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Executives

Craig R. Herkert - Chief Executive Officer, President and Director

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

Kenneth B. Levy - Vice President of Investor Relations

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles Edward Cerankosky - Northcoast Research

Charles X. Grom - Deutsche Bank AG, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Karen F. Short - BMO Capital Markets U.S.

Deborah L. Weinswig - Citigroup Inc, Research Division

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Meredith Adler - Barclays Capital, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

SUPERVALU (SVU) Q2 2012 Earnings Call October 19, 2011 10:00 AM ET

Operator

Good morning, and welcome to the SUPERVALU Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Ken Levy, Vice President of Investor Relations.

Kenneth B. Levy

Thank you, operator. I want to welcome everyone to SUPERVALU's Second 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 our prepared remarks, which is available on SUPERVALU's Investor Relations website under the Presentations and Webcasts section. Following prepared remarks, we will open up the call for your questions. So that we accommodate as many people as possible, I would ask that you limit yourself to one question with one follow-up.

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

Craig R. Herkert

Thank you, Ken, and good morning, everyone. As you saw this morning in our press release, SUPERVALU announced earnings of $0.28 per share on identical store sales of negative 1.8%. These results are in line with our plan and indicative of the traction we are gaining with our 8 Plays to Win.

The sequential improvement to our IDs was aided by inflation but also reflected operational changes that led to improved traffic trends. With 2 consecutive quarters of improved sales, we are starting to see the impact of a methodical application of our 8 Plays strategy. I am pleased with the progress we are making. We are transforming our retail operations through hyperlocal retailing, rolling out new, engaging marketing programs and delivering on key initiatives such as lowering shrink and running more effective promotions.

With recent headlines about the ongoing challenges facing today's consumer, it comes as no surprise that shoppers continue to show signs of thrift. Consumer confidence remains low and unemployment remains high. As long as Americans continue to express broad financial concerns, personal spending will be constrained. We cannot change this macro trend, but we can and will position our business to respond.

SUPERVALU continues to expand its selection of value-oriented products. Into the second quarter, we have devoted more displays and shelf space to these items, including 10-for-$10 merchandise and entry-priced private label brand offerings like $1 pizzas. By the end of the fiscal year, we will have added 80 new items under our Shopper's Value label. As I have said before, SUPERVALU is moving to offer fair price plus promotions. We will remain a promotional retailer and continue to provide customers with a wide assortment of products and kind of strong service that had been the hallmark of our business.

Understanding the importance of price and value in today's environment, we are committed to narrowing the relative price gap that has evolved in some of the markets where we compete. Accordingly, we continue to invest in price on select items, categories and across specific markets, such as our new produce initiative in the Chicago market. Consistent with our strategy, these investments are all prefunded and are helping us move closer to our goal of fair price plus promotion.

As we continue towards becoming America's Neighborhood Grocer, we are changing the way we do business every day to better meet the needs of the customers we serve. I will provide more detail on our transformational activities and hyperlocal strategy shortly. But first, Sherry will comment on our second quarter financial performance, our financial position and SUPERVALU's outlook for the balance of the year.

Sherry M. Smith

Thank you, Craig, and good morning. Our second quarter sales were $8.4 billion, and earnings per diluted share were $0.28. These results were consistent with our internal plan, and we remain on track with our business transformation strategy. Our identical store sales were negative 1.8% this quarter, an improvement of 200 basis points from quarter 1, with sequential improvement coming in both traffic and basket size.

Customer counts improved to negative 3.8%, though the challenging economic environment continues. The sequential improvement in traffic levels was driven by gains in several major markets, as well as the initial rollout of customer-centric marketing initiatives like Sizzlin' Summer Giveaway, which ran in 2 banners this summer. The impact of these new marketing programs was partially offset by a reduction in our promotional sales. As we noted last quarter, our new planning tools help us optimize our promotions, balancing both sales and margin. In all, the price investments we have been making, coupled with a more disciplined approach to managing promotions, led to a decline in the percent of items sold on promotion.

Basket size increased 200 basis points on a year-over-year basis, driven by product cost inflation of 4.5%, which was partially offset by a 2.5% decrease in the average number of items per transaction. On a sequential basis, basket size increased 150 basis points over the first quarter, with higher inflation contributing 100 basis points and improvement in items per basket accounting for the other 50 bps. Although units were down, they were flat with the first quarter.

I would like to provide you with a little more detail on the process we have been using to address cost inflation. We have taken a deliberate approach to passing on price increases as soon as practical, along with careful consideration for competitive market-by-market situations. These exceptions are generally confined to a limited number of sensitive items, primarily in fresh or retail within categories where we are purposely repositioning our price offering.

It is through these actions that we continue to solidify our commitment to delivering fair pricing within an inflationary environment. For the full year, we still expect inflation to be 3% to 4%. Gross profit rate in the second quarter was 22.2% compared to 22.3% last year. Retail gross margin was 27.1% compared to 27.3% last year. We're benefiting from promotional effectiveness and lower shrink, both of which more than fully funded our price investments. However, a higher LIFO charge and still high fuel prices served as pressures to margin.

Selling and administrative expenses were 19.7% of sales compared to 20% last year. We continue to look for more cost-efficient ways to run our business, and ongoing expense initiatives are providing meaningful improvement to our bottom line. In the second quarter, we removed an additional $50 million of permanent costs, on top of the $40 million we realized in Q1 and fully expect to achieve more than our $115 million target this fiscal year. Cost reductions this quarter came from administrative savings, lower benefit costs, store closures and steps we have taken to simplify our business. Interest expense was $120 million in the quarter, down $9 million from last year, reflecting lower debt levels. Lastly, our tax rate came in at 37.4%, consistent with our guidance.

