter and into Q2.

At our hard discount format, Save-A-Lot, network IDs were positive 3% and benefited from new marketing and merchandising programs designed to bring even greater value to customers. 5 weeks into the second quarter, we are continuing to see sequential improvement in IDs at Save-A-Lot and across all of our markets.

Overall, we continue to benefit from better decision-making and disciplined execution in our business and are using both customer and associate feedback to enable rapid execution of early learnings and best practices across our enterprise.

The promotional effectiveness tool that became operational last quarter continues to serve us well, providing strong analytical support as we build our promotional plans. Pricing algorithms, which leverage historical data and unit movement, are improving our ability to forecast the impact of promotional investment while more disciplined guidelines are helping us optimize promotions and better manage markdowns.

It's clear that consumer demand is being impacted by a slowing economic recovery and fuel prices, which are up almost $1 per gallon this quarter compared to last year's first quarter, as well as the unseasonably cold, wet weather we had this spring. Consumer sensitivity to price and macroeconomic factors accelerated trade down during the quarter, which ran about 100 basis points. Given the volatile nature of many of these external forces, it's too early to know how rising food and fuel prices will impact households for the balance of the year. I can tell you that at SUPERVALU, we are not sitting idly by to find out. We are focused on customer solutions and actively bringing products and programs to our stores that meet the needs of today's customer.

This quarter, we rolled out several new dollar items in our frozen foods and meat department and are seeing tremendous response. To accommodate today's value-driven shopper, we have also adjusted pack sizes and introduced single-serve portions, both designed to provide attractive price points.

Another recent value introduction is our new Chill Out private label wine, which sells for less than $6 a bottle. With 5 varieties to choose from, Chill Out offers customers a fun and different option to light their wines. Our shoppers really love this product, and sales are tracking meaningfully ahead of expectations since it was introduced early in the quarter. We estimate that this new line has added an incremental 40% to our sales within the category.

Moving to our business transformation plan, fiscal 2012, as I have said before, will be an inflection point for SUPERVALU as we committed to providing you with quarterly updates on our efforts. We want to share our progress against the metrics we are using to measure ourselves, and we'll be more transparent as we execute our ambition to becoming America’s Neighborhood Grocer.

Last quarter, I introduced the 8 Plays to Win framework that we are using to define key priorities and keep us focused on our business transformation. Six of these plays address operational excellence and customer centricity in our traditional retail stores, while the other 2 plays are dedicated to growth of our independent retail and Save-A-Lot operations. The 8 Plays give us boundaries for decision-making and supports our commitment to act as one company, winning for the customers and committed to growth.

One of our key plays is neighborhood retailing, which is already visible at store level, where we have added locally-relevant offerings to end caps and displays. In Q1, our traditional retail store directors supported by new tools and training were given control over 25% of their display space. This increased to 50% earlier this month. Though we're still early in the process and I know it will take time for these local changes to meaningfully impact our numbers, we are encouraged by the initial results. Our store directors know the preferences of local customers, and additional empowerment allows them to respond in realtime. Our expectation is that we will gradually increase customer loyalty and basket size as we better -- as we are better able to provide store-specific offerings that meet the unique needs of our shoppers.

The crux of our hyperlocal strategy is neighborhood retailing, both engaging customers within the store and matching the store to local needs. We know the core customers frequenting our stores, but we have an opportunity to deepen ties with loyal households and build new relationships with customers in our trade area who historically has shopped us only for convenience. The incremental opportunity of extending this relationship is significant.

Let me share examples of this in 2 of our stores. In Herndon, Virginia, within our shopper's banner, one store is leveraging customer feedback and demographic information to adjust shelf allocation and better meet the needs of the surrounding Asian community, most of it of Indian descent. While accounting for only 7% of the local population, this segment represents a meaningful opportunity to the store and in the past had been largely overlooked.

Recently, the store team added 8 linear feet to the set, merchandised specifically for the Indian customer, bringing in approximately 100 new items including Kingfisher Beer, curries and other cooking sauces. The sales impact is incremental to the store's overall top line. But more importantly, we are better meeting the needs of a fairly sizable portion of the trade area, which can only help build traffic, basket size and customer loyalty.

Clear across the country in Beaverton, Oregon, one of our Albertsons stores hosted a trade show with a number of local vendors that allowed them to showcase their products that we offer in our store. This 2-day event featured a meet and greet with more than 15 local companies and provided customers an avenue to learn about the history and the background of businesses operating within their community. Local vintners, brewers, bakers and purveyors of spices and healthy meal solutions offered samples and coupons in an environment which really emphasized the surrounding community. The vendors loved showing off their products in this venue, and customers were enthusiastic about the event. And our store realized sales lift in the mid-single-digits. But what really excites me is this idea came from the store's grocery manager which underscores how our store teams are embracing the empowerment we have given them.

In private brands, sales penetration was 19% of sales, up about 90 basis points on a year-over-year basis. We know that private brands are an important option for cost-conscious customers, and our growing collection of over 5,000 SKUs has proven to be a good way of giving them great products at compelling price points.

In each of the next 3 years, we expect penetration to rise by 100 basis points as we bring our value play to the forefront and highlight the quality and value of our private brand program for shoppers.

Into the second quarter, we begin launch -- the launch of our Essential Everyday brand. This flagship label is rolling out in phases and replaces the labels associated with each of our banner brands. Essential Everyday will be our national brand equivalent offering and a great compliment to our restaurant quality, culinary circle and our natural and organic Wild Harvest lines.

