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

SUPERVALU (NYSE:SVU)

Q1 2013 Earnings Call

July 11, 2012 5:30 pm ET

Executives

Kenneth B. Levy - Former Vice President of Investor Relations

Craig R. Herkert - Former Director

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

Analysts

Nathan Rich

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Ajay Jain - Cantor Fitzgerald & Co., Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Jason DeRise - UBS Investment Bank, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

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

Edward J. Kelly - Crédit Suisse AG, Research Division

Operator

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

Kenneth B. Levy

Thank you, Ashley. I want to welcome everyone to SUPERVALU's First Quarter 2013 Earnings Conference Call. Joining me on today's call are Craig Herkert, Chief Executive Officer and President; and Sherry Smith, EVP and Chief Financial Officer. Following our prepared remarks, we will open up the call for your questions. [Operator Instructions]

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

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

Craig R. Herkert

Thank you, Ken. Good afternoon, everyone, and thank you for joining our call. This afternoon we reported our first quarter earnings and also announced a number of initiatives designed to make us a more competitive company and unlock value for our shareholders. As you read in our release, this was a challenging quarter for us.

Earnings per share this quarter were $0.19 on identical store sales of negative 3.7% in our Retail Food segment and network IDs of negative 3.4% at Save-A-Lot, both were well below our targets.

Our performance reflects the fact that we did not move quickly enough to respond to intensifying competitive conditions in our industry. Consumers price sensitivity has intensified given the continuing weak economic environment. And this has led many retailers to become even more aggressive on promotions and price investment and to step up their marketing activity in several of our key markets.

We are moving on all fronts to address these competitive challenges and win back our customers and market share. First and foremost, we are accelerating our price investments across all banners. This modified timeline will allow us to deliver fair price plus promotion to half of our stores this fiscal year and the balance by the end of fiscal '14. We're also intensifying our focus on efficiency and productivity, replacing our senior credit facility to add financial flexibility and remove the covenants that have constrained price investment. Finally, we're adjusting capital allocations to channel resources back into our price initiative and other operational priorities, as well as debt reduction. This includes the board's decision to suspend our quarterly dividend.

Let me provide you with more detail on the operational changes we announced today. We've previously stated that our long-term strategy is to bring pricing in line with our primary conventional competitors and to narrow the gap to discounters. We're taking the steps necessary to move this along much faster.

We're beginning to do this in Chicago where last month, fair price plus promotion rolled out at Jewel-Osco. This rollout will be completed in this 180-store banner by Labor Day. The tenets underlying our value transformation at Jewel, include hyper-local retailing, which is tailoring each store to the unique needs of its neighborhood; a price architecture that is appropriate for local stores and demographics; a comprehensive media campaign to highlight our new pricing and community commitment.

Many of the efforts underway at Jewel are already in place in our Shoppers banner in the mid-Atlantic and our Shop 'n Save banner in St. Louis. At each, we have implemented disciplined cost control and a competitive pricing structure that provides more value to our customers.

And at Shoppers, we have rolled out a new marketing campaign to highlight homegrown and regional brands. These efforts are achieving their intended results and allowed us to reestablish our position in an increasingly competitive markets.

We're also continuing to take steps to improve pricing across departments and categories throughout our traditional network. These sales-driving initiatives are leveraging our tools and funding to improve every day base pricing.

Our significant investment in produce initiated last October remains a strong cornerstone of the transformational work we're doing and has enhanced perceptions of produce freshness with each -- within each banner. Unit sales volume remains on plan, and we are happy with how we are positioned in this category relative to competition.

In collaboration with our vendors, we have also made strong headway in lowering everyday retails across the salty snack category in Chicago. This work was started in quarter 4. Based on the positive results we've seen, we've implemented this pricing strategy in salty snacks in our Southern California Albertsons division in June. And it will be in our Intermountain West division starting next week.

We believe these actions within our traditional stores will allow us to generate more traffic, achieve positive identical sales more quickly and ultimately, hasten the rebuilding of market share.

We've moved forward with our price investment. We have -- we will also intensify our focus on efficiency and productivity.

In recent years, we've made a number of important organizational changes and introduced new tools to enhance operations. We believe SUPERVALU still has significant opportunity to streamline and rightsize its expense structure to assure that costs better align with sales.

The efficiency review program we noted on last quarter's call coupled with other productivity measures we are implementing are expected to contribute $250 million of incremental cost savings over the next 2 fiscal years. These efforts will improve efficiency while still providing our business the support and services they need.

Similar to our traditional business, the independent business is feeling the impact of our stretched retail customer. Like-for-like sales have dipped from last year, though some of this was offset by sales to new affiliates. With more than 1,900 primary supplier relationships and 650 secondary relationships, we continue to see opportunities to grow this business by offering retailers the services and products they need to meet the diverse needs of their customers.

Beginning this quarter, we are presenting Save-A-Lot as a separate segment in our consolidated financial statement. This new detail provides investors greater visibility into our hard discount operation.

As with other parts of our business, Save-A-Lot experienced challenges this quarter, driven in part by heightened competition, but primarily by the impact that the economy is having on its core customer.

Persistent retail food inflation has eroded purchasing power of Save-A-Lot's core shopper with a high concentration of customers on government assistance programs, double-digit price increases in basic food items like pasta, canned vegetables and tuna have had a meaningful impact on the Save-A-Lot customer.

We're responding to this deterioration in purchasing power, as well as heightened competition by refreshing assortments and investing in price by expanding our offerings of key value items. We expect that this will not only encourage existing customers to buy more, but will also increase our appeal with customers that shop us less frequently.

We expect to realize additional efficiencies from our distribution system as well as from corporate stores through better management of shrink and labor costs. By doing so, we'll be able to pass these savings through to our customers across our 1,300 store network.

Save-A-Lot remains an important part of SUPERVALU's growth story. We've added 4 stores this quarter and expect to add a total of 40 stores to our network this fiscal year. We plan to continue our investment in new products and facilities to make Save-A-Lot an even more relevant value retailer in the years to come.

I noted earlier that we will continue to strengthen SUPERVALU's financial position. To this end, the company is in the process of finalizing a new asset-backed lending facility and real estate term loan that will replace our existing senior credit facility and term loans. This transaction will enhance our liquidity position and provide flexibility to help us accelerate our price investments. Sherry will provide additional color on this transaction shortly.

Finally, in addition to the actions I've outlined today, our board and management will explore strategic alternatives to create value for the company's shareholders. SUPERVALU has engaged Goldman Sachs and Greenhill as its financial advisers. There can be no assurance, however, that this review will result in any transaction or a change in the company's overall structure or its current business model.

Our Chairman, Wayne Sales, will manage this process, which will allow my executive team and me to remain focused on executing our accelerated business plan.

The results of this strategic review will be shared upon completion. In the interim, we will not be commenting on the status of the review process.

With that, let me pass the call over to Sherry to discuss our overall financial performance for the quarter and provide details of financial restructuring measures we announced today.

Sherry M. Smith

Thanks, Craig. Our first quarter results fell short of expectations. And we expect the trends that contributed to this shortfall, mainly the continued intense price sensitivity on the part of consumers and aggressive promotions and price actions by competitors will continue for some time. The plan we are announcing today is the result of a comprehensive analysis of how we can marshal our resources to better address these issues and achieve long-term growth in our business.

We expect near- and medium-term profit margins to be pressured as the price reductions we're implementing initially outpace cost reductions and volume improvement. However, we believe that these moves will dramatically improve our positioning for the long term.

Our status as a leading national food retailer with a track record of generating more than $1 billion in annual operating cash flow, generally defined as net earnings excluding noncash charges plus depreciation and changes in working capital, provides us a strong foundation as we move forward with steps to address our competitive issue, enhance our financial strength and flexibility and generate value for shareholders.

Today, we announced we have underwritten commitments in place for a new asset-backed line of credit, as well as a stand-alone real estate term loan secured in part by a portion of our portfolio of real estate, which together totaled $2.5 billion. These transactions, which we expect to close in August, will replace our existing $2.5 billion senior credit facility and term loan.

As part of the structure, we anticipate a $1.65 billion asset-backed lending revolving credit facility, which will be underwritten by Wells Fargo, U.S. Bank, Barclays and Credit Suisse, as well as an $850 million real estate secured loan, which is underwritten by Credit Suisse and Barclays. Upon completion, this financing will remove certain restrictive financial covenants included in our existing facility and allow for more flexibility as we move forward with our plans. We will continue to have a $200 million securitized accounts receivable facility in place with terms that are unchanged from today as an additional source of short-term borrowings.

For fiscal '13, we plan to reduce total outstanding debt by $450 million to $500 million and are committed to reducing debt by at least $400 million on an annual basis for the foreseeable future. As noted in our release, SUPERVALU is also intensifying its focus on rightsizing its expense structure. From administrative offices to retail stores to distribution centers, we are identifying opportunities to become leaner and more efficient.

This quarter, we developed a medium-term road map that details functions and work that can be streamlined and simplified. Some of these efforts was informed by the efficiency review program we announced last quarter. By aggressively focusing on productivity and efficiency, we believe we can realize an additional $250 million in expense reductions across the organization over the next 2 years. This is incremental to our goal of removing $75 million in expenses this year.

Our capital spending plans for fiscal '13 have also been revised from $675 million to a range between $450 million and $500 million. At the same time, we will continue to invest in our existing store base and plan to complete 40 store remodels and add 40 stores to the Save-A-Lot network, including license locations. Going forward, we will continue to make investments for in-store merchandising and customer-facing sales driving initiatives. These are important to us as we work to reverse our sales trajectory.

In support of our capital allocation strategy, we also announced the board's decision to suspend our quarterly dividend. Our board will review the dividend policy annually.

All of these moves support the acceleration of our price investment strategy and will allow us to continue to pay down debt in a more meaningful way.

Let me next move to our Q1 results. Third quarter -- excuse me, this quarter, we earned $0.19 per share on total sales of $10.6 billion. Retail food IDs were negative 3.7% and network IDs within Save-A-Lot were negative 3.4%. The declines in both segments reflect heightened competitive activity, softness in consumer spending and a continued focus on price and value by customers.

Within both our Retail Food and Save-A-Lot segments, customer counts and unit per basket were negative this quarter, while basket size rose modestly. We estimate cost inflation was about 3.5% this quarter.

As per operating earnings, both our Retail Food and Save-A-Lot segments were weighed upon by the negative ID sales and unit volume declines, which pressured expenses. Our cost reduction initiatives in these segments help this quarter's results but did not fully offset pressures caused by the sales declines.

Within our independent business, our operating earnings were essentially flat when adjusting for the cycling of a small gain from last year related to the sale of a non-core asset and absorbing severance cost related to the consolidation of 2 distribution centers this quarter.

Our effective tax rate came in at slightly more than 25%, reflecting the benefit of tax planning activities in the quarter, which I referenced on our April quarterly call.

Concurrent with the actions we announced today to enhance performance and shareholder value, we are suspending guidance for IDs and earnings per share. We still expect SUPERVALU to generate cash flows in excess of $1 billion and our accelerated plan will allow all of our stores to be priced competitively by the end of fiscal '14. These actions are the right path for the company. We will continue to provide annual cash flow, debt reduction and CapEx spending guidance moving forward.

With that, I will turn the call back to Craig for some closing comments.

Craig R. Herkert

The challenging economy and the highly competitive environment in which we operate demand that we consider all avenues available to enhance value for all of our stakeholders, including our customers, associates and our investors. The actions we're announcing today will allow us to address the price gap that exists in our markets, drive more traffic to our stores in a shorter time frame and be more responsive to the needs of our customers. To assure that we are evaluating the full range of opportunities available to us to create value for shareholders, we're also reviewing strategic alternatives for our business.

SUPERVALU is a profitable company with solid cash flows. And while these strategies will put pressure on our margins and profits over the near term, it is important that we take the bold actions necessary to put the company on a solid course for long-term success. The steps we have outlined are both prudent and beneficial to all of our constituents. I will now open the call up to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Deborah Weinswig with Citi.

Nathan Rich

This is actually Nathan Rich filling in for Deb today. My first question was I was just wondering if you could give some more color on how the price investments will be put in place, whether it will be sort of like a banner-by-banner strategy or category by category. And then also if you could just give some more details on the timing.

Craig R. Herkert

There will be a little bit of both, Nathan. But primarily, banner by banner with the Jewel-Osco, banner being complete by Labor Day. And we will be announcing next banner shortly. We will not be announcing that today. Concurrent with that, however, we will continue to see some price investment across banners like I articulated with salty snack program that we really like what we saw at -- in the Chicago market that -- now being rolled out to Southern California and next week to Albertsons Intermountain West. So a little bit of both, but primarily banner by banner.

Nathan Rich

Great. And then can you also talk about how your customer loyalty program will fit into your new strategy?

Craig R. Herkert

We continue to have a customer loyalty program across many of our banners. One exciting thing that we've done recently for those of you who is at the Chicago market is introduced a revised Jewel rewards program that includes fuel rewards with participating Shell stations in Chicago market. That program started about 3 weeks ago. We're heavily advertising that and very early stages, but that is clearly an enhancement to our existing program in the Chicago market.

Operator

And our next question comes from the line of Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Is bankruptcy 100% off the table as a strategic option here?

Craig R. Herkert

Yes, it's not reviewed. We are a profitable company with solid cash flows of $1 billion. We continue to pay down our debt on or ahead of schedule. So that is not a part of our strategic review.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay. Is one option to spin off the Albertsons business and throw all that Albertsons debt onto it? Correct me if I'm wrong, but I'm not sure you're guaranteeing all that debt. What would prevent you from just saying, "This is a bad acquisition, but it's a sunk cost, let's just cut our losses here."

Craig R. Herkert

The board will be reviewing strategic options. And beyond that, I will not comment on what that might entail.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Well, let me ask this then. Can you talk a little bit about the loss of covenants? What does that mean for your -- does it mean now you can close a lot of underperforming stores very quickly? And is that something you want to do? Is it something you can do without triggering the withdrawal liabilities on your multiemployer pension plans?

Craig R. Herkert

Let me not comment on what we might do regarding any store dispositions or anything of that nature. Let me state very clearly that what this enables us to do is to be more aggressive on our value transformation program. Our mandate from our Board of Directors and our desire is to move quickly to implement our fair pricing plus promotion strategy across our traditional retail network.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And one last one, I'm sorry. What debt is guaranteed and what debt is not guaranteed? Can you just remind me of that, please?

Sherry M. Smith

So today, the revolver has a guarantee of the subsidiaries but that's the only debt that has a guarantee that's been replaced with the asset-backed facility and the real estate facility and the bond indentures.

Operator

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

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Craig, in relation to the price investments to the extent that you are increasing your cost-reduction target from around $75 million to what appears to be around double that figure for this year, I just want to confirm that you're really planning to set aside all of those cost savings for price investments. Is that correct?

Craig R. Herkert

Yes.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

And as a related question with the understanding that you're raising your debt-reduction target modestly and you need to set aside some cash for that, based on the dividend cut and the new CapEx guidance and all of the headcount-driven cost savings, just back of the envelope, it seems like you would have around $300 million to $400 million available for price investment this year. Is that the right way to sort of quantify the near-term potential for price investments?

Sherry M. Smith

We're not giving any guidance in regard to the earnings per share, EPS, of that type of measurement.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Right. But I just -- I guess to the -- just can you talk about the planned proceeds from the dividend cut and the lower CapEx spending?

Sherry M. Smith

Obviously, we're not giving EPS guidance. So the former guidance is not in place today that we had for this year. We will have fees related to the financing. And we will also be investing in price and continue to pay down debt. We've increased our debt pay-down for this fiscal year also, so those are other components.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And then just finally, on Save-A-Lot. It's nice to finally see some transparency on the profitability for Save-A-Lot. But it also looks like the comps took a significant step backwards in this latest quarter. So can you just comment on any specific factors behind the sequential sales weakness? And can you talk about the sales trends for Save-A-Lot in the first few weeks of the current quarter, if you're seeing any improvement there?

Craig R. Herkert

Yes, we're obviously not providing any forward-looking statements. So I think I can comment on the Q and really is what I had in my prepared remarks, which is a very stressed customer. We have just north of 60% of our customers are in some sort of government assistance, which as I'm sure you are aware has not been rising in the same time that we've seen food inflation, particularly on the food products that are important to our customers at Save-A-Lot. So the customers are clearly stressed, that would be number one. And number two, as I know you're aware, there has been significant growth of other players in the discount arena that we are working to make sure we're competitive with. So all that said, with the team led by Santiago Roces who's doing is focusing on making sure that we improve our value proposition whether that be through an appropriate assortment of KVIs and looking at making sure we have the right mix of products to our customers. And frankly, working on efficiency within the Save-A-Lot model as well so that we can drive cost down in that business and continue to invest in price.

Operator

Your next question comes from the line of John Heinbockel with Guggenheim.

John Heinbockel - Guggenheim Securities, LLC, Research Division

So Craig, a couple of things. With regard to Save-A-Lot, do you think there are any execution issues there? Again because I would have thought you would have done -- you would have picked up share from higher-priced, higher-cost formats. Are there execution issues? Or do you think you're just losing share to Dollar Stores as they add more consumables to their mix?

Craig R. Herkert

With any big business, John, I would assume there are certainly some executional opportunities that I know the team in St. Louis is working on. So let me be blunt, clearly, I'm sure there are some executional opportunities, particularly as it relates to being as responsive as we need to be to consumer demands. I'm comfortable that Santiago and the team are in fact focused on those things. But remember that the consumer for that business is very stressed, and what we're focused on is dealing with that consumer while at the same time paying attention to the competitive situation that we find ourselves in and responding appropriately.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Can you -- do you think -- can you trace that -- what the Dollar guys have done with consumables? Is it particular challenge for Save-A-Lot? You don't think that's it specifically?

Craig R. Herkert

Let me not speak to a particular competitor, John. I think clearly, there are a lot of competitive challenges out there. Obviously, Dollar Store is among those things that have been influencing the way Americans shop, amongst other things. So yes, it's a relevant factor. I don't know that I would comment particularly what the relevance is on that particular issue. One of the things that we're doing is making sure we're paying attention to all of the above and ensuring that we offer our consumer the products that they're looking for, particularly around opening price points. And again, I would say, I'm happy with what Santiago and the team are focused on with regards to the development of a range of products that are appropriate to the needs of our customer.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. And then just finally on the core business. How do you guard against -- I mean the acceleration of pricing is good. Cutting CapEx, clearly there are areas to invest out in the field. When you look at that and you look at cutting back cost, and some of that has to be labor. It's really a negative comp would bring labor down all by itself. How do you sort of guard against that being kind of something that feeds on itself and kind of drives certain banners into sort of a spiral they don't get out of while others are investing and have the ability, I guess, to invest more heavily in their businesses?

Craig R. Herkert

Yes. I think there are a couple of things, a complicated question. But I think one is you can take cost out by using the great new tools that the IT team has delivered to us, and we talked about these in past calls. Making sure that we're allocating our labor in the right departments, in the right stores at the right time, so there's clearly opportunity there. As you said and as we -- obviously we were public on this a few weeks ago, in Southern California there's an opportunity to make sure that we rightsize our labor based on declining sales. So those are just things that you have to do when you run a business, and I'm comfortable that we can do that. As it relates to the CapEx, I would remind you that we have -- 50% of our store base has been remodeled in the last 5 years. And I think 85% has been remodeled in the last 10 years. So we have a reasonably up-to-date store base. We've been investing north of 2% in remodels over the last few years, which is consistent with what the industry does. So I'm reasonably comfortable that we have an asset base that is appropriate for our customer. And we will still do remodels this year as we articulated. And we will still do beyond those remodels, maintenance capital across the enterprise to ensure that the customer-facing needs of our stores are best taken care of.

Operator

Your next question comes from the line of Jason DeRise with UBS.

Jason DeRise - UBS Investment Bank, Research Division

I wanted to ask one question about the new debt and then kind of come back to some operational question. First, on the debt, can you give us any kind of thought about what's the new interest rate or blended interest rate impact there may be on this new debt and also if there's any new restrictions? Obviously, the old covenants go away, but are there any restrictions that we'd also need to consider as we model the company?

Sherry M. Smith

We intend to provide that information when we close on the financing, and that will be in August. Certainly, I can tell you that the terms are very similar to what you would expect for that type of financing in the marketplace today.

Jason DeRise - UBS Investment Bank, Research Division

Okay. And then I guess in terms of the operation, I just -- you're announcing more as the cost cuts and obviously you talked to us quite a bit about the opportunities for efficiency. But I just -- I wonder if you've done so much cost cutting that it's actually leading to less ability to generate revenues and actually what may need to happen more staff needs to go at to the stores and there's other increases that need to happen in SG&A to really drive the turnaround in revenues? There's been at least one other major store that was talking about these reductions, also talking about increasing the service hours put in the stores, so I want to get your thoughts about that.

Craig R. Herkert

Yes. First of all, I'll remind you the reductions we're talking about across the enterprise, they are not necessarily store based. Although clearly, as we did in Southern California, there will be opportunities over the coming 2 years to make sure that we are appropriately staffing our stores at the right time to meet our customers' needs. I would also remind you that this company, as you know, was built over the years through many acquisitions and therefore, had incumbent upon it a lot of inefficient processes. We are moving aggressively towards shared services and getting the support functions of this company appropriate for operating as one company, winning for the customer. So there are broad-based opportunities not in one single area. And in every case, we are focused on ensuring that we enable our store directors to serve their customers in our traditional stores, that we enable our independent business leaders to continue to provide the great service that they're providing our 1,900 independent grocers and that we continue to allow our Save-A-Lot team to service not only our corporately-owned stores but all of our great licensees. So we have our focus on the right thing, which is reducing our expenses on noncustomer facing opportunities. That's what our organizational efficiency project was all about. So we have a lot of work in front of us over the coming 2 years, but we are focused on ensuring that we execute against our plan to serve our customers while we're executing these cost cuts.

Jason DeRise - UBS Investment Bank, Research Division

And if I can ask one more on the CapEx. What has been removed from the CapEx spend that was originally guided for, for this year that you're no longer going to spend on?

Craig R. Herkert

It's broad-based. It's a little bit of a remodel. It's a little bit of IT. It's everything that falls into CapEx. We took a hard look at everything we're doing and focused on what do we need to do right now. And I think we've articulated that. We continue to invest in growing our Save-A-Lot business. We will continue to invest where appropriate on our remodel program. We have identified over the past few quarters that we have a very targeted remodel program that is rightsized for each individual store. So it's been a very thoughtful, thorough process of looking at all aspects of CapEx.

Operator

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

Mark Wiltamuth - Morgan Stanley, Research Division

Craig, are you assuming a positive volume response in 2013 or 2014 in response to the price reductions?

Craig R. Herkert

We are not providing guidance going forward. I would say that we are very pleased as we've articulated in the past on those categories where we've moved to fair pricing, that we see unit movement heading in the right direction. So we are very pleased with that. And as I said in my prepared remarks, we're pleased with the performance of those banners that either already are or already have transitioned to a fair pricing program. But beyond that, we are not providing guidance.

Mark Wiltamuth - Morgan Stanley, Research Division

And if you have troubles actually getting a volume response out of the customer, maybe, Sherry, if you could talk to us about the flexibility you'll have to kind of weather those tougher waters, because there is a chance that you're going to cut price and you're not going to get much response out of it.

Sherry M. Smith

Well, I think that is one of the reasons we put in place the asset-backed lending facility and the real estate term loan. It does not have the financial covenants in it. And so that allows more flexibility for us as we move forward. What we look at, in fact we have stated is that we expect our operating cash flows to be at the $1 billion level. And the other actions that we took allow us to be able to invest in price and meet our debt pay-downs.

Mark Wiltamuth - Morgan Stanley, Research Division

Again, your maturity schedule is largely unchanged, you're just replacing the big revolver? And map that a little more for us.

Sherry M. Smith

Well certainly the existing term loans come out, and so then the real estate loan generally will be in a 6- to 7-year term, so that moves out that maturity as well. So you see a very -- what we said is fiscal '13 to fiscal '15, there is just less than $1 billion that comes due in those 3 years.

Mark Wiltamuth - Morgan Stanley, Research Division

Okay. I think the concern here is going to be on the response you get from your customers. And I think the -- I think that's where we're all going to be focusing, can you get a movement within a year or 2 out of the customers? I'm just -- anything you can give us that makes us feel more comfortable there.

Craig R. Herkert

Yes. What I would say is we know that this is the right move. We are doing this because it's the right move for the long term for this business to serve our customers. We also anticipate that there are near-term challenges as we invest. And when you take a category, you take a banner like Chicago and you dramatically lower prices and obviously has an impact on near-term IDs. So that's why we're in this for the long term. We believe it's the right long-term decision for our business and our customers.

Operator

Your next question comes from the line of Karen Short with BMO Capital.

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

I guess just following on that line. You go ahead and you reduce prices, I guess my assumption will be that your competitors are going to do the same. And they obviously remain in a much stronger position financially and strategically. And they have a higher quality assets because they've been invested in more consistently. So I guess what gives you the confidence that -- I mean that this is the right strategy, that you're not going to get a response? And that you're actually are go to be able to succeed with this?

Craig R. Herkert

Well, let me respond to your second comment first. I'm not sure I would agree with you that our competitors have a better asset base. As I said, we actually feel very good about our asset base. So number one, I don't think we're out-positioned on an asset base. And number two, we are making significant price investments. We -- it's business, we expect to be competitive -- there to be competitive responses, but we believe that our fair price plus our promotional strategy is a viable long-term strategy coupled with what we're doing in store on fresh and hyper-local and being part of the community and execution. It's all of the above that work for us. So we do feel comfortable with it. And we do feel good about our asset base that we can be not only competitive but compellingly competitive.

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

Okay. And then I just was curious, the reduced CapEx and then the cut dividend, were those decisions that were made prior to initiating the strategic review or in conjunction with the strategic review?

Craig R. Herkert

This was a holistic list of things that the board and management worked on. All of this was worked on together.

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

Okay. And then I guess just a last question. In terms of the competitive environment getting worse, I mean the first thing is on Save-A-Lot, I guess you relate it to being more a situation where your customers were feeling worse, not so much -- well a little bit competitive, but also your customers. But I guess I don't -- I mean the environment didn't really seem to get worse sequentially from where you were at in the fourth quarter. So maybe a little color on what happened with Save-A-Lot's IDs. And then on the competitive environment, can you maybe just give a little bit more color on where you saw flareups and if you would kind of characterize it as flareups or was it broad-based across all formats in terms of higher -- greater competition.

Craig R. Herkert

Yes. I don't know if I have more color on Save-A-Lot, Karen, than what I've already indicated. It's a combination of the environment, the percentage of our customers who are relying on government assistance and the stress that puts on them and the general malaise of the economy and clearly, competitive situation. So I don't want to diminish any of the above, and I don't have more clarity. And as it relates to commenting on which particular competitors have had the biggest impact, no, I would prefer not to comment. We are a business with retail across United States. We have competitors all over. And so it's -- I don't want to get into a discussion about what competitor had what impact. I think it's fairly clear that given the economic situation the American consumer is in, a lot of grocery competitors are focused on making sure that they have the right value proposition for customers. We needed to accelerate our ability to play in that game, and we're doing so.

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

Okay, it's all right. Just last question, what portion of the companies owned real estate, I guess, is now secured? Meaning I guess if you needed to do a sale leaseback for liquidity, how many stores are -- will be unencumbered after this debt refinancing is completed?

Sherry M. Smith

No. From a real estate perspective, clearly, we have very solid real estate assets here. And we're not going to go to that level. I think if you think about liquidity, we're putting in place the same liquidity that we've had available in the past. That's at $2.5 billion level. It gives us ample liquidity from what we would view as being drawn on those facilities even during our peak borrowing.

Operator

Your final question comes from the line of Edward Kelly with Credit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

Craig, could you just define what it means to get pricing in line? Are you looking at broad-based basket? And by the way, which competition are you focused on? Is there just through market channels?

Craig R. Herkert

Yes. So I think maybe the best analog (sic) [analogy] would be what we're doing at Jewel-Osco in Chicago. We are significantly narrowing our base price gap. So we're looking at base prices, prices before promotion, and we're looking at significantly narrowing that gap to discounters and there are many discounters out there. And frankly, by doing that, we obviously improve our position relative to traditional grocers. We will at the same time continue to be a promotional merchant. That mix changes as we move to fair pricing. But to be very clear, we continue to be a promotional merchant, again evidenced by what we're doing in Chicago. So beyond that, I don't want to give you the specific numbers. I would say that we know very clearly where we were. And we are tracking weekly where we are by category. And I'm very comfortable that the team has put together a very, very good plan. We are tracking exactly where we intended to track on those measures. So to be clear, it is a base price change. And it's a significant base price change. It is not a KVI strategy. It is broad-based. And we continue to be a promotional merchant because our customers like our stores for our promotions. We will continue to do those promotions. They will be specific by banner, and we know what banner needs what promotion.

Edward J. Kelly - Crédit Suisse AG, Research Division

Now is your goal on a basket to be in below your conventional competitors and your individual markets? Or is it to be in line with those competitors?

Craig R. Herkert

Let me not comment by market what we're doing. This is really a competitive situation. So let me say, we know very clearly by market where we need to be and where we need to be by competitor. And I would just say there are certain things we want to keep to ourselves for competitive reasons. But we are very clear on what we're going to do, what the investment is, and we are tracking ourselves rigorously against those goals.

Edward J. Kelly - Crédit Suisse AG, Research Division

All right. And I just want to lastly kind of follow up with along the same lines that you just -- questioning on price investments, the last couple of questions here. But how much pain are you willing to take on your price investment strategy? And what I mean by that is it -- the reason that you haven't gone faster to date is that investing an price takes down sales right, it takes down your gross profit dollars in the near term before you see any lift in traffic. And essentially the more aggressive you go, the more pain you have to feel on the P&L side. So how do you think about balancing this strategy and investment in price versus where you see the floor and your EBITDA willing to go?

Craig R. Herkert

Yes. Again, we're not going to provide guidance. So I want to be clear, what I would say is the board and management are committed to doing this and doing this with speed. And we are committed to ensuring that we take our cost out of this business, commensurate, so that we can continue to fund it. What we believe is that the funding may not line up exactly, which is obviously a challenge in the near term, but we will fund these investments. Our merchandising team continues to have, I think, great success in how they are negotiating with our vendor partners. We've had fantastic support from our vendor partners, whether it be on the category decisions, such as salty snacks or whether it be with most of our key vendors as we moved to fair pricing in Chicago. So it is not all about taking cost out and it's clearly not all about simply lowering earnings per share. But there is an opportunity as we think about when we do it and how does it all match up. What I would say is the board and management are completely committed to doing this and to doing this with speed that we articulated in our prepared remarks.

Kenneth B. Levy

Well, thank you for joining us on today's call. Investor Relations will be around for the balance of the evening. If you have additional questions, please do reach out. Thank you very much.

Operator

Thank you ladies and gentlemen. This does conclude today's conference call. You may now disconnect.

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

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

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

Source: SUPERVALU Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts