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SUPERVALU Inc. (NYSE:SVU)

F1Q09 Earnings Call

July 22, 2008, 10:00 am ET

Executives

David Oliver – Vice President – Investor Relations

Jeffrey Noddle – Chairman, Chief Executive Officer

Pamela Knous – Executive Vice President, Chief Financial Officer

Analysts

Susan Anderson – Citigroup

Edward Kelly – Credit Suisse

John Heinbockel – Goldman Sachs & Company

Meredith Adler – Lehman Brothers

Mark Wiltamuth – Morgan Stanley

Neil Curry – UBS

Gretchen Hoey – J. P. Morgan

Emily Shanks – Lehman Brothers

Scott Mushkin – Jeffries & Co.

Operator

Good morning. My name is Tomika and I’ll be your conference operator today. At this time I would like to welcome everyone to the first quarter fiscal 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions).

I would now like to turn over the call to Mr. David Oliver, Vice President of Investor Relations. Sir, you may begin.

David Oliver

Thank you and welcome, everyone. SUPERVALU’s call today is webcast and will be archived for the next three weeks. You can find this when you go to our website.

Today on the call are Jeff Noddle, SUPERVALU’s chairman and CEO, and Pam Knous, Corporate Executive Vice President and CFO.

As you know, the information presented and discussed today includes forward-looking statements which are made under the same provisions of the Private Securities Litigation Reform Act of 1995. The risk and uncertainties related to such statements are detailed in our fiscal 2008 10K.

After today’s prepared remarks we will have a question and answer session. As always, I will be available after the call for additional questions. So let’s begin.

In the first quarter we reported total net sales of $13.3 billion, which was flat with last year. Reported diluted earnings per share was a record $0.76, a 10% increase over last year and at first-call consensus. Adjusted for one-time acquisition related costs, diluted earnings per share were $0.79, a 3% increase over last year.

This morning, in our release, we also updated our fiscal 2009 53-week earnings guidance to a range of $3.00 to $3.16 per diluted share on a GAAP basis. This compares to our previous guidance range of $3.06 to $3.22 per diluted share. Our updated earliest guidance is in line with current first-call consensus of $3.07 per share.

We have also updated our identical store sales guidance to an estimate of 50 basis points excluding fuel compared to our previous guidance of 1% to 2% for fiscal 2009.

I will now turn the call over to Jeff.

Jeffrey Noddle

Thanks, David, and welcome, everyone, to SUPERVALU’s first quarter fiscal 2009 earnings call.

This morning we are pleased to report record first quarter results and our ability to manage through a challenging economic environment, along with record energy costs. Pam will cover the quarter’s results in more detail in a moment, but I’d like to begin the call with a few comments on our updated guidance.

Today’s economic environment is quite different than we anticipated just a few months ago when we gave our fiscal 2009 guidance. Our updated guidance issued this morning underscores how challenging it has become to project and quantify the impact of future changes in the economy. In particular, the current economic downturn, as well as energy and food inflation, have had and continue to have a major impact on consumer purchasing behaviour. And I hope you know that we try to be both realistic and prudent. Due to this uncertainty and to be conservative we have taken $0.06 off our guidance range.

I’d like to begin by providing you additional colour on how we constructed our guidance for the balance of the year. We also will touch upon the steps we are taking to mitigate the macro-economic headwinds and stay focused on those things over which we have control.

First I want you to know that our changing guidance is not related to the integration of Albertson’s. In fact, quite the opposite. The integration is proceeding on schedule and we are pleased with our progress.

Putting that aside, there are really three drivers of our changing guidance. First, the continual increases in energy costs, particularly fuel and utilities, are exceeding our original estimates for the year. Although initial plan factored in sizable energy cost increases over the prior year we did not anticipate the unprecedented rise in energy cost and the effect on us and our customers. Despite good mitigation activities, we are currently forecasting a double-digit increase in energy costs above that reflected in our original plan.

Second, our non-cash LIFO charge is currently expected to double from our original plan with food inflation approximating 4% to 5%. Unfortunately, these high inflation levels seem very reasonable today in light of the higher fuel and grain costs which penetrate almost every food category.

Third, driven by the external economic weakness impacting our customers we now expect for the remainder of the year some continuing softness in ID sales. Our updated ID sales guidance of 0.5% reflects the approximate 100 basis-point impact of trading down that we experience in the first quarter, including a continuation of investment in price to provide value to our customers as well as recognizing the increased movement of own brands and promotional product.

Appropriately, with these headwinds impacting our business, we are proactively responding by managing those factors that are under our control. In addition to our strategic growth and synergy initiatives, we began a company-wide cost reduction program. This program incorporates initiatives that are expected to further reduce infrastructure cost and inventory shrink, as well as mitigate inflationary cost pressures as we deliver value to our customers. Our updated guidance includes the expected benefits of these efforts.

So now that we’ve highlighted the key components of the updated guidance I would also like to review with you any implications. First and foremost, we are not changing the timing, focus, or execution of any of our strategic initiatives. Our remodelling activity is on track and on plan with 43 major remodels in the first quarter and 165 major remodels forecasted for the year.

Own brands is on track and on plan following an extremely successful launch of our Wild Harvest Natural and Organic line this spring.

Our new chief marketing officer, Steve Michaelson, is on board – a critical step to building our marketing competency and our organization, leadership, and focus.

Synergies are also on track and on plan.

Our merchandising transformation is on track and on plan.

Customer service foods are improving and our debt reduction goal is on track and on plan also.

Perhaps most relevant is that we are not seeing significant changes in customer count trends, market ranks, or pricing positions across our major markets. Any attitude, to some extent there has been some market share loss that has occurred, but I want to remind you that approximately 70% of that loss is driven by our own planned closure of underperforming stores.

I have said many times I wish we could freeze the competitive marketplace as we complete this three-year transformational journey for our company. That, of course, is not reality. From the very onset of the Albertson’s acquisition we did say the wild card store journey were near term sales trends and the overall economy. However, we certainly did not contemplate the current economic environment that is likely to continue to unfold for the balance of the year. As our guidance indicates, we believe we still can achieve another record earnings year.

Pam will surely provide more specifics on the quarter and our outlook, and then I will wrap up the call with a few summary comments. As I turn the call over to Pam I would like to emphasize, we remain confident in our overall plan, we are achieving traction on those strategic initiatives, and we have a great team in place that is fully committed to delivering this updated earnings guidance.

Pam, take it away, and then I will update you on a few of our key initiatives and answer any questions you might have.

Pamela Knous

Thanks, Jeff, and good morning, everyone. Let me begin by reiterating that we are pleased with our record first quarter earnings per share, even if the record was only by a few cents yet reflecting a 12% count-down annual growth rate before one-time items just closing on the acquisition in June 2006. We have now reported eight consecutive quarters of record results which we consider exceptional performance considering the size and scope of the acquisition.

Today in my comments we’ll focus on operating results for the first quarter, our financial condition, and additional comments regarding our fiscal 2009 outlook.

First, let’s start with our ID sales of negative 90 basis points. This compares to last year’s first quarter when we reported an increase of 1.2%. I would like to recap for you the major components behind the year-over-year change.

First, in total, we are experiencing slight decline in customer counts. Although this is partially offset by higher average tickets which reflect both food inflation and consolidation of trips.

Second, this year’s ID’s are being impacted by approximately 100 basis points from the effect of the economy on consumer purchasing behaviour. This encompasses our estimate of trading down, including increased promotional product movement and continued investment in price.

We have talked previously about investment in price at Shaw’s, as well as continued investment in price every day across our markets as we consider appropriate. But within this economic environment our investments have been more broadly based to provide customers value as they look for ways to manage their strained budgets.

Third, this quarter we are experiencing higher levels of competitive openings. As you are likely aware, the Chicago market has been a recent focus for Wal-Mart with 15 super centre openings during this past year.

And finally, other less significant sales impacts year over year were the deflationary impact of brand drugs shifting to generic. This shift cost us about 20 basis points and IDs in the first quarter on top of a similar amount in the same quarter last year and the impact of owned brands. I would also add that our economic stimulus gift card promotion launched in early May and extending through July did not have a measurable impact on sales in the quarter.

Now a few comments on operating results. The impact of the higher cost just referenced was particularly evident in our retail EBIDT as a percent of sales in the first quarter. Retail EBIDT percent declined 40 basis points to 3.9% of sales this year compared to 3.4% of sales last year. The primary reasons for this decline were the impact of soft sales and price investments made to provide customers value in today’s economy, as well as higher energy costs and a higher LIFO charge partially offset by lower employer related benefit costs and synergies from the Albertson’s acquisition.

This quarter supply chain services EBIDT as a percent of sales increased 60 basis points to 2.9% of sales compared to 2.3% last year. The EBIDT percent improvement reflects the benefit of sales leverage from a strong 4.6% sales increase over last year. This reflects a combination of pass-through food inflation, new business growth, and lower customer attrition.

Looking at the balance of the year, Target will convert a second geographic region to a SUPERVALU managed third party logistics operation later this summer. This follows the initial conversion of a Texas facility in early April. As discussed on our fourth quarter call, Target’s transition to 3PL will impact the five chain revenues in operating earnings the balance of the year.

Turning to our borrowing costs, net interest expense in the first quarter was $190 million compared to $223 million last year. This $33 million decline was about equally weighted between lower debt levels and borrowing rates.

As we enter year three of the acquisition we are nearing the end of our one-time acquisition-related costs. Since June 2006 we have incurred a total of $149 million in such costs. In the first quarter, these costs, which are included in SG&A, were approximately $10 million pre-tax or $0.03 per diluted share compared to $28 million pre-tax or $0.08 per diluted share last year. This year’s first quarter costs primarily related to employee retention and relocation. The change in these costs explains the decrease in general corporate expenses year over year.

Regarding synergies, we are on track for achieving $40 million to $50 million in synergies for fiscal 2009, which puts us on target for the $150 million to $175 million in total acquisition related synergies by early in the fourth year following the acquisition.

Now I would like to make a few comments on the balance sheet. You’ve probably noted our quarter one debt levels are approximately the same as year end. By accelerating our remodel program, 43 major remodels were completed in the first quarter versus 15 last year. As such, capital expenditures will not be back end loaded as in the prior year. I do want to assure you that we are on track and remain committed to achieving $400 million in debt reduction by year end.

We are still making progress on our debt-to-capital ratio. This ratio now stands at 59% compared to 60% at year end. In the two years since the acquisition this ratio has improved 500 basis points; a significant accomplishment. I would add that in the first quarter we paid $129 million in scheduled debt maturities and $100 million in voluntary term loan payments using our $2 billion revolver that expires in June 2011. This revolver with $1.3 billion of capacity is more than sufficient to take out the $124 million debt maturities that remain in fiscal 2009.

This quarter we also extended our $300 million accounts receivable securitization program.

We are well within our required covenant levels with first quarter EBIDT adjusted for one-time acquisition related costs of $466 million, depreciation and amortization expense of $322 million, net rent expense of $113 million, and total debt of $8.8 billion.

One point I would like to provide some additional clarity around is remodel capital. Depending on who you are talking to, remodel capital can be defined differently. As you know, the remodel capital has double components, the two largest being customer focused capital, such as our meal solution modules which allow us to deliver new merchandise offers and other improvements for the customer benefits. This contrast was cause for the replacement of infrastructure. Examples of this would be new coffin cases or refrigeration systems replacing assets at the end of their life cycle. We can find these types of costs in maintenance capital and typically implement these upgrades in conjunction with a remodel when the timing makes sense.

And as we have shared with you previously, prior to the acquisition, Albertson’s had underinvested in both customer focus capital and infrastructure capital. We expect an IRR on customer focus remodel capital of 20% or higher. On maintenance capital return is measured by the savings created from lower repairs and maintenance, energy costs reductions, lower workers’ comp, etcetera. So as we talk about remodel capital our average major remodel is approximately $2.5 million. Each project is currently seeing an 8% sales lift in the early stages with additional lift expected in years two and three. The number of years it’s been since the store has last been touched does influence the total capital spend. We are seeing total spending on stores not touched in 10 years reach $4 million.

As just stated, we are disappointed that economic headwinds and inflated insulation in energy and food costs resulted in our decision to lower GAAP earnings guidance by $0.06 per diluted share. Though our practice is not to give quarterly guidance, today I will provide some additional colour related to certain items impacting our quarters in the balance of the year. As a reminder, our second and third quarters will reflect highly concentrated operating expenses related to acquisition integration activities and added costs as a result of our decision to maintain duplicative merchandising staff levels as we transition certain roles from the banners and regions to Minneapolis.

As you look to reflect our updated guidance in your quarterly estimates we expect our retail growth margins to be under pressure by higher fuel costs, LIFO charges, and trading down, including price investments. We also expect selling and administrative expenses to be impacted by higher utilities, particularly in the second quarter when rates in consumption peak during the summer months.

We currently see the second quarter being the most impacted by these factors as much as the cost mitigation activities just referenced is expected to occur in the third and fourth quarters.

In closing, for the first quarter, despite weaker than planned IDs and absorbing approximately $0.09 per share in higher energy and LIFO costs, we did deliver yet another record quarter. As we enter year three of our transformational journey our business model remains strong.

Thank you and I will turn the call back to Jeff.

Jeffrey Noddle

Thanks, Pam. As we respond to the challenges presented by this environment we are in we continue to execute on our key growth initiative. We are confident that these initiatives, such as store execution, remodels, own brands, merchandising, and customer centric marketing, will gain traction and provide sales momentum yet this year with the most improvement occurring later in the year, albeit somewhat muted by the current economic environment.

I’m pleased to report that the first quarter SUPERVALU’s own brands continued their positive momentum. Today own brands represent slightly more than 16% of our total retail sales with own brands share up 90 basis points from last year at this time. Overall our own brands’ growth rate continues to outpace national brands. As I mentioned previously, our Wild Harvest launch was our most successful product launch ever.

Building on that success, we will add another significant brand later this quarter with the introduction of a new premium food offering. This exciting new line will provide time crunched consumers a compelling reason to [inaudible] back on. They will enjoy a restaurant quality chef inspired meal at an outstanding value. With items across multiple categories this mega-premium brand will have a significant presence in fresh prepared foods. I look forward to sharing more information about this product line in the months to come.

In the quarter, as I mentioned, our real estate team was also very active completing 43 major remodels including 13 stores in our Albertson’s southern California banner and eight stores in our Acme banner. Remodelled stores continued to show favourable sales less development as they incorporate our merchandising initiative. In fact, the post-construction sales lift from the offensive remodel completed in the last 12 months is running at approximately 8% when measured against sales performance for the 12 weeks prior to the construction.

I hope we’ve provided clarity as to why we have updated our fiscal 2009 guidance and provided you additional colour on the balance of the year. In addition, I want to assure you that we are confident and committed to our plan and our strategic initiatives which will differentiate us in the minds of our customers and provide a foundation for our long-term growth.

Thank you and now, operator, we’ll take questions.

Question-and-Answer Session

Operator

Thank you, Sir. (Operator Instructions). Your first question comes from Meredith Adler – Lehman Brothers.

Meredith Adler – Lehman Brothers

Good morning. A couple of questions. I’d like to start by talking a little bit about sales. First question is, the legacy assets, the Cub, Shop ‘n Save, etcetera, were all more price oriented than the acquired asset. Are you seeing better sales performance at those stores?

Jeffrey Noddle

Well, good morning, Meredith. You know we don’t normally comment specifically on those, but I would make a general comment that where you are, where you have a history and a foundation built with a customer on an everyday pricing kind of operation it does give you an advantage generally during this time period. You failed to mention Save-A-Lot, which I would mention in that same context. Obviously Save-A-Lot is very well positioned in this current economic circumstance we are in. Save-A-Lot continues, as we commented last year, to have another very solid year and we’re pleased with the progress we see in some other markets they have entered as they continue to open stores and also have now turn the corner on a number of those stores open more than a year.

Generally you’re right that the legacy SUPERVALU assets were a more EDLP oriented, generally speaking. I do think that those are, for the moment, better positioned in the economy, but we have many markets that we have positive comps in that are outside of those that I mentioned and some that we don’t. I think it’s as much also driven by the economic circumstances by region. A lot of people have commented about the west, in California, for example.

So as much as that is one, the underlying factor is I do think the economic realities by region are another factor as well.

Meredith Adler – Lehman Brothers

And then you have lowered your ID guidance for the year, but you still have a meaningful improvement over the current trend. Could you just spell out for us what you see as being the key drivers? Is it clearly the remodels, merchandising, and marketing, but could you, you don’t have to give us numbers, but give us a sense of what’s going to drive that?

Jeffrey Noddle

We actually have this broken down by line item where this sales improvement is going to come from, but you’ve mentioned the major factors already. The remodels, just the fact that we’re getting more scaled in our remodels and we’re turning the corner on some important ones. For example, I just visited a few weeks ago, we redid all the stores in the Santa Barbara, California, area. I think it’s five or six stores. All remodelled, reintroduced, very strong results, even in light of difficult fires and things they’ve had out there. They were just getting more substance in the remodel. More of our merchandising initiatives are being not only put into the remodel stores, but also into all stores. And we’re migrating those around the company. Our marketing competency continues to grow and build. We’re not in a position where we have a thing called full analytics on who our customers are, who they aren’t, what their wants and needs are, what are trends, who are our best customers, where’s our opportunity, down to even local stores and certainly local markets. The use of that information continues to grow. And I’ve said at the back half of this year is when I expect results from those. And that’s not changed. Own brands I already commented on the strength of. Generally our comparative numbers are weaker in the back half of the year as well.

We continue to ratchet a number of initiatives around customer service and all these things in our mind still add up to, we expect, although we’ve taken it down somewhat by the effect that Pam indicated, but we expect stronger sales results in the back half of the year and that has not changed.

Meredith Adler – Lehman Brothers

Great. And then my final question is about the supply chain services business, which did very well this quarter and certainly better than we expected. I was wondering if you could talk a little bit about kind of where the new business is coming from. And then you also gave attrition a number of 2% to 4%; does that include Target?

Jeffrey Noddle

No, the 2% to 4% we’ve said is, you know, is our traditional attrition. I think that we said it’s running better than that this year. That does not include Target. We are very careful not to give out any Target numbers. They don’t care for that and we acknowledge that.

The new business wins, there’s no particular one area. We still do get some additional business with Target, even in those areas where they have it converted. So that continues to add into the Target part of the business. But we also have taken on some independent customer groups. I can think of several off the top of my head in different locations. As we have delivered more of our central merchandising capability, more of our marketing capability, we have brought many of the independent groups here to Minneapolis to witness and talk to those people and see what our capabilities are. Frankly, it’s won over some people in that part of our business. So the same capability has certainly be impactful on supply chain as well as it is on our retail outlook as well.

Meredith Adler – Lehman Brothers

Okay. Great. Thank you.

Operator

Your next question comes from Ed Kelly – Credit Suisse.

Edward Kelly – Credit Suisse

Hi. Good morning. Jeff, could you discuss your ID trends throughout the quarter? Did you see any stabilization or did this really accelerate throughout the quarter? Is there anything that would give us a sense that the remodels and the other strategies that you’re talking about or initiatives are gaining traction?

Jeffrey Noddle

I guess the only comment that I would make is it was fairly consistent throughout the quarter. We did see disappointment over Memorial Day. The weather particularly in the West and the Mid-West was poor over Memorial Day. So that Memorial Day kind of came in the mid part of the quarter. So that was disappointing. But other than that it was fairly consistent throughout the quarter.

Edward Kelly – Credit Suisse

And have you seen any change so far in the second quarter to date?

Jeffrey Noddle

Generally we are in about the same trend in the second quarter, maybe just slightly better. But you know, the weeks don’t match up. There’s two days difference this year in comparison because this was a leap year. So you have to be careful when you’re doing that measurement. But generally the trends are the same.

Edward Kelly – Credit Suisse

Okay. And could you just help us maybe get a sense for the worst case scenario in earnings this year? I mean, your stock trades at nine times the mid-point of EPS guidance, but your guidance does bake in a half percent ID gain and you were down 0.9 in the first 16 weeks and it doesn’t seem like the trend has improved much. You’ve got your 1% decline in comp guidance translated into I guess a 2% reduction in your, the mid-point of your guest guidance. Can that continue if we’re looking at a full-year compound with the same level as we’re looking at now? How should we think about all that?

Jeffrey Noddle

Well, we tried to lay that out in our comments this morning, Ed, but I would just summarize it this way: Generally speaking, as Pam detailed for you and made comment in between energy costs and LIFO there’s about $0.09 or $0.10 a share, something like that, headwind against us. We have started cost reduction initiatives that we are fairly certain will deliver this year. They are very specific by line item. Those should offset those kinds of costs and really the other factors and what we’ve talked about in the consumer, in the trading down activities that we see, things are certainly a little more competitive in certain markets than they were. So we’re just trying to be conservative on that side. We continue to run savings on interest costs and all those factors that both Pam and I laid out. You should have enough there to understand how we arrived at, even with minimal comp ID sales improvement, it really is driven by cost initiatives and trying to offset some of the other factors and just being a little more conservative. But generally our trends, as Pam has commented, since the acquisition, we’ve continued to put very solid results although this undoubtedly is a more uncertain environment than we are in. But I think we’ve laid out a reasonable plan to be within that range and we’ve tried again this morning to give a lot of detail so that you could build that into your expectations.

Edward Kelly – Credit Suisse

Okay. I guess the question really is, let’s say that the macro-economic environment stays where it is or even gets worse, and let’s say we’re in a situation where your comps don’t necessarily improve through no fault of your own, are there other things that you can do within your cost structure to mitigate the impact on EPS just like you did with your guidance today?

Jeffrey Noddle

Well, what we see today the answer would be yes. We think we can. But this environment certainly is more volatile than we’ve had over a number of years and it certainly is one of the more difficult operating environments that I’ve experienced certainly in my time here at SUPERVALU. So I want to give you all a cautionary note. But our plan, we’ve put a lot of thought into changing our guidance today and we gave you all the thinking behind it. I think we’ve got hopefully enough flexibility to achieve those results. But I certainly still expect that we will have improving sales trends in the back half of the year. That has not changed.

Edward Kelly – Credit Suisse

Okay. Great. Thank, Jeff.

Operator

Your next question comes from John Heinbockel – Goldman Sachs.

John Heinbockel – Goldman Sachs

Thanks. Jeff, a couple of things. When you look at the consumer survey work that you guys do, particularly in the old Albertson’s areas, what are you seeing in terms of price perception, number one, particularly in the changing macro? And then secondly, as you invest in price what are you finding in terms of the returns on what you’re investing? Is it worse than it might have been because of the macro? Is it the same in terms of getting bang for your buck?

Jeffrey Noddle

Well, the first part of your question, yeah, we were growing in what the price perception was among the Albertson’s properties. We’ve talked about that many times over the last couple of years. We gave information out earlier in the year on what markets, how we were pricing our traditional competitors. I won’t go through that detail again, John, but we remain very much priced in the same position, if you will. I think we did comment earlier this morning that we haven’t seen any change to those kind of metrics. Is this a harder environment to make a price statement in? The answer is yes, undoubtedly, with the high inflation that we’ve got.

Price investment, we do see return on sales where we have taken price and made some price investments. We don’t do them the same everywhere. We do them differently by markets. Pam mentioned Shaw’s. Also during the quarter we made some price investments and changes in the Acme Philadelphia markets. And we do return on sales, but we say return is too early in my view to judge where will that leave us in further quarters in terms of our operating results and our sales results. We have taken those steps where we feel it’s necessary and appropriate. We will continue to, you know, I’ve said that over a long period of time we would migrate our price position, particularly in a lot of the Albertson’s properties, to a different position. Some is everyday low price, some is change in promotional approach. I think in this environment we’re just going to have to do some sooner rather than later and that’s been incorporated into our guidance and thinking as well.

John Heinbockel – Goldman Sachs

It sounds like the investments are more likely to be shelf price oriented than heating up the weekly circulars.

Jeffrey Noddle

I think there’s some of both, but generally there are certain categories where we like to be priced better every day and we think the categories are conducive to that. We’ve taken that approach. You’re always, every week, balancing your everyday pricing versus your promotional pricing. There is no question, though, that we see customers buying more on promotion. I mean, those statistics are clear and evident, and why should we expect any less in this environment that customers are going to buy more on sale and more on value. So we’ve got to make sure what’s in an ad, the items where we put those investments are really the ones that count. That’s what I think we can work on and do better in the back half of the year.

John Heinbockel – Goldman Sachs

And it also sounds like the premium fresh and healthy sales lift has not changed because of the macro and you don’t expect that 8% lift will change because of the macro.

Jeffrey Noddle

Well, it’s hard to tell. We gave the 8% number on our offensive remodels and it is up slightly. So I think it tells us down in certain markets, for example in California because of the housing situation, we would have expected bigger returns and it’s been a little more difficult in some of those markets. But generally no, our expectation hasn’t changed. So far the results indicate that they have.

John Heinbockel – Goldman Sachs

Okay. And then finally, we have not seen yet, I guess, any pressure from union contracts on wages, you know, people wanting or needing a higher wage because the cost of living has gone up. Do you see any of that? Any early signs of that? Is that sort of down on the horizon? Or we may never see it?

Jeffrey Noddle

Well, as you say not only in our business but across our economy you haven’t seen too much of that. I think because the economy’s so weak I think there’s a reluctance on that side of the discussion to press hard for wage increases. I don’t think there’s much doubt over time that if this inflation continues, particularly fuel continues, that we will see some of that pressure. But in our current negotiations and settlements, you know, I think they’ve been reasonable in regards to the overall economy and to what we need to operate in those markets. A lot of it is also driven by work rules and those kind of things and health care and pension, and sometimes we make some tradeoffs between those two to fund wage increases. So they’re all different by circumstance and depending on the funding of the current pensions in that particular market. So there’s a lot of tradeoffs that go, but generally your comment is right, John. There has not been an overwhelming pressure on it. I think with such a weak economy people are a little bit cautious in that regard.

John Heinbockel – Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from Susan Anderson – Citigroup.

Susan Anderson – Citigroup

Hi. This is Susan Anderson on the line for Deborah Weinswig.

One, can you talk a little bit about the marketing to consumers that you’re doing on the remodelled stores and what’s the reasoning behind the one market at a time strategy?

And then also can you talk about any new promotions or innovations with promotions that you’re doing to help drive sales and traffic in this environment?

Jeffrey Noddle

I’m a little confused on the first part of your question. You said remodelled by market. Could you explain that a little bit, please?

Susan Anderson – Citigroup

Yeah, just, what’s your strategy in terms of remodels by market?

Jeffrey Noddle

Well, we’re doing remodels across the entire enterprise. We just said for two years that we made a decision that we would remodel by opportunity, not by market. So our remodels are spread, I don’t have it in front of me, but they’re spread all over the enterprise. I think we commented on Jewel and Acme, on the numbers there. But we have projects, trying to take those that are oldest, those with the better outlook, and those that are just in need of remodel. We are delivering those across the enterprise. So we’re really not doing it by market.

Susan Anderson – Citigroup

Okay.

Jeffrey Noddle