SUPERVALU F3Q08 (Qtr End 12/1/07) Earnings Call Transcript

Jan. 8.08 | About: SUPERVALU Inc. (SVU)


F3Q08 Earnings Call

January 8, 2008 10:00 amET


Yolanda Scharton - Vice President,Investor Relations and Corporate Communications

Jeff Noddle - Chairman,Chief Executive Officer

Pam Knous - Corporate ExecutiveVice President and Chief Financial Officer


John Heinbockel - Goldman Sachs

Meredith Adler - Lehman Brothers

Perry Caicco – CIBC World Markets

Analyst for Deborah Weinswig –Citigroup

Scott Mushkin – Banc of AmericaSecurities

Mark Wiltamuth - Morgan Stanley

Bob Summers - Bear Stearns

Jason Trujillo - Lehman Brothers

Ed Kelly - Credit Suisse

Jason Whitmer - ClevelandResearch

Patricia Baker - Merrill Lynch

Carla Casella – JP Morgan


Good morning, ladies and gentlemen, and welcome to theSUPERVALU Fiscal 2008 third quarter earnings conference call. Atthis time allparticipants are ina listen-only mode.Later we will conduct aquestion and answer session. Please note that this conference is beingrecorded.

I will now turn thecall over to MsYolanda Scharton, Vice President, Investor Relations and Financial Media. MsScharton, you may begin.

Yolanda Scharton

Welcome, everyone. SUPERVALU’s call today is webcast andwill be archived for afew weeks and you can find this link on our website as well. Before I introducetoday’s speakers, I would like to remind our audience that we areplanning an analystday later this month, January 24th inLas Vegas. If you’re not signed up,we would love to seeyou there. Please email meif you are not yetregistered and we’ll make sure to getyou the details of theday. Our day includes presentations by Jeff and many of our keyexecutives as well as tours of two of our stores.

Let’s now turn to today’s call. On thecall today are JeffNoddle, SUPERVALU’s Chairmanand CEO; and Pam Knous, Corporate Executive Vice President and Chief FinancialOfficer.

And as you know, today’s information presented and discussedincludes forward-looking statements which aremade under the Safe Harbor provision of thePrivate Securities Litigation Reform Act. Therisks and uncertainties related to such statements aredetailed in our fiscal2007 10-K.

After today’s prepared remarks we will have aquestion and answer session and ask you to please limit your questions to one sowe can accommodate everyone. And as always, I will beavailable after thecall for additional questions.

Jeff Noddle

Thanks, Yolanda and good morning everyone. We areplease with theresults of the thirdquarter, representing our sixth straight quarter of double-digit earnings pershare growth. I will provide commentary on theeconomic environment and activities for thequarter and then discuss our outlook for theremainder of the year.

As you arewell aware, consumers have been [bothered] by avariety of economic headwinds inthe current year,starting with theoverall level of fuel prices and today theemerging impact of themortgage credit crisis, allof which have impacted consumer confidence. Infact, the consumerconfidence index declined each straight month August through November which didparallel our third quarter.

Consistent with this as abackdrop, our sales results were slightly softer than we projected, achieving 0.5%identical store sales for thethird quarter, thesame as our second quarter.

Our IDsales were negatively impacted by approximately 40 basis points from thecontinued deflationary pressures inour pharmacy business from theincreased sales of generics. This was slightly higher than thesecond quarter. I would additionally comment that sixof our major banners had positive IDs inthe quarter of atleast 1%, with all butone also cycling prior year positive IDperformance.

Inflationary pressures also continue atan overall level ofclose to 3%. Even with thecertain of the proteinsleveling off just recently, combined with dairy and grain based product, we areat thehighest level we  have seen ina decade. We docontinue to see anorderly pass-through of pricing increases, however. Even though consumerconfidence in Decemberleveled off atNovember’s low, consumers arefar from optimistic about thenear term.

We noted inour Southern California and Las Vegas markets where variable ratemortgages and these types of activities were extensively used, which fueledmuch of theresidential growth inrecent years,  we dosense some real cautiousness by our consumers. These trends continue into our fourthquarter and our full year forecast for IDsales for fiscal ’08 is now 0.5% to 1% versus our prior guidance atthe lower end of a1% to 2% range.

Let meturn to some specific activities inthe quarter. First anupdate on our store development program. During thequarter we complete 49 major remodels, bringing our year-to-date total to 85major remodels, maintaining thestrong commitment to investing inour fleet with our important premium Fresh and Healthy program.

I’m also pleased to saythat for the year we aretracking above theearlier remodel guidance range of 110 to 120, and now expect to complete atleast 125 major remodels. Of thetotal 85 major remodels completed year-to-date, 58 were inthe acquired banners,with 16 at Shaw’s, 15 atIntermountain Region, 12 inSouthern California, nineat Acme and sixat Jewell. Theremaining 27 remodels were inthe legacy SUPERVALUbanners with most at[inaudible] and shoppers. We continue to bepleased with the earlyresults we areachieving in ourpremium Fresh and Healthy remodels.

Turning to new stores, total retail square footage increasedby approximately 2% when excluding store closures. Weopened seven traditional supermarket stores inthe quarter with 18year-to-date. Save-a-Lot opened four company operated stores and 12year-to-date.

I’m also very pleased to comment on our recently announcedacquisition of eight stores inWyoming from Albertson’s LLC,which will close by theend of this month. This is anatural extension of our geographic market area and we can fully leverage ourexisting infrastructure.

Not only arewe very pleased to welcome previous associates back to theSUPERVALU/Albertson’s family, but I’m also pleased to announce that we expectthis transactions to beaccretive to earnings infiscal 2009.

With our upward revision and remodel comp and thepurchase of these eight stores, we currently estimate total capitalexpenditures at $1.3billion for fiscal ’08. Retail capital is estimated atapproximately $1.2 billion or approximately 3.5% of total retail sales.

Although capital expenditures will beslightly  higher than originally planned,we will still achieve planned debt reduction of $540 million by thefirst quarter offiscal 2009, which includes $140 million achieved atquarter one fiscal ’08due to overall strength inour operating cash flow.