Essential Everyday is now in 3 high-traffic, highly visible categories: cereals, pastas and pasta sauces with 140 items. Because we're still in the early stages of this launch, I plan to provide more insights on this new label during our next quarterly call.

Another noteworthy private brand item that launched this quarter within our Shoppers Value line is the extensive offering of individually-sized frozen pork, poultry and beef items. Each product is priced at $1, and they've done very well for us. As a result, we quickly rolled these items out to all of our traditional stores and our plans to introduce a total of 80 new items under the Shoppers Value label this fiscal year.

Improving our in-stock position is another area of focus that addresses 2 of our 8 plays. Enhancing product availability ensures that we have the items our customers are looking for when they visit our stores and will also provide incremental funding for our targeted price investments.

I'm pleased with the pace at which our in-stock tools are impacting ordering and availability across the company. Having said that, I know we still have opportunities to improve the way stores order product and how they utilize new technologies and reports to better manage inventory. As we make progress on this initiative, we are getting great feedback from store directors. In certain cases, some who thought they had clear visibility of the store are now provided new insights into operations, uncovering the root cause creating out-of-stock conditions. These new insights allow us to take comp corrective action and build sustainable processes to ensure conditions are not repeated.

Through the first quarter, we rolled out new in-stock tools and trading to 353 stores on the perishable side and 481 stores in nonperishables. This represents about 1/3 of our retail store fleet for perishables and just under 1/2 for nonperishables.

On a related initiative, we're making nice headway on shrink reduction, both in the center store and across our fresh offerings. As we noted earlier this year, our produce departments are now using a sticker tool to better allocate shelf space based on product movement. And across our store, we are improving our procedures to place orders more in line with sales forecast, both of which help manage inventory levels and reduce waste.

This quarter, we reduced retail shrink expressed as a percent of retail sales by 10 basis points. With a 3-year goal to lower shrink by 50 points, we expect to realize close to 1/3 of this in fiscal '12.

Growing our hard discount format Save-A-Lot is another important part of SUPERVALU's story. We're doing this through organic store expansion and by driving positive ID sales. Momentum is building from compelling opening price points under our new Save-A-Lot Today brand, which is comprised of about 30 unique products. Save-A-Lot is also leveraging this brand, along with its first national 10 for $10 campaign to drive increases in transactions and basket size. And although we only have added a handful of stores in the quarter, this was consistent with our plan. We have a full project pipeline and remain optimistic that we will grow our portfolio by 160 stores this fiscal year.

In May, we also welcomed a new leader to Save-A-Lot, Santiago Roces joined us as a new CEO, bringing 2 decades of grocery and food retail knowledge with him. I fully expect his proven track record in developing new markets and working with franchisees will help drive unit and sales growth in our hard discount format and ensure our success in doubling Save-A-Lot's footprint by the end of fiscal 2015.

We're also focused on extending the reach of our independent business and deepening our relationship with existing partners. This segment, which we have previously referred to as supply chain services, serves as primary supplier to more than 1,900 independent stores and does more than $9 billion in annual wholesale sales. Our independent business is an important part of SUPERVALU's growth play, and we are excited about the opportunities to extend this business on the West Coast. We realized improvements in like store shipments to our independent customers, which were slightly positive this quarter. Offerings like Shoppers Value private label brand are helping our retail affiliates create strong value and price perceptions with their customers.

Late last week, we announced that Leon Bergmann would follow Mark Anderson as the new head of Independent business. We appreciate Mark postponing his retirement to leave this organization on the interim basis over the past 6 months and know that Leon will bring tremendous experience and strong vision to this organization.

Next, I want to touch upon another initiative that is personally very important to me and strategically favorable to our bottom line: corporate social responsibly. Earlier this month, SUPERVALU released its annual CSR report. I'm especially proud of sustainability programs we've implemented and want to highlight our newest initiative that moves the company towards 0 waste. SUPERVALU was the first grocery retailer in the U.S. to achieve 0 waste classification, receiving this designation in 2 of our Southern California Albertsons stores in November. This fiscal year, we are committed to adding 40 additional 0 waste stores to our fleet, and through the first quarter, we successfully added 10, bringing our count to 12.

These efforts are good for the environment, and they reduce operating costs, which is good for our bottom line. We plan to have more stores certified in the future, and we'll keep you updated as we do so.

Lastly, I would like to mention SUPERVALU's ongoing commitment to address food deserts, where there is a strong unmet need for nutritional foods. Last week in a ceremony for White House with the Partnership for a Healthier America, SUPERVALU committed to open 250 stores in addition to the 400 we already have in or around neighborhoods with limited or no immediate access to nutritional foods. Our hard discount format, Save-A-Lot, will allow us to meet this pledge by providing healthier options and create 6,000 new jobs in the process. Let me now turn the call over to Sherry for a more detailed discussion of our financial performance.

Sherry Smith

Thank you, Craig, and good morning, everyone. If there is one message I want to convey today, it's that we are on track with our 8 Plays to Win strategy. We saw sequential improvement in ID sales this quarter and delivered earnings per share of $0.35.

Today, I will review SUPERVALU's performance and financial condition, provide an update on our corporate market share and discuss our outlook for the balance of the fiscal year. With this call, I'm also pleased to provide new disclosures on a number of initiatives that we committed to at our Investor Day so that you will be able to track our progress on key operating metrics.

