SUPERVALU Inc F4Q08 (Qtr End 02/23/08) Earnings Call Transcript

Apr.17.08 | About: SUPERVALU Inc. (SVU)

SUPERVALU Inc. (NYSE:SVU)

F4Q08 (Qtr End 02/23/08) Earnings Call

April 17, 2008 10:00 am ET

Executives

Jeffrey Noddle - Chairman and CEO

Pamela Knous - EVP and CFO

Duncan Mac Naughton - EVP, Merchandising and Marketing

Analysts

Ed Kelly - Credit Suisse

Mark Wiltamuth - Morgan Stanley

Scott Mushkin - Bank of America

Deborah Weinswig - Citigroup

Emily Shanks - Lehman Brothers

Regina Russell - JPMorgan

Bob Summers - Bear Stearns

Meredith Adler - Lehman Brothers

Chuck Cerankosky - Ftn Midwest Securities Corp

Operator

[Call started abruptly]

Chief Financial Officer and Duncan Mac Naughton, Executive Vice President, Merchandising and Marketing. I would also like to say that on today's call is Yolanda Scharton, who will be leaving us at the end of the month, and for 36 earnings calls has been at the helm of Investor Relations. We appreciate the years of service provided to SUPERVALU.

As you know the information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties related to such statements are detailed on our fiscal 2007 10-K. After today's prepared remarks, we will have a question-and-answer session. Please limit yourself to one question, so we can accommodate everyone. I will be available after the call for additional questions.

Now, here is Jeff.

Jeffrey Noddle

Thanks, David and welcome everyone to today's call. Today marks the completion of our first fiscal year and include the full 52 weeks of the acquired Albertsons properties. With that I am pleased to report our second consecutive year of double-digit earnings growth following the acquisition. As we approach the two year mark of the acquisition, we are well position to drive future growth and maximize the value of the company.

Today, I will simply cover few financial highlights of fiscal 2008, as always Pam will provide more detail on fiscal 2008 in her remarks. I will spend the majority of my time this morning focusing on the underlying business and SUPERVALU's key initiative. We will also be joined on today's call by Duncan Mac Naughton, our Executive Vice President, Merchandising and Marketing.

From an overall perspective in fiscal 2008, we reported a record $44 billion in sales, which is precisely the number we projected back in January of '06, when we announced the transaction on a full year run rate of sales. We delivered $2.76 in earnings per share on a reported basis and 19% increase over 2007 and delivered $2.97 earnings per share on an adjusted basis, a 13% increase over 2007, when excluding one-time acquisition-related costs in both years and last year's loss related to the sale of the Scott stores.

We reduced our debt to capital ratio to 60% compared to 64% last year. We accelerated our remodel program and we captured synergies of $40 million. As we previously disclosed, identical store sales were flat for the fourth quarter of fiscal 2008, cycling 1.4% positive ID stores sales in the fourth quarter of fiscal 2007. You might recall that last year sales at our Jewel banner in Chicago received a sizeable lift from the Chicago Bears Super Bowl success. Unfortunately for both the Bears firm and SUPERVALU, they did not repeat that performance this year.

In the fourth quarter we continued to experience the 30 basis point negative impact on total ID from the recent increase in pharmacy generics. Now I think we are all pleased that this year's flu season was relatively mild that fact we believe also negatively impacted IDs by about 20 basis points in the quarter. In total, we are experiencing slight declines in customer counts, although this is offset by higher than average tickets, which reflects both food inflation and the consolidation of super market trend.

In addition, we are seeing evidence of customers managing their budget and focusing on value with increased movement promotional items, economy sizes and also our own brand. But we are disappointed with the overall flat ID sales performance in the quarter and Bears is worth noting that our sales trends have improved that shows as our programs begin to gain traction in that important market.

Overall the fiscal 2008 total company ID store sales increased 0.5%. Looking forward to fiscal 2009 and based on, where we see the economy today, we believe we will deliver 1% to 2% ID store sales growth. In fiscal 2009, we will cycle our highest prior year IDs in the first quarter and cycle our weakest prior year IDs in the fourth quarter, is against this back drop that we expect IDs to be somewhat below the annual guidance range in the first quarter with stronger IDs in the back half of the year.

Overall we believe that the execution of our many initiatives will enable us to establish sales traction throughout fiscal 2009 and achieve sales within our fiscal 2009 ID sales guidance range. ID sales growth and long-term sustainable earnings growth are of course our primary goals. At our Investor Conference in January, I highlighted a number of key initiatives that I believe will help us to achieve our goals.

Of the long-term earnings growth and delivering increased value to our consumers and of course to our shareholders. We are deeply engaged in the number of merchandising and marketing programs that will leverage SUPERVALU's national scale by allowing us to remain locally relevant to our shoppers.

Our merchandising centralization is well underway at Minneapolis to bring together the best and the brightest from across our organization in a highly collaborative atmosphere to ensure that we are creating and harnessing the most innovative thinking in the retail industry. As we also have received hundreds of applicants from outside the company with impressive credentials.

Technology is a focal point in our organization. We are developing a state-of-the-art application suite to support our merchandising organization, at the same time we are continuing to leverage automated selecting and order warehouse technologies to better serve our storage and retailers from our distribution centers.

Our remodeling program is also hitting its stride moving ahead in a faster pace than originally projected. In addition to providing our customers with updated stores our remodeling gives us the opportunity to create stores that are in lockstep with our Premium, Fresh and Healthy programs.

I will now turn the call over to Duncan Mac Naughton for a more in-depth update on our fiscal 2009 merchandising activity. Duncan?

Duncan Mac Naughton

Thanks, Jeff. I appreciate the opportunity to update you on an important merchandising initiatives that you will see in our stores this fiscal year. In fiscal 2009, we will continue to roll out our successful meal solutions offering focusing on customer-friendly meals to new markets.

Many of these are components of our meal solution offerings in Las Vegas at our January Investor Conference. Our newly developed Hot and Cold soup bar offer a variety of ready-to-eat or ready-to-take-home premium soups. Also an enhanced offering the formula meal solution centers being rolled out in our deli department branded simply good meals. This meal solution center is a customer-friendly, (inaudible) 7:105 island offering all the necessary components of a restaurant quality easy to assemble meal right down to the recipe.

Conveniently located within the stores, these offerings are truly (inaudible) solutions for these shoppers. We will continue to roll out with these key meal solutions in 2009, in demographically appropriate stores across all major banners. Another important effort this year will be further leveraging the size and scale of SUPERVALU thorough more extensive use of national programs designed to drive sales. Our first national program of fiscal 2009 launched on March 3rd in partnership with Procter & Gamble, which feature a wide array of general merchandise and food products.

Moving forward this year, we will continue to partner with key vendors to deliver multiple national promotions during every period. These national programs will use our proprietary customer shopping data to target high impact product categories for maximum value offering. This is just one way that our renewed focus and customer centric marketing will create a better value for our customers.

Finally, as previously announced we established a goal of moving our own brand sales mix from 15% to 17% of retail sales by the first quarter of fiscal 2010. This means building a strong value message around our own brand. We are making steady progress on this front.

In the fourth quarter of fiscal 2008, our own brand run rate continued to improve just under 16%. Equally exciting on the own brand front is this month's national rollout of a 150 items of Wild Harvest national organic products. The Wild Harvest mega brand will be fully integrated across many product categories and is being supported by a comprehensive 'Identify Your World' marketing campaign.

We are very excited about the opportunity to drive customer loyalty with all of our own brand offers. Our own brands momentum will continue throughout the year with more mega brand rollout including Baby Basics and HomeLife product lines and later this year, we will launch our new premium own brand line that will feature exciting prepared entrees and side dishes as well as premium grocery, bakery, deli and frozen food selections.

In today's economic environment, our own brand offerings are extremely relevant to our customers. Behind these key initiatives is a world-class team of merchandising and marketing professionals. We began staffing 400 positions in our Minneapolis innovation center in the fall of last year. We currently were ahead of the planned schedule in building our whole team.

During the staffing ramp up stage, our new enterprise merchandising team will collaborate with banner merchandising to further leverage international scale and enhance our ability through enabling the relevant. Our world class team will be supported by (inaudible) 8:150 technology. Late last year, resulted one of the primary application need to support our business. The application replaces multiple dated applications used today.

We are now beginning our first phase of development after a successful conference room pilot. When completed the integrated merchandising technology will support many functions including financial planning, item planning, category planning, and promotion optimization measurement, while delivering necessary infrastructure costs savings, as part of our expected synergies in fiscal 2010.

As we outlined in our January Investor Conference, until we complete the staffing and training of our team in Minneapolis and certain phases of our technology will intentionally maintain duplicate merchandizing support in the field to reduce implementation risk. We are very pleased that many of our talented associates from across the company are joining the central merchandizing effort.

They bring a wealth of knowledge from their specific banners and allow us to tap into the broad expertise and experience. We are very excited about the merchandizing transformation and the benefits it brings to SUPERVALU. We believe these programs and the new marketing and merchandizing organization will provide momentum in driving sales fiscal 2009.

Thank you for your time this morning and I would like to turn the call back to Jeff.

Jeff Noodle

Thanks, Duncan. We are not only leveraging the size and scale of the company, we are aspiring for innovation that will surprise and delight our customers. Of course the main point of contact with our customers are stores and we are working diligently to make sure we are constantly raising the bar on store condition through our national remodel program.

In fiscal 2008, we completed the 141 major remodels, well ahead of the 125 major remodels we originally expected to complete. In the fourth quarter, we completed 55 major remodels. This dedication towards stores was particularly evident in our Jewel-Osco banner, Chicago lands number one grocery retailer.

In the fourth quarter Jewel-Osco alone celebrated a record 17 grand reopenings following major remodel. As we stated before our goal is to have 80% of our fleet new or newly remodeled in the last several years. At the time of the acquisition this metric was at 64%. At the end of fiscal 2008 we have move it out to 70%. Remodeling has always been an effective use of capital for us and we know this progress will translate into increased ID sales.

In fiscal 2009, we expect to maintain this pace projecting approximately a 165 major store remodels. Activity will be significant in the acquired banners including 25 Jewel stores, 21 Shaw's stores and 37 Albertsons in southern California. Our fiscal 2009 remodel plans will be spread more evenly throughout the year and includes continued refinement of our Premium, Fresh and Healthy modules to meet the needs of local customer.

When our fiscal 2009 remodels are completed, we would have just 27% of the acquired premier Albertsons properties, a pace that puts us ahead of our original expectations for our remodeling program. In fact, to date our identical stores sales went to the approximately 85 offensive remodels is running slightly above 7%.

This measures our base line sales performance 12 weeks prior to construction the sales performance post remodel. As you may recall in January, we reported a 7% lift on 61 office of remodel using the same measure. Going forward we will update our remodel performance using this metric.

Our supply chain services organization continues to be a vital backbone of the company. In fiscal 2009, supply chain services will also continue to focus on integration activities with the installation in SUPERVALU's proprietary warehouse management system in the five acquired distribution facility serving Albertsons Intermountain West and southern California. This system brings standardized functionality across the west with common reporting in metrics and will enhance the overall efficiency of our supply chain ultimately allowing us to sunset multiple legacy systems.

In March of this year, we completed the installation of automation technology in our greater California facility and will ramp up volume throughout fiscal 2009. This technology will increase productivity and our capacity within the limited space. We remain engaged in the East Coast network rationalization project that we launched in late fiscal 2007, which consolidates warehouse volume from multiple facilities into our Lancaster, Pennsylvania warehouse. This project includes the installation of our T squared automation technology scheduled to be operation late in fiscal 2010.

Another significant milestone was completed in the conversion of all SUPERVALU pharmacy to our new ARx System in the fourth quarter. ARx is the next generation pharmacy management system that was designed and developed by SUPERVALU. ARx allows physicians to electronically transmit prescription and enable shoppers to fill prescriptions across our pharmacy network. In total we have converted more than 900 stores from four legacy pharmacy systems to our state-of-the-art ARx System reducing IT and administrative cost and increasing store labor productivity.

Finally, our synergies are very much on target with $40 million delivered in fiscal 2008. We also have plans that we will achieve an incremental $40 million to $50 million synergies in fiscal 2009. In total our synergy target remain at a $150 million to $175 million. So, bringing these altogether, we are doing some very heavy lifting this year, while we execute our growth plans and integration activity. We are putting in place key components to gain traction and establish sales momentum that will enable us to achieve our previously stated goal of 3% ID during fiscal 2010.

Now, I'd like to turn the call over to Pam Knous after, which I will make a few concluding remarks. Pam?

Pamela Knous

Thanks, Jeff and good morning everyone. I echo just earlier comments that we are pleased with our results this year and begin fiscal 2009 with many new initiatives and activities to deliver the long-term potential of SUPERVALU.

Today, I will focus my comments on the operating results for the fourth quarter and briefly fiscal 2008, our financial condition and providing additional color on our fiscal 2009 outlook.

Starting with the first quarter of fiscal 2008, year-over-year comparisons now reflect align quarterly reported for SUPERVALU and part of the operation. Sales for the fourth quarter were record $10.4 billion compared to $10.3 billion last year. Fourth quarter retail net sales were $8.1 billion compared to $8.2 billion last year, primarily reflecting the impact of store closures in the acquired operations and flat identical store sales.

In total, retail square footage decreased 2.5% year-over-year, reflecting a 4.8% decline from store closures, partially offset by 2.3% benefit from new store openings and in-market store acquisition. This decrease primarily reflects the closure of 79 acquired Albertson's properties since the acquisition, resulting in plan reduction in our market share in select markets, as we position our brands for future growth. Despite the closing, we have maintained the original market share ratings in these markets.

Similar to the third quarter, year-over-year comparisons in the fourth quarter reflected change in our business mix, albeit a slight change. After the change in business segment mix, fourth quarter gross margin as a percent of net sales improved 10 basis points to 23.3%. Similarly, absence of business segment mix change, selling administrative expenses as a percent of net sales improved 20 basis points to 19.3% primarily reflecting lower year-over-year depreciation expense in the quarter, as a result of completing the purchase accounting analysis in the first quarter of fiscal 2008 as well as cycling the prior charge related to the sale Scott's Food & Pharmacy.

As a reminder, corporate expenses are included in selling and administrative expenses with fourth quarter corporate expenses reflecting a slight improvement from the prior year, when excluding one-time acquisition related cost. Net interest expenses in the fourth quarter was $157 million compared to $173 million last year, reflecting a year-over-year decline in debt level and lower borrowing rate.

From the earnings' perspective, we reported fourth quarter GAAP diluted earnings per share of $0.73 up 28% compared to last year. When adjusted for the impact of one-time acquisition-related costs and the sale of Scott's last year diluted earnings per share in the fourth quarter increased 5% to $0.77 per share.

Turning to our full year results, total sales for the year were a record $44 billion compared to $37.4 billion last year primarily reflecting a benefit of 52 weeks of the acquired properties in fiscal 2008 compared to 38 weeks last year. Since the acquisition we have incurred a total of $139 million in one-time acquisition-related costs.

In fiscal 2008, one-time acquisition-related costs, which are included in SG&A, were approximately $74 million pretax or $0.21 per diluted share compared to $65 million pretax or $0.20 per diluted share last year. This year's costs primarily delay the eastern region supply chain consolidation costs, severance and retention expenses and consulting costs.

Looking at the full year earnings, we reported record GAAP diluted earnings per share of $2.76, up 19% compared to last year and pleased to say inline with our original guidance provided last year at this time and at the upper end of our updated guidance range provided in January.

Turning to our financial condition, in the less than two years since the June 2006 acquisition, we have reduced debt by approximately $698 million ahead of our original $400 million goal by June 2008. The additional debt reduction was primarily due to strong cash management and also prior to lower cash tax payments related to the Albertsons transaction.

In fiscal 2009, we expect to achieve an additional $400 million in debt reduction, shifting our goal to fiscal year comparisons versus the anniversary of the acquisition date. At yearend fiscal 2008, total borrowings including capital leases were $8.8 billion compared to $9.5 billion last year. This resulted in a debt to total capital ratio at yearend of approximately 60% compared to 64% at the end of last year.

Our financial condition paid dividends in fiscal 2008 the Standard & Poor's and Fitch both moved the company's corporate credit rating to a positive outlook. Also in March 2008, Standard & Poor's raised the issue level rating on SUPERVALU's unsecured debt to D plus from B, reflecting progress in achieving our stated long-term goal of returning to investment grade.

I will also add that we have more than sufficient capacity under our existing revolver and projected cash flows to take our debt maturities of approximately $253 million in fiscal 2009. We are in full compliance with our debt covenants, with fiscal 2008 reported EBIT of $1.7 billion, depreciation and amortization expense of approximately $1 billion, net rent expense of approximately $0.4 billion, and total debt of $8.8 billion. These financial results put us well within our required covenant levels.

Capital spending for the fiscal 2008 was $1.3 billion, including the in-market acquisition of eight stores in Wyoming and approximately $36 million in capital leases. In fiscal 2008, the company completed 141 major remodels, 25 minor remodels and 27 new stores. Capital spending primarily included new retail stores, store remodeling activity and technology expenditures.

We are disappointed that we did not achieve our goal of one day reduction in inventory days supply, over the inflationary trends in most product categories, we took advantage of forward opportunities and continue to do so today that will benefit our customers in the upcoming year.

During fiscal 2008, we repurchased $280 million or 4.8 million shares under our previously announced 235 million share repurchase program. But pleased to say, we are ahead of our original plan for improvement in our financial conditions following our transformational acquisition.

Turning to our fiscal 2009 outlook, though our practice is not to give quarterly guidance, today I will provide some additional color related to certain items that will impact the quarter. For fiscal 2009, we expect top line sales of approximately $45 billion to $45.5 billion, primarily reflecting 1% to 2% identical store sales growth as just discussed by Jeff, as well as 15 new stores and $800 million benefit in the fourth quarter from the 53rd week, offset by approximately 25 to 35 store closures and lower supply chain services sales with targets announced decision to assess a multi-year migration to self distribution.

In fiscal 2009, target will convert supply arrangements for two geographic regions in SUPERVALU's managed third-party logistics operations. Supply chain revenues and operating earnings will be impacted by the target conversions to 3PL beginning in the first quarter. Under this 3PL arrangement SUPERVALU will no longer own the inventory or record sales of inventory although receive a fee for 3PL services performed. The first of these conversions occurred earlier this month in Texas with a second conversion in the South East scheduled for late summer 2008.

Highly concentrated in the second and third quarters, will be operating expenses related to acquisition integration activities including network rationalization, standardization and technology initiative. Additionally, we expect to incur added costs beginning in the second quarter as a result of our decision to maintain duplicative merchandising staffing levels as we transition certain roles of the banner and regions in the Minneapolis innovation centre that Duncan discussed previously. All of these items are reflected in our fiscal year guidance.

In fiscal 2009, our strong cash flow will continue to benefit us, funding our $1.3 billion capital program as well as an estimated $400 million in additional debt reduction. The powerful impact of de-leveraging the balance sheet will be evidence in our fiscal 2009 results in the form of lower interest expense as well as capturing the benefits of the overall lower interest rate environment with approximately 30% of our debt carrying floating rate. However, lower interest rates also necessitate someone offsetting adjustments to pension cost and discounted self-insurance reserves.

I would also add that our current plans are to reinvest the net benefit from interest rate reductions subsequent to our March 3rd guidance in our ongoing sales driving initiative. One-time acquisition costs are expected to be approximately $11 million to $16 million or $0.03 to $0.04 per share in fiscal 2009 putting us on track with our total one-time acquisition-related costs guidance of $150 million to $155 million.

Our 53 weeks fiscal 2009 GAAP earnings guidance is $3.06 to $3.22 per diluted share an increase of 11% to 17% over fiscal 2008. Excluding the benefit of the extra week GAAP earnings guidance is $3 to $3.16 per diluted share, an increase of 9% to 14%. Excluding the extra week and one-time acquisition-related costs our adjusted earnings per share in fiscal 2009 is expected to increase 2% to 7%.

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

Jeffrey Noddle

Well, thanks Pam. And as you certainly heard today we have a very full plate of activities underway this year, ranging from the rolling out of our multiple merchandising and remodeling programs across the entire store network to drive sales. Implementing multiple technology projects across the company to ensure our synergies are delivered as expected and continuing to strengthen our financial condition by continuing to de-lever our balance sheet and of course positioning SUPERVALU for future growth.

As we know the two-year mark of the acquisition, this June we are on plan to leverage our transform business and as Pam said ahead of our plan on our financial condition. I am pleased with our overall fiscal 2008 performance and that we did deliver our second year of double-digit earnings growth.

Now, I will be happy to take your questions. Operator?

Pamela Knous

Operator, are you there?

Question-and-Answer Session

Operator

Yes. (Operator Instructions) Your first question comes from the line of Ed Kelly.

Jeffrey Noddle

Operator, we're not hearing a question.

Operator

Mr. Kelly, your line is open.

Ed Kelly - Credit Suisse

Hi, Jeff, good morning. Sorry about that.

Jeffrey Noddle

Good morning, Ed.

Ed Kelly - Credit Suisse

Could you maybe just give us a little bit color on your supply chain services business this quarter, the performance was obviously very strong, a lot better than most of us were expecting, but could you just talk about what drove that?

Jeffrey Noddle

Yeah, we did have exceptionally strong quarter and a terrific year in supply chain. It’s a number of different things we were able to begin to add some new business as the year progressed. Our attrition rate was lower than we would have expected at the beginning of the year. We really did well in all components of it. Pam mentioned a few miscellaneous items that impacted, but overall we had a strong year.

I think Ed, if I was to describe what I think, I think that independent retailers are beginning to see the benefits of our leveraging scale with that many business there in Minneapolis by independent retailer groups, where we are showing them are innovations centers, showing them what we're doing in terms of own brands, in terms of leveraging our scale with national vendors.