At themidpoint of our three year journey, 68% of theacquired Albertson’s properties arenew or newly remodeled over thelast seven years, reflecting meaningful progress toward our 80% goal. That isup from 64% as of theacquisition date.

Second, let megive you an update onour own brand. Following acomprehensive review of our brand portfolio that included alabel rationalization effort; we arenow launching our own brand strategy to our customers and have begun anearly phase out of existing labels that will deliver amore meaningful portfolio of brands that areconsumer-centric.

As Duncan MacNaughton, our Executive Vice-President ofMerchandising and Marketing, previewed with you last quarter, our branding strategywill have three tiers: premium, mega-brands or what we call thenational brand equivalent, and value, and will contain aportfolio of strategically important, consumer relevant product that deliverhigher margin, differentiation and consumer loyalty. Of course, we will maintainour banner brands where they doexist today.

We fully expect by theend of the firstquarter of fiscal 2009 themajority of our own brands will bein allstores. Some examples of our mega-brands are: Wild Harvest, and that meets theneeds of our natural and organic customers; BabyBasics, our brand that meets allof moms’ needs incategories such as diapers, wipes, health and beauty care, et cetera; and HomeLife, our mega brand for general merchandise and grocery non-food products.

Allwill be launched withupdated cotemporary brand marks and package design based on extensive consumerresearch across the USand are beingsupported by enterprise led, as well as banner specific marketing initiative aswe drive an increasingpenetration for our own brand.

Of course, for our price-conscious customer, ourvalue-tier brand called Shoppers Value will have approximately 200 SKUs that expandacross categories throughout thestore. At thetime of theacquisition, our combined own brand penetration was approximately 15%. Our goalis to increasepenetration by approximately 200basis points by thefourth quarter of fiscal 2009, or ayear from now.

Third I’d also like to give you anupdate on our recent activities atShaw’s. As you areaware the New Englandcompetitive landscape hasundergone lots of changeover the last several yearsto include Stop-and-Shop, now anchors off of [Holme’s ] US operations; Hanfordis now an importantcomponent of [Delays’] US Group, and Shaw’s Star Market hasgone from Sainsburyto Albertson’s and now to SUPERVALU, and itis a very significantand important market for us.

As areminder, our attention to theNew England market did begin immediately with acapital focus as many stores were indire need of upgrades to provide thefoundation to deliver on our customer proposition. Since theacquisition, we have opened five new stores, remodeled 30 stores and closed 14under-performing units, demonstrating our active program inthe New England market.

We will continue to fast-track capital investment inthis important market infiscal 2009, with 21 major remodels and two replacement stores. By theend of fiscal year 2009 we will have touched more than 30% of our store basesince the acquisition.

Inaddition, this past fall we upgraded our marketing and merchandising activitiesaddressing customer messaging, pricing, in-stock positions and speed tocheck-out. Utilizing in-store check-out TVs, which every customer will see, we areemphasizing our new messages of More Ways to Save and Fresh LowPrices. Our associates have fully embraced these changesand attired in newuniforms, are our bestsales advocates. Our traction to date is good and we areconfident that we have theright leadership team for  Shaw’s Star Marketas we look to the future.

Finally, another significant activity inthe quarter was ourcontinuing progress on standardizing theAlbertson’s distribution centers tothe SUPERVALU suite ofsystem-driven competencies.Our focus in addition toLancaster, Pennsylvanianow encompasses thefacility in Southern California. Starting with anautomated dynamic pick system for general merchandise and health and beautycare products which is amajor upgrade to theexisting conventional warehouse configuration, which will beup and running this fall.

Standardization provides enhanced functionality includingtransportation capabilities for satellite tracking, seasonal buy as well asreplenishment forecasting and order management and workflow as well as along list to eliminateduplicates in thesystems. As well, supply-chainfacility utilization activity to date include thesale of our Eastern Pennsylvania facility, termination of three facilityleases, and theupcoming fourth quarter sale of thenon-strategic legacy SUPERVALU dairy business inVirginia.

Leveraging SUPERVALU supply-chainexpertise is not only acritical component of our synergy, but italso enhances our overall competitiveness. Weare on track with thisvery important initiative.

Pam will provide further insight into thequarter and I will wrap upwith commentary on our guidance and outlook forthe remainder ofthe year.

Pam Knous

Thanks, Jeff and good morning, everyone.  Thethird quarter of fiscal 2008 represents only thesecond quarter for which we can make meaningful year-over-year comparisonssince our transformational acquisition of thepremier properties of Albertson’s inJune of ’06. And yes, this is thelast quarter we will have to deal with unaligned calendars between thetwo companies. As you allrecall, last year included 13 weeks of theacquired properties and thecurrent year includes only 12.

As Jeff said, we arepleased with our results inthe quarter. ReportedGAAP earnings pershare are up 22% to$0.66 per dilutedshare. When eliminating theimpact of one-time acquisition costs inboth years, up $0.03 [inaudible] pershare respectively and theimpact of the extraweek of $0.03 pershare, diluted earnings pershare increased 23% to $0.59 pershare, clearly delivering theeconomics of thetransaction.

Today, I would like to quickly cover thekey aspects of ourthird quarter results and then update you on our financial condition. Total salesfor the third quarterwere $10.2 billion compared to $10.7 billion last year. Third quarter retailnet sales were $7.9 billion compared to $8.4 billion last year, down thesame $500 million, primarily reflecting one less week of theacquired operations.

Theimpact of store closure activity was also sizeable inthe quarter. Actualsquare footage decreased 2.8% year over year with 76 closures, including 20 forSave-a-Lot, offsetting 2% growth year-over-year from 43 new stores including 21for Save-a-Lot and 0.5% identical store sales.

As we previously announced, we areon track to close approximately 50 under-performing stores infiscal ’08, primarily from theacquired properties.

Supply chainservices net sales were $2.4 billion, up approximately 4.8% from last year. Thestrong sales increase primarily reflects new business growth and lower thannormal customer attrition. Total gross profit margin inthe third quarterdecreased 70 basis points to 22.2%. Adjusting for the50 basis point impact related to thechange inbusiness segment mix, which includes theextra week in theprior year, gross margin decreased 20 basis points.