Moving to the balance sheet. We continue to lower our debt level, paying off approximately $230 million this quarter, which brings our year-to-date total to about $300 million. In today's inflationary environment, we continue to take advantage of forward-buy opportunities to lower cost of goods, which again added to inventory levels at the end of the quarter. This is a temporary phenomena that will reverse itself as prices begin to stabilize.

We remain in compliance with both credit facility covenants with trailing 12-month EBIT of $1 billion, excluding impairment and other one-time items. Depreciation and amortization were $0.9 million 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 early September, we announced the sale of 107 fuel centers and continue to pursue buyers for our remaining 27 locations. These transactions are expected to close late in the calendar year and will have a minimal impact to full year earnings. From a strategic perspective, the sale of the fuel centers will allow us to focus on our core grocery business and our business transformation strategy. We do not have a large footprint in fuel and selling these non-core assets allows us to explore partnerships and fuel reward programs with other fuel retailers that possess broader networks with wider reach and greater appeal to our customers.

Let me next update you with the quarterly scorecard on our business transformation initiatives. As of early September, our store directors now control half of the store display space in their stores, which is really helping our stores cater to the neighborhood and embrace hyperlocal retailing. Our in-stock tools continue to be rolled out across our traditional store network. Perishable tools are now in 69% of our stores, and nonperishable tools are in 74%. We continue to expect that our entire network will have these tools in place by the end of the year.

In Q2, retail strength improved by 15 basis points, and we are on plan to realize 15 basis points of improvement this fiscal year. Private brands dollar penetration increased by about 60 basis points year-over-year to 19%. Lastly, our total market share in our top 20 DMAs, accounting for about 2/3 of our sales volume, fell 40 basis points compared to a year ago but was the same year-over-year change as Q1.

With 2 quarters behind us, we are in a better position to make some adjustments to our full year guidance. In general, we feel good about the factors we can control but are cognizant that consumer sentiment remains fragile and risk remains in the macro environment. Accordingly, we are adjusting our sales outlook for the year to approximately $36.5 billion, which contemplates our fuel-centric transaction and the timing of new business in our Independent Business segment.

IDs are expected to be in a range of minus 2% to minus 2.5%. We have also modified our capital spending plans for the fiscal year and now expect to invest between $700 million and $725 million in our business. As stated in our press release, we will open fewer Save-A-Lot stores this year but will reallocate capital to increase our investment in customer-facing assets, such as merchandising fixtures to better display product, as well as our logistics and transportation network. Additional spend on maintenance will freshen our retail stores, and we will continue to invest in energy management projects. We are also increasing our traditional store remodels from 55 to 75 to a new range of 80 to 90.

This puts capital spending for the year at slightly over 2% of traditional retail sales, in line with our peers. We are also adjusting our debt paydown target to a range of $525 million to $550 million, which includes our current view of working capital, capital expenditures and our sale of fuel centers in the back half of the year. Finally, we are tightening the range of earnings per share to $1.20 to $1.30.

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

Craig R. Herkert

Thank you, Sherry. Our customers are beginning to respond favorably to the more relevant merchandising and assortment that they're seeing in our stores. We've introduced new consumer promotions to drive them into our stores and experience our enhanced offering.

This quarter, we implemented programs like Sizzlin' Summer Giveaway, a Collect & Win promotion designed to drive repeat visits and build customer loyalty. The program gave customers 1 game ticket for each qualifying transaction, along with bonus tickets for the purchase of select items, which number in the thousands. It ran in 2 banners this summer, Intermountain West and ACME, and we'll launch in 3 more markets later this fall.

In the Twin Cities, we tapped into social media to inspire customer engagement. At Cub, we rolled out a program called Plenty for Twenty and used Facebook to challenge customers to document their own creative meal solutions through videos and photo submissions. The program tied into brand-positioning campaigns that featured TV spots, online media and in-store signage that focused on value within our stores. Both Plenty for Twenty and Sizzlin' Summer were well received and drove sales in many fresh departments.

Turning to our hyperlocal efforts, I want to give a little more context to how it is evolving across the organization and continuing to build relevance with our customers. At first glance, hyperlocal may seem to be an approach focused solely on local preferences and regional products. But it's much more robust than that. Hyperlocal is about looking at our stores on an individual basis and determining what's appropriate store-by-store, aisle-by-aisle. It includes national brand promotions, customized assortments, associate engagement and taking full advantage of our scale to deliver real value.

While it's great to walk into a store that carries the right local products, the real strength of hyperlocal comes from harnessing the power of our 1,100-strong traditional grocery store network. Today, we are in a better position than ever before to understand what each store needs to better meet the needs of their shoppers.

We will continue to emphasize the unique nature of each store, but the fact remains that national brand popularity in many categories is the norm across the U.S. This is why many of our largest suppliers are joining us in our hyperlocal efforts. Take our ALBERTSONS store in Cheyenne, Wyoming. Every year, during the final 2 weeks of July, the town hosts Frontier Days, one of the biggest rodeos in the country, attracting upwards of 70,000 visitors from all over the world. For this year's event, store director Bob Simonson, challenged his team to go bigger. They responded to the call and worked closely with a major national vendor to create promotional displays that maximized its rodeo sponsorship and helped drive sales. For the entire event, the store posted a healthy increase in ID sales even off of last year's double-digit comp. That included strong sales lift in its snack foods and beverages. Bob would tell you that the single biggest reason for this success was the autonomy he had been given to merchandise his store around the needs of his customers, meaning he made the decision to drop pallets of water in the front lobby, knowing they would sell during the event.