I think there is beginning to be recognition that there are some very powerful programs that they can attach to. But we really had a solid year. We just had good volume and we are continued to leverage our expense rations, but that business is a lot about being able to continue to improve our productivity. We've been able to do that over the years and we continue this year very strongly, we had a very strong year.

Ed Kelly - Credit Suisse

Can you just help us in looking, where the business is going next year, I mean you talked about 2% to 4% attrition, but you are obviously getting new business and you have got target kind of beginning to cycle out, do you do better than that 2% to 4% attrition on a sales perspective?

Jeffrey Noddle

Well, setting aside the attrition rate, I believe we're accordingly going back to normal 2% to 4% does not include target impact. And I'd hope we have not to do better that number without the target. We haven't given any specific guidance on what our volumes will be for the year and all of course is included on our guidance range of earnings.

But I think we've got a good jump this year to continue to outpace any business loss with new business though we announced recently a new group in a Pacific Northwest that we'll be brining on here shortly. So, I think we've got a change, we've said that without the target impact that we should be able overtime to overcome any attrition loss and they have a low single-digit kind of growth and I think you have seen that over the last couple of years and I have no reason to believe on target that we can't continue to do that.

Ed Kelly - Credit Suisse

Okay. But from a modeling perspective it seems like when we include target that your sales might be down a little bit more than 2% to 4% I guess?

Jeffrey Noddle

Well, I said the 2% to 4% does not reflect any impact from target, lets the year unfolds we'll give more information on that.

Ed Kelly - Credit Suisse

Okay. And then the margin in that business was obviously very strong this quarter as well. How do we think about that next year? Is it something that you think you can sustain over the next few quarters?

Jeffrey Noddle

Well I think it depends on the volume over the course of the year. I see nothing on the horizon that says we can't continue to put up our margin the way we do this business today even though Pam mentioned that we have increased our forward buy activities, thus close to our retailers today in the way we do our pricing. We did have some miscellaneous items at the end of the quarter. The sale of a dairy which had a small impact to the quarter, but still overall we are continuing to leverage and I don't see the reason why we can't continue to have decent margins in that business.

Ed Kelly - Credit Suisse

Okay. And then just one last question for you, could you just help us connect the dots little bit more on the ID guidance for next year. Q4 was obviously flat, but you also talk about in the press release consumer spending being pressured by inflation in the economy. Can you maybe just talk a little bit about how much of the improvement comps is driven by remodels, how much is driven by what's going on in the merchandising side. Do you assume that the economy is going to stay the same as it is today, get worse, get better, so maybe if you could just give us a little bit of insight there?

Jeffrey Noddle

Well, I think our planning says that based on the economy that we see today and particularly based on that we made comments that the later half of the year we made this comment at the end of the third quarter as well and for fiscal 2009 and the back half of the year, a number of things come together for us. Obviously we are up against easier comparisons for the first part. But that also a number of these issues come that we've been talking about we begin to deliver more substantially on the merchandising and marketing effort, the owned brands effort and the remodel program as we continue to have more and more stores every quarter we are adding to that base of impact.

I am not going to give a specific number of each of what we think those are worth, although we do know what those are worth internally. But 1% or 2% is based on the world as we see it today. The back half of the year should be stronger than the front half of the year and I see no reason at this point why we couldn't gain traction from all these efforts I begin to allude we will produce at the-- in the last couple of quarters of the year and that's what we are anticipating.

Ed Kelly - Credit Suisse

Great thanks Jeff.

Jeffrey Noddle

Thanks Ed.

Operator

Your next question comes from the line of Mark Wiltamuth.

Mark Wiltamuth - Morgan Stanley

Hi, Jeff just wanted to ask a little bit about inflation. Could you give us an idea how cost inflation was in the quarter and have you been full passing that through and are you getting any pushback from consumers as the higher prices are rolling through?

Jeffrey Noddle

Yeah, Mark inflation continues at about the same pace and strength that we saw at the end of the third quarter. I think we made comment in the third quarter it was running in the high threes kind of number. Although the makeup of it now is a little bit different I think then what we had at this time last year for example even though it had ramped up as high the trend line by that I mean last year was really driven a lot by dairy, by the protein and by produce to some degree. This year it's more driven by commodities currently it's more driven by commodities coming through packaged goods. Obviously grains, (inaudible) grains and commodity based, and in general inflation being caused by higher fuel prices.

What we can make up of it is a little bit different. I don't think there is any surprise we may comment that consumers react to inflation. We see more promotional goods, the higher percentage of sales and promotional goods. We see it strengthening own brands. Now at the same time we are improving our offerings so it's hard to know which falls in which bucket. But inflation at this point at least though this early part of the year I don't see much abatement from what we see in the pipeline on the current rate of inflation. I always we have some hope that the later half of the year will be better. But right now the pipeline is more and I would expect it to continue at the same rate.

Mark Wiltamuth - Morgan Stanley

And on the inflation front, if you look at Wal-Mart fourth quarter numbers that would kind of imply that they are passing through costs and also attacking on a little extra margin. Do you think they are kind of raising the pricing umbrella for the grocery group right now and are you using that too narrow your gap with them?

Jeffrey Noddle

Well I think as I've mentioned many times previously that the price increase generally throughout the industry are fairly orderly. There always been slight difference in timing among competitors, particularly now as we get into as I mentioned we are now into more packaged goods and some like it depends on how much inventory a given retailer may have of older cost goods versus replacement cost goods. So that affects the timing, but generally increases are being passed through. I believe they are being passed through by Wal-Mart. I thought it was interesting to note that their like store sales for March which included Easter were well under 1% and will they certainly have the same inflationary pressures throughout their business.

So it continues very orderly, I don't think we have seen any particular competitor try to use the rate of inflation in holding that back as a major competitive tool. People are very promotional now, they are certainly being aggressive and a lot of marketing efforts to consumers but we don't see anybody particularly using that strategy to impact the market.

Mark Wiltamuth - Morgan Stanley

Okay, thank you.

Operator

Your next question comes from the line of Scott Mushkin.

Scott Mushkin - Bank of America

Hey, guys, couple of questions here. I just wonder if you can give us a sense in where IDs are running right now and then I had a follow-up on the forward buy commentary Jeff that you made. You said you kind of pass it right through to customers that's, I know Fleming gotten some issues number of years back on this and I was just curious that the contracts, how they are written and that you are putting your balance sheet at risk but not getting any benefit that seems somewhat. Then I was wondering if we can get some guidance on interest expense for the year, that's it from me?

Jeffrey Noddle

All right, Scott, well first of all an IDs, the comments we'll certainly state that the comments we already made and that is that our guidance is 1% to 2% for fiscal 2009, we said that the early quarter will be certainly in the first quarter. We think will be somewhat below that range and we expect the later part of the year to be higher to make up within that 1% to 2%. With the change of Easter it’s real hard to project at this point exactly where certainly any, this quarter is going to come out. I remind everybody this is the four period quarter for us, which does not end till the middle of June, so we have got quite a way to go yet.

In terms of my comment about forward buy,a number of years ago almost in all of our wholesale distribution supply chain operations to our independent customers, we went to a pricing model that we pass through, that no longer is dependent on our margin being derived partially from forward buy activity as worth as a historical pattern in not only SUPERVALU but most wholesale operations. We have long moved away from that model. We are aggressive buyers of product and that benefits our independent retailers, it gives them more competitive cost of goods, it benefits our own stores as well and our own retail operations and we've moved away from that years ago Scott and we think that is a very appropriate place to be and a benefit for those stores that are doing business with us today.

As far as interest expense I'll let Pam comment on that.

Pamela Knous

Yeah, we have given you the debt level. We have given you the amount that's variable and so it should be relatively easy to model out the interest expense for fiscal '09.

Scott Mushkin - Bank of America

And if you remind me how much is tied to LIBOR?

Pamela Knous

About 30% is variable.

Scott Mushkin - Bank of America

And it’s all tied to LIBOR?

Pamela Knous

Yes.

Jeffrey Noddle

(inaudible) in here.

Scott Mushkin - Bank of America

No, I did. Thanks very much. And one final thing on the synergies, did I hear you right $40 million for next year?

Jeffrey Noddle

$40 million to $50 million.

Scott Mushkin - Bank of America

$40 million to $50 million so then we got in the two months that of the next year we got to do what about to 60 to 70 to kind of get to the 150 run rate, is my math right there?

Pamela Knous

Of the total numbers, the range has not changed in total which was 150 to 175 and we have talked about certain of the synergies being back end loaded. So yes, at the end of that time frame we are still giving the same guidance of 150 to 175.

Jeffrey Noddle

The back end loading comes -- a lot of it from the supply chain that we already talk about Lancaster, and that's a significant project, as an example that won't be fully realized until fiscal 2010.

Scott Mushkin - Bank of America

Great. Thanks guys.

Jeffrey Noddle

All right.

Operator

Your next question comes from the line of Deborah Weinswig.

Deborah Weinswig - Citigroup

Good morning and congratulations on a great quarter.

Jeffrey Noddle

Thanks, Deborah.

Deborah Weinswig - Citigroup

Can you talk about how you are approaching the fiscal stimulus? We've had a few retailers across the spectrum that say that they'll be cashing checks in their stores and they will be giving incentives for customers to cash the check. Can you just talk about how you are approaching them?

Jeffrey Noddle

Well I would tell you that we will have programs and plans. I don't think this is appropriate place to communicate those to not only all of you but our competitors. But I will say this we think in this is another incidence where I think SUPERVALU's portfolio of businesses is rather meaningful. We have the stabilize rooms of course, we have almost over 1200 stores that very much are front-end center for us, the customers, who will be a very high recipient of the stimulus checks and I will tell you that we will have plans throughout the rest of company also and those are underway.

Deborah Weinswig - Citigroup

Okay, you also talked probably about some of the changes you are seeing as regards to customer behavior, can you also discuss how much earn, how much debt you can do so with regards to performances at Save-A-Lot and if you are seeing differences in consumer behavior between Save-A-Lot and the other banners?

Jeffrey Noddle

Well, last year when we commented about window through Save-A-Lot, which seemed to get widely misinterpreted of what I said, but I would repeat again Save-A-Lot had a very solid year. Save-A-Lot is obviously very well positioned for this economic environment that we are in. I am very happy with the performance of Save-A-Lot, very happy its in our portfolio and we're very carefully determining -- we've got I think 55 to 65 stores in the plan for this fiscal 2009, I think I hope 0.52-26 we can do better than that and then continue to accelerate and stabilize.

The Save-A-Lot customer is a stressed consumer by definition and certainly there is nothing going in our economy today that doesn't prove to stress that consumer in terms of the rising food costs and certainly to a larger degree the rising fuel costs. Save-A-Lot is well positioned and we expect another solid year on Save-A-Lot this year.

Deborah Weinswig - Citigroup

Okay, and then last question on the kind of innovations on center/new marketing and merchandising organization. When should we start to expect to see benefits driven by the new organization?

Jeffrey Noddle

Well as I talked about I expect traction in the second half of our fiscal 2009 and a portion of that is attributable to that organization being in place and reproductive.

Deborah Weinswig - Citigroup

Great, best of luck, thanks so much.

Jeffrey Noddle

Thanks Deborah.

Pamela Knous

Thank you.

Operator

Your next question comes from the line of Emily Shanks.

Emily Shanks - Lehman Brothers

Hi, good morning. Most of our questions have been answered. I did want to ask are you -- can you comment on any trends you're seeing by geography?

Jeffrey Noddle

By geography, Emily other than to say as we said in the third quarter, we don't have to do very much research to figure out that the West Coast and particularly California is continuously impacted more than the rest by some of the housing related issues. And I think I will leave my comments to that. But having said that there is a lot of people and those are great markets and with the acquisition of Albertsons properties. We got to have a significant presence in Southern California and the Pacific Northwest and a lot of our remodel activities, this is a good opportunity for us to get these stores remodeled. I made a comment, I think we had 30 some stores in southern California on the remodel docket for fiscal 2009. I think it's a great time for us to get these stores right up to date and as the economy improves out there which I expect it will I think we're going to be in a great position to deliver much more to more consumers in California.

Emily Shanks - Lehman Brothers

Great, and then if I could just one quick follow-up question on the interest rate. I just want to clear Pam I know you said 30% is floating, but just specific to the credit facility we can assume none of that is hedge right, it's just off loading?

Pamela Knous

Correct.

Emily Shanks - Lehman Brothers

Okay, thanks.

Operator

Your next question comes from the line of Steve Chick.

Regina Russell - JPMorgan

Hi, this is [Regina Russell] in for Steve Chick. I had a couple of questions here, the first regarding sales trends during the fourth quarter, you came out with the press release in the beginning of the March and I was just wondering how did you see sales trending through the quarter and how did you see inflation trending through the quarter?

Jeffrey Noddle

Well, I think again I've already talked to the inflation trend we saw pretty much the same trend through the fourth quarter that we saw at the end of the third quarter in inflation. So there really wasn't any substantial change there but there certainly hasn't been any reduction in the inflation rate either. As far as sales trends, we pre-announced March 4th, excuse me our guidance and we said at that time our fourth quarter sales were flat and the quarter ended up as we expected. So I think I will leave it at that comment.

Regina Russell - JPMorgan

Okay, and then with the potential synergies of the 40 million to 50 million, is there any potential for any of that to be pushed back into 2010 as well or is that pretty much set for '09?

Pamela Knous

That's our guidance for fiscal '09.

Regina Russell - JPMorgan

Okay. So and then Pam you mentioned some operating expenses in Q2 and Q3 related to technology. Now I am wondering is that actually included in some of the one-time charges or is that are those expenses excluding that?

Pamela Knous

Expenses excluding one-time items.

Regina Russell - JPMorgan

Okay. And that's for all of the technology expenses that…

Pamela Knous

We mentioned several events that were taking place, concentrating in the second and third quarter, we talked about the duplicative [tapping], we'll have overhead costs as we implement these various initiatives, there will be training types of these various initiatives. So, there are costs in addition to one time transaction costs as you actually go to install or implement these major initiatives.

Jeffrey Noddle

And of course our one-time transaction cost dropped considerably next year nearly about $0.03 to $0.04, I think it's a guidance we have given, so most of these expenses and the activities Pam is talking about will flow through the normal expense ratios.

Regina Russell - JPMorgan

Got you. And then one final question on the remodel comps. I know you have said that you are seeing a 7% remodel comps, but I believe I heard a little bit differently, I think at the Analyst Day that it was 6%, can you tell me a little bit about the difference between those three numbers?

Jeffrey Noddle

Yeah, we gave in two different ways, we've studied how the industry normally measures it and the measurement of a period of time prior to the remodel compared with the period of time after the remodel seems to be the most common way that measurement is done. So that's what we are adopting and we gave both numbers in January but that seems to be the common method and that's what we'll use going forward.

Regina Russell - JPMorgan

Okay, and so that's reflecting the 7% then?

Jeffrey Noddle

Correct.

Regina Russell - JPMorgan

Okay. All right, thank you.

Jeffrey Noddle

Thank you.

Operator

Your next question comes from the line of Bob Summers.

Bob Summers - Bear Stearns

Hey, [Pam] good morning. I wanted to dig into the '09 guidance a little bit. If I start with an underlying operating number and then layering the benefits from net synergies, the extra week and then interest, I get to a number that's pretty much at the higher end of your earnings range. So, what's the right way to think about reinvestment in the year and then if I could just get some clarification on Pam's comment about reinvesting the lower interest expense? Are you talking about reinvesting the transitory benefit from LIBOR rates being down or are you talking about also encompassing the lower run rate from the lower debt levels?

Pamela Knous

Well, I will answer that question first. If you recall we issued guidance's, early March and subsequent to them the Fed has actually taken additional actions that lowered LIBOR. So the comment that I made about reinvesting had to do with just that last round of interest rate moves. The $400 million debt reduction goal has been consistent for quite some time now.

Bob Summers - Bear Stearns

Okay. And then second, just maybe talk about over the next couple of months you are going to be anniversarying some of the peaky type PPI growth rates in finished foods. What's the right way to think about that in terms of the gross margin impact if at all?

Jeffrey Noddle

Well, Bob we don't give out specific guidance on gross margin, but I would just offer to say and I have said this before that the rate of inflation environment that we are in, now does make it a little more challenging to arrive at your gross margin numbers. We have been able to do that through this period of time. It seems like most of the retailers have been able to do that. And my point 30-0.19 is it takes more management of when are increases hitting, when are competitors taking it. And although I have said it's very orderly, there could be some time differences. There are, I am going to say it takes more effort and more constant management to achieve our general gross margin levels and our guidance anticipates a continuation of the gross margin levels that you have seen that's accomplished and that's within our guidance and it just takes a little more work to get to the same place and we're certainly going to do and prepared to do that work.

Bob Summers - Bear Stearns

Okay. Thank you.

Jeffrey Noddle

Yeah.

Operator

Your next question comes from the line of Meredith Adler.

Meredith Adler - Lehman Brothers

Hey guys. I would like to go back to the question about the competitive environment and I just want to make sure that you are not seeing anybody do anything really irrational and would you say that you are finding given the economy that vendors are working very closely with you to develop programs, to provide more value to customers?

Jeffrey Noddle

Yeah. Good morning, Meredith. We describe the competitive environment this way, we always think any competitors are gap that irrational at times as I'm sure they think we are. But generally through this inflation period of time, certainly people are aggressive promotionally, they are aggressive in their multi offerings to their best consumers. There are people who in certain markets over a long period of time are trying to improve their pricing position as we are. But what I am saying is we don't see anybody really using inflation or not catching through inflation as a competitive strategic marketing tool.

So to that degree I think it's fairly orderly. I do think that consumers are able in the near term to respond to higher inflation and we've talked about more promotion goods being sold on promotion, I don't think these things are come intuitive, more promotion, you get higher percentage of sales in promotional goods, higher percent of sales in own brand. People are using more coupons. We see some evidence of that for example.

And these things are very intuitive I think in the environment, so that people can offset some of that cost of inflation. These are things that we manage every single day and every week in our promotional plans as do all retailers and you adjust to these kinds of things. So, I think the rate of inflation, but I'm not certain that the rate of inflation across the entire food landscape will the sale results in retail food industry to (inaudible) the rate of inflation in, because people can adjust and now this is uncommon in these type of fact.

Unidentified Company Representative

Okay. We have time to two more questions.

Jeffrey Noddle

Let me add to the rest of Meredith's questions. As far as the vendors, vendors are working with us extremely well, but we're at a migration of our merchandising group, as we talked about several times on the call. So, vendors are also migrating their resources with us, but along that way where you getting more and more cooperation from our vendors on national promotion.

We talked about how we are doing, we did our first national promotion. Duncan talked about that and we're going to be doing numerous one throughout the year. Every period I see our vendor connectivity improved, as we migrate to a more stable merchandising group and that's what's going on today, Meredith.

Meredith Adler - Lehman Brothers

Okay. And if I could just follow-up since everybody else has asked you a million questions.

Jeffrey Noddle

Go ahead.

Meredith Adler - Lehman Brothers

Wwhen I was asking about the promotional environment, I wasn't just saying about inflation, but also given the weaker economy and since everybody knows the economy is weak presumably people are going to be irrational, but I think that is a fear in the marketplace, that there will be a lot of price wars that get started and you may maintain sales, but it will kill your profitability. So, just wondering what you're seeing to-date?

Jeffrey Noddle

I don't see that Meredith. I think the profitability of that is much lower today than it was years ago. You have so many more options on how to market and go-to-market with consumers today. You have loyalty programs that you can deliver to your best customers that also allows you to have data information deliver opportunities; to not your best customers or people who aren't your customers. There is so much more analytical information today that you can utilize to target your efforts just across the board as you described the price war. It seems very unlikely.

Meredith Adler - Lehman Brothers

That's what I wanted to know. Thank you very much.

Jeffrey Noddle

Meredith thanks a lot. Okay, we have time for one more question.

Operator

Your next question comes from the line of Chuck Cerankosky.

Chuck Cerankosky - Ftn Midwest Securities Corp

Good morning, everyone.

Jeffrey Noddle

Good morning, Chuck

Pamela Knous

Good morning, Chuck.

Chuck Cerankosky - Ftn Midwest Securities Corp

Just I'd like to clarify one thing in that paragraph about gross margin, if you adjust for the shift in mix, it said gross margin was up 10 basis points, that reflects that on the retail segment groceries were up and wholesaling has been inherently a lower gross margin. Are you talking about that?

Pamela Knous

Right, that's the component of the mix. Yes, thank you.

Chuck Cerankosky - Ftn Midwest Securities Corp

All right, good and then I want to get back to the distribution segment, supply chain segment with the good sale 7% sales increase in the quarter, what part of that was volume would probable inflation?

Jeffrey Noddle

Well, we haven't given out that metric, but I have said that inflation ran in the high threes kind of that’s an overall comment. I don't believe that metric much different in the supply chain.

Chuck Cerankosky - Ftn Midwest Securities Corp

Okay. A little static in the line, but so similar whatever the rate was well, say in the high threes. It runs even through supply chain and the retail segments.

Duncan Mac Naughton

Yes, I mean in the same cost increases or adhoc in one part of business there is another. But remember the majority that increased did come from new business and a lower attrition rate.

Chuck Cerankosky - Ftn Midwest Securities Corp

All right, those were my questions. Thank you.

Duncan Mac Naughton

Thank you, Chuck.

Unidentified Company Representative

Okay. Thank you everyone.

Jeffrey Noddle

You will available for…

Unidentified Company Representative

Yeah, I will be available for today, for our calls in tomorrow.

Jeffrey Noddle

Thank you.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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