Themargin rate inthe current year didbenefit from merchandising programs, including costof goods sold synergies. However, this improvement was more than offset bypromotional activities across thequarter and the impactof lower margins associated with fuel sales.

As we discussed with you inthe third quarter lastyear, our third quarter which includes theThanksgiving holiday, continues to beour most promotional quarter of theyear.

Total selling and administrative expenses as apercent of sales in thethird quarter decreased 110 basis points to 18.3%. When adjusting for the40 basis impact related to thechange inbusiness mix which includes theextra week in theprior year, selling and administrative expenses as apercent of sales decreased 70 basis points. Thedecrease primarily reflects lower employee-related costs including incentives,health and welfare, workers compensation and pension, as well as lowerdepreciation expense which more than offset costs related to closed stores.

We also had lower litigation charges and lower one-timeacquisition-related costs inthe quarter than theprior year.

I know thevariability inlitigation charges from quarter to quarter is achallenge for all ofus. As you may recall, our litigation charges were actually higher inthe second quarter ofthis year versus thesecond quarter last year. Now we arelower in thethird quarter this year versus last year.

As you know, timing of these costs is tied to theactual filing of claims allthe way through to theultimate resolution and settlement. Unfortunately, this activity does nothappen consistently across theyear or in any patternyear to year.

One-time acquisition costs were approximately $11 millionpre-tax compared to $15 million theprior year, primarily related to theEastern region supply chainconsolidated costs, consultant fees and retention expenses, We areon track with our guidance of approximately $70 million of one-time acquisitioncosts for fiscal 2008, inline with our original estimate of $145 million.

As I started my remarks, we can now measure for thesecond time our retail performance on ayear-over-year basis rather than just theincrease resulting from combining thetwo companies. Again, when adjusting last year for theextra week to create acomparable timeframe, retail EBIT is up 10%. Retail operating earnings inthe third quarter were$342 million, or 4.4% of sales compared to last year’s adjusted EBIT of $310million or 3.9% of sales.

Retail depreciation was $213 million and $235 million inthe current and prioryear quarter respectively. The50 basis point improvement inretail EBIT as apercent of sales reflects our ability to leverage thescale of our new retail operations, achieve synergies, as well as lower depreciationexpense related to thefinal purchase accounting.

Supply chainservices operating earnings were $69 million or 2.9% of sales compared with $70million or 3.1% of sales last year, which included over a20 basis point deficitfrom contract cancellation fees. Weare very pleased with therecord level of growth insupply chainservices in thequarter and its conversion rateof 2.9%, one of our highest.

Intotal, reported operating earnings forthe third quarter were$395 million or 3.9% of sales, including depreciation of $235 million comparedto reported operating earnings of $367 million or 3.5% of sales last year,which includes $273 million ofdepreciation.

Now I will cover our financial condition. We arepleased with our progress indebt reduction. Debt reduction from acquisition date through thethird quarter of fiscal 2008, our seasonal peak borrowing, was approximately $180million. Total borrowings, including capital leases atquarter end was $9.1 billion incomparison to $9.7 billion atthe third quarter lastyear.

This resulted ina debt to totalcapital ratio at theend of the thirdquarter of approximately 61% compared to 64% atthe end of fiscal2007. We are infull compliance with our debt covenant. Thethird quarter reported EBIT of $395 million, depreciation and amortizationexpense of approximately $235 million, net rent expense of approximately $81million and total debt of $9.1 million. These financial results put us well withinour required covenant levels.

As Jeff stated, our full year CapEx will approximate $1.3billion indicating almost a$450 million spend including theMiami stores inquarter four. We areramped up to achieve this spend level, and we fully expect to more evenly splitthem across thequarters for next year.

To wrap up, thestores that have earnings growth inthe quarter aremany, but include positive IDs, benefits of merchandising activities, continuedimprovement in ourstore operations including store standards, ongoing expense management andelimination of 56 underperforming stores over thelast 12 months; theemergence of synergies, primarily formcost of good savingsand lower corporate overhead costs; and lower interest costs due to lowerborrowings and rates.

I would now like to turn the call back to Jeff.

Jeff Noddle

Thanks, Pam. As detailed inour release, we arerevising our fiscal 2008 earnings guidance to $2.71 to $2.77 from $2.73 to$2.83 previously, primarily for two reasons. First, this reflects our newidentical stores sales guidance of 0.5% to 1% for theyear that I discussed with you earlier. Inclusive of that is anticipating amore cautious consumer.

Second, we have better visibility into thetiming of our synergy-related activities. Our current forecast for synergy forfiscal 2008 is approximately $40 million versus arange of $40 million to $50 million given earlier inthe year. Our fiscal2008 estimate for one-time acquisition costs remains unchangedat $0.20 pershare.

Again we arevery pleased that this revised earnings pershare guidance range will equate to asecond year of double-digit earnings pershare increases. We areclearly delivering upon theeconomics of our $11.4 billion acquisition of Albertson’s premier retailproperties.

We areat themidway point in ourthree-year journey, and we areon track with theother milestones we set out for ourselves on day one of this transformationalacquisition. We said that we would improve in-store execution, we would invest inour fleet, we would create anew culture for thefuture, and we would deliver $150 million to $175 million insynergies.

Since we looked atcompleting our journey, wecan now see that thetimeframe involved tocreate anenterprise-led, banner collaborative marketing and merchandising model willtake somewhat longer than originally anticipated, asneither organization had asufficiently robust ITsystem platform that would deliver thefunctionality that wefelt we needed for thelong-term.

As Duncan previewedwith you on last quarter’s call, we have selected Oracle as our partner tobuild this retail-based platform which separately complements our other Oracleapplications, reducing overall technical infrastructure complexity. But itdoes add some additional time to thechangeover as wemust change bothlegacy systems.