First, I'd like to share more detail on identical store sales of negative 3.9%. Year-over-year, average transaction size increased about 50 basis points while customer accounts were down 4.4%. Remember that at times, we were excessively promotional last year and are now cycling some of these ineffective activities that drove higher traffic. The percent of items sold on promotion also fell this quarter by about 200 basis points due to our emphasis on more effective ad spend and promotional effectiveness.

It is important to note that the sequential quarter improvement in IDs from negative 5% to negative 3.9% was primarily driven by an increase in items per basket, as well as slight improvement in customer count. The increase in inflation in the first quarter compared to the fourth quarter was essentially offset by higher trade down. Cost inflation was about 3.5%, driven by rising commodity prices and higher fuel costs, which were more pronounced in the perishable categories. We estimate that grocery inflation was closer to 2.5%.

Gross profit rate in the quarter was 22.1%, down roughly 40 basis points from last year adjusted. Retail gross margin was 27.2% compared to 27.6% a year ago when adjusted for one-time items. The decline in rate this quarter was driven primarily by rising fuel prices and a higher LIFO charge. Price investments related to our fair price plus promotion strategy, as well as the impact of commodity cost increases on price-sensitive items were fully funded with the benefits of more effective promotions and improvements in shrink. While we remain in the early stages of our business transformation efforts, we are pleased with the contributions of these initiatives.

As I stated last quarter, we are focused on enhancing SUPERVALU's operational performance and rightsizing our cost structure. We continue to make steady progress on these priorities, with selling and administrative expenses totaling 19.6% of sales, a decrease of 30 basis points relative to last year.

The savings initiatives we have put in place, primarily around administrative costs, are more than offsetting the increases to health and welfare costs and pension expenses, which we noted on our fourth quarter call. For the quarter, we removed $40 million in permanent costs, most notably from administrative areas and benefited from closing underperforming stores. We remain on track to achieve at least $115 million in cost savings by the end of this fiscal year.

Operating earnings for Retail Food were 2.5% of sales compared to 3.0% last year when adjusting for the market excess and the impact of the labor dispute at Shaw's. This decline was driven by the factors that I've previously touched upon. Operating earnings for Independent business were 3.1%, up 10 basis points year-over-year.

Corporate expenses were $16 million in the first quarter compared to $29 million last year. You may recall that last year, we absorbed about $9 million in charges related to nonoperating properties.

Interest expense was down $19 million this quarter, reflecting the benefit of lower debt levels. And lastly, our tax expense came in at a rate of about 41% as a result of approximately $4 million in expense related to prior year's audit activity. This higher-than-normal tax rate reduced earnings by about $0.02 per diluted share. We expect our effective tax rate to be approximately 37.4% in each of the remaining quarters of this fiscal year.

Moving to the balance sheet. SUPERVALU's financial condition remains sound, and we are well positioned to weather the challenging economic environment. We lowered our total debt outstanding by $65 million in the first quarter, and cash flows have been strong through the first weeks of the summer. We expect to meet our total debt reduction target of $500 million to $550 million by year end.

During the quarter, we completed an amendment to our senior credit facility, allowing for the extension of the facility's term B-1 loan. Over $247 million of the term B-1 loan was extended and another $291 million of new money was raised. The new borrowings were used to reduce short-term debt and to retire the term A loan at its June maturity. We are pleased we were able to complete this transaction, which allowed us to improve our near-term debt maturity profile. Over the next 3 years, maturities total about $1 billion and SUPERVALU remains committed to prudently paying down debt.

We also remain in compliance with both credit facility covenants, with trailing 12-months EBIT of $1 billion, excluding impairment and other one-time items. Depreciation and amortization were $0.9 billion and rent expense was $0.3 billion over this period. Our quarter 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.

In light of rising vendor prices, we did take advantage of forward buy opportunities during the quarter to reduce average cost of goods, which increased inventories relative to last year. Day supplies inventory was up by about half a day but should reverse itself as prices stabilize and forward buy returns to normalized levels later in the year.

I would also note that new in-store reports and better forecasting tools that continue to rollout will help our associates right better orders. This focus should improve day supply of inventory this fiscal year.

Capital investment for the quarter totaled $158 million as we completed 11 traditional store remodels and opened 18 Save-A-Lot locations. 15 Save-A-Lot stores closed in the quarter, leading our store count increase by 3. Our annual plan still calls for the addition of 160 stores this fiscal year, and we are optimistic we will get to that number by year's end.

As an update to our year-over-year change in total market share, our most recent reading shows we have lost about 40 basis points across our top 20 DMAs, which account for about 2/3 of our overall sales volume. This is a modest improvement from the 60 basis point decline I cited in April.

Finally, I'd like to touch on our guidance for the fiscal 2012 fiscal year. As Craig noted, we are affirming our full year earnings guidance of $1.20 to $1.40 per diluted share. Total sales are still expected to be $37 billion for the full year, which we have provided in original guidance in an 8-K the day following our Q4 release.

In addition, we clarified our Independent business segment total sales guidance, which is expected to be down 2% to 4%, primarily the result of the sale of Total Logistic. Our Q4 guidance are flat was related to the independent Retail business excluding Total Logistic. Therefore, there is no change to total sales or earnings per share guidance for the year.

Full year ID sales are still expected to be negative 1.5% to negative 2.5%, and we anticipate our corporate gross margin will be flat to slightly down for the full year, given the higher LIFO charge and fuel sales impact. We remain in the early stages of our business transformation, and the true impact of our price investments will likely evolve and shape customer perceptions over several quarters. Our original guidance included inflation of 3%, and we still expect inflation to remain in the 3% to 4% range for the balance of the year.

Full year capital spending is projected to be approximately $700 million to $750 million, with the bulk of new Save-A-Lot store openings planned for the second half of the year. We are also on plan to complete 55 to 75 store remodels in fiscal '12, all designed to better match our stores to their respective neighborhoods.

Beginning this quarter, SUPERVALU is providing a scorecard on the business transformation initiatives we outlined for you in Q4 to keep you up-to-date on the progress we are making.

As of July, our store directors control 50% of their in-store displays and are embracing hyperlocal retailing. As Craig noted, we rolled out new in-stock tools to 32% of our retail stores for perishables and 44% for nonperishables. This puts us on pace to have these tools in our entire retail network by the end of the year.

This quarter, retail store shrink improved by 10 basis points, and we expect to realize improvement of at least 15 basis points this fiscal year. Dollar penetration of private brands improved 90 basis points year-over-year, and the launch of Essential Everyday positions us well to reach 100 basis points of growth this fiscal year.

Lastly, we continue to build our Independent business and open new Save-A-Lot locations. We are making steady progress on our business transformation initiatives and delivering on the new business metrics we have outlined.

So to reiterate, SUPERVALU remains on track, and we are making good strides on our business transformation initiatives. I hope the updates we've provided today have been helpful and look forward to keeping you abreast of our progress with each passing quarter.

With that, I'll turn the call back to Craig.

Craig Herkert

Well, thanks, Sherry. We remain focused on improving the fundamentals of our business, and I'm pleased with the progress my entire team made this quarter. Our business transformation is on track to deliver the improvements embedded in our F12 guidance.

New analytical tools are improving our decision-making capabilities and in-store operations, and we continue to show progress with each passing quarter. Having visited a number of our stores in the quarter, I can tell you there is tangible excitement among our in-store associates. Our store directors have genuinely embraced the additional discretion they have been given to make their stores cater to the needs of their local communities, and our 140,000 associates are driving SUPERVALU's business transformation with an eye on results.

I want to thank all of our associates for their engagement in our 8 Plays to Win. SUPERVALU is managing its resources well and better meeting the needs of customers with more relevant, locally-focused offering. We will continue to maximize our market penetration through hyperlocal focus in traditional retail while we grow Save-A-Lot and continue to expand our Independent business. I'll now open up the phone lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

Wanted to ask about the forward buys on inventory. Did that help gross margins during the quarter or were you keeping the prices low for the consumer?

Sherry Smith

We kept the prices low for the consumer, so we're able to buy in at before the prices went up.

Mark Wiltamuth - Morgan Stanley

Okay. And your -- for your goals of reaching flat gross margins for the year, you're starting off the year here in this first quarter was down 40 basis points or so. How do you expect to make up that gap?

Sherry Smith

So again, we said for the full year. So if you look at our quarters from last year and remind you certainly, our Q3 gross margin rate was impacted from a lot of heavy investments and ineffective promotions. So that's really as we balanced out across the year that again, price investments become offset with promotional effectiveness and shrink, growth of private brands. All of those types of initiatives will blend out to the flat for the full year.

Mark Wiltamuth - Morgan Stanley

Okay. And lastly on the inflation pass-through, it sounds like there's a little bit of a mixed bag. Some of the categories, you were able to pass through, and there were other areas where you just chose not to. Is there any way to quantify how much that was of a drag on margins in the quarter?

Craig Herkert

No. I will tell you, for the most part, Mark, we passed through center store. We passed through inflation, period. And in fact, in the fresh categories, we also passed through inflation, but we might have done so in a particular need to make sure we're watching price points. In no case, did we not pass through inflation. I want to be very clear about that. One thing I think is important to note is our team is taking a very specific and thoughtful approach, Mark, to dealing with not only inflation but the consumer need. And I thought it'd be worthwhile to walk you through a very specific example. In 4th of July, we've seen huge increases in beef costs to run ribeyes in one of our banners. So last year, we ran them at $3.98 a pound. This year, we passed through inflation, which meant they were going to be $5.98 a pound. Last year, $3.98; this year, $5.98. So we still ramped. They were still in the ad. You can look at the ad. They were still there. But they were downplayed and what we up-played was chicken at $1.99. We gave our customer a value offering, and we managed our gross margin mix. So let me be real clear, we are, in fact, passing inflation. The difference that you heard me talk about might be in certain categories. We mentioned dairy or maybe we would look at some penny pass-through versus rate pass-through, but we're managing it market by market and category or item by item. We are passing through inflation.

Operator

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

Deborah Weinswig - Citigroup Inc

On the -- as we think about IDs going forward, Craig, would you expect them to be driven more by traffic or ticket? So many different initiatives in place, it's hard to kind of parse it all out.

Craig Herkert

Yes, we're actually looking at improvements in both. Ticket's been a very nice thing for us as we've really gotten focused on approaching our neighborhoods and really trying to drive loyalty with our primary customers. If I can, Deborah, I'd like to walk you through some of the things we're doing that I think addresses both of these. We are today running brand new, brand new, creative TV spots in our traditional retail banners. You can see some of these if you go to the Cub Food website, you'll see what we're doing for our more value-oriented retail banners, some really interesting user-created stuff going on, just love what we're doing here. And then we've got a great new fresh campaign, really focused on fresh, primarily produce, which is completely in fitting with our long-term strategy, that's hitting the market in our traditional retail banners across the country. You should be able to see these online at the end of August. They'll all be available online. They're playing in some markets today but you'll be able to go online and look at them. We're having great success with our Collect and Win campaign that we put together for Acme and IMW. We could not be happier with our consumer and our associate response to Collect and Win. Based on that success, by the way, those programs are running right now, we will be running that same program in 3 large banners this fall so stay tuned. We'll talk more about that in the future. But clearly, traffic driving program. This week, we'll see some information if you go on the Albertsons' website on 8/1. So mark your calendars, we will be introducing our brand new Preferred Rewards program in San Diego and also in Seattle, a program that's just really exciting, focused on rewarding our best, most loyal customers, driving loyalty and really emphasizing all the things this team is working on with this great fresh program, the hyperlocal program. We're excited about that. I think that's a big deal in those 2 markets. Again, 8/1 you'd be able to see that online. We've got some great stuff we've talked about in the past, Deborah, about what we're doing online. Our new websites across the country now. We've been able to really move up the implementation of our next generation web. I think most of our banners will have it by the end of this summer, very exciting. And what it does is it gives both our banners and importantly our stores the capability to go in and speak about their store, about their community, and we're seeing some of our store directors really getting specific about talking to consumers, both on their website and on their Facebook page. One of the places I might direct you to is there in the Northeast, our Shaw's banner has done a great job of really connecting with consumers via the Shaw's Facebook page. Again, hyperlocal, talking directly to our most loyal customers. And perhaps, on a little bit smaller scale but we think it's kind of fun to play with these things, for those of you who like ice cream and might live in Chicago, sign up for Groupon this weekend and see if we might be playing around with Groupon at Jewel-Osco this weekend. So lots of things going on here, Deborah, to drive traffic right here, right now. And we believe also drive basket and loyal customers.

Deborah Weinswig - Citigroup Inc

That's extremely helpful. You talked about connecting with the customers up on the Shaw's market, how are you communicating hyperlocal to consumers in the market who aren't customers? And along those same lines with hyperlocal, how are the store managers communicating best practices to each other?

Craig Herkert

Well, let me take the second one first. This is wildly exciting to me. We have an internal social networking program here at SUPERVALU, where we have opened up all of our associates, all of our associates to this social networking site. Think of it like Facebook but an internal Facebook. And so all of a sudden, we have these amazing things being shared. I'll give you one that's very current and really exciting. We have a group within our social -- there's lots of groups within the social networking sites. One of the groups is called College Stores, and we have something like 180 stores across the company that are in or around colleges. And now, these folks can talk to each other realtime, all the time, without any input from senior management. This is completely up to them, and they have access to it. I have access to it so I can see, and I'm checking our social media sites several times a day, including the weekends. The stories being shared, Deborah, are just amazing. The ideas on how to better merchandise to these consumers. Our merchandising team here in Eden Prairie is involved. And so when they get involved, they say, oh, guess what I can do, I can offer you something like a refrigerator for $100, with $100 in vendor coupons fully funded by the vendor. And all of a sudden, the stores are like, great, and they're talking to each other. We have a great store director website. We now are up to 200 great store directors. For those of you who are at our meeting in Chicago, we talked about the fact that we're really giving a lot of authority to our great store directors. We've got 200 of them. They talk to each other. They talk to me. So social media has been a huge deal at our company, and quite frankly, it's growing each and every day, more people are signing up, more ideas being shared, pictures, videos, that's kind of cool. What was your first question? I got so wound up on my second part, I missed it.

Deborah Weinswig - Citigroup Inc

So with regards to marketing, how are you communicating to consumers in the market who aren't customers, the hyperlocal strategy?

Craig Herkert

Well, again, I would draw your attention to this, particularly what we're doing online. I think Shaw's, although this is happening in a lot of places, take a look at what Shaw's is doing to communicate to customers online and in some of the really neat programs that they're doing to drive traffic to their Facebook page and to their website on how they're doing that. Quite frankly, the other thing that's really exciting, and this is a store-by-store issue, Deborah, the store directors are getting out in their communities. They're doing things like what I talked about out in the West, having the local vendors come and do a trade show. They're having community events. They're completely involved in their community and getting the story out there, taking responsibility to get the story out about what they're doing to resonate. And then clearly, from a macro perspective, we feel very good about what our team's doing on driving really effective ads, both in the circular and on TV. I want to be clear, this promotional effectiveness tool we've talked about for a few quarters isn't only about eliminating ineffective promotions, although clearly, it has helped us do that. Additionally, it really helps us identify the promotions that do work, and we're actually seeing some very nice results of having more effective promotions on a macro scale. So it's a combination of the local and the macro that we think is resonating with our customers.

Deborah Weinswig - Citigroup Inc

All right, I'm going to throw one last quick one in there. So when you reported earnings for the last quarter, you said that you were disappointed with the top line. I would say your tone definitely seems more enthused this quarter. Can you maybe talk about the key driver or drivers, if you will, that are leading to the difference in terms of tone? And also obviously, Save-A-Lot also had a very nice performance in the quarter.

Craig Herkert

Well, I think a lot of it is because we're executing against the plan that we told you about last quarter and that we told you about the Investor Day. There is no new news here. I want to be clear. There's nothing new we're doing. There's nothing short-term we're doing. Everything we're doing is what we said we were going to do to address our relevance with the consumer, and quite frankly, I feel good about how our team is executing against it. If there is a single thing, Deborah, that I would point to, to say what mattered, it was really embracing this hyperlocal thing and what our store directors and our store teams, our department managers have done to really get after this. I just -- I could not be more proud of what's happening out there at retail.

Operator

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

Edward Kelly - Crédit Suisse AG

Could you discuss the cadence of your IDs throughout the quarter? And maybe give a little bit more color on the further improvement you've seen in Q2. Can you tell us maybe where IDs are running currently?

Sherry Smith

Well, I think what we said to you is that we are seeing the move on the sequential improvement. So again, we're pleased with where we ended our Q1. And in the first 5 weeks, all of our markets and Save-A-Lot are continuing to demonstrate sequential improvement. And so we expect that our Q2, we will meet our goal.

Edward Kelly - Crédit Suisse AG

Sherry, has that been fairly consistent or are things still bouncing around a lot out there week-to-week?

Sherry Smith

We would say that's generally fairly consistent and a lot of the programs that Craig has talked about are very much resonating the activities that our store directors are doing. The in-store experience has a lot of factors there, aligned with all of the marketing campaigns that we've put towards it.

Edward Kelly - Crédit Suisse AG

Okay. And could you maybe talk about what you're seeing from the competition in terms of pricing and passing through of product cost inflation? Safeway has mentioned delaying price increases in some cases. It doesn't sound like you're doing that. So I'm just curious as to what you're seeing out there in the marketplace.

Craig Herkert

Well, if I could be blunt, Ed, we're really trying to be proactive and take an approach that's all about us. And so I prefer not to talk about my competition, and I would just refer back to the fact that we're in control of our destiny, and we've got our plan and we're executing against it.

Edward Kelly - Crédit Suisse AG

But do you think the marketplace is rational today, Craig, in terms of how they are passing through product cost inflation?

Craig Herkert

In general terms, I would say to you yes.

Edward Kelly - Crédit Suisse AG

And then one last question for you, and I might be wrong on this, but you said 160 new stores for Save-A-Lot. I thought your prior target was 210. Is that right? And if so, why has that changed?

Sherry Smith

So 210 is in regards to the capital spend. And so every year, a size of the fleet that you've got, 1,300 stores, you're going to have some closures, so we'd expect about 50 closures this year to get to the 160 net.

Edward Kelly - Crédit Suisse AG

So 50 Save-A-Lot closures?

Sherry Smith

Yes.

Edward Kelly - Crédit Suisse AG

And is that a normal level of closures for Save-A-Lot?

Sherry Smith

About, yes. Last year, it was a little over 40.

Operator

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

Meredith Adler - Barclays Capital

A lot of my questions have been answered, but maybe just talk a little bit about how your discussions with vendors are progressing. I think you had some new tools and new data that you could share with them. What has been the response? And do you feel like you're getting the kind of support that you want?

Craig Herkert

Great question, and if I can be blunt, I prefer to defer discussions on that to later date. Our discussions are going really well, and let me just leave it at that. We're working with our vendor partners to achieve the fair pricing plus promotion strategy I outlined. And as I told you in the past, it's part of our business transformation. It is not all of our business transformation. But let me defer further discussions on that until next quarter.

Meredith Adler - Barclays Capital

That's fair. And I'll ask a question about -- I have to get used to the new name, the Independent business division, and you are trying to expand that in California. I was just wondering how is that going? Is that meeting expectations? And how challenging is the competition?

Craig Herkert

Let me just talk about what we're doing. I won't talk about competitors. I could not be happier with what the team did out west. This idea of leveraging our existing facility, in fact, they had an opportunity to go out and visit our Portland distribution center just a few weeks ago and met with the team there, a great team. The work they did to sort of add the appropriate products we needed to serve C&K markets, 62 stores in Northern California and Oregon. It's happening. It's happening right now. The transition from their previous wholesaler to us has gone really well. I like what the team has done. So I would say we're on track. I'm proud of what the team's have been able to accomplish out there.

Meredith Adler - Barclays Capital

Great. And then just my final question, this is actually going back a really long time, Craig, probably before you got there. But nobody has really updated us on distribution in the Acme area or the mid-Atlantic. It was supposed to be a tremendous consolidation of different facilities. Did all of that get finished?

Sherry Smith

Yes. All of that was completed, I think, over a year ago. And in addition, we had invested and put in the technology into the Lancaster facility, so we've got great productivity in that marketplace.

Operator

Our next question comes from the line of Scott Mushkin with Jefferies & Company.

Scott Mushkin - Jefferies & Company, Inc.

So first, I wanted some housekeeping things, if you would. Traffic in the first quarter of last year first quarter of '11, do you have that?

Sherry Smith

Negative 6.5%.

Scott Mushkin - Jefferies & Company, Inc.

Negative 6.5%. And then inflation in the first quarter of last year and the fourth quarter of last year?

Sherry Smith

So last year in the fourth quarter, we had said inflation was about 2.5%, slightly about there.

Scott Mushkin - Jefferies & Company, Inc.

Okay. And do you have the first quarter by any chance from last year?

Sherry Smith

First quarter was running close to 1%.

Scott Mushkin - Jefferies & Company, Inc.

1%. Okay, so then if I look at the ticket, which I think was 0.5%, I think I heard what you guys said was that it was really -- inflation was completely the 3.5%, I think, that you ran this quarter was completely offset by trade down. Is that correct? So the 0.5% you look as a good number. Is that correct on the ticket side?