Even more impressive than water was the 58% increase in cherry sales that creative displays and placement drove. These results would have been difficult to achieve without the new flexibility that Bob and his team now have. During this 10-day period, his store became a draw for tourists and local shoppers alike. Associates donned cowboy hats and shirts, created a walk-in display that looked like horse stable and the parking lot was converted into a petting zoo.

This example illustrates how hyperlocal retailing coincides with national products to both engage customers and meet their local needs. Our hyperlocal focus is also increasing sales and raising customer excitement around sporting events such as high school, college and professional football. These events are great opportunities for our stores to connect with customers and create a sense of community.

By empowering our store directors with more authority over products and displays, we're seeing greater creativity and improved results. Perhaps most importantly, our store directors are sharing their ideas and learnings with peers to drive change. We are starting to see how best practices can benefit individual stores, especially in programs that span multiple markets by leveraging social networking sites.

An example of how this works is our college store network, which is connected through an internal social media platform. Whether the store is across the street from UC Irvine in Southern California or around the corner from MIT in Cambridge, there are certain things that all college-age shoppers are going to be looking for. The communication among store directors at our college stores creates good camaraderie and a healthy sense of competition.

We saw this just about a month ago as we developed a national back-to-school program, which was particularly relevant in our college stores. With our enterprise merchandising team sourcing directly from the manufacturer, our 180 college stores offered a $100 dorm room-sized refrigerator that came with $100 in manufacturer coupons. As the program was deployed, our store directors did a great job of cross-merchandising a broad range of products from snack foods and energy drinks to licensed school apparel and small electronics. In all, we sold more than 8,000 refrigerators, not to mention incremental product through creative cross-merchandising and couponing. I'm in our stores almost every week and the changes I see are exciting. Our store directors and associates are embracing our hyperlocal philosophy in ways that reach directly into the community, and we're getting credit for it from our shoppers.

In merchandising, our business transformation work is progressing on plan and drawing our vendors into greater collaboration with us as we move more cases and improve pricing. We've just moved through our first round of national vendor meetings and are pleased with our progress. Furthermore, our store directors are empowered and engaged. The flexibility that they have to determine their displays while fulfilling our commitments to national vendors is allowing them to execute more effectively than in the past.

As I mentioned earlier, in Chicago, we began implementing fair price plus promotion across the produce department, where about 200 items have seen adjustments. Our in-store communication is more value-driven with the promise of fresh produce, fresh prices. Our associates are also being trained on demos that help educate shoppers about choosing produce and how to incorporate items into meals. There's a lot of enthusiasm around this effort, and we're looking forward to having it in most of our banners prior to the end of the year.

Next, I want to provide an update on our launch of Essential Everyday, which began rolling out to stores this summer. This national brand equivalent has been introduced in high-engagement, high-traffic categories: cereal, pasta, pasta sauces. In all, there are about 140 Essential Everyday items on our shelves today and customers are responding positively. We look forward to expanding Essential Everyday this winter, with additional categories like canned vegetables, condiments, dressings and frozen foods, and we'll continue to provide you updates on customer acceptance.

At Save-A-Lot, IDs were consistent with the first quarter at plus 3%, driven primarily by inflation. This quarter, we merchandised more effectively with programs like our 10-for-$10 promotion and now have most of our licensees participating in mid-month mailers. These mailers are specifically designed to promote products such as our Save-A-Lot Today branded items that stretch late-month food budgets when prices become even more important to our customers. Today's macro environment is proving more challenging than we had originally anticipated, and it is impacting the ability of licensees to obtain financing for new stores.

In addition, Santiago Roces, our new CEO of Save-A-Lot, has been on board for less than 6 months. We feel it is appropriate to revise the pace of new store openings in the near term. We now expect to add 80 to 90 locations to our store count this year compared to our original expectation of 160. This change does not alter our commitment to double Save-A-Lot's footprint as we believe this format is an important part of our growth platform, but it will extend our timeline beyond 2015. Our Independent Business continues to perform well, with like-for-like sales up over 1% this year.

We are pleased with our relationships and the opportunities that existing customers have to grow sales and expand their operations. SUPERVALU's value proposition to retailers is second to none, and we're confident in our affiliation activities. However, the slowing economic environment has made some retailers more cautious in shifting their affiliations and extended the timeline for normal due diligence. This is reflected in our sales outlook for Independent Business segment, which contemplates new affiliation activities taking longer than previously expected.

Finally, I want to note the commitment and dedication of our associates in the wake of Hurricane Irene. Our ACME, Farm Fresh, Shopper's, Shaw's and a significant number of Save-A-Lot stores were in Irene's path. Before the storm hit, we stocked our stores with the kinds of supplies our customers would need like batteries, bottled water and canned goods. We had a team on point to ensure business continuity, associate and customer safety and appropriate emergency precautions. The preparation of our teams and our associates' willingness to go the extra mile allowed our stores in many cases to be the last to close and the first to open in our communities. Even in Ludlow, Vermont, where flooding was widespread and included our Shaw store, we were able to quickly open a tent store to provide this community of just 2,600 people with the essentials they needed. We thank all of our associates for rising to the challenge even as they had their own homes and families to consider.

In all, we're pleased with the direction of our second quarter and the progress we're making with our business transformation plan. There is still a long way to go, and we know that the consumer and the economic environment remain fragile. I'm happy to report that our vision of one company, winning for customers and committed to growth is being embraced across our organization. I see a new level of energy and commitment in our leaders, our associates and our store support teams. We have them to thank for their progress that we are making. We are following our strategy and moving as one company to realize our vision of America's Neighborhood Grocer.

I would now like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Charles Grom with Deutsche Bank.

Charles X. Grom - Deutsche Bank AG, Research Division

Just on the improvement in traffic from the first quarter. Can you walk through which market saw an improvement? And if you could overlay that with some of the new marketing programs that you introduced over the summer.

Sherry M. Smith

Chuck, we don't give anything with regards to the specific markets. But what we could say is that we saw a nice improvement in our IDs here, and Craig will talk about some of the marketing programs.

Craig R. Herkert

Yes. Here's something that we're really finding works for us. We are, as you know, a promotional merchant in our traditional grocery stores. And our customers really responded well to the game that we ran this summer in the 2 banners that highlighted. And we think about this as the sort of the gamification of shopping and how people really get engaged. We will be rolling a similar game out later this month to 3 other banners. We're looking forward to that, the customer engagement, and frankly our own associate engagement because this particular game both encourages our customers and our associates to be engaged. Additionally, we really like the general marketing programs our team has put out. Hopefully, you've had a chance to see both the Plenty for Twenty ad that we did here in the Twin Cities. We talked about that in the call. But if you go online, you can see the actual television spots which are really creative and different. Likewise, we really like and our customers like what we've done with our new fresh campaigns that we think are innovative, creative and unique that we've done for our other traditional banners. Again, those are available online, but we like those a lot. We think it drives the message that we're trying to be America's Neighborhood Grocer and focus on a great fresh offering.

Charles X. Grom - Deutsche Bank AG, Research Division

Sounds great. And then it looks like you accelerated both the perishable and nonperishable in-stock tools. Can you walk us through kind of how that's impacted your comp, if you could, over the past couple of quarters? And is there a lag as you roll it out, where you just continue to see the benefit from the first wave that you did in the fourth quarter of last year? And then just on the 50 basis point increase in items per basket, that was an upside surprise. Could you walk us through why you think the basket size is actually improving?

Craig R. Herkert

Let me start and then I'll turn it back to Sherry. Just the deployment of the business transformation tools has been really, really good for us. And the way that Pete Van Helden and the team have embraced it, the fact is what he's done is he's had our presidents really drive the implementation of these tools and the deployment of these tools. So it's really, while they were developed centrally, they're sort of being driven on a sort of a mass scale, and the banners, the stores have been embracing it including the use of our internal social media site as they see the benefits that happen. So we like the deployment of the tools, we like the speed with which they're going. There is, in fact, a lag between when you deploy the tools and when you see some benefits. And I'll turn it to Sherry.

Sherry M. Smith

Sure. And in regards to the basket, as Craig talked about, the Collect & Win and some of the other programs that we've been running in our markets really to drive more traffic through our stores. And though there is some offset that we also talked about with our promotional tools, that we're getting better at running more effective promotions that drives out some of the ineffective behaviors that we are cycling from the prior years.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay, great. And then just the last question just for you, Sherry, just if I look at the gross profit margin guidance. And this, for the year, is flat to down slightly. It looks a little conservative, given what you're cycling against from a year ago. So can you just maybe just walk us through some of the baseline assumptions and maybe include LIFO in that for me?

Sherry M. Smith

Sure. So the components that go into the margin is certainly, we benefit from the promotional effectiveness that manages through the margin much better on our markdown spend. Then there's also benefit from shrink. And then those become offset with price investments and increases and things like the LIFO.

Craig R. Herkert

I think if I can just add in, this is consistent with what we shared over the last several quarters. We will continue to invest in price, but we will earn our way to do so. But we are on our path to fair pricing plus promotion. And I think it's important to keep stating this is a long-term proposition for us, it is not a 1 quarter proposition. But we will continue to invest in price but only as we can pay for.

Operator

Your next question comes from Meredith Adler with Barclays Capital.

Meredith Adler - Barclays Capital, Research Division

I would like to talk just a little bit about your plans for fuel promotions. I can understand that you didn't have a very big network and probably made sense to sell what you had. But could you talk about at all, are you in a position to talk about what you think you can do with larger retailers of fuel? And if you started doing any of that at all yet?

Craig R. Herkert

Yes. Let me just say what we're doing as opposed to prognosticate about what we might do. We did, in fact, just last week, kicked off a program here in the Twin Cities with our partner Holiday. I believe we just had a handful of stations before we announced our partnership with Holiday. Now there's well over 200 stations here in the market, so we can broadly communicate this program as opposed to isolate it to a few stores. And that is in effect today. So as we stated in our release, we think this is a nice opportunity for us to engage with partners who have a broader array of stations, and it's happening today here in the Twin Cities.

Meredith Adler - Barclays Capital, Research Division

And are you giving people some kind of a deal if they shop at your stores to buy fuel? Or is it the other way around?

Craig R. Herkert

Yes, yes. No, no, very specifically, and again, this is available online. We've been very public on this. If you go online, you'll see that for a certain dollar threshold that you spend at Cub Foods, you get cents off at Holiday gas stations.

Meredith Adler - Barclays Capital, Research Division

Great. And then I have a question back to items per basket. I think you made improvement versus the first quarter, is that right, but not year-over-year?

Sherry M. Smith

That's correct, Meredith, yes.

Meredith Adler - Barclays Capital, Research Division

Okay. And are you able, in any way -- I mean, clearly, a lot of the initiatives you have, the technology initiatives are about in-stock positions at the stores. Are you able to make a connection between when a particular tool was rolled out to a store and what happens to items per basket?

Sherry M. Smith

No, not specifically. Certainly, there's a hyperlocal initiative that we have. We have the different tools. So all of those are together, what we believe, is you're making a difference to what the consumer sees in our stores.

Craig R. Herkert

Yes, the good news is, Meredith, we're doing a lot, which means it's fairly difficult to isolate any one particular tool and its direct impact. But I'm actually very pleased with the fact that we're doing a lot and it's certainly the deployment of the business transformation tools that we talked about a moment ago. But it's the marketing programs, it's the operational programs, it's the great store director programs. It's the combination of a lot of things that we're doing.

Meredith Adler - Barclays Capital, Research Division

And then I guess, just my final question would be, do you also have some data that indicates that you might be winning back some customers? Or is it too early for that?

Craig R. Herkert

I would say it's too early. We're in a long -- our value proposition here, our business transformation, is a long-term proposition to make sure we are a great, relevant local retailer everywhere. So I would just say it's too early to give you an answer to that.

Operator

Your next question comes from Ed Kelly with Credit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

Craig and Sherry, I just want to make sure we're getting the right message hear from you. So you obviously feel good about your progress so far, but guidance came down to the low end. So can you help us reconcile this? And I understand some of this is probably Save-A-Lot and the Independent stuff. But the ID guidance is also now back down to the lower end of the range. So can you just connect the dots there for us?

Sherry M. Smith

Yes, I think as we said, we really looked at the macro environment and the health of the consumer and recognizing that they're going to continue to be more pressured out in the environment. We think that we have the great programs that we're bringing forward for the holidays here into the back half of the year, and so we're mindful of that and as well as we continue to fund that, we're able to invest in price to make a difference in the market.

Edward J. Kelly - Crédit Suisse AG, Research Division

The ID guidance, I think, really kind of implies that your IDs will stay around this level in the back half. Can you tell us where you're trending currently in IDs? And is that the correct read on the guidance?

Sherry M. Smith

So year-to-date, our IDs are negative 3%. And so the guidance that we have is for the full year at negative 2% to negative 2.5%. And as we move into the first weeks here in the third quarter, we're slightly soft to the Q2. But we believe again the timing of these programs are launching here at the end of the month and moving into the holidays. And that is what will drive our IDs through the back half.

Edward J. Kelly - Crédit Suisse AG, Research Division

That slight difference versus Q2, is that inflation-driven, traffic-driven? Or is there not enough information at this point?

Sherry M. Smith

Yes, it's too early and I think, obviously, we'll provide color overall on the Q3.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And then there's been a lot of talk about trends sequentially and ticket basket, that type of stuff. But if I just think about your IDs, your price and the net impact which is volume, volumes still don't look like they're down about 6%, which is kind of a big number. And I know there's movement around there about promotions and that type of stuff. But how concerning is this to you? And what type of improvements should we expect, I guess, as we progress through the year and into next year?

Sherry M. Smith

So I think, if you recall, we have said really as we move through this year, we will continue this cycle, some of the ineffective promotions that we were running in the prior years. And so therefore, that's moving out the units that we're selling at more of the fair price versus units that we might be selling at no margin. So I think what we've tried to help you with is to know that we see that the units are flat quarter-to-quarter and we did see change in shifting from promoted to nonpromoted, all in line with what we expect with the tool sets that we've been implementing.

Craig R. Herkert

I think, Sherry, it's important to note, these moves we are making are self-deflationary in some areas and they're purposeful, they're thoughtful. What we spoke about earlier at Jewel food stores and a few other banners already as we look at fresh pricing and produce, it's a purposely driven program to get our prices into a fair proposition that brings down some of that high-low stuff, and it's a purposeful program we've articulated in the past. It does have a near-term impact. But we're comfortable with that because it's a long-term value proposition we're striving toward.

Edward J. Kelly - Crédit Suisse AG, Research Division

I understand. And then just last question for you on remodels. Your remodel target seems to be inching up a little bit. Can you walk us through the logic there? And how does that play out after this year?

Craig R. Herkert

Yes. Let me start and Sherry may add in. Andy Herring and the team, I think, are doing a really nice job about being granular about our remodels and how to spend money in a thoughtful and appropriate way. And what it's enabled us to do is work with our banner presence, the operating team, to really focus our spend, and frankly, spend in such a way that we're seeing customer benefit. So we like both the trend this year and where we think we can go in the future with this more thoughtful, more granular approach to our remodels. I don't know, Sherry, if you want to add anything.

Sherry M. Smith

Yes. So along those lines, we're able to allocate the appropriate level of dollars to each of the remodels instead of per se peanut buttering the same amount to every store. So it's purposeful on what's going to be needed in that specific location to meet that consumer.

Operator

Your next question comes from Scott Mushkin with Jefferies.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

I wanted to follow up on Ed from his line of questioning. And getting into the volume data, actually our volume data, I think, you said was negative 6-ish we're seeing in the first few weeks or month or so of the quarter, maybe it's even worse than that. And so what I'm trying to understand is in our research, we do concur with some of what Craig has said that the execution's better, the hyperlocal strategy and the examples, I think, you were using. We find that as we go around the stores, too. I guess, what we're scratching our head a little bit is that it seems like the business may have taken a turn for the worse in the last month or 2. And I'm struggling on from why that would be the case. And with all the good initiatives you guys have, is it simply a function of price that we may have to invest in price more quickly, given the environment? So I guess, I'll just start there.

Craig R. Herkert

Yes. Well, first, I don't know that we would concur with the idea that the business is taking a turn for the worse, so let me start with that. And let me say that clearly, as we've said before, Scott, we need to continue to invest in price, but we will do so thoughtfully as we move down our business transformation. We're happy with the progress we're making both with our negotiations with our vendor partners. We feel good about where that's going. We feel really good about the marketing programs. And we feel good, frankly, about the fact that we've been able to invest in price appropriately across some key items, key categories, and as I've said earlier, a very important category, produce and a very important market for us, the Jewel.

Sherry M. Smith

And we also have more tools today that allows us to be more flexible as we see different trends and adjust accordingly in this type of macro environment.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Have your volume trends been stable? Or have they been coming under pressure, given the environment?

Sherry M. Smith

As we said in Q2, we were flat with our Q1, so our units essentially remain flat.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

How about now, Sherry, in the first 4 weeks or 5 weeks of this quarter?

Sherry M. Smith

Yes, we're not commenting on the first few weeks. This is updating today on our Q2. But clearly as Craig said, we have a lot of initiatives and programs as we see out here starting in the next few weeks and winning through the holidays.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

But you did say, I think, that comp had softened up a little bit, at least, in the first part of this quarter. And as the thought process I have and inflation has actually accelerated in a little bit with the data we've seen, so I think the implications might be a bit that volumes have softened. Going to maybe the next question, which is inflation, kind of what are you seeing out there? What is your thought process? What did you see this quarter? And what's your thought process moving forward in the year?

Sherry M. Smith

Sure. We saw inflation of -- cost inflation of 4.5% this quarter. We still see a very rational environment there, and we've been very deliberate approach in passing on these price increases. There are limits in a number of cases where we make the decision not to pass through all the cost inflation we're seeing. But these circumstances are really confined to commodity, [indiscernible] fresh categories or retail sometimes within categories, where we're purposeful on repositioning with our price offering. As we look into the back half, we've said we still expect inflation for the full year to be the 3% to 4%, though some moderation of this third quarter -- or excuse me, the Q2 level of 4.5%.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

That's perfect. I actually have just one more housekeeping item. Irene, what was the impact on traffic and comp of Irene in the back half of the second quarter?

Sherry M. Smith

So again, Irene overall is in our IDs in Q2 and no meaningful impact overall. Because we service well on the front end, obviously, the stores were dark for some time in certain markets as well...

Craig R. Herkert

But I think we had 54 stores impacted for some period of time with power outages and whatnot. So as the hurricane went up the coast, we were heavily impacted, so we did a great job taking care of our customers, we reopened quickly, but we had a lot of stores impacted for some period of time. And as I mentioned, one store that is still down, although we have a tent in the parking lot, where we're serving customers with basic needs. But we still have one store down in Ludlow, Vermont.

Operator

Your next question comes from Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth - Morgan Stanley, Research Division

Wanted to focus a little on the change in the remodel allocation. You're upping your remodels here. Do you feel like returns are better on those? And what kind of a lift are you getting off of the remodels that you are doing?

Craig R. Herkert

So let me say we feel very good about what we're getting out of these remodels, as I said earlier, because of the fact that we're working really granularly, specifically store, specifically with store directors on what to do that's actually going to drive sales and whatnot, as well as just our normal maintenance stuff. We do not report at this point on the lift of those things, but we feel good about what we're doing.

Mark Wiltamuth - Morgan Stanley, Research Division

And are you getting a lift? Or is it -- I think, the last couple of times you talked us, there was not really a lift from remodel.

Sherry M. Smith

Again, what we have said, our overall goal around our remodels is for an internal rate of return of 15%. And so generally, as we look across the remodels, that's built in to the expectation with that investment in capital.

Mark Wiltamuth - Morgan Stanley, Research Division

Okay. And to focus a little more on the operating environment, with the deflation running at these levels, it seems like there's some trading down and volume and demand dampening going on across the industry. What's your view on what's happening in the overall grocery industry right now? Do you feel like we are contracting on overall sales and/or volumes at this point?

Craig R. Herkert

Let me not speak about the industry but let me talk about what we're doing. What we're trying to do here, Mark, is make sure that we have a team both here in Eden Prairie but across the country that is flexible enough to deal in each neighborhood with whatever it is the customer is looking for. We do see clearly across huge chunks of the country that consumer remains very stressed, particularly given times of the month. So depending on the store and the area, we see significant lifts when EBT breaks. And we are now doing a much better job than we've ever done before merchandising towards those EBT breaks. We continue to see high, high, high EBT usage in our Save-A-Lot business. We continue to see, in some markets, not across-the-board, but in some markets, Mark, a significant usage of our value private label brand, Shopper's Value. We've got more than 2 dozen new items that have come out. We have more coming out for the rest of the year. We see great take-up. One of the items I talked about on the call was the Shopper's Value $1 pizza that's done extraordinary well for us. And our stores, given this hyperlocal flexibility they now have, can determine what they need to put where. In other cases, we have stores that are markets that are not as impacted, and they continue to do really well with things like our Culinary Circle line, which continues to perform well, or our Wild Harvest organic line. So it really -- it's just being very specific about the store, but it is clear, there's a huge chunk of America that remains stressed, particularly given certain times of the month. And what we're doing is we're merchandising to that consumer, making sure that we're relevant.

Mark Wiltamuth - Morgan Stanley, Research Division

So your items per basket were sequentially better. But what do you feel is going on in tradedown relative to inflation?

Craig R. Herkert

Well, again, I don't want to give a number, but I would say we see some of it. What we see is tradedown to -- we're doing well with our value brand, we're doing well with private label. We had a 60 basis point improvement in private label sales, so we certainly see some of that. We see the Shopper's Value, we see our 10-for-$10 program doing well. We spoke about that on the call. We see, as you all know because you read this as well, some manufacturers downsizing products to make sure they meet price points that are appropriate for consumer needs today. So it's a little bit of all of the above to make sure that we stay relevant where consumers are.

Operator

Your next question comes from Karen Short of BMO Capital.

Karen F. Short - BMO Capital Markets U.S.

I'm just curious, not to beat a dead horse here. But basically, if you look at your full year guidance, if earnings were to be flat in the back half of 2012 off of last year, you kind of get to an earnings number that's at the high end of your range of guidance. To be at the low end, you'd be looking at a kind of a 15% decline in earnings in the back half. So I guess, given where this quarter shook out, I'm still not sure I understand why you think that things would deteriorate in the back half.

Sherry M. Smith

So we continue this year, as we said, we're ramping up our funding which allows us to continue to ramp up our price investments. Certainly last year in the fourth quarter, we had just initiated some of our new tools. We talked about benefiting from our promotional effectiveness, which was again starting to really do some ramp-up. So some of the difference this year is that as we see those benefits, we're investing back into our market, and we think that's the right decision. So we feel again that the guidance as we provided today, $1.20 to $1.30, is very appropriate in the macro environment that we're operating and the things that we're doing in regards to our business transformation.

Karen F. Short - BMO Capital Markets U.S.

Okay, that's helpful. And then I guess, going back to the volumes again, if you kind of -- I don't know if you can look at it this way, but I know you talked about at some ineffective promotions and maybe some slightly irrational promotions last year. If you take out those categories and those items, do you have any color on what the volumes and kind of the categories that weren't impacted by what you did last year? Like are those -- are you seeing improved trends in those, I mean, better than the negative 6%? Is there anything you could talk to there?

Craig R. Herkert

I don't know that we would get into that level of detail, Karen. I think we have in our traditional grocery stores 45,000, 50,000 SKUs. We certainly track the key items. As we said before, we feel very good about how our merchandising team and marketing team are using the new tools we have to make sure that we're really driving traffic and given the appropriate amount of investment to do so profitably. Beyond that, I don't know that I would say.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then within your inflation expectations for the back half, I guess, which categories are you expecting to see easier comparisons from where we are now?

Craig R. Herkert

Yes. Let me not prognosticate in detail about inflation because I think that is just -- that's a tough road to go because we just don't know. We expect inflation to be around 4%, as Sherry said. And what we've got today, and this is important to note, is the ability, the people, the processes to make sure that we are watching and moving appropriately on inflation as quickly as is appropriate while maintaining price competitiveness in those select categories where we think we need to. We're watching closely and we're moving quickly.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then just last question. Obviously, if you said something about your rationale, unless I missed it, but you've reduced the Save-A-Lot store count. Why -- can you maybe give a little color on what's going on there?

Craig R. Herkert

Well, first, let me say, we're still very happy that we'll open 80 to 90 new stores this year. That continues a very aggressive growth rate off of, I think, 92 net new stores last year. Recall that we ramped that up from essentially 0 net new stores over many years. So it's a significant growth phase, and we're happy with that. We still think that we can achieve doubling the size of the business, we'd just extend it. And as we said in our call, there's several factors. Certainly, the macroeconomic and its impact on our independent licensees and certainly the chance to give Santiago Roces, our new CEO, an opportunity to make sure he's driving the model that he wants to drive. I'll tell you, he is thrilled with the prospects of the business. We like the trends of the business, we like the focus of the business and we still believe we can double the size of the business.

Operator

Your next question comes from Deborah Weinswig with Citigroup.

Deborah L. Weinswig - Citigroup Inc, Research Division

In terms of the 8 Plays to Win, are you finding that one is having a greater impact on the business? And maybe if you can just provide a little bit more color there.

Craig R. Herkert

I don't know that I would say -- it's a good question, Deborah. I don't know that I would say that. I think if you even talk to our store directors, our presidents, I think they would say it's all of the above that is helping them to compete at store level. So no, I don't know that I would say a particular play is one that is more significant than others. As it gets very specific on the tools within some of the plays, we certainly have accelerated the rollout of some tools over others because they work. But I think that's just management stuff that we do. But I think, in general, it's the combination of all that we're doing that makes us feel good about where we're heading.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then as we look forward, can you help us think about the next big steps in hyperlocal?

Craig R. Herkert

The next big steps in hyperlocal. Well, I think what you see, these are all fairly public things. But I like what's happening. Again, let me give kudos to the marketing team. I think we have essentially rolled out our next-generation websites across most of the enterprise today, which gives our stores the ability to localize their websites and their Facebook pages. I'm actually very encouraged with that. We've got a number of store directors using social media to communicate with their customers. We've been public about that. You can follow our store directors on Twitter today. So I think it's -- we now have the tools, we have the training, and now we're in the process of learning how we use all the things that we're doing to communicate really locally to our customers. And there's some things happening already. And again these are public, you can follow us on Twitter today, you can follow us on Facebook and see what we're doing. But I like the capability that we've given our store directors to be really, really local.

Deborah L. Weinswig - Citigroup Inc, Research Division

And then one quick one for Sherry. Can you talk about the process of identifying the permanent cost reductions? It sounds like you've been a bit more successful than expected. It is more kind of bottoms-up or top-down?

Sherry M. Smith

It's really a combination of both. And I think as we talked about, it's one of the 8 Plays of simplifying our business. And across our organization, our associates are engaged in that. And so it's across our administrative store expenses, and then certainly, as we continue to get better at our overall benefit. So it's many avenues and everyone is engaged across the organization.

Operator

Your next question comes from John Heinbockel with Guggenheim Securities.

John Heinbockel - Guggenheim Securities, LLC, Research Division

So a couple of things. Craig, if you look at the game promotion, did that move the dial more on traffic or ticket in those markets?

Sherry M. Smith

No. What we would say is, again, it's an item that we think is helping for our consumers out there, and so we're not going to break it down between the 2 components. And it's again, as we think about the different initiatives, the different programs that really are going to help us win in our markets. And so launching here in the next 3 is again very exciting for us as we move into the back half.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Do you think the experience in the next 3 will be similar to the first 2? Do you think that's right in terms of the lift?

Craig R. Herkert

Yes. Certainly, that would be our expectation. It's why we tested it in a couple of places and move it forward. But we are, as I mentioned in the call, we are certainly looking forward to rolling out in the next 3 banners later this month.

John Heinbockel - Guggenheim Securities, LLC, Research Division

When you think about the produce program at Jewel, did that -- it sounds like that had a negative impact on average selling price when you factor in both the everyday price and the promotional intensity. Or is that not right?

Craig R. Herkert

I should first note that, that just launched the beginning of this quarter, so it really didn't impact Q2. It was really about where we're going, going forward.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Do you think -- because I know the plan in a lot of these instances when you go to fair price, because you're trying to sell a lot less on promotion, is to have the ASP basically flat or down very little. Do you think that's fair in this program and then other ones going forward?

Sherry M. Smith

Yes. And I think, John, if you think about our IDs, clearly, as we're ramping up on funding and ramping up on price investments, that factors into what the improvement we'll see in our IDs. That's a negative pressure there. But obviously, that's the right thing to do.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. And then finally, if you think about vendor support, vendor allowances, clearly, you've been hurt by what the volume trends have been. When do you think -- I don't know, it's probably not happening yet. But when do you think that level of support from vendors begins to pick up in a material enough way to kind of put that back into the market for customers? Is it going to take 6 months or a year or what's your sense?

Craig R. Herkert

Well, I would say I think we're actually pleased with how we're working with our vendors. As I mentioned, our merchandising team completed the first round of our vendor negotiations. This is the first time that they were able to do so with great information and tools. And we're actually pleased with the outcome. Our vendors are committed to working with us. Our large vendors are committed to working with us. And so I actually...

John Heinbockel - Guggenheim Securities, LLC, Research Division

So it's happening already. We don't have to wait for the volumes to pick up to get increased support.

Craig R. Herkert

No.

Sherry M. Smith

And I think, John, we would suggest we always had good vendor relationships. Clearly, we are a large retailer out here. And so while the volumes were declining, we still believe we were receiving appropriate funding. What we're doing in vendor negotiations is being able to work through what is the right types of funding that we want and get more consistency, be simpler to work with and take advantage of that with our vendors in the future.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. And then I guess, one final one. Craig, when you look at -- what work have you guys done to look at the brand equity of the different banners? Because you look at some of -- the comps that you've had the past 6, 9 months, I know things are getting better. But at a point where you worry about brand equity, what work have you done to look at where that sits today in some of these markets and how it's coming back?

Craig R. Herkert

Yes. Well, first of all, let me state very clearly that we've done a lot of great work on our brands. And let me say that's not something I'm prepared to report on today. But we have our marketing team, led by Julie Dexter Berg, has done some great work on our brands. And I think part of it is what you see in the positioning things that we've been rolling out with our advertising that ties into where those brands are. So we research, we pay attention and we look to where we want to go.

Operator

Your final question comes from Chuck Cerankosky with Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

Craig, just kind of a big macro question. You've got some market share challenges. What is your long-term -- what do you think the long-term implications are for that as you're dealing with an inflation situation right now that's requiring you to pass through the higher product costs but you also have the challenge of improving your price image?

Craig R. Herkert

Yes. Well, first of all, let me state that we really look at improving our price image, getting to fair price separate from the inflation issue. And believe it or not, you can do both. The fact remains you have to be very thoughtful as you look at categories where both things are happening at once, where you're having inflation and you're trying to reposition yourself. But we have the tools that allow us to determine where we want to invest. In some cases, we may choose that we'll pass along either less or some portion of inflation, but we're doing so as part of our investment strategy to get to fair pricing. So it is a thoughtful part of our positioning and investing getting to fair price. Remember, our goal is to reduce the relative price gap on a regular shelf price on an everyday basis, not to have a net actual reduction in price in an inflationary environment. It's to reduce the gap, and we measure this. And we're actually pleased with the fact that we can measure that the changes that we are making here are, in fact, helping us reduce that regular shelf price gap to our competitors. So it's what we said we're going to do, we are doing it, but I do think we can do it in an inflationary environment. It's complicated to be sure, but we can do it.

Charles Edward Cerankosky - Northcoast Research

So you're talking about 3 price points, your old price, your new price and where competitors are. Well, actually 4 price points, I guess, with the promoted price might have been in the past.

Craig R. Herkert

Yes, I think that's right. I think it's looking at all of the above, and we watch all of it. They all go into factoring where we're going to go.

Charles Edward Cerankosky - Northcoast Research

Would you care to prognosticate about when you think your market share trends might improve as part of this process?

Craig R. Herkert

No. As we said before, Chuck, this is really a long-term process, our business transformation, to get us to fair pricing and the hyperlocal and that. And so we think we're on the path. We're comfortable with the trajectory, but I would not want to prognosticate on when this is done and what the final impact is.

Kenneth B. Levy

Well, thank you very much for joining us today. As always, the investor relations team will be around this afternoon for any follow-up questions.

Operator

Thank you, ladies and gentlemen, for all your participation. You may now disconnect.

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