We believe our enterprise-led model supported bycontemporary retail application is critical to our ability to compete inthe future and we’regoing to approach this project and take thetime now as we have with other projects to proceed ina planned and thoughtfulmanner and do itright the first time.

Soas I just stated, our synergy target remains at$150 million to $175 million but a  greater proportion will now fall later inthe third full yearpost acquisition; for example, fiscal 2010, with some merchandising synergiesnot being realized fully until year four.

I’m also pleased to announce our fiscal 2009 capital plan of$1.3 billion, which includes alarger commitment to store remodels. We areincreasing the amountof major store remodels to approximately 165, up from this year’s estimate of125, accelerating progress towards our goal of 80% new or newly remodeledwithin the last sevenyears.

Soto close, taking stock of themid point in ourjourney, we are makingexcellent progress on our many initiatives, mainly our marketing andmerchandising competencies, investing inour stores, systems and people; allbuilding for the longterm yet still operating our business day-to-day. We remain committed toachieving an IDsales goal of 3% or more during fiscal 2010.  I assure you that we aretaking the stepsnecessary across this company to deliver on that goal.

I remain confident that our future is bright, our plans arestrong and our team is committed to thesuccess of SUPERVALU and delivering shareholder value.  As Yolanda mentioned, we look forward tomeeting with many of you in Las Vegason January 24th for our investor day.

Now we’ll behappy to open it upfor questions.



(Operator Instructions) Your firstquestion comes from John Heinbockel - Goldman Sachs.

John Heinbockel - Goldman Sachs

With respect to thesales environment, your sales revenues is certainly not as robust as others,but it’s certainly not terrible. What type of sales performance begins to getyou concerned about share loss, where you have to respond? If we muddle aroundwhere we are today,that would seem conducive to seeing continued margin improvement.

As afollow on to that, is theconsumer such today that spending alot of money promotionally, would that elicit aresponse or is that just awaste of capital?

Jeff Noddle

Thanks, John, as always there’s alot to your question. Interms of sales, obviously if you go negative comps I think that would bea much higher level ofconcern. Although we had hoped and planned and thought we’d doa little better inthe quarter, we stilldid the same inthe third quarter aswe did in thesecond.

But I dothink, John , it’s worth mentioning that I think people quickly forget when Iread – we followed and tracked and read allof what was said about theAlbertson’s properties prior to theacquisition about thecondition of thestores, about thecondition of certain markets and thekind of remodel activity that would need to bedone, in fact thoseproperties were running negative comps when we acquired them. We’re still only ayear-and-a-half into this and I think theexpectation of what is accomplished over that period of time certainly sometimes gets ahead of itself.

We’re keeping insight very clearly what we set out to dowhen we laid out this plan inJanuary of 2006; we have got to remodel these stores. We had some early bettersales results than we anticipated. I think we got as high as 1.7 one quarter inthe first year andthat was very pleasant to seebecause I think people felt better about their future. I think that playedthrough.

Now the consumer environment istougher, the competitive environment is tougher because the consumerenvironment is tougher, but I think we’re still pretty much on plan and ontrack.

To answer your question, if we wentnegative comps with theinflation running where itis, obviously that would bea concern to me. Butyou also have to factor that we have alot of stores that we’re closing, Pam mentioned 50 stores. When we look atmarket share we take alot of things into consideration.

As far as putting more money intopromotion, there are some markets where are putting more money into promotion.There are some markets where we are investing strongly in everyday pricing.There are some markets where we’re just changing the mix between the two.

I don’t feel that anybody can justendlessly pour capital into promotional activity and expect to build long-termcustomer loyalty, because we’re going to build long-term customer loyalty byremodeling these stores, improving theexecution in ourstores, delivering against perishables expectation better. We’re just not goingto lose sight of those long-term strategies, even though we arein atougher environment.

I hope that answered your question.

John Heinbockel - Goldman Sachs

Just one final thing. Getting to the3% goal for 2010, how much of that is driven by theremodel program which gives you anautomatic lift to comp? Is that half of thetwo-thirds of it, more? That hasto be thenumber one driver to getyou there, I assume.

Jeff Noddle

I think it’s themost important changewe’re making to thestores because it’s not just theremodeling job it’s also what we aredelivering within theremodel. That’s thepremium Fresh and Healthy merchandising changes.That doesn’t mean we can’t still deliver some of those new merchandisingactivities in storesthat aren’t fully remodeled or just have minor remodels.

I consider that to bea keycomponent, ingredient inmaking that 2010 number happen. There area number of otherthings that are moresubtle and meaningful to and we’ll betalking a lot moreabout those on the 24thof January.


Your next question comes from MeredithAdler - LehmanBrothers.

Meredith Adler - Lehman Brothers

I’d like totalk a little bitabout the systemsproject. I’m not sure Iheard properly, but does itrelate to your merchandising effort and then my real question is, you moved alot of people fromBoise this summer, could you comment on how that whole process ofintegrating your merchandising department and your relationships with vendorsis going?

Jeff Noddle

Meredith, first just to make clearwhat we said about thesystems project that relates to merchandising. When we initially laid out ourplan we assumedwithout knowing enough indepth about the Albertson’smerchandising andprocurement system that either ours or theirs would facilitate what we neededfor the longrun.

When we got inand really learned agreat deal more about their system and of course evaluated our own systemscapability to take on anenterprise such as this size, wesaid that neither one really serves thelong term. Sowe had a choice tomake. Did we want togo ahead with one or theother which would facilitate aquicker resolution ofbringing on to one standard platform, or did wewant to take the timenow to really do thisright for the longterm?

Thedecision that we made, and we’re always going to make these decisions is that inthis case it was anOracle decision, but thedelay is probably sixmonths or so on our fullyrealizing our merchandising synergies, because it’s just going to take moretime to convert both sides of thecompany rather than just converting one.

Sothat is very simply what that decision wasabout, even though that drags itout a little bit into thefourth year, it’s clearly theright decision and we’re going to make those right decisions for thelong term.

I would add that theonly two decisions that we have made that arereally different than what we laid out interms of our timeline for thethree years, if you think about it, was theOracle decision in merchandisingand the decision thatwe made to add the Tsquare because we were very pleased with our results from theHopkins, Minnesota facility to add that into the Lancasterrationalization. Those really arethe only two decisionsthat have affected our timeline whatsoever. Otherwise, we think we areexactly on thetimeframe that we have laid out.

Themove of people from Boise,we had probably 100 or sopeople that moved this summer. That again hasgone right according to plan and on time. We did getslightly less percentage of people – very slightly less – than we had hoped to getto move. That wasn’t unanticipated, but you always hope to getmore, so we arefilling in thosepositions now. We will belaunching an efforttoday throughout thecompany to begin to movesome of our talent from our banners inthe regions into thesepositions over thenext year. That effort begins today across thecompany and really formalizes that process that is underway.

Sowe think we are ontimeline; really, theonly decision that hasaffected that timeline is, as I mentioned, theOracle decision. I amnot going to say, Meredith, that allof our merchandising improvements and changesare dependent upon allof that structure being inplace, because that is not true. But for itto be fully andcompletely realized, we aregoing to have to have allof those people inplace and that system technology inplace as well.

Meredith Adler -Lehman Brothers

When you look around – and Idon’t expect you to talk about individual regions, but when you look around ateverything you have acquired, and for that matter, your legacy banners, isthere anything that is either very disappointing versus your priorexpectations, or simply haschangedsignificantly?

Jeff Noddle

Meredith, I don’t think anything hasreally changedsignificantly. I think theconsumer is probably tougher than we would have anticipated, looking back twoyears ago now as wecontemplated this transaction; or I guess just about announced this transactiontwo years ago. I think theconsumer environment and theinflation higher is alittle tougher, and that always leads to atougher competitive environment.

There aresome minor things that aredifferent in some of themarkets that we acquired, than we anticipated. As I have said consistently, wehave never been surprised by amajor difference than what we had anticipated when we entered thetransaction.

Meredith Adler -Lehman Brothers

Sothe weakness is notconcentrated or localized inany particular area, itis more widespread?

Jeff Noddle

Well again, we don’t commentspecifically on markets, but we did comment that sixof our major markets have atleast 1% comps or better. That is on top of almost allof them but one having positive comps ayear ago. So when youstack them year over year, thecomps look a lotbetter than what people seem to comment on.

Meredith Adler -Lehman Brothers

Those aresix out of how manydivisions or banners?

Jeff Noddle

Themajor ones would be 11and 12 major markets, and we areleaving out some really small markets for us that may have positive ornegative, but we arejust leaving those out of theequation.


Your next question comes fromPerry Caicco – CIBC World Markets.

Perry Caicco – CIBC World Markets

Jeff, I wonder what your outlookis for gross margins over thenext 12 months? Should we beassuming that you will have to befairly aggressive to drive business atAlbertson’s and in theface of the consumerweakness, that you will bebattling costinflation? Or, is there some upside from greater purchasing power andmerchandising programs to partially offset that?

Jeff Noddle

Well, Perry, I amvery careful to not comment specifically on our gross margin, but as ageneral comment as you saw inthis last quarter inPam’s comments and my comments, what we said is that we realized somemerchandising benefit, but they were offset by some promotional spending. Theend result is if you adjust for theadditional week and mix change,we did have a slightdecline in grossmargin.

Our outlook for thefourth quarter looks ata similar trend interms of sales, as we said inour sales guidance. One can assume we arelooking, at least for thefourth quarter, as thesame.  When we give guidance for nextyear, we will have more to sayabout that outlook then.

But I think we arealways weighing between, as we moveforward in thistimeframe, we aregoing to always gain more and more merchandising synergies, without question.But anytime we arealways weighing how much dowe spend, what is thepromotional activity that we need, what arethe sales results bymarket? Those variables arealways going to be there,but at least for thefourth quarter I see itsimilar to what we’ve been doing over thelast several.

Perry Caicco – CIBC World Markets

When you refer to merchandisingsynergies, Jeff, areyou including thegreater combined purchasing power of thetwo companies? I amjust wondering where you areon that specific part of theproject.

Jeff Noddle

I amincluding that, Perry, and I would describe where we arein that project as, wegot some early wins that we were able to dobecause I think we said even before we closed on thetransaction we did asignificant comparison between major contracts between thetwo companies and then after we closed we went on to really dive down evendeeper. So we got someinitial benefit from that. Now we arereally just starting, over thelast few quarters, to really start to leverage our national side to scale. Iexpect that to have anincreasing impact as we go forward. Because as we got thepeople in place, wenow have thecapability; additionally, allthe time to better leveragethe entire scale of thecompany. I think you will seethat impact over thequarters as we go ahead.


Your next question comes from Deborah Weinswig – Citigroup.

Analyst for DeborahWeinswig – Citigroup

Jeff, can you provide us anupdate on theperformance of thenewly converted premium Fresh and Healthy stores? I know inthe past quarters youhad given some examples. Hasthe more challengingconsumer environment impacted those newly converted stores as well? Thanks.

Jeff Noddle

We said we were very pleased with our initial results.Remember, we said that we had 49 remodels done inthe quarter, butprobably the vastmajority of those arelate in thequarter. It is veryearly to measure theimpact of those.  We did give examples,but I will tell you that we areseeing sales gains year over year on those remodeled properties, and that iswhat this is about. As we getmore in thebasket, if you will, we fully expect that to help us toward that 3% goal infiscal 2010 of stores.

One important thing about this:  we actually show one of these stores inLas Vegas on January 24 and we hopeall of you will have anopportunity to join us there.

Analyst for DeborahWeinswig – Citigroup

Regarding your supply chainservices business, you guys showed lower than normal customer attrition inthe quarter, but yetstill guide overall 4% to 5% attrition for theyear. What is happening there and how should we understand thefourth quarter?

Jeff Noddle

We arecontinuing to getenough new business to more than offset theattrition. We have said for along time that is whatthat business is about. Theattrition rate we setout on a historicalbasis was 2% to 4%; we updated itmore recently for 4% to 5% based on activities that went on last year. We havebeen able to gather and garner new business. We said itwould be alow single-digitbusiness net over the longterm, and we were on thehigh side of that this quarter. I think that was avery positive result.


Your next question comes from Scott Mushkin – Banc ofAmerica Securities

Scott Mushkin – Bancof America Securities

Jeff, when you look atwhat you are doing,you have remodeled alot of the stores andI know you have updated some of themerchandising. When you look atthe comp that iscoming in, I guess theassumption is traffic is down if you areseeing about a 0.5.What do you think is themain cause of people choosing to shop away from you atthis stage, given theactivities you’ve done?

Jeff Noddle

Scott, I wouldn’t quite describe itthat way. We never anticipated significant like-store sales increases until wegot a number of thingsin place. We have saidthat – we said it on January 23, 2006; we have said itevery quarter since. That is that we have got anumber of things we have to accomplish. We have to geta significant numberof these stores remodeled.

As I mentioned earlier inthe call, people notequite a bit about whatthey thought thecondition of theAlbertson’s properties were before we acquired it. We arestill only 18 months into this project, and really just starting now to realizethe remodels gettingcompleted. We are nowgoing to get 125 donethis year. We have now established 165 as thebase for next year.

You said we’ve got to getenough of these stores remodeled. We have to improve theexecution in thestores. We have to realize thebuying and scale clout, thepotential that we have to bring theorganizations together.  18 months intoit, quite frankly, I think we have accomplished quite alot in that regard.

If you think about it, while we have done that allthe way through wehave had double-digit accretion inearnings. So interms of our expectation, our financial plan didn’t include significantincreases inlike-store sales. As I mentioned earlier inthe call, we have hadhigher inflation than anticipated, but that also causes consumers to adjusttheir purchasing. We have aview into that that others don’t have, particularly through our Save-a-Lotoperation.

I still would say, even though others aren’t saying it, Iwould still say fromour window, we areseeing some trading down. Save-a-Lot hasperformed well this year and I think one of thereasons is because they areattractive to a morestressed consumer.

Where we measure market share, and there area lot of differentways to measures market share, but theones that are mosthighly used in thebusiness, in fact wedon’t show market share declines inmost markets. I think across thebusiness, I think for everyone, we areseeing less trips to thestore and more purchases being done when they dogo to the store, and Ithink that is fairly typical across theretail environment.

Sothis isn’t anything different than what we anticipated or saw, and we havedelivered on almost every metric that we committed to almost two years ago.

Scott Mushkin – Bancof America Securities

Did you have any gain on sales of assets inthe quarter? I didn’t seea cash flowstatement. Maybe I just missed it.

Pam Knous

Nothing material.


Your next question comes from Mark Wiltamuth - MorganStanley.

Mark Wiltamuth –Morgan Stanley

To look alittle farther out, obviously you’re getting some benefits here from thesemerger cost savings,providing some fuel for your growth. Once you arebeyond all thesynergies, what do youthink the good coregrowth rate for thebusiness is? Is itgoing to be highsingle-digits or doyou think you can continue your double-digit growth?

Jeff Noddle

Well, it’s also hard today to settle inon what our long-term goal would be. We have talked about long-term goals inthe past of gettingourselves back to 15% return on invested capital. I think that remains one thatwe keep it our sights.There are alot of dials to dial to getthat.

I think if you look across our industry, I think thebetter performers aredoing sales growth in themid single-digit kind of numbers all-in and they areable to usually lever adouble-digit increase inearnings. I think thebetter performers aredoing that kind of number and we arecertainly going to give this to thebetter performers as much as we can.

Sowithout being any more specific about theout years than that, that certainly is what we aretrying to gear our expectations to and should accomplish, hopefully. But again,I think it’s rather unique that you have atransaction of this size and scale that produces double-digit earnings increasefrom day one for sixstraight quarters and somehow that’s gotten alittle bit lost in allthe analysis that isdone.

Mark Wiltamuth –Morgan Stanley

With some of thesynergies now leaking into thefourth year, is there any further delay inone-time integration costs? Arewe going to be donewith those in fiscal‘09?

Pam Knous

We will give updates on allof our guidance for fiscal ’09 atone point in time; we arenot going to piecemeal itout. So we hear yourquestion, we will definitely address that with guidance for ‘09.

Mark Wiltamuth –Morgan Stanley

I guess what rises itis if you are talkingabout some more systems work to bedone on themerchandising and soforth, does that kind of trickle into 2010 or not?

Pam Knous

Thecosts to implement that merchandising system arenot part of one-time transaction costs. If you recall, we had avery specific set of projects that we were going to implement that match upagainst those; thefacility rationalization, employee retention, etc. Thecost of implementingthat merchandising suite will not bea component ofone-time transaction costs.


Your next question comes from Bob Summers - Bear Stearns.

Bob Summers - BearStearns

Yes, just acouple of things. I’m looking atthe industry growthnumbers from September to November and thesequential acceleration from theprior three months. I amjust trying to think about that regarding theidea about consumer confidence and some trading down and again, trying tofigure out the rightway to think about that.

Second question is regarding theremodeled stores, when is that inflection point? Arewe talking the firsthalf of fiscal ‘09, back half, or is iteven pushed out further than that?

Lastly, you did give us two specific examples. Last quarter theCambridge store which was averagingup 9% and the Fullertonstore which was up 8%. Could you update us on those two specific stores?Thanks.

Jeff Noddle

Bob, I didn’t go back and look atthose two specific stores. I don’t believe thetrends are anydifferent. I looked atit some weeks ago, butif you want the latestI didn’t look at it.But those were thetrends and they have held. Again, we picked those two not because they were thebest, we picked those two because we cited those as examples ayear-and-a-half agoalmost, that these areexamples of theopportunities, so wethought it would beappropriate to come back and update people on those numbers.

As far as theremodels, what’s theinflection point? If we aregoing to achieve 3% or better like store sales for fiscal 2010 -- now that isfor the entire resultsof fiscal 2010 --  we aregoing to have some incremental improvement between now and then. My expectationis as we get moreremodels that we’re going to seea benefit inlike-store sales as we march towards that goal over thenext year plus.

SoI would only say, we arealways going to bemore heavily back weighted because we will have more remodels done and we will beturning the corner onsome of the early onesand expect strong second years as well.

As we proceed through fiscal 2009 we should seesome incremental improvement as we march towards that goal, if we areto succeed at thatgoal and we have no reason now to believe that we won’t.

Bob Summers - BearStearns

Theindustry sales this year,  is thetrade-down phenomenon and theconsumer confidence issue, I mean is that more germane to Save-A-Lot than theother banners? What is theright way to think about that?

Jeff Noddle

I think itis more germane to Save-A-Lot because we have that window. Itis just a very clearwindow into that consumer.  I think thatyou should assume that.  I know othershave commented they don’t seetrading down. We just serve such abroad spectrum across that I just think our window is wider and we dosee trading down, but itis very heavily influenced by our Save-A-Lot window.

If you arelooking across, we haven’t seen some of theretail results for general retail and mass merchants, but theexpectation through thefourth quarter is pretty lean. Theonly one I saw this morning was Circuit City and itwas pretty miserable; minus 11 or something like that.

I think that this phenomenon is there. How we translate thatexactly into food, because our merchandising people arereporting less than expected our expectations areless, but I think that psychology does play true to theconsumers even infood, although I expect us to beimpacted less than some general merchandise type retailers.


Your next question comes from Jason Trujillo - LehmanBrothers.

Jason Trujillo -Lehman Brothers

First, we noticed that inventory haspicked up quarter over quarter more than itdid last year. Can you help us understand why that is happening?

Pam Knous

It allhas to dowith the seasonal peakand as we commented, we were alittle bit more promotional this quarter than last. I don’t viewed itas anything unusual and we arestill focused on our goal of getting aday out by the end of theyear. I think this is just themix that had for this seasonal peak.

Jason Trujillo -Lehman Brothers

As far as with thecombined company, what is theminimum cash balance needed to run thebusiness?

Pam Knous

As we talked about before, we would expect to seecash anywhere probably from about $50 million to $250 million atany point in time,just depending on borrowings against theline, short-term investment. Inany respect, that 50 is about what cash is atstore level. Thegrowth is just really thecut off of thecalendar at apoint in time.

Jason Trujillo -Lehman Brothers

Lastly, just one housekeeping item. What was thetotal store count atquarter end for stores inoperation?

Pam Knous

We will pull that out and Yolanda will getback to you on that.


Your next question comes from Ed Kelly - Credit Suisse.

Ed Kelly - CreditSuisse

Aquestion for you on centralization and procurement. Supermarkets traditionally donot have a great trackrecord of centralizing procurement, rationalizing private label. Can you justhelp us understand why it’s different for you guys this time around?

Jeff Noddle

Ed, like I always say, that we studied hard allthe ones we couldobserve and what we thought went right with them and what went wrong with them,so I guess we have theexperience of their experience. So, we try to incorporate that.

I think also what’s different is those that have not gonewell is because they have moved to acomplete centralized model quickly and initially.  I think that makes thetransition a lotharder; our model for thelong run, not justbecause of transition, is based on more of abalance between local merchandising and national scale. We call ita center-ledcollaboration type approach, which is just anicer word for saying that we aregoing to balance between, we arenot going to lose allof our competency and inmarket knowledge but we want to leverage thesize and scale of thecompany.

I think by that balance, although we’re going through atransition, I think that takes some of therisks, some of that risk concern.  Ithink our business model is somewhat different than those that have done itbefore.

I think if I could draw acorrelation, Safeway went through amodel as I described where they moved very rapidly and they had some toughperiods of time inthere, but they certainly seem to beproducing well now. I think, Kroger hasgone through a moreextended period of time, I think more similar to our approach and they didn’thave more immediate disruptions but they have built competency over time.

We think ours is agood balance between thetwo. Ours is amid-tier between that because we designed itfor the longterm, we will leave some of our good competency and consumer expertise inthe local markets; wejust think our risk is somewhat less.

As far as rationalizing private label, frankly I don’t seea lot of risk inthat. I think the onlyrisk to that is how quickly we can deliver hard numbers, not therisk of losing shares.

Pam Knous

I might mention there, Ed, that our plan does not result inour taking out our strong banner brands; that was some of thechallenge that existed with some of theother retailers. I mean, Jewel will still have its brand, Cub will still haveits brand. Really what we aredoing is we’re supplementing itwith these mega-brands that aremore universal.

SoI think that when we talk about rationalizing our own brand, we areactually doing that different than you might bethinking about some of theothers as well.

Jeff Noddle

Pam makes avery good point. When thecompanies were brought together we had over a100 private label. We aregoing to get thosedown to 20 to 25 approximately but itwill still include some of those local brands for those banners that aresignificant; we will not changethose.

Ed Kelly - CreditSuisse

How longdoes it take beforeyou can finally take astep back and say thecentralization of procurement and private label rationalization was successful?When will you know that?

Jeff Noddle

I think as we getinto fiscal 2010 and as I have said, we have got a3% or more comp goal for that period of time. We’re going to need theseingredients, if you will, to deliver that result. Soin my thinking, that’sthe timeframe that wehave got to bedelivering on that inenough of a way thatwe can impact our sales significantly. Although that sounds like along time away, it’sonly a year from Marchso it’s not that faroff.


Your next question comes from Jason Whitmer - ClevelandResearch.

Jason Whitmer - Cleveland Research

Jeff, I have heard you saya number of times thata lot of yourassumptions still remain very similar from day one of thedeal; but knowing that we’re probably getting into alittle more difficult phase of theintegration, getting to theimplementation phase, hasyour priority list changedat all? Have some of thekey drivers, theearnings flow of thecompany over the next12 to 18 months, have those shifted atall? Just your to-do list and your focal points, have those shifted around atall internally?

Jeff Noddle

Not really, Jason. Thethings that we laid out atthat beginning that arejust critical to realizing -- what we’ve said from thebeginning was we acquired real estate locations for neighborhood supermarketsthat you just can’t replicate. We said here is themissing ingredient. We need to update these, we need to bring amore modern merchandising approach to it, we have to improve theexecution. We’ve got to really leverage thesize and scale of thecompany and we have to realize thefull competency of supply chainthat SUPERVALU brought to theequation.

Those priorities have not changed.Yes, there are moreminor things that we aregoing to prioritize differently because we arenot in astatic environment. Theconsumer is changingconstantly, competitors arechanging constantly.Look in Southern California for example, we’ve got awhole new competitor that wasn’t even contemplated atthe time of theacquisition two years ago.

But our priorities really have not changed.As long as our cashflows remain strong -- and they have -- and that we areable to make our commitments on debt repayment and those things, our capitalprogram, we’re actually spending quite abit more than what we planned initially. We said around $1 billion, $1.2billion for thebeginning. We’ve announced $1.3 billion now for next year.

Jason, our priorities have not changed.I think getting these great real estate locations remodeled remains our highestpriority. I saw this morning you had commented that itis coming a little bitslow. We have, from day one, put this as our highest priority. Amajor remodel is significant. Ittakes quite a lot ofmoving and changingaround in stores toaccomplish it. Thepermitting process insome of these places is alot longer than I would like, as some of our people would attest too. Butthat’s how long theytake. We have no reason not to accelerate these as quickly as we possibly can.

Jason Whitmer - Cleveland Research

Itsounds like the timingof remodels and implementing those seems to beprobably one of thebest catalysts over thenext one to two years, but how quickly can you also tag team alot of themerchandising and marketing initiatives system-wide that can really movethe needle atall thestores up?

Jeff Noddle

Those have to go on simultaneously and inparallel and I expect that they will. For us to achieve thegoals that we set out that we have given you for fiscal 2010, particularly insales as I mentioned, those aregoing to have to go on parallel to that. I would agree with you that we arein thetougher part of theintegration now or thetransition, as we call it, because we don’t look at itas an integration.This is the harderpart.

We knew this would bethe harder part andthere are alot of things that you want to make sure arein place before youcan say that you havegot your best foot forward to theconsumer. You’ve got to have empowered associates, people who feel good abouttheir company. You got to have improved service levels, improved execution, youhave got to remodel stores, you’ve got to leverage your size and scale.

These areall theingredients that we said from day one and we still put sixgreat quarters together inour view in doing itand that is afoundation that most don’t have when they enter atransaction of this size and scale.


Thenext question comes from Patricia Baker - Merrill Lynch.

Patricia Baker -Merrill Lynch

Getting back to theconsumer environment, thecompetitive environment, obviously theconsumer environment is worse and thecompetitive environment is much worse than you would have thought, let’s say,if we go back to January ‘07. Does theway the consumer isbehaving right now and what you’re seeing out there, is itin any way reminiscentof or have the textureof prior recessionary periods?

Jeff Noddle

Well, I don’t consider myself theultimate economic forecasting expert here but I don’t think what I have seen sofar says to me that wewould have put the “r”word around this. Somuch of the concern inthe economy iscentered on housing as being thecatalyst. I am not sosure that in theaggregate that doesn’t provide more opportunities for supermarket. I think therestaurant business is going to bemore stressed because of it.

Sono, it doesn’t feel tome like ityet but these wins, now that we arepast  theholidays I think thenext few months will bevery telling in termsof how the consumerfeels about their outlook and their position. Itdoesn’t feel that way to menow, but like I said,  I amnot an economicforecast expect by any means.

Patricia Baker -Merrill Lynch

Would itbe fair to say, Jeff,that if I compare thefirst quarter call, thesecond quarter call and this call, you seem to have made alittle bit more commentary around theconsumer and certainly, if we look atwhere the sales came inin thethird quarter and your expectations for thefourth quarter, things have either deteriorated or there was anexpectation of animprovement that just didn’t happen.

Jeff Noddle

Yes,  we did report thesame sales results for thethird quarter that we did inthe second and if you doall theweighting all we saidwas after you weight thefirst three quarters inour guidance for like store sales for theyear, and just as our outlook says we areexpecting about thesame, if you take and weight  allthe numbers and put ittogether.

Soyes,  we had thought that maybe we would getsome improvement inlike-stores sales, we came inat thesame level as thesecond quarter. So wefeel that the consumerhad a little more of aconfidence impact inthat regard and that would cause us to make more comments about theconsumer. But you know, still anticipatory looking forward.


Your final question comes from Carla Casella – JP Morgan.

Carla Casella – JPMorgan

My question is on thewholesale side of thebusiness. Have you seen any regional pickup incompetitive activity inwholesale? I know inour region we have seen alot of press lately about Wakefern. I amwondering if they aregoing head to head, up for any contracts with you?

Jeff Noddle

Carla, no, I wouldn’t describe that we have seen any changein competitiveactivity in thewholesale arena. You did seeI believe during thequarter there was acompletion of atransaction out in theNorthwest where one co-op acquired another co-op, soI think what we seemore is rationalization continuing inthat business, more than heated up competitive activity.

Carla Casella – JPMorgan

Have you talked with therating agencies? Doyou feel that any of your changesin your CapEx guidanceor anything else, same-store sales, haschanged their viewof your ratings?

Pam Knous

Absolutely not. Our cash flows arevery strong. Therating agencies arevery pleased with theprogress that we’re making.

Carla Casella – JPMorgan

I just wanted to clarify one thing. I think you mentionedthat you still have to paydown $540 million of debt by theend of fiscal ‘09?

Pam Knous

First quarter of fiscal ‘09.

Carla Casella – JPMorgan

Okay, 1Q. Sois that still on track with your plan, that you were saying $400 million for2008 or has that changed?

Pam Knous

If you recall we actually were ahead of schedule andachieved $140 million inthe first full yearwhich we announced in thefirst quarter. So withthis, if we accomplish $400 million infiscal ‘08 and that $140 million, we will beat $540 million for thefirst quarter of ‘09.

Yolanda Scharton

Thank you everyone for calling intoday and we look forward to seeing you atour analyst day.

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