Sherry Smith

So the sequential move from Q4 to Q1, yes.

Scott Mushkin - Jefferies & Company, Inc.

The sequential move from Q1 to 4. Okay, and then I wanted to follow up on, I think, it was Mark's question earlier. It's maybe kind of a funny question to ask but, I guess, first of all, do you think your pricing is where it needs to be? I guess, that would be my first question. And then my second question, a follow up. My answer is I don't think it is so I'd like to hear your comments, but given that, why is the goal for flat gross margins this year? Why would that be a goal of the company if your pricing is not where you want it to be?

Craig Herkert

Well, first and foremost, I agree with you. Our pricing is not where we want it to be. We've been very clear that we are on a multiyear journey to address our pricing and get to fair pricing across all markets. So let me be super clear, it is not where we want it to be. We are making progress. We are making progress -- items, categories and particular banners. We are not where we want to be. And why are we holding gross margin? Because we are going to fund our price investment in advance of doing it. We want to make sure that we continue to deliver against the earnings goals, pay down our debt, all the metrics we need to deliver as a business. So we are happy with the initial results of our business transformation tools. Sherry talked about shrink. We both talked about promotional effectiveness. We talked about some growth in private brands. All these things are what we called out last year when we said we're going to move down this journey, and we are going to invest, invest the improvements we met, whether they were cost decreases or gross margin increases, we're going to invest that in pricing which is why we want to hold gross margin flat.

Scott Mushkin - Jefferies & Company, Inc.

Okay. And as far as like take inflation out off the table here for a little bit, with the consumer where it is and your pricing where it is, do you think it's realistic that you can run even negative 1.2% on the customer count side? I mean, is that -- can that be done with where you are? Or is that setting the goal a little bit too high if you don't do more in price?

Craig Herkert

Well, obviously, we believe it can be or we would not have reaffirmed that. So let me say we believe it can be, and we believe it is not all about price. We believe, as I've articulated this morning again, it is the combination of what this entire team is doing on driving local relevance and effective promotions and great marketing and insight and all of the above that will drive us to it. So yes, I believe we can do that. Price is a key component, it is not the only thing that we're working on.

Scott Mushkin - Jefferies & Company, Inc.

Just one more, I appreciate taking the questions. So let's just say in -- some of our research is suggesting that maybe the execution is improving like you guys laid out on the call. Why -- What's in it for equity holders to reduce the debt? I mean, if things have been put out pretty far, I mean, why not take that money and invest it in the business to whether it be price investments which would hurt your EBITDA or capital to put some more work in the traditional supermarket business? Like, what's in it for equity holders to further reduce debt at this stage?

Sherry Smith

Well, I think the things that you talked about are still going to drive to the equity holders. We need to provide the right return on the earnings per share. And so we believe we can do that through providing the funding to do the investment. The capital that we're spending this year, we are moving towards the growth of Save-A-Lot, that's a great return overall to the business model. And so we have considered all the different levers as we've looked across where to best put all of our cash flow that we're generating from the business.

Operator

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

Karen Short - BMO Capital Markets U.S.

Just not to beat a dead horse, but in terms of the passing on price increases, are you finding that there's a lag in passing on the price increases or is it fairly immediate?

Craig Herkert

We are doing it when we get them. It is immediate. We are not lagging. Our clear direction is when we get cost increases, we pass them along. Absent what Sherry spoke of earlier, if we're able to take advantage of buy-in opportunities, we hold our prices during that period where we have the buy-in opportunities. But absent that, we pass along the price increases. One of the things I should talk about, Karen, and it is important phenomena happening. Maybe at a little minor scale right now, but I think we're seeing it enough that we should talk about it. And that is the industry is doing this. This is not necessarily us doing this alone, this is the industry. It's the downsizing of some consumer products to make sure we're still having products that are resonating with consumers. So let me not call out any brands but I think it's fairly clear in some categories, certainly in juice and beverage categories, where you're seeing a very deliberate downsizing of products to maintain price points. I think you continue to see some of this movement in some of the paper categories as well. The industry and we are certainly aware of the fact that price points do matter, and part of the way that you can manage the price points is thinking about the pack size. So I mentioned that where we have control over this in our private brands, in our fresh, our team's been very creative about making sure that we're offering products that are priced appropriately for our consumer.

Karen Short - BMO Capital Markets U.S.

Got it, okay. And then you made a comment in your prepared remarks, I think, it was something along the lines of consumer sensitivity to price accelerated the trade down during the quarter which ran about 100 basis points. I guess, can you just clarify what you mean by that, by the 100 basis points? Was that the impact on margins, the comps? I wasn't clear.

Sherry Smith

Yes, so that's part of the IDs as we look at it. And so again, as we look at our sell-through of the items, so again even the example that Craig talked about early on where we had some of the price on the ribeyes and the chicken, so you would have found more sell-through on chicken. And so as the consumer moves in some of the different product categories, and so we did a good job out there really promoting whether some of the right value categories to even influence to help those stressed consumers in how they're buying and being able to put good meal solutions for their families.

Karen Short - BMO Capital Markets U.S.

Got it, okay. And then, just 2 more financial-oriented. On corporate, if I kind of take this year or this quarter's run rate, I get about 50-plus, a little over $50 million for the full year in corporate expenses. Is that kind of the right run rate? Or do you think you're still going to make some progress on cost reductions this year that would bring that number even lower?

Sherry Smith

That's generally about right. A lot of the cost reduction flow through the different segments.

Karen Short - BMO Capital Markets U.S.

Okay. And then on your dividend, I'm just curious maybe an update on your thinking there. And obviously, the yields is significantly higher than your peers. Would you kind of look to reduce it to be more in line on a yield basis? Or do you think about the payout ratio? Or how do you think about that?

Sherry Smith

Well, I think we did announce our dividend at the same rate again today. And so we would -- we've said we are going to hold back for this year. We think that's the right place for us to be given the return to the shareholder at this time.

Karen Short - BMO Capital Markets U.S.

Okay. And then just the last question. On last year's first quarter transcript, you guys said that your ID sales were driven by a 3.5% decline in customer count, not 6.5%. So at 6.5%, excluding COGS, I guess I just wanted to kind of clarify.

Sherry Smith

I'm sorry. I think I gave the IDs earlier. Sorry about that. The customer count is a negative 3.5%. Thank you for clarifying that, Karen.

Operator

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

John Heinbockel - Guggenheim Securities, LLC

So a couple of things. Craig, if you think about the path to a flat or a positive comp, what is that path with respect to the various components? Traffic, average selling price of items per basket from where we are today, what drives the bulk of that? What is a lesser contribution?

Craig Herkert

Yes, I think it's probably more of a granular answer than I'm prepared to give this morning, John. It's a great question. Let me tell you, our team is focused on driving all of the above, with particular emphasis on what we're doing in fresh foods. But let me acknowledge it's a good question and say the specificity of the answer I'm not prepared to give.

John Heinbockel - Guggenheim Securities, LLC

What do you think is the -- you would think that maybe ASP is a little -- or rather items per basket. Is that a little bit easier because you can do more of that through loyal customers than the customer count you -- by definition, you're going to have to bring in some new customers to get that positive?

Craig Herkert

Yes. Well, there's a couple of things that I want to talk about. Customer count is very important to SUPERVALU, and we are, as I mentioned earlier in my Q&A, we're doing a lot to drive customer count. One of the things that we're doing, however, John, and it's a year of sort of dealing with it is we're -- we've stopped doing really ineffective promotions. And so as you might imagine, first thing in the morning, I get to look at sales, ID sales across every banner across the country every day, but what we know is and we know this in advance because we're doing it purposely, in some markets, we were doing some really ineffective spend. Now that was driving a lot of traffic, customer count. But it was ineffective. It wasn't profitable business. It wasn't sustainable business. Everything we're working on today is to drive sustainable business. And so there, I think it's about a year of sort of some ups and downs depending on the market as we work through some of that. Now that said, I want to be clear, it's not that we're not focused on driving customer count. We're driving on focused -- we're focusing on driving the appropriate customer count that's sustainable, profitable business for our company. And I think you'll see us continue to report on that as the months and years go by.

John Heinbockel - Guggenheim Securities, LLC

And 2 other related things. How has price perception progressed say in the last 6 months? Because obviously, inflation can weaken progress. And then along with that, talk about price elasticity because it strikes me there maybe more -- the customer may have more and this goes to the heart of passing pricing through, the customer may have more elasticity -- there may be less elasticity. I think you're seeing some trading down, but I think there's a few that one-for-one, you raise prices, volume collapses. It seems like there might be a little more resilience or lack of demand elasticity out there.

Craig Herkert

So on the second question first, it really is item-specific issue. There are some categories where you pass it through and there's no change in behavior. There are others where there's change in behavior, and what we're doing, John, is we're making sure: a, we're passing the increases along; and then b, we're saying, well, if that's causing a certain item or product to get out of reach of most of our consumers, what then do we have to do to bring products in reach? So is it Chill Out lines, which have been a huge success for us because it brings product available to the store that's available to the customer? Is it Shoppers Value? I mean, to be able to put a piece of chicken on your plate or, I think, we have 4 different kinds of fish or a pork chop for $1 is a phenomenal value. So our job is to make sure that we give customers a range of offerings. And if they are stressed, John, I want them still to be able to come to my store and buy product. If on the other hand, they're not as stressed and they can afford the $5.99 for the ribeye, we will have that $5.99 ribeye. What was your first question?

John Heinbockel - Guggenheim Securities, LLC

The issue of...

Craig Herkert

The price and mix. We measure weekly how we're doing. We do not report on that publicly. Let me tell you, we are wildly focused on our price index across the country, across the markets. We do measure it, and we are investing in items very specifically. We are investing in categories and clearly, we are investing in some major markets. So we are investing, we have very specific goals, we track against that goal, but we don't report on those results publicly.

John Heinbockel - Guggenheim Securities, LLC

Has progress slowed with inflation or no?

Craig Herkert

No. We are pleased with our progress. Remember, we think of -- it's an interesting thing here. But we actually think of inflation and our fair pricing program. There are 2 separate issues. What we're working towards, John, is to reduce our relative price gap. So it's -- even if inflation happens, you can still work on reducing your relative price gap because inflation is happening to everybody. So we are passing along inflation. And while we are passing along inflation, we are depending on the category or the item. It is thoughtful. It is planned for. We are reducing our price gap. So 2 separate issues. It's complicated because inflation's happening, but it is doable to do both and they're not in conflict with each other.

Kenneth Levy

Well, thank you very much for joining us on today's call. A replay of this call is available on our website. And I will be available for any follow-up questions this afternoon. You may all disconnect.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.

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