SUPERVALU (SVU) Mark Gross on Q1 2017 Results - Earnings Call Transcript

| About: SUPERVALU Inc. (SVU)

SUPERVALU, Inc. (NYSE:SVU)

Q1 2017 Earnings Call

July 27, 2016 10:00 am ET

Executives

Steven J. Bloomquist - Investor Relations Contact

Mark Gross - President, Chief Executive Officer & Director

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Analysts

Ajay Jain - Pivotal Research Group LLC

John Heinbockel - Guggenheim Securities LLC

Edward J. Kelly - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Joseph Isaac Feldman - Telsey Advisory Group LLC

Scott A. Mushkin - Wolfe Research LLC

Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)

Shane Higgins - Deutsche Bank Securities, Inc.

Vincent J. Sinisi - Morgan Stanley & Co. LLC

Stephen Tanal - Goldman Sachs & Co.

Operator

Good morning. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the SUPERVALU First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Mr. Steve Bloomquist, you may begin your conference.

Steven J. Bloomquist - Investor Relations Contact

Thank you, and good morning, everyone. I want to welcome you to SUPERVALU's first quarter fiscal 2017 earnings conference call. Joining me today are Mark Gross, President and Chief Executive Officer; Bruce Besanko, Executive Vice President, Chief Operating Officer and Chief Financial Officer; and Eric Claus, Chief Executive Officer of Save-A-Lot. 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 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. In addition, certain information presented and discussed today, constitutes non-GAAP financial measures. Information required to be disclosed about these measures is included in our earnings release issued earlier today. A replay of today's call will be available on our corporate website at www.supervalu.com.

With that, let me now turn the call over to Mark.

Mark Gross - President, Chief Executive Officer & Director

Thanks, Steve. And welcome everyone to our first quarter conference call. This morning, we announced first quarter sales totaled $5.2 billion and adjusted EBITDA was $222 million. Sales at Save-A-Lot increased by approximately $25 million over last year's first quarter, while we saw declines in both Wholesale and Retail, which I will discuss shortly. Adjusted EBITDA was down from last year's first quarter, as we suggested it would be on the last call. But on a consolidated basis, it was in line with our internal plan.

On our last call, we discussed three initiatives for this year that are directly tied to our number one priority, improving our top-line performance. One, retain our existing customers; two, do more business with these existing customers; and three, add new customers. I'm glad to announce that during the first quarter, we made good progress on each of these three items.

Let me walk through some initial accomplishments and other items we're working on in our wholesale and retail businesses, before turning it over to Eric to discuss Save-A-Lot. As we have discussed, last year, our Wholesale segment lost the business from Albertson's southeast stores and most of the volume from Haggen stores in the Pacific Northwest. We also lost the Gordy's business in the Midwest. As a result, first quarter Wholesale sales were down about $185 million, compared to last year, which is simply the reality of how we started the new fiscal year. However, our goal is, to have replaced this lost Wholesale volume by year's end. The good news is that we're on path to accomplishing just that.

As announced earlier this month, we've entered into a long-term supply agreement with Indiana-based Marsh Supermarkets, to serve as its primary grocery wholesaler and to provide certain professional services. Marsh operates approximately 70 stores across Indiana and Ohio. And, we believe that our merchandising, strategic retail pricing, and shelf management programs will help them be even better competitors. I also believe that our comprehensive private brand offering which includes Wild Harvest, Culinary Circle, and Essential Everyday will be well-received by their customers. We expect to be supplying all stores by the end of September, which is early in our fiscal third quarter.

We also announced this month our agreement to acquire 22 Food Lion stores in northern West Virginia, western Maryland, south central Pennsylvania, and northwestern Virginia. These stores became available as part of the merger between Ahold and Delhaize. They'll be rebranded to our independently licensed Shop 'N Save brand. We currently supply and support approximately 100 licensed Shop 'N Save stores in this region. Stores operated by a strong group of our wholesale customers. These soon-to-be-acquired stores will fit nicely into that group and the existing supply and support network. This wholesale group is separate and distinct from our Shop 'N Save retail banner in St. Louis, Missouri.

We're currently in the process of finalizing transition plans, and expect to complete the purchase of stores in the next 90 days. And, as was noted in the announcement, we're working with the FTC and our wholesale customers on ways for our customers to have an interest in these stores. Both of these deals are consistent with the in-vision we outlined on our Q4 call and my strong belief that we can leverage our distribution network, service offerings, and private brand portfolio to grow SUPERVALU.

Produce is another initiative we're working on and which is gaining traction. I believe we will sell more produce in this fiscal year in our wholesale business than in the past, and we already set record in our west wholesale region this quarter. I believe we're winning this produce business because we can deliver the lower cost of goods, fresher product and a broader assortment to our wholesale customers; all attributes that will benefit their ongoing business and future growth. Our focus on produce has carried deep into the organization and resulted in meaningful sales gains.

Finally, I'm pleased that one of our larger wholesale customers recently agreed to a lengthy extension of their supply agreement. We had a great relationship with this customer over the years, and have helped support their growth during that timeframe. They are a strong proponent of our private brand program and do a great job in serving their local communities, and I couldn't be happier knowing that we'll continue to work together and believe this is a strong vote of confidence in SUPERVALU as a supplier.

Moving to our retail business, in Q4 of fiscal 2016, our ID sales were negative 3.9%. That trend did not improve as identical store sales in the first quarter were negative 4.5%. Customer accounts fell 4.1% and basket size declined 40 basis points. Let me address the five areas of retail focus designed to improve results that we outlined on the last call and give you an update on each.

First, we continue to invest in price and promotions. Experience tells us that it takes time to see behavioral changes in household shopping patterns and we are hopeful that these investments, which really began toward the end of the F 2016 will have a positive impact, as we move through fiscal 2017. Second, the people investments we plan to make took time to implement and only became fully deployed toward the end of the quarter. The adjustments we've made to our staffing model are now in place and we believe the new positions will begin to improve store conditions and favorably impact our business. As part of this process, we're continuing to evaluate and standardize processes across our network, which upon completion, are expected to produce cost savings.

Third, many of the new merchandising initiatives were yet to be deployed in Q1, but should be substantially complete by the end of Q2. For example, all stores now have implemented our revised bakery and deli store program, which made changes to the item assortment and how product is displayed. In the pilot stores where these changes have been in place the longest, we have seen good results to-date.

Fourth, we are tracking toward our goal of having 1 million digital accounts by year-end and are working to enhance the promotions and capabilities of our digital platform as we grow the user base. We are continuing our strategic investment in the e-commerce channel and plan to have a combination of click and collect, as well as home delivery available in about a one-third of our 200 stores by the end of the fiscal year.

Fifth and finally, we began the initial deployment of our store segmentation effort toward the middle of the first quarter and expect a wider rollout to favorably impact the rest of the year. Broadly speaking, these segmentation efforts are focused on higher-income areas, lower-income areas and markets with greater concentrations of ethnic populations. In areas where we're further along in segmentation, we've begun tailoring our assortment and merchandising, consistent with the economics and demographics of each specific store location. As part of this process, we're now running versioned ads targeted towards these segments that include themed impacts.

Each of our five banners has its own unique strengths and challenges, which means the implementation of each of these five elements may differ across markets. Consequently, we recognize that a number of our initiatives will take time before customers can be expected to change their shopping behavior.

Before I turn the call over to Eric for his operational comments on Save-A-Lot, let me provide a brief update on the status of the separation of Save-A-Lot, which we still believe could occur in the second half of our fiscal year. As you know, we filed Amendment No. 1 to the Form 10 with the SEC in June. We expect to have updated carve-out financials through our first quarter shortly and could file Amendment No. 2 to the Form 10 later this summer.

With that, let me turn the call over to Eric for his comments on Save-A-Lot. Eric?

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Thanks, Mark, and good morning, everyone. It's again a pleasure for me to join today's call and discuss some of the exciting things happening at Save-A-Lot. First quarter network ID sales at Save-A-Lot were negative 1.4%. Although negative, this was an 80-point sequential improvement from the fourth quarter and was driven by a 110-basis-point sequential improvement in licensee Wholesale ID sales.

Cost deflation remained a headwind, running around 5% in the quarter. As a reminder, this level of deflation is higher than many of our food retailing and distribution peers due to Save-A-Lot's higher mix of commodity items such as eggs, beef and milk, items where we've experienced the highest levels of deflation. Identical store sales for our corporate stores were negative 1% with Q1 customer accounts up 70 basis points, more than offset by an average basket decline of 170 basis points. I am encouraged by our corporate store IDs, where Q1 represented the first quarter of sequential ID improvement since Q3 of fiscal 2015, and was the second consecutive quarter of improved customer accounts.

Adjusted EBITDA was $62 million or 4.3% of sales, $10 million lower than last year, when adjusted EBITDA was 5.1% of sales, as last year's first quarter was the second highest rate in the last nine quarters. The largest drivers of the year-over-year change in adjusted EBITDA were the roughly 50 non-ID corporate stores we are now operating compared to last year, which typically take a few quarters before beginning to positively contribute to results. And roughly 50 basis points of higher shrink compared to last year, when we had a very strong quarter on the shrink line.

Our marketing and merchandising initiatives are designed to improve the sales and EBITDA performance of all Save-A-Lot stores, including the newer ones. And we have teams focused on correcting the higher rates of shrink we've seen for the past several quarters.

Let me provide an update on the many marketing and merchandising initiatives I outlined on the fiscal 2016 Q4 call, and what we're seeing in terms of early results. The two corporate show stores in St. Louis continue to do well, running between 5% and 7% ahead of their pre-reset sales trends, at upper-single-digits better than a group of control stores that have not yet been reset.

We're also encouraged by the early results of five licensee stores that have been reset as well, as what we've seen in the first wave of corporate resets that have been completed. Amongst our overall licensee base, about half the stores have committed to all or part of the reset package and we continue to work with the others to encourage them to follow suit.

On the store development front, our fiscal 2017 new store target for the Save-A-Lot network is unchanged at up to 75 gross store openings. We've been encouraged by the excitement level of a number of our larger, more experienced licensees who have shown a stronger propensity for opening Save-A-Lot stores, with one of these groups having committed to open four new locations. Our site selection process has become more focused and we believe now better takes into account many the characteristics of successful Save-A-Lot stores when evaluating a possible new site. Moving forward, we expect this process and new evaluation tool we are using to raise our hit ratio on opening profitable stores.

As you may recall, the fiscal 2016 Q4 call was just before our recent licensee symposium where representatives from over 80% of licensed stores descended upon St. Louis to hear about the many marketing, merchandising and operational changes we are busy working on. As part of the event, we took everyone to our two show stores so they can not only hear about our resets and in-store initiatives, but they can see firsthand how the projects were implemented in-store.

Overall, the level of excitement and positive responses from the event were higher than even I expected, and the team and I plan to use this momentum as we move further into fiscal 2017. On the merchandising side, pretty well all of our stores are now carrying the 100 or so additional new national branded items, and customer response has been positive. We continue to plan for the rollout of America's Choice private-label brand that we hope will create a closer tie to the Save-A-Lot format than is achievable with the many brands we presently offer.

Lastly, our teams are working on new plans to dense up the stores for special buys, and aggressively bounce back programs to drive return sales. We recently hosted all our business unit directors to share these plans and improve execution at retail, both in corporate and licensed stores. We are excited as we continue to build an authentic sales-driven culture. Our teams have come together and are working well to move the Save-A-Lot brand forward, and we look forward to updating you again in the future.

Let me now turn the call over to Bruce.

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Thank you, Eric, and good morning, everyone. As outlined in this morning's press release, for the 16-week first quarter fiscal 2017, we reported net earnings from continuing operations of $47 million, which included $6 million in after-tax charges and costs primarily related to amending our term loan and the potential separation of Save-A-Lot, net of favorable sales and use tax refund that we've received.

Excluding these items, net earnings from continuing operations were $53 million and earnings per diluted share were $0.19. First quarter adjusted EBITDA, as outlined in table four of our release, was $222 million, down $24 million from last year's first quarter, but as Mark stated, in line with our internal operating plan on a consolidated basis. Consolidated net sales in the quarter were $5.2 billion, a decrease of $211 million or approximately 3.9% compared to last year's first quarter, with the largest variance in our Wholesale segment.

Moving down the P&L, consolidated gross profit was 15.0% of net sales, flat with last year, with lower gross margin rates at Wholesale and Retail, offset by a higher margin rate at Save-A-Lot, driven by business mix. Consolidated SG&A expense, adjusted for the items I noted at the beginning of my remarks was 12.4% of net sales for the first quarter, compared to 12.0% last year. All three segments experienced rate increases, partially due to the deleveraging impact of lower sales and specific to Save-A-Lot increases due to the costs associated with new corporate stores opened over the past four quarters.

Net interest expense in the first quarter, excluding $7 million in charges and costs related to our term loan amendment and required prepayment to our term loan lenders, was $53 million compared to $59 million last year. The decrease in interest expense was primarily driven by a lower outstanding debt balances. Finally, our tax provision was $27 million this quarter, which is an effective tax rate of approximately 36.6%.

Moving from our consolidated P&L to segment results, Wholesale operating earnings for the quarter were $64 million or 2.8% of sales compared to last year's $77 million or 3.1% of sales, primarily driven by the decline in sales and higher employee-related costs. Save-A-Lot's operating earnings for the quarter were $39 million or 2.7% of sales, compared to $51 million last year or 3.6% of sales. The new corporate stores drove higher employee-related and occupancy costs and shrink, as Eric noted, was higher than last year. For Retail, operating earnings for the quarter were $8 million or 0.6% of sales, compared to the last year's $33 million or 2.2% of sales. The biggest drivers were the roughly $42 million decrease in sales, as well as the lower gross margins from lower pricing, including higher promotional activity.

Finally, corporate operating income excluding the net $1 million of expense related to Save-A-Lot separation costs and a sales and use tax refund that we have received was $23 million, compared to $0 last year, prior to $3 million in Save-A-Lot separation costs. This improvement in corporate operating earnings was primarily driven by lower pension expense and employee related costs including lower incentive comp.

Now, let's turn to the balance sheet. At the end of the quarter, our outstanding debt, including capital lease obligations, totaled $2.48 billion, a net decrease of approximately $40 million compared to year-end. This lower debt balance reflects the approximately $100 million prepayment to our term-loan lenders in the quarter, as required by the excess cash flow sweep provision of the loan facility. From a liquidity perspective, we ended the quarter with approximately $730 million of available capacity under our ABL. We also completed the amendment of our term loan during the quarter, which now permits the company and its subsidiaries to undertake certain transactions necessary to effectuate a spinoff of Save-A-Lot.

Turning to cash flow, we generated approximately a $121 million in operating cash flow from continuing operations this quarter, up from last year's a $111 million, largely due to lower cash contributions to employee benefit plans, including our corporate pension plan. Cash reinvested in the business totaled approximately $60 million for the quarter. With regard to capital investment, our full-year capital spend is expected to be in line with what was outlined on the last call, a range of $325 million to $350 million. A few planned new or relocated retail stores maybe delayed beyond this fiscal year, which is expected to be approximately offset by required warehouse and transportation spending in our Wholesale segment, to service the new wholesale business we announced.

Let me finish with some comments on how we see the balance of F 2017 playing out. We now expect adjusted EBITDA to be lower than the $771 million we reported in F 2016 due to two main reasons. First, we're less optimistic about sales in our retail stores in the back half of the year than we were on our last call, and second, Save-A-Lot has experienced cost deflation for a longer period of time, and to a greater extent than we expected. As a result, we now expect full-year consolidated adjusted EBITDA to be approximately 1.5% less than last year.

With that, let me turn the call back to Mark.

Mark Gross - President, Chief Executive Officer & Director

Thanks, Bruce. As we've said since my arrival, we believe SUPERVALU has a unique position in this industry and can grow in a meaningful way, over the coming years. I'm especially encouraged with our new relationship with Marsh and their faith in our ability to help them improve on their already successful business model.

For Save-A-Lot, Eric and his team are doing exciting things and we believe the future is bright. We clearly have some challenges that we're working on in our retail stores. To reiterate what we said on the last call, there's a great deal of work in front of us, as we ended last year with some significant customer losses. But our people are energized and the opportunities are there for us, and as we have shown, we're well positioned to take advantage of them. I'm very proud of how the team is working together and what we've accomplished in my first six months. We look forward to updating you on our progress again next quarter.

With that, let me open up the call for your questions.

Question-and-Answer Session

Operator

Your first question is from Ajay Jain from Pivotal Research.

Ajay Jain - Pivotal Research Group LLC

Yeah. Hi, good morning. So just first on the EBITDA guidance and, Bruce, your updated outlook I think you said its 1.5% decline for the full year that still implies some growth over the balance of the year. And so I'm just wondering now that you have that supply agreement with Marsh, should we assume that, that business is incremental to EBITDA unless – was that already contemplated in the prior guidance, I'm just trying to see if you can reconcile the previous guidance with the assumptions around your latest outlook as it relates to Marsh and if there has been any change as it relates to Marsh or no change at all?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Well, a good question Ajay. So, both pieces of new business that Mark mentioned, both the Shop 'N Save, new business which will initially will run through retail, but will later run through wholesale, that together with Marsh were not included in the earlier guidance at the beginning of the year, so those are incremental.

Ajay Jain - Pivotal Research Group LLC

Okay. And just this is a related question, I think Mark, in your prepared comments, you said that when you gave your guidance a few months ago, you were expecting a decline in earnings in Q1 with sort of a back-end loaded recovery, but was the magnitude of the sales decline in Q1 much more than you initially expected?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

I'm sorry, Ajay. So, that was a question at the end, was I expecting...?

Ajay Jain - Pivotal Research Group LLC

Yeah. In other words, the incremental sales weakness, was that magnitude more than what you were contemplating when you gave your guidance back in April?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Let me start and then Mark you can jump in. We had expected from a wholesale perspective, the level of year-on-year negative growth that we've reported. We knew right from the start that Albertson's and Haggen and Gordy's were lost businesses and sort of when we racked and stacked our expectations with respect to new business that we knew was coming in, net of that loss business, we kind of expected what we saw from a wholesale perspective. I think where we're – and then frankly from the Save-A-Lot perspective, I think we're generally in line with where I thought we would be at the end of the first quarter. Retail is softer though, and retail sales in particular have been a little softer than our internal plan.

Ajay Jain - Pivotal Research Group LLC

Okay. And I had one final question, that's specific to Save-A-Lot. I've noticed that all these stores are now starting to pop-up in Southern California, and just wondering, if that impacts your real estate strategy at all, because I think Las Vegas and LA are supposed to represent some of the key growth markets and growth opportunities in terms of your pipeline and your store development plans for Save-A-Lot?

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Yeah. This is Eric. Thanks for the question. No, it doesn't change our strategy at all. We have very few stores in California, we're opening some more, but again the market, just this whole discount market, is just opening and there is a lot of opportunity that I don't see, there is so much opportunity that I don't see that there is any real conflict between the two of us or lack of markets to open in.

Ajay Jain - Pivotal Research Group LLC

Okay. Thank you.

Operator

Your next question is from John Heinbockel from Guggenheim Security (sic) [Guggenheim Securities].

John Heinbockel - Guggenheim Securities LLC

So, first question on – maybe talk a little bit about your strategic philosophy on the traditional retail business, I mean obviously, it's a business, it's had challenges, it's probably not as good a fundamental business as wholesale. I mean, is that a business that you can somehow creatively divest portions of that and retain the supply capabilities, may be selling to chains or independents or it's too big and not compelling enough for someone to buy it to do that, because, I imagine, you would like to reduce your exposure to that business if you could?

Mark Gross - President, Chief Executive Officer & Director

John, it's Mark. Thanks for your question. As we stated on our prior call, we see tremendous growth opportunities in our wholesale business.

John Heinbockel - Guggenheim Securities LLC

Right.

Mark Gross - President, Chief Executive Officer & Director

So by pure math, on just that, we would be increasing our wholesale sales and retail would become less important to us. I think there are a number of strategies we can deploy for retail. Some of it is very focused on operational improvements in that business and some things could be, I mean it's always possible, along the lines that you described. I think as we sit here and work to maximize shareholder value, any and all options are on the table and that's the work we have in front of us.

John Heinbockel - Guggenheim Securities LLC

Okay. But you don't really want to put a lot of capital into that business. Is that fair?

Mark Gross - President, Chief Executive Officer & Director

I would prefer to put capital where it would be best deployed and I think the opportunities are greater in Wholesale, but that said, there are times where you can deploy capital selectively on the Retail and have a great return. I'm thrilled with this new store rebuild in Oakdale and how consumers have responded to that.

John Heinbockel - Guggenheim Securities LLC

All right. Then on the Wholesale front, so you look at Marsh, how many more of those kind of transactions you think are out there? And I assume you want to compete on your capabilities as opposed to price. So, I assume you're not going to win the – and didn't win Marsh solely on price? And then, just lastly, of your independent customers, how many of those buy produce from you today? And is that a big opportunity that they buy other things, but they're not buying produce?

Mark Gross - President, Chief Executive Officer & Director

Right. Let's take a look at both of those.

John Heinbockel - Guggenheim Securities LLC

Yeah.

Mark Gross - President, Chief Executive Officer & Director

John, as you know, it's a big country. I think there are a lot of opportunities for us to grow that wholesale business. I think there are plenty of people, whether they own one store or 500 stores that would benefit from being supplied by SUPERVALU. So, the first thing is, I think it's a wide universe. And on how you win that business, yeah, I think the right way is that combination, is that you're right on price, that you're right on the services offering and as we've described on private label, I think each of those are an element of a winning strategy and I think all keen to play in why we were successful.

On the produce side, we are underpenetrated on produce, and that's why, we identified that as a significant opportunity. Our customers, who aren't buying produce – aren't buying as much produce with us, have already voted. They're our customers, they've already said, they want to do business with us. And now, it's do we have the right offering for them on the produce side, and it's making sure that, we're doing that. And with the focus that, Mike Stigers and his team have brought to that, we're having great success with our customers. This should be a good year for produce for us.

John Heinbockel - Guggenheim Securities LLC

Okay. Thank you.

Operator

Your next question is from Edward Kelly from Credit Suisse.

Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)

Yes, hi. Good morning, guys. Mark, just a follow-up on John's question. Could you maybe take a step back for us, and just talk about the wholesale industry backdrop as a whole, the level of competition out there today, as you think about your positioning, your key points of differentiation relative to your competitors? And then as you think about growing it, maybe a little bit on the fragmentation of the industry and the potential for you to help consolidate that, and is M&A something that you would entertain if it made sense?

Mark Gross - President, Chief Executive Officer & Director

Sure. So on the industry. Yes, I would break down the elements of opportunities there is there's a world of retailers who self-distribute. So there's the opportunity to come in and have them focused on what they do best, which is being merchants and running their stores and turning distribution over to us. There is a world of organizations that together cooperatively do their own supply, where we could again be the supplier to them, and by supplier I mean both in product and services. And then there are those who may be supplied by others who would be better served by being supplied by us. All three of those are opportunities for us.

On the M&A side, yes, as we started this call, we will look at all opportunities to maximize shareholder value. And in some cases, it will make the most sense to start up warehouses just on our own. But in other cases, it will make sense to buy existing distribution. And I think both of those are out there and available to us.

If you look at our offering, is we have built a system of support, and it originally focused on, let's say, the small independent and what that small independent needed to be competitive. But as this world grows increasingly complex, as people need a vast variety of both different product offerings, depending upon the demographics in which they serve their customer, and then the services that they need, that complexity drives the need for people to have the support of an organization like SUPERVALU to greater numbers. So it's no longer just the small independent who will benefit from that robust offering, all right.

You can easily be in the 200 store, 400 store count and your services offering, what you've got in your back-office, is not sufficient to meet your current need, but we've already built that. And that's a differentiator for us. We also have – if you look at the different types of customers that we service, everything from some of the highest end operators to super low discount. As any organization looks to differentiate its product offering, because not all of its stores will be in either the highest income or the lowest income area, and they want differentiation within their product offering, we've got it. And we have the expertise to be able to explain what we think is working in different markets, and that's a tremendous resource. So, I think, all of those pieces lead to greater growth opportunities throughout the country.

Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)

Great. And just a quick follow-up on Marsh. Could you provide any color on the annual sales contribution of this contract and how we should be thinking about the EBIT margin of the business relative to the company as a whole? Just trying to figure out all the ins and outs of the customer base as we attempt to model going forward. Thank you.

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Hey, Ed, we're not going to provide any kind of additional color on a specific customer like that. What I can tell you though is that larger customers like Marsh are more sophisticated players, and so they tend to demand more of SUPERVALU and they do. And so unlike a very small player, they have a different composition, both in terms of volume and in terms of their rates. But that's about as much color as we can provide.

Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

Operator

Your next question is from Joe Feldman from Telsey Advisory.

Joseph Isaac Feldman - Telsey Advisory Group LLC

Yes, hi. Good morning, guys. Thanks for taking the question. I wanted to ask couple of different things. One is you talked about on the Save-A-Lot side the corporate stores like in St. Louis, for example, comping up nicely. I think it was 5% to 7% ahead of prior trends and really doing a good job there. What do you think the key differences with why they're outperforming versus the others? And how do we get the others up to that kind of a level?

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Joe, this is Eric. Well, Actually the whole strategy is to move our whole corporate store base and as much of the licensee base to that new level of store experience. What we did in those stores is that we opened up produce a little bit more, which is I think one of our – especially in our space in the hard discount is one of our key differentiators. We opened up space for more bakery, which is mostly freeze and thaw, which is a business that we really weren't in. We added a bit of cooler and a bit of frozen, because we over-index in those departments, and then we completely reset the center-store in terms of adjacencies of categories and the size of categories. So we cut back on the categories that are not in growth mode. We increased the categories that are in growth mode. We've recognized that certain categories such as baby or pets or things like that need a higher mix of national brand versus private label just because that's what people buy.

So what we really did is just move the level of precision in terms of our merchandising, particularly in center-store, up a few notches. Our plan, as we announced on the last call, I believe, is to convert roughly 320 of our over 560 corporate stores in this fiscal year. As we speak, we actually have 70 corporate stores already done. So I'm talking about week. So although the numbers in weeks are very encouraging also, obviously, the test of time will tell. But I think none of this is revolutionary. It's evolutionary, and we also have on the license side of the business, as we speak, over 600 stores that have taken some element, if not all of it, but at least some of the elements of this new store.

So some already had more refrigeration and more frozen space than these show stores, they didn't have to add in those refrigerating units. But it's very encouraging to see the amount of licensees that are onboard with this also, and I think it's a much stronger offering. Again, it's not refined to perfection. That'll take a little more time, but it's certainly a step in the right direction.

Joseph Isaac Feldman - Telsey Advisory Group LLC

That's great to hear. Can you remind us also what the cost to do one of these full-on resets is and maybe the timeframe to get one of these done?

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Yes. The cost to do it is about $50,000 a store, which includes labor, and we do that over two nights. The stores are not shut down. So we see very little disruption to the store. The biggest disruption is just in the customer base that comes in is used to finding their flour in certain part of the store and they're used to finding their cookies in another part. So that shifted and that's in any supermarket where you kind of rearrange the stores, you get a bit of discomfort for a couple of weeks, while people get used to it, but it's really a very un-invasive process.

Joseph Isaac Feldman - Telsey Advisory Group LLC

Got it. Thank you. And then if I could just sneak one more in, guys. You mentioned on the Retail side of the business some staff adjustments late in the quarter. Just wanted to get a little more color on that. Was that like reductions? Was that just reallocation of the labor or the way people are doing things within the store?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Joe, this is Bruce. It was actually the investment in labor, in the stores and in the management teams. The classic example is in one of our banners we added a new district and a new district infrastructure in place, and so that would be a good example. We're nearly fully staffed I think from a management perspective now across the banners, which is the first time in a while we've had that.

Joseph Isaac Feldman - Telsey Advisory Group LLC

That's great. Thanks, guys, and good luck with this quarter.

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Thank you.

Mark Gross - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Scott Mushkin from Wolfe Research.

Scott A. Mushkin - Wolfe Research LLC

Hey, guys. Thanks for taking my questions. So I want to go back to the guidance. didn't fully understand the answer. I think in the prepared remarks you said, we're now expecting EBITDA down about 1.5% compared to last year. Is that inclusive of the new contract wins or is that excluding? And so any EBITDA that comes from the new contract wins would be on top of that?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

What I did Scott is, I've included everything I know into that guidance. So it is inclusive of the new business that I expect and that Mark talked about.

Scott A. Mushkin - Wolfe Research LLC

Okay, okay. So that's inclusive of that. That really clears it up. That's perfect. So then looking at the wholesale business, really more of a longer-term question. As we think about the wholesale business going forward and we think about the margin structure there, what's your thought process? Are there margin opportunities? Is it more of a revenue-growing, contract-winning type of situation, maybe with a little margin pressure? What's your thought process on that wholesale businesses, as we go forward over like a multi-year period, not obviously this year?

Mark Gross - President, Chief Executive Officer & Director

Right. So, Scott, it's Mark. Thanks for that question. I think it's both. So I think you have significant top line growth opportunities that's the first part. Secondly, as I go through the organization and the work we do and Jim Weidenheimer and his team who have joined me, I think we have substantial margin opportunities. So we'll get more business and we'll do better with both the business we have and then making sure the new business we bring on is profitable as well. But the both of those opportunities are there.

Scott A. Mushkin - Wolfe Research LLC

So you think there's opportunities both to grow the revenue base but also to enhance the margins over time.

Mark Gross - President, Chief Executive Officer & Director

Yes.

Scott A. Mushkin - Wolfe Research LLC

Okay. So then my final question is, obviously the Retail business side had a harder time. I'm not sure what you're seeing at your – if you're seeing evidence of that in your Wholesale clients too. But seems like the industry is really having a tough time. I want to get your perspective. Obviously deflation's gone on longer than expected and what are your thoughts? You're not the only guys investing in price on the Retail side. So what are your general thoughts on the industry and then I'll yield?

Mark Gross - President, Chief Executive Officer & Director

I think your question said it. It's a tough world out there. Deflation, particularly in proteins, has lasted longer than people expected. It's good news for the consumer, but yes, that's a headwind in everyone's world. People are investing in price. You have new entrants, but the industry also on the positive side I think has never been better focused on servicing the needs of its customer. I don't think we've ever been better on this picture of doing what we think is better and more convenient for the customer versus what was in the past, let's say, more convenient for the retailer in performing. The difficulty is a number of players all have that same picture and so it makes for a tough competition.

Scott A. Mushkin - Wolfe Research LLC

So if I could just – sorry, just one last one in there. You said something that was interesting about the number of builds going on. Any thought that the number of the store builds would actually start to maybe slowdown a little bit and then I'm definitely done? Thank you.

Mark Gross - President, Chief Executive Officer & Director

Yes. I don't know if the pace of new store construction by different players in the market would lessen. I'm not sure I'm seeing that trend.

Scott A. Mushkin - Wolfe Research LLC

Perfect. Thanks.

Operator

Your next question is from Rupesh Parikh from Oppenheimer.

Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)

Thanks for taking my questions. So, first I'll start off with two questions just related to the guidance. One, if you can help us understand how you're thinking about food deflation for the balance of the year within your outlook. Then second, how are you thinking about the cadence of EBITDA growth for the remainder of the quarters?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Hey, Rupesh. Bruce here. So in terms of inflation, let me give you our views here collectively. So in the first quarter cost deflation was actually deflationary. It was deflationary year-over-year on a consolidated basis by slightly over 1%. It was driven by significant deflation in the meat categories, particularly at Save-A-Lot, and Eric can comment on that further if he likes, but also on some of the dairy and cooler items too. So we had expected that deflation would abate over the course of the year, and frankly we have not seen that occur at least through the end of the first quarter.

Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)

And how are you thinking about that going forward, the deflation? Would it be built into your forecast?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

We have included in our forecast – we have amended our views of deflation with respect to the levels that we had initially planned. So we're hopeful still that deflation will turn, but we have now modeled in it not turning as quickly as we had our earlier thought. That's in the guidance that we have provided.

Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)

Okay. And any additional color in terms of how to think about the cadence of EBITDA growth for the remaining quarters?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Not really. I don't really have any color for you, Rupesh. What I would tell you is just to be clear just so there is no lack of clarity in terms of the guidance. What I'm trying to provide to you guys from an EBITDA perspective is that we believe that EBITDA will be down relative to the number that we had provided in the call a few months ago, and that we expected to be down about 1.5% from that number that we had provided on the last call. So we hope to overachieve on that, but that's the guidance at this point.

Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)

Okay. Great. And my last question, just going back to the Save-A-Lot segment, so again this quarter we saw a pretty meaningful operating margin decline for that segment, and it seems to be driven in large part by the addition of the corporate stores. I just wanted to get a sense of when do you guys see that pressure abating or maybe even bottoming out as these corporate stores are added to the base?

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Its, Eric. Rupesh. Thanks. Obviously the newer stores in the first quarters have a more significant negative effect on the EBITDA as they gain some traction. We've pulled back a little bit the number of corporate stores that we're opening in fiscal 2017 by about 15 stores, so that we could focus or redeploy the capital for the store resets. Additionally, going forward we've very, very much refined our real estate tools that we're choosing stores with a really much more discerning manner in terms of making sure that the stores that we open are really in the dense urban markets where we operate the best and where we also have a little bit of history which helps improve the profit model significantly.

The one thing that I would also be remiss not to mention in the first quarter versus last year is that in the first quarter of fiscal 2016 was basically the onset of deflation. And on the retail side of things, the retail pricing did not deflate as quickly as the cost deflation. Therefore, we had, like I'd mentioned in my earlier notes, one of the best quarters in many, many quarters of EBITDA, driven by that. And I think that you'll see mostly initiatives that we are employing at the company will take hold in the latter half of the year, and should see some improvement there.

Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)

Okay. Thank you.

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Thank you.

Operator

Your next question is from Shane Higgins from Deutsche Bank.

Shane Higgins - Deutsche Bank Securities, Inc.

Yes. Good morning. Just a quick question back on the Retail segment about the competitive environment. Did you guys say that you did see a step-up in competitive price investments and promotions? And what about by region? Was there really any differences across the different banners?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Well, what we meant by our commentary, Shane, was that we've put in more price investment. We didn't do it necessarily as a consequence of any particular event, but we are interested in driving our top line sales. And as part of the series of initiatives that we've put in place, some of that includes hotter promotional activity and that price investment. And so that's what we've done. We've invested more in some areas than others, but broadly speaking, we think it's the right thing to do in order to deliver on topline performance.

Shane Higgins - Deutsche Bank Securities, Inc.

And how are you guys funding these price investments? Is it, you talked about I think, reduced shrink before? Are there other areas where you're taking out costs and reinvesting them?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Well, that's the biggest one. So, we have put in place a whole series of our instruments including human resources to help drive down our shrink rates. That process, that whole initiative is fairly new. We started it in really, I guess, in the end of the fourth quarter of last year. So it's had several weeks to run now. And we're actually seeing some benefit in some more than others in some of the banners. So we're actually seeing some traction there. We need to accelerate that traction as we move into the year and that the benefit of that shrink reduction we hope will be then further investments.

Shane Higgins - Deutsche Bank Securities, Inc.

And just a final one from me. Are you guys supporting these price investments with some additional marketing expense? Any color there would be great and then I'll yield. Thanks.

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Not really, I mean, when you say marketing expense, I assume radio and television ads, that's not been, at least up until now through the first quarter, has not been a significant incremental investment.

Shane Higgins - Deutsche Bank Securities, Inc.

I'm sorry. Are you guys planning on? I mean, how you're going to get the word out to consumers that you guys are actually making some pretty good investments in price? And is that going to be something that ramps up this quarter?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Well, we've already – I mean, we invest in radio, we invest in media already. So, what I was indicating is that there's not a significant amount of incremental expense there. But we also do direct mail as another opportunity. So, we feel like the marketing plan is generally okay. We may bump it, but at this point, I mean I think we're in good shape.

Mark Gross - President, Chief Executive Officer & Director

Shane, I would add. Listen, the point that underlies your question is the absolute right one, that when you make a price investment, you have to make sure that the customer appreciates what you're doing. So you have these different pieces of marketing that we already do; it's the radio, it's the direct mail, it's the billboards, it's the circular. All of those things invite the customer into the store, and then the signage in the store and the people you have working in the store, all to give that price impression. But it makes no sense to do a price investment if you don't tell the customer. We're fully onboard with that. The answer that Bruce is giving is, we're not spending more on marketing, we think we communicate price in each of these markets.

Shane Higgins - Deutsche Bank Securities, Inc.

Great. Thanks a lot.

Operator

Your next question is from Vincent Sinisi from Morgan Stanley.

Vincent J. Sinisi - Morgan Stanley & Co. LLC

Hey. Great. Thanks very much for taking my question. I wanted to ask more of kind of a 30,000-foot view and kind of just how you guys think of that balance within your both Save-A-Lot and Retail banners where kind of the promotional level versus the list that you may or may not be seeing, and obviously the sales softness this quarter, but also as you mentioned the opportunities. Is it that you're seeing more of a customer response when it's magnitude and or by category, and then you talked within a Save-A-Lot about kind of aggressive buys yet to come, kind of where are we from a stage perspective, an inning perspective? Thanks.

Eric A. Claus - Chief Executive Officer, Save-A-Lot

Yeah. So, thanks for the question, it's Eric. Why don't I start with Save-A-Lot? So, we've taken a lot of kind of the short-term initiatives, which mostly relate to advertising and pricing; we've started densing up the store. So, a lot of the kind of the short-term fixes that I just went through is your day-to-day, keep the wheels on the bus kind of thing in terms of sales and keep driving your sales.

I think the more important question for us is long term what we're doing and the long-term initiatives, which include the resets. The resets again will have the largest effect on sales probably this year in the company, but that again – we have to complete them. So, obviously that happens in the back half of the year. We've seen customer accounts increase in the first quarter and that's largely driven by the advertising program.

I think that you also can't forget, and I hate to talk about deflation, I hate to even say that deflation is a reason that sales shouldn't be stronger, but the reality is in a hard discount business with the few number of SKUs that we have, if you took strictly ground beef, milk and eggs out of the equation, we would have had positive comps in our corporate stores for the first quarter. So that obviously has an effect.

But, essentially, we're doing the usual blocking and tackling, the bettering of the ads, we changed the cadence of the ads, the content, all that kind of stuff. We are aggressively working on some KVI pricing, changing a little bit the pricing structure of the company to make it more aggressive, but also more targeted to certain markets. So, I think the short-term stuff is the blocking and tackling that ensures that sales will improve slowly, but the bigger things are things like the reset, the introduction of a strong private label program, which will be launched at the end of the summer, so all those long-term initiatives. And I'm trying to take a bit of a longer-term view, that doesn't mean you don't put a whole pile of energy into the short-term things, and the short-term things I guess that we're doing them.

So I think over time, you'll see that the strength of the topline should improve. And again, something in our business, we're very much an EBT shopper kind of a store. So we have a lot of – a significant portion of our customers are EBT customers. We've seen drops as recent as the latest stats coming from the government in April that have dropped – the payments have dropped by 6%.

So those are the headwinds that we're fighting. But we're not using them to say that, hey, we're not going to go positive. It's the things that are – it's the nature of the beast in retail and we're just working on those longer-term initiatives to be able to drive that topline and the improvement of profitability per box, which is great for the license business and great for the corporate business.

Mark Gross - President, Chief Executive Officer & Director

Vincent, it's Mark. So, to give then the flavor on the conventional retail and also mix in some of the wholesale. To your question of what is the customer responding to, is it goes to those elements I'll call it of customer satisfaction, and then the pieces that we're responding to. So part of that customer satisfaction and what does the customer respond to. So, there you see the comments that Bruce made about operational execution, and that's where you get this labor investment, to make sure we are providing that part of the shopping experience.

The second piece is what's the offering? And there you get the conversation that Eric is making of what they've changed in the Save-A-Lot box? How it better opens up with fresh and the changes that he is making there? Similarly, in our conventional retail, it's like other retailers, he is making that better offering particularly in deli bakery, a better fresh, a better healthy, some additional prepared foods to make that ease of meal preparation, and then there's price. And, it's layering in all three of those elements and we're finding, hey, you have to do all of that to succeed in this business.

Vincent J. Sinisi - Morgan Stanley & Co. LLC

Okay. No, that's very helpful color. Thank you. And, if I could just, as a follow-up, just kind of going back kind of Ed's question on the wholesale side. When you think of the overall landscape here and with the most recently the upcoming Marsh and Food Lion opportunities here, has there been kind of any change in how you went about securing those businesses versus similar size customers in the past? Any notable change in dynamics in a positive or a negative way that that would be helpful for us all?

Mark Gross - President, Chief Executive Officer & Director

Yeah. And, that's a success. Larger organizations and this was to a point that Bruce was making earlier. Larger organizations have needs that can be specific to them, and it's being the – it's the flexibility to meet the customers where they are, it's that same theme that you would think of in retail of how do I meet the customer where they are? Well, the same thing applies to wholesale. It's how do I meet the customer, where they are? What does this customer need and making sure that our organization is flexible in our approaches and the answers we give and how we set things up to win that business. And with that reorientation, the teams are proving themselves very successful.

Vincent J. Sinisi - Morgan Stanley & Co. LLC

Okay. Thanks very much.

Operator

Your last question comes from Stephen Tanal from Goldman Sachs.

Stephen Tanal - Goldman Sachs & Co.

Good morning guys. Thanks for taking the question. I just wanted to do follow up on retail and the price cuts specifically. I'm wondering if there was a specific impetus for it or if you feel like maybe you're leading with these price cuts or maybe following a competitor, what are you generally seeing in the environment out there?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Well, we want to be competitive, so we wouldn't – that's part of it is, we want to be competitive. We also want to make these banners as successful as we can and so we're making the investments we believe are necessary to drive in customer traffic. And so that's sort of the basis of it.

Stephen Tanal - Goldman Sachs & Co.

Okay. Fair enough. And on the margin compression in the segment, can you sort of talk about the moving pieces, I mean, obviously fixed cost leverage was probably pretty meaningful, but any color you can share there would be helpful?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

And Steven, you're talking specifically about the Retail segment?

Stephen Tanal - Goldman Sachs & Co.

Yes.

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Yeah. Essentially it is a sales deleverage. We also had – we've got a few new stores in this quarter that also impacted on our costs, obviously a new store has new cost. But essentially it's a volume issue.

Stephen Tanal - Goldman Sachs & Co.

Got it. And just moving on to the TSA contracts, if we are looking at this, it sort of does look like the decline rates accelerating, which I guess is pretty consistent with what you guys have been saying, but any thoughts on the cadence through the year, what you're sort of assuming in guidance, maybe a different way to ask it as you kind of contemplate where you'll end up, and how this will trend throughout the year?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

So, with respect to TSA, we're in obviously in good, and great communication with our partner at Albertson's. They update us routinely as they look at TSA. And so we're keeping pace with what they would lag in. In terms of the wind down, I would direct you over to them, and have them articulate what their pacing maybe, but we are, I think, doing a great job keeping up with them, and we'll continue to do that.

Stephen Tanal - Goldman Sachs & Co.

Got it. Just last question for me. You mentioned, having some good success on the wholesale side in produce, I'm wondering how you're measuring that? I think when we're down there, we would talk a little bit about the PCR metric, is that a metric you can share with us, or any kind of quantification there, that we can sort of think about?

Bruce H. Besanko - EVP, Chief Operating & Financial Officer

Well, PCR, that's an internal measure, we've not typically talked about it externally other than, say that, it is a measure that we look at, any time Mark talks about the strategy, one of which is to sell more to existing customers, that really reflects purchase concentration rate. So, to the extent that a customer has not been buying produce and they begin buying produce, our PCR increases obviously as a consequence of that. So, we track it because it's a measure, a good internal measure for us.

Stephen Tanal - Goldman Sachs & Co.

And is that, sort of what you're looking at, when you're saying that you're seeing good success, like PCR is coming up, is that fair to say?

Mark Gross - President, Chief Executive Officer & Director

Yeah. It maybe even more bluntly than that. Here is this large customer. They weren't buying produce before, now they're buying produce. It's pure, I mean, here are produce sales to existing customers. It's more this week than the prior week. It's more than the week before that and that's why I said in the West region, they've sold more produce in the quarter than ever before and I think our wholesale business will sell more produce at the end of the year than it is ever sold before. It's on track to do that and from everything that I'm seeing, and all the customers I'm meeting with, I believe that will be achieved.

Stephen Tanal - Goldman Sachs & Co.

All right. Fantastic. Thanks guys.

Steven J. Bloomquist - Investor Relations Contact

Thanks, everybody. We'll wrap the call up. If you have any follow-up, call to the office later today. Thanks for your time.

Operator

This does conclude today's conference call. Thank you for participating. At this time you may now disconnect.

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

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

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