Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

SUPERVALU (NYSE:SVU)

Q4 2012 Earnings Call

April 10, 2012 10:00 am ET

Executives

Kenneth B. Levy - Vice President of Investor Relations

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

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

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Meredith Adler - Barclays Capital, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Charles X. Grom - Deutsche Bank AG, Research Division

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

Deborah L. Weinswig - Citigroup Inc, Research Division

Stephen Shin - Morgan Stanley, Research Division

Operator

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

Kenneth B. Levy

Thank you, Ashley. I want to welcome everyone to SUPERVALU's Fourth 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.

We have some supplemental information to accompany our prepared remarks today, 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. [Operator Instructions]

The information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor provision 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. I'm happy to report that in fiscal '12, we delivered on our financial commitments while building a strong foundation for the second year of our transformation. We delivered full year adjusted earnings of $1.25 per share. We improved full year identical store sales by 300 basis points, finishing the year at negative 2.8%. We removed $165 million from our cost structure, and we strengthened our balance sheet.

Our business transformation strategy and the 8 Plays to Win framework are helping us to redefine our value proposition. In the 12 months since we unveiled this strategy, we developed and rolled out new tools and capabilities to improve the way we run our business. We implemented hyperlocal initiatives to better match our in-store offering to the needs of the communities we serve, and we invested in price across our traditional retail network.

In our retail stores, we are now leveraging proprietary data to improve performance and create a better shopping experience for our customers. Through fiscal 2012, we deployed new reports that allow us to pinpoint out of stocks by day and by time of day so that we can take prompt corrective action and improve availability. We improved freshness and assortment in produce based on space allocation tools and we have begun to manage inventory levels better with new ordering and forecasting tools, which benefit our DSD vendors.

We have also simplified our operations across the enterprise by streamlining processes and eliminating redundancies to reduce administrative costs and take complexity out of our business. In February, we announced significant workforce changes that served to rightsize our company while allowing us to improve decision making and delayer operations.

Another key tenet of our business transformation is delivering fair pricing. In fiscal 2012, we made steady progress to improve pricing and we did so without adversely impacting margin. We stayed true to our pledge to prefund price investments by creating a disciplined environment, committed to taking in dollars before spending them. Our investments were made broadly across markets, categories and items, and we ramped up the levels of these investments as we were able to generate additional funding.

Among the most visible investments we made was in our produce department. Produce is a category that contributes about 10% of retail sales and is a key driver of store choice for most shoppers. In the third quarter, we began lowering everyday retail prices by up to 20% on approximately 200 items and completed this reset early in the fourth quarter. While we are still early in assessing trends, I'm pleased to report that unit volumes improved by over 300 basis points since implementation in Q3 and have outpaced unit movements in the rest of the store. As I have discussed before, we anticipate our price investments will first be seen in basket size as existing customers respond to our lower shelf pricing and broaden their shop with us. Over time, we would expect to generate incremental traffic as secondary shoppers return to our stores to shop with more frequency.

Perhaps the most important effect of our produce investments is that it has positively impacted customer perceptions, with our primary customers noting an overall improvement in the freshness of our food. These results serve as an important validation of our strategy.

We have also expanded our private brand offering. This past year, Essential Everyday, our new national brand equivalent line, rolled out in 41 categories with more than 500 SKUs. With its crisp updated packaging, this new label drives brand recognition, delivers immediate production efficiencies and has been embraced by our customers. We have also aggressively expanded Shopper's Value, our entry-level price brand, which added 68 new SKUs and saw an 11% increase year-over-year. As we work to deliver greater everyday value, hyperlocal will be our true point of differentiation. In fiscal '12, this approach helped to invigorate our store directors and associates as they moved to engage customers on a whole new level. This is a major cultural shift for our company, but one that store teams have genuinely embraced.

Another point of focus in fiscal '12 was on growth. Our independent business added new business affiliations including C&K Markets on the West Coast, bringing 62 stores into the SUPERVALU family and leveraging our existing asset base. We also extended our relationship with Western Bee and are now supplying their 27 stores in the New York metropolitan market. At Save-A-Lot, 52 stores were added to the network, including 47 that serve food deserts and demonstrate strong progress toward our commitments to the Partnership for a Healthier America.

I am proud of the focused work by all of our associates this past year. Overall, we made meaningful strides in fiscal '12 and finished the year on plan.

Let me now turn the call over to Sherry for more details on our financial performance and position, as well as guidance for the next fiscal year.

Sherry M. Smith

Good morning, everyone. As Craig noted, fiscal '12 was an important year for SUPERVALU as we began implementation of our plans. For the year, SUPERVALU reported adjusted earnings per share of $1.25 on sales of $36.1 billion. We generated more than $1 billion in cash from operations, of which we invested $711 million into our assets, paid down approximately $530 million in debt and returned $75 million to shareholders through dividends. We made solid progress against our plan and are well positioned to deliver improved diluted EPS in a range of $1.27 to $1.42 in fiscal 2013. This guidance reflects our continued execution on the 8 Plays strategy.

In the fourth quarter, we reported adjusted earnings of $0.38 per diluted share. Because of $2.38 in after-tax charges covering 2 distinct items, our GAAP loss was $2 per diluted share, the first of these items related to the fair value estimate for goodwill and intangible asset impairment that we noted last quarter. We finalized our calculation from Q3 and recorded an additional charge in the fourth quarter based upon the continued decline in our stock price. This quarter's charge totaled $492 million after tax, equivalent to $2.32 per diluted share, and in taking it we now have no more goodwill, only intangible trade names associated with our traditional retail stores.

The second item was a $13 million after-tax charge, or $0.06 per diluted share for severance and related costs resulting from our previously announced reduction in workforce.

Sales during the quarter totaled $8.2 billion and identical store sales were negative 1.9%, including the impact of our price investments. Average transaction size rose by 20 basis points while customer counts declined by 2.1%. Unit movement trends, while negative, were at their best level in more than 2 years in Q4. On a sequential quarter basis, IDs improved about 100 basis points with the majority of our banners showing improvement.

Cost inflation ran about 4.5% this quarter, which was in line with our expectations. We continued to make strategic price investments and have seen encouraging early results in categories like produce, which Craig mentioned earlier.

Gross profit rate in the fourth quarter was 22.8% of sales compared to 23.3% last year. Retail gross margin was 28.1% compared to 28.2% last year. The decline in retail gross margin rate reflects the timing of price investments and higher advertising spend, which were partially offset by the impact of lower fuel sales. Total company margin was also impacted by a change in business mix.

Selling and administrative costs, excluding charges, were 19.9% of sales this quarter compared to 20.2% last year. Despite the deleveraging caused by negative IDs and lower fuel sales, our cost reduction initiatives more than offset these pressures. Lower surplus property costs relative to a year ago also contributed to the decline in rate. For the year, we removed approximately $165 million from our expense structure, bringing our 2-year savings total to nearly $350 million.

In our independent business segment, the divestiture of Total Logistic Control and Target's transition to self-distribution drove a decrease in both sales and operating earnings. We have now fully cycled both of these events and remain optimistic about our prospects of adding to our existing base of independent retailers. This business continues to be an important part of the company and provides us a stable stream of cash flow.

Interest expense for the quarter was $115 million, down $5 million from last year, reflecting the benefit of lower debt levels.

And our effective tax rate, excluding impairment charges, came in at 33.3%, which reflects tax-planning activities in the quarter.

Moving to the balance sheet, our financial position continues to remain solid. I am pleased that we achieved our debt reduction goal by reducing total outstanding debt by approximately $530 million for the full year. I should note that this figure excludes about $35 million of existing leases which upon renewal at below market rents, primarily in the fourth quarter, are now classified as capital lease, assets and obligations.

Year-end borrowings under our revolving credit and securitized AR facilities totaled $82 million. Under the existing terms of our credit facility, our debt covenants tightened on December 31 of 2011. We still maintain a comfortable cushion and remain in compliance with both debt covenants.

Trailing 12-month EBIT totaled $0.9 billion, excluding impairment and certain other charges. Depreciation and amortization was $0.9 billion and rent expense was $0.3 billion over this same period.

Our year-end leverage ratio, as defined in our revolving credit facility, was 3.47x compared to a covenant maximum of 4.0x and our fixed charge coverage ratio was 2.58x compared to a covenant minimum of 2.25x. We continue to manage our business to ensure appropriate cushions to our financial covenants.

Looking forward, we have roughly $1.1 billion in funded maturities over the next 3 fiscal years: $320 million in fiscal '13, $200 million in fiscal '14 and $590 million in fiscal '15. We are comfortable with this maturity schedule and expect to meet these obligations with internally generated funds.

Let me also note that we have a $1 billion maturity in May of 2016, which is over 4 years away and less than halfway through its maturity. We will manage our liquidity over the coming years to minimize the refinancing risks for our 2016 maturities.

Now let me provide some color on our pension plans. For our company-sponsored defined benefit plans, SUPERVALU's fiscal '12 cash contributions were about $90 million. We did prepay approximately $60 million in fiscal 2011. In fiscal '13, we will contribute about $170 million and expect our contributions to rise only modestly from there. The expense in fiscal '12 was about $115 million and will be flat in fiscal '13.

As a reminder, the corporate-sponsored plans were largely frozen to new entrants in 2007, and the majority of participants will see their benefits lock at the end of this calendar year. On the multiemployer side, SUPERVALU made approximately $130 million in contributions to these plans in fiscal 2012. These contributions represent about 2.5% of total employee costs. Over the past year, contributions declined by approximately 3% due to workforce reductions mainly from store closures. In fiscal '13, we expect contributions to be approximately $142 million or a 9% increase based upon our assumptions for collective bargaining and asset return.

Our estimated share of unfunded liabilities in plans we participate in was approximately $1.68 billion pretax at fiscal year end. This is based on the market value of assets and actuarial liabilities in accordance with ERISA. We regularly update the rating agencies on our company-sponsored and multiemployer pension plans and believe these obligations are both manageable and reflected in our current credit ratings.

As I mentioned, capital investment totaled $711 million in fiscal '12 and the amount allocated to retail was about 2.3% of retail sales. This year we completed 83 traditional store remodels, updated technology to drive productivity and added a number of customer-facing merchandising initiatives to help drive sales. We are committed to keeping our stores fresh and believe we are spending at an appropriate level.

At Save-A-Lot, we added 16 corporate stores and increased total store count by 52 locations. Beyond retail, we continue to invest broadly across the company, including capital spending on our independent logistics network.

Let me next update you with the quarterly scorecard. Our cost reduction total for the year was $165 million, outpacing our original target of $115 million. Our in-stock tools are now in all traditional stores. Our full year retail shrink improved by about 11 basis points, moving us toward the 50 basis point target we set for the end of fiscal '14. Private brand dollar penetration finished the year at about 19%. Lastly, our market share declined by approximately 40 basis points in our top 20 DMAs. This was consistent with last quarter and primarily a result of store closures and negative ID sales since Q4 2011.

Looking forward, earnings per share is expected to be in the range of $1.27 to $1.42 in fiscal '13 with full year ID sales forecast between negative 1% and negative 2%. We expect inflation to moderate as we move through the fiscal year, but should settle within the 2% to 3% range.

Let me provide some additional detail on our guidance by segment, beginning with retail. ID sales are expected to improve from fiscal 2012 but still remain negative, in part due to the ongoing price investments. For fiscal '12, sale of fuel centers will remove about $5 million from total sales. Save-A-Lot will help to offset some of this pressure as we anticipate another year of positive IDs and sales growth. As for retail gross margins, we expect the rate to be up modestly compared to F '12, driven largely by lower fuel sales as a result of the disposal of 106 stations.

We also anticipate making meaningful price investments in the coming year. These, however, will continue to be funded by improvements in merchandising and shrink, thus having minimal impact on the margin rates.

On the expense side, lower fuel sales will increase our SG&A rate in a similar fashion while our outlook for ID sales will also put modest pressure on expenses. We anticipate annual increases to employee-related costs as well as standard contractual increases in our existing labor contracts. These items should be largely offset by continued expense discipline, which we believe will generate an additional $75 million in savings in fiscal '13.

In general, cost savings over the next 3 years should continue to be meaningful and are being driven by an efficiency review program related to our business transformation plan that is currently underway at SUPERVALU. This work is separate and distinct from the reduction in force we announced in February. When completed by the end of the first quarter, we expect this review to provide us with a clear roadmap to simplify the structure of our company and improve end-to-end operations.

All told, we expect operating earnings in our retail segment to be flat to up $20 million from fiscal '12 adjusted levels. Within our independent business, sales are expected to be up modestly. This is a steady business, producing EBIT of about 3%. In fiscal '13, cost savings and operational efficiencies should largely offset inflationary cost increases and margin changes attributable to a shift in business mix.

In the first quarter, we will also cycle a prior year $6 million pretax gain from the sale of a non-core asset. Accordingly, operating earnings for independent business as a percent of sales should be in line with fiscal '12 results.

SUPERVALU will also benefit from lower year-over-year interest expense in fiscal '13 as we continue to pay down debt. This will add about $0.05 for the full year.

Our effective tax rate should come in at 36% this year as we expect to realize the benefits from continued work on tax planning initiative. This is embedded in our fiscal '13 earnings expectations and much of this benefit will be realized in the first quarter.

From a cash flow perspective, we will generate approximately $1.1 billion in cash from operations. This assumes improvements to working capital, primarily from inventory management related to forward buys and better retail inventories with the in-store tools we have developed.

Our debt reduction guidance reflects lower proceeds from asset sales and a change in our pension plan contributions relative to fiscal '12. In general, SUPERVALU is committed to reducing outstanding debt by a minimum of $400 million per year for the foreseeable future. We have committed liquidity from our revolving credit and securitized AR facilities, which have total borrowing capacity of $1.7 billion.

Capital investments will continue across our asset base including stores, distribution centers, technology and sustainability efforts. Our fiscal '13 plan maintains a pace of retail investment at slightly more than 2% of retail sales. We will open 3 new traditional retail stores this year, 2 of which will be on-site replacement stores in locations where we own the real estate and have a great opportunity to expand our customer base. The plan also includes approximately 100 traditional store remodels. Customer-facing spending across various merchandising and product displays will help drive incremental sales. We have also planned several energy and sustainability projects such as new door installations across 200 stores in frozen and dairy departments, which will provide sharper lighting inside cases and lower energy costs.

We will continue to invest in our logistics business this year to maintain facilities and upgrade our transportation fleet on a normalized life cycle.

Lastly, Save-A-Lot will add approximately 50 new stores in fiscal '13. The environment we described last quarter, characterized by a slowdown in small business financing and general economic uncertainty, is largely unchanged and is factored into our expectations for licensee openings in fiscal '13.

Our scorecard for the next fiscal year includes: ID sales of negative 1% to negative 2%, reflecting ongoing price investment; paying down $400 million to $450 million of debt; investment of $675 million across our asset base; incremental shrink improvement of 20 basis points; and SG&A cost reductions of at least $75 million.

I feel good about where we are as a company. We accomplished a great deal in fiscal 2012 and have positioned the company for improved results in fiscal 2013.

Now, I'll turn the call back to Craig.

Craig R. Herkert

Thanks, Sherry. Now that we've laid out our capital and financing roadmap for fiscal 2013, I'd like to take a closer look at our operational plan for the year.

Fiscal '13 will be a year of focused execution as we leverage our resources to drive results. As our business transformation advances into its second year, we will focus on 3 priorities: one, improving our value proposition; two, bringing an even greater hyperlocal experience to the neighborhoods we serve; and three, driving long-term growth.

Let me provide some detail on each of these. Delivering value and investing in price is our #1 priority. The good news is that effort is underway. Today, we have better analytical capabilities that are helping to fund our fair price plus promotion strategy, and the benefits are apparent in our shelf pricing.

I talked earlier about the disciplined approach we took to reposition produce. This strategy delivered results, driving better value, freshness and improving the customer experience. This same approach will serve as our playbook as we move beyond produce with the next phase of our transformation. We will continue with our pricing strategy across markets, categories and items.

This year, however, you will see a more intense focus on getting to fair price plus promotion as we layer deeper investments across specific markets such as Chicago. This is what we call value transformation, as it involves removing price as a barrier to shopping our stores while also highlighting our great service, a quality assortment and a convenient neighborhood location. We are confident that a more intense market focus is the most effective way to transform our pricing, educate our customers and drive sales.

We will be aggressive in our communication with customers and bold about the changes we have made to improve our value proposition. As we've said previously, SUPERVALU will pre-fund investments through a combination of operational efficiencies, effective promotion and vendor support. Recall that we completed the first round of our discussions with our suppliers this past September. Thanks to these meetings, we are now aligned on strategy and our suppliers are stepping up to play an important role in the actions we take this year.

Our long-term strategy is to bring pricing in line with our primary conventional competitors and narrow the gap to discounters. I think it's important to reiterate what Sherry mentioned earlier. Each price investment we make to achieve our sustained competitive strategy will impact ID sales in the near term. We have been keenly aware of this and it is built into our plans. Over time, however, these decisions will improve unit volume as they did in produce and bring incremental traffic as well as change perceptions of value at our stores.

Hand-in-hand with value is our continuing emphasis on delivering a compelling in-store experience through our convenient neighborhood locations. The first stage of our move to hyperlocal retailing put more control in the hands of our store directors to engage with communities and make our stores better reflect neighborhood preferences. Today, we are focused on sharing best practices and scaling learnings to similar profile stores for maximum application.

Our store directors are excited about hyperlocal retailing and are actively sharing their insights on SUPERVALU's internal social network. Social technology has allowed information to spread quickly and spawned collaboration across stores throughout the year, especially during key selling events and holidays. For us, momentum is just starting to build. Through deeper community engagement and an improving in-store experience, we will gain greater relevance with our customers as we better serve their needs.

Hyperlocal retailing is complemented by our strong real estate position and a localized approach to store remodels. We are ensuring the appropriate level of store investment by using a localized remodel process, which incorporates input from store directors, customers and banner management to ensure that our remodels are right for the store and meet the unique needs of the neighborhood.

Accordingly, a store in a large urban center like Chicago will have a different need and more a different level of investment than one in a less densely populated rural market, like certain parts of our Intermountain West division. These limited and expensive remodels, however, must all meet the same after-tax hurdle rate of 15% and we track their performance for 3 years, following the project's completion.

We continue to take a thoughtful approach to store remodels that will keep our stores fresh and inviting for our customers across the neighborhoods we serve. We expect business growth to start with improved performance at our traditional retail banners, but it will also be driven by Save-A-Lot and our independent business. Save-A-Lot finished the year with 1,332 stores and network IDs of 3.2%.

We know that Save-A-Lot's hard discount strategy requires an uncompromising focus on operational efficiency and delivering compelling customer value. From procurement to merchandising to operations, we are being very thorough and believe that there are significant opportunities to bring innovation to enhance efficiency and the in-store experience. Low prices and great value are important to our customers, and our goal is to make this format even more compelling.

In fiscal '13, we expect to add approximately 50 Save-A-Lot stores to our network and are on track with our goal to open 250 Save-A-Lot stores in food deserts within the next 5 years. At present, we now have a total of 740 Save-A-Lot stores serving food deserts, representing nearly 56% of the entire network.

Moving to our independent business, it continues to be a very stable revenue stream for us and a business that offers reasonable growth prospects. Like-store shipments remain positive in fiscal '12 and our retailers continue to invest in their businesses, opening new stores and completing remodels to maintain their positive momentum. We serve as the primary supplier to 1,900 stores and provide product to another 750 on a secondary basis.

Before I wrap up my comments, I want to emphasize the progress that we've made on our environmental efforts. Sustainability is an important part of our role as a strong corporate citizen and these efforts also make solid business sense, particularly in an environment of cost control. I'm pleased to report that 54 stores were recognized as 0 waste stores, diverting 90% of their waste away from landfills. We now have 491 stores participating in organic diversion or composting programs. Energy consumption, on a like-store basis, declined almost 4% through a concerted effort toward practices such as installing high-efficiency lighting and adding doors to open multi-deck cases.

Across-the-board, from sustainability efforts to our 8 Plays strategy, everything we are doing is focused on growing sales, controlling costs and investing in price. We made meaningful progress this past year and we enter fiscal '13 in a stronger competitive position.

In closing, let me reiterate that fiscal '12 was a foundational year for SUPERVALU as we delivered on our EPS guidance, made meaningful debt reduction, invested capital across our assets and made great strides to improve operations. We expect fiscal '13 to be another year of solid progress as we continue to execute on the transformation plan that we outlined last year. We enter the new fiscal year as a leaner company, committed to a business strategy that will make us a more competitive retailer.

I'd like to thank all of our associates for their continued dedication and support. Our 8 Plays strategy is gaining traction, and our success in the coming year will be the product of our continued efforts to win for our customers with a great assortment, unmatched service and sharper prices. I'd now like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Hey, could you update us a little bit? Craig, is there a philosophical change on the pacing of price investments? I know in the past you had talked a little bit about taking it slowly. It sounds like the way you went about it this more -- the past couple of months of produce is a lot quicker than what you normally did and maybe the way you're talking is about doing it a little more quickly going forward as well. Just -- if you could just update us on that a little bit, that'd be helpful.

Craig R. Herkert

Good question. No, there is no change in philosophy. We have always intended to be as aggressive as we can, knowing that we need to fund the price investments before we do them. So we're happy with the progress the team has made in the last fiscal year and we look forward to making more progress going forward. But it is not a change in strategy. We are committed to funding these investments before we make them.

Operator

And our next question comes from the line of Meredith Adler with Barclays.

Meredith Adler - Barclays Capital, Research Division

I guess I just want to follow up on that a little bit. I guess I did hear a slight change in how you might be thinking about making those price investments. It sounded like you wanted to be more sort of focused market-by-market and then at the same time to emphasize the great locations and the convenience. Is that right? Is that -- are you going to think about region being more important than categories or items?

Craig R. Herkert

It's both. First of all, good morning, Meredith. We are, in fact, going to be holistic in our price investments and our value transformations, things like what we did last year where we invested significantly in produce across the enterprise. We will continue to see elements of where we do things across the enterprise and we will see elements where we focus on a market. But it is, in fact, a holistic view as we go through this transformation.

Meredith Adler - Barclays Capital, Research Division

And then maybe you could just talk a little bit more. You commented that customer perception of freshness had gone up, which I presume is tied to a lot of the shrink tools that you put in place, especially for produce. But I was wondering whether you got any feedback yet about pricing in the produce department or you feel like it's just too early to get people to comment on it.

Craig R. Herkert

Well, there's 2 ways I'd answer that. One is we do measure rigorously and regularly our price gaps and we know for a fact that we have had the intended result on narrowing the price gaps or changing the price gaps. So that's -- the fact is we continue to maintain and watch that and that's extraordinarily good news. We have not seen that customers have seen a measurable image change with this. It is important to bear in mind it is only 10% of the store. The good news is, as I highlighted in the call, we are seeing change in behavior, which is exactly what we had hoped to see. And I think that change in behavior is, in fact, part of why the freshness has gone up. It is, of course, due to some of the tools that we put in place. But I think, Meredith, it is important to note that because we got the fair pricing, we are able to turn our fresh produce products on a regular basis much more frequently and not simply sell so much of that when they're on sale. So it is -- it's had the intended very positive impact of improving our freshness, along with the fact that our produce managers have really embraced the new tools to order differently and to assort their stores appropriate for the neighborhood and for the time of day and things like that.

Meredith Adler - Barclays Capital, Research Division

And I'm sorry, I'll just ask one more question about the economy. You operate in some densely populated, probably relatively affluent areas. Do you anticipate that an improving economy will be beneficial to you and maybe you should comment on gap prices and what that might mean?

Craig R. Herkert

We are operating with the assumption that the economy remains sort of in a -- the place that it is and so our goals on value transformation will continue regardless of what happens in the economy. Our focus on hyperlocal continues regardless of what happens to the economy. The good news is with our hyperlocal focus, our stores have much more authority today to assort and to promote their store appropriate for what is happening in their community because, as you highlighted, depending on where the store is, the community might have a very different view on what's going on economically. I think we're well positioned this year to make sure our stores are appropriate for their community. And on gas prices, I think it's just part of the overall mix. Certainly, we know that it is a concern for consumers and it's just another reason why we need to make sure that our value transformation happens at an appropriate pace.

Operator

Our next question comes from the line of Ed Kelly with Credit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

Thank you so much, by the way, for the increased disclosure on the multiemployer pension plans. I was just curious if you could help us understand what that underfunding will look like if we used fair value of the liabilities.

Sherry M. Smith

I think, Ed, as you know, the way the PPA rules are, we have calculated in accordance with that and I think as well as you look at SUPERVALU's plan, our annual expense has been in this $130 million to $140 million really over the last 5 years. So part of that is due to the fact that we do have -- many of our employees actually are not in a multiemployer plan even though they're union associates. They are in certain 401(k) plans, so when you look across the spectrum of our total employee base, this represents the ones that are in those multiemployer plans. The average rate used here is about 7.5% as that calculation was done on that liability for $1,068,000,000.

Edward J. Kelly - Crédit Suisse AG, Research Division

And on SG&A, I'd like to ask you about just this one. You've done a great job of controlling costs and you hinted, in fact, that there's more cost cutting to come here over the next few years. I was hoping that you could provide a bit more color on where the cost cutting comes from. And then this is a business that, I guess, if you think about it on a normalized basis, has some normal level of inflation. And I guess I was curious as to the point that you see SG&A beginning to grow again. I mean how far away is that realistically?

Sherry M. Smith

Starting with your first, when we talked about the workforce reduction that we had done, about 800 associates in February, that's related to a lot of the savings in fiscal 2013 of at least $75 million that we talked about. We have an efficiency review that we have underway and with that, we will continue to outline our roadmap for that here as we move into this fiscal year. The things that we've done so far really tie in with our business transformation. As we've had the tools, as we're able to simplify across the business, there are different, call it, layers at different levels that we're able to do things more efficiently in utilizing the tools. It's also as we move towards common systems, we will see again more ability to do things efficiently across the organization. And the focus that we have as one company, as we are organizing certain of our functions more holistically allows us to be able to reduce our costs and still certainly clearly operate the business and increase the efficiencies in which we do that. I think as you ask on when do we add, again, today, we are not adding or growing our store base a lot. And so as we think about how we deploy our resources, it's to make sure they're deployed against the right initiatives and as we focus -- as our organization focuses on what the key initiatives are, we are able to again deliver on the earning guidance that we've provided for fiscal '13.

Edward J. Kelly - Crédit Suisse AG, Research Division

You think with the initiatives that you're thinking about, that it's realistic to think about SG&A as being, in dollar terms, being down over this period, over the next 3 years, is that something that's achievable, do you think?

Sherry M. Smith

I think as we said in my prepared remarks, as we establish this roadmap, we will come back to you and tell you about what that roadmap is for SG&A. Certainly, we view that we will clearly offset the rates of inflation and then if there's more to that, we will provide an update.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And then last question for you. Supply chain services this quarter was a little disappointing, I guess relative to where we were. I don't know if it was for you as well. But could you just maybe provide a bit more color on what happened in that business this quarter?

Sherry M. Smith

I think that business you need to look at always as a full year, and so the business runs at about a 3% EBIT margin rate. And for the full year, that is delivered and so there's always, from time to time, some quarterly shifts in that business cycle. But overall, we have now finally cycled all the Total Logistic Control and the Target so we will have more comparables as we move into fiscal '13.

Operator

And our next question comes from the line of Ajay Jain with Cantor Fitzgerald.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

I had maybe another variation of the same question that was asked earlier about price investments. And Craig, I know you've been very clear in the past and I think even in your prepared comments today that any incremental price investments have to be prefunded. And I really just want to confirm that, that approach is 100% consistent with your outlook for fiscal '13. I'm just trying to get a sense for whether, going forward, you might consider being more aggressive on pricing based on any change in the operating environment, if you felt like you needed to drive customer traffic, if you might consider being more aggressive even if you don't have -- necessarily have 100% of the targeted cost savings in place.

Craig R. Herkert

Well, we are committed to prefunding our price investments, as I said. We actually are fairly confident and comfortable with the plan that we have for fiscal '13, that it does address some very important areas for us. So we are committed to prefunding our price investments, and we'll be moving at an aggressive pace.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

And as a follow-up, I think it's been a while since you guys did your strategic review of all your operations, and so I had a hypothetical question. If there was a strategic asset that you were inclined to dispose of at some point, would you consider doing a dilutive asset sale if it had the potential to stabilize the earnings base longer term?

Craig R. Herkert

Well, obviously, I wouldn't comment on that. What I would say is this management team, along with our Board of Directors, has a regular review of our strategies, including all of the assets that we have. Beyond that, I wouldn't comment.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And if I could ask one final question. Just in terms of your planned headcount reductions that were announced recently, can you comment at all on how much of those cost savings you're planning to redeploy in price investments? Does any of that flow through to the bottom line, or is it all reinvested in gross margin?

Craig R. Herkert

I don't know that we would target very specifically that number. What we do target is all of our saving including that and we deploy -- obviously, the best majority of that is deployed into reducing our costs as I think we saw in our F '12 results -- reducing our retails, excuse me. So we don't break it out by cost savings area, but we are tracking very specifically what we invest in price.

Operator

Our next question comes from the line of Charles Grom with Deutsche Bank.

Charles X. Grom - Deutsche Bank AG, Research Division

I'm just wondering if we could just dive into a little bit, the customer count improvement really showed a nice improvement. I'm wondering how much of that was success from the Wish Big Win Big program that you ran this quarter, which I believe was in about 40% of your stores and wondering how broad-based the customer count improvement was across banners.

Craig R. Herkert

It's -- obviously, we felt good about Wish Big Win Big as we continue to learn what sort of appropriate games work in our business. That certainly had part of it. As we said earlier, part of it would be ascribed to our value transformation that we have done. And frankly, part of it is because many of our stores are really embracing the hyperlocal initiatives, becoming more relevant. So it is broad-based, it is across the enterprise, it is not everywhere.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. And then on the comp guidance for the year, just wondering. You're probably 6, 7, 8 weeks into the quarter. If you could give us a little bit of flavor on how quarter-to-date sales are relative to the down 1.9% that you did in the fourth quarter?

Craig R. Herkert

Yes, we really aren't going to comment on this year primarily because Easter falls or fell 2 weeks earlier, and as you know in the food business, that has a dramatic impact on customer shopping, so we're going to make sure we finish this quarter.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. And then to Sherry, the inflation was up 4.5%, I believe, commensurate with the second and third quarter for you guys, yet your LIFO charge was considerably lower. Just wondering if you could give us an explanation on why. And then within your guidance for '13, what you're thinking about LIFO.

Sherry M. Smith

Sure. So in regards to the fourth quarter, we were anticipating possibly a slightly higher inflation rate, sort of be up to the 5%. But we came in nicely at 4.5%. We also did a very nice job of managing our inventories. As you know, coming through the seasonal time for SUPERVALU when our year end ends in February, the teams across and again some of the new tools that we have being able to really take advantage of that, focusing on back rooms, focusing on inventory processors as well as in our distribution centers as we manage our inventory. So all those factors are part of LIFO and it is a point in time at the end of the fiscal year.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. And then for '13, what do you -- what's embedded in your guidance?

Sherry M. Smith

So we said 2% to 3% is what we would view as the overall inflation rate. Certainly, it'll start out slightly higher as we move into the fiscal year, but closer to that 2% to 3%.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. And how about a LIFO charge, about half of the rate or half the charge you incurred in '12, is that reasonable?

Sherry M. Smith

Generally, it'll be somewhere in that range, just slightly up from that.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. And then just a final question. As I look at the delta between your total sales growth or total sales decline of down 4.8% and the ID of down 1.9%, that spread widened a lot in the fourth quarter. Is that mostly because of the fuel centers that you closed?

Sherry M. Smith

Yes.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay, and then the $500 million decline, is that just basically for the first 3 quarters of '13? Is that how we should model it?

Sherry M. Smith

The fuel centers, if you recall, they closed during the fourth quarter so we did have some fuel sales, probably in about half of the fourth quarter.

Operator

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

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

I just want to kind of get back to the pricing discussion we had. It sounds like you guys got a little bit more aggressive in the quarter. It looks like about the ticket that that's the case and has some positive results in traffic. Delhaize has made comments that they are getting more price focused and our own surveys are now suggesting that it looks like Kroger may have stepped things up recently. And all this, according to our data, is in reaction to the consumer that seems to be balking at higher prices. So as I look across this and the kicked up activity, how does this, generally across the industry, give us a warm and fuzzy that we're not going to get into a position unless the consumer gets really a lot better that your activity, Delhaize's activities, maybe Kroger's activities are kind of the opening chapter in a pricing environment that's going to get a lot more challenged?

Craig R. Herkert

Well, I can speak to where we are. We think it is really important to get our value proposition right. Where we have done it, we have seen a very positive customer reaction to it. I don't know that I would look at the current environment as being that unusual. I think in this industry, you have -- any time there are economic challenges, you have retailers repositioning their price. I don't know that I would view it as being wildly outside the norm. And clearly, with the economy the way it is, value continues to be important. But for us, it's a combination, Scott, of making sure that we get that base price right, we call it fair pricing. By continuing to use our promotional strategy, we have a very effective promotional strategy. And as you know, for most of our traditional retail stores, we are, in fact, promotional merchants and we will continue to do so. So it's a combination of making sure that we're competitively priced, that we're fair priced and that we continue to have direct promotional strategy. I don't know that I would say much more beyond that.

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

Okay, that's helpful. And then I wanted to go back to what Ed was talking about, distribution and the profitability there and hopefully I didn't miss something. But it seems like the distribution gross margins came under pressure and retail really didn't. And I was wondering if you could tell us what the differences would be that would drive that where retail gross margins would hang in or distribution would be under pressure.

Sherry M. Smith

In the fourth quarter of last year, we still had some TLC in the profitability, that sale occurred at the end of December and so you've got some shift in business mix in terms of rates there that flexed it. And so again if you look at the full year, the independent business EBIT, as a percent of sales, is about 3%.

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

Okay. Because sequentially, though, from the third to fourth, we really had a step-down it looks like in the gross profit distribution which didn't occur in retail. I know it's just a line to understand it a little bit better, but maybe that's part of it. And then my final question really goes to kind of a philosophy of the board and kind of the management team where if we saw -- run some numbers and you look at particularly your Save-A-Lot business because I think you said comped at 3.2% positive, it's a growing business. If you look at the valuation in the marketplace of comparable businesses, some of these dollar stores where they trade on an EBIT, EBITDA, I know there's a low cost basis there, but I think you could probably do a tax-free spin of that business, that would be accretive. And I'm just trying to understand, with the stock as bad as it's been, kind of where management's head is, where the board's head to get shareholder value here.

Craig R. Herkert

Yes, Scott. I think I would just reiterate what I said earlier. Management and the board have a regular process of reviewing the business, the business performance and the best way to achieve shareholder value and we review that regularly with our board.

Operator

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

Deborah L. Weinswig - Citigroup Inc, Research Division

In terms of Save-A-Lot, can you dive a little bit deeper into when we might see the store openings accelerate? And how should we think about the split between franchise and owned at this point?

Craig R. Herkert

Let me not comment on the first question. What I would say is, as you know, we brought in a new President and CEO last year, Santiago Roces. He and his team have gone through a deep dive, understanding the business, and as we highlighted in our prepared comments, really focus on efficiencies and bringing even more value. We are happy with the fact that we were able to add 52 stores last year. We'll continue to add stores this year. And we still believe that there is a significant opportunity to grow that business. Part of this will certainly depend on the economic situation for our independent licensees. And we continue to see that the majority of these stores will be owned by our independent licensees.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then secondly, in terms of the shrink opportunity in the coming year, will the majority of that be technology-driven or process-driven or both, and I wasn't sure if you were able to put a dollar amount around that.

Sherry M. Smith

We'd said that it'll be a 20 basis point improvement is our goal here for fiscal 2013. And there's a lot about the process improvement because of the tools are rolled out so it's really rolled through all of last year, if you recall. And so as we get better and better about utilizing the tools and then there'll be some additional improvements as we go forward.

Craig R. Herkert

And I would say certainly it's technology-based but the great news is, Deborah, the technology is there now. Now, it's about executing against that technology, and as I mentioned in my prepared remarks, this is really a year of execution. One of the things that we see on our social media site is the great results we're getting from those stores that are utilizing the tools and embrace the new processes. So it's a combination of tools and, of course, processes and now it's all about executing against it.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then with regards to the higher advertising spend in the quarter, could you give some more specifics around that? And do you think that helped drive the stronger comp in the quarter?

Sherry M. Smith

It's just one of the factors in the margin, and as we've been very focused with our marketing strategy all of this year in identifying where we believe are the right spend, that again we have the strategy as we move into F '13 to be more targeted with our overall spend and where we believe it's appropriate to drive the right sales.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then last question in terms of the change in the business mix, did that kind of move in the direction that you hoped it had? And what would you -- if you had kind of -- if you had 3 wishes for next year, what would you like to see in terms of the business mix? And where would you like to see private label continue to move towards?

Craig R. Herkert

Let me take the private label question first. I am just thrilled with the feedback we're getting from customers on our Essential Everyday launch. It has been embraced across the country. This is really, really good news for us. Our private brand team has not only converted the older labels, the wildly disparate labels we had into Essential Everyday and not missed a beat, but in fact have developed some fairly innovative products along the way. I also like the movement that we've made on Shopper's Value and Culinary Circle. So I think there's good news. We have thousands of SKUs coming this fiscal year on Essential Everyday as we will not complete, but did essentially complete on that transition. We've also committed to our independent grocers that will be introducing Essential Everyday starting this fiscal year to our independent grocers based on the very positive feedback that we've received from our traditional stores. So I think nice headway there and I think a nice opportunity going forward. And Sherry, I'll let you comment on the mix of the business.

Sherry M. Smith

We think essentially, Deborah, in our gross margin, as we said for guidance for next year, aside from the change due to fuel, we would anticipate it to be essentially flat for the full year, particularly in the retail. And when you look at that, actually our retail gross margin for the last 3 years has been in about the same range at this 27.34% or 27.5%. So again, the funding activity and the price investment all provide for us to maintain our margin rate.

Operator

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

Stephen Shin - Morgan Stanley, Research Division

This is Stephen on for Mark. Quick question on the improvement in traffic. You guys talked about that you've finished the reset in produce in early 4Q. So did you see traffic trends or the customer counts improve throughout the quarter?

Craig R. Herkert

Yes, generally speaking, yes. We have seen the results we had hoped to get from our value transformation in produce are happening as we had hoped to get them. So yes.

Stephen Shin - Morgan Stanley, Research Division

Okay. And then for the guidance, you guys talked about that the strategy improvement should hopefully show up in a bigger basket size, I guess it should show up in basket size first. So for the year in your ID guidance, your -- the upper end of the range would imply just the improvement in basket size. Are you hoping to see some traffic improvement in there as well?

Craig R. Herkert

I think your assumption is correct, mostly basket size. One of the things that we've seen particularly in areas where we've done value transformation is our first opportunity is to enable the customers we already have in our stores to do more of their shop with us. That is our first goal. Over time, we will continue to advertise to a broader group of people and invite more folks into our stores, which will increase traffic. But it happened sequentially. First things first, the folks were already in our stores, shopping for our promotions, enabling them to feel good about shopping more of their basket with us.

Kenneth B. Levy

Well, thank you very much for joining us on today's call. We'll be around for the rest of the day if you have additional questions. And there is a replay of this call available on our website. Thank you for your time.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. 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!

Source: SUPERVALU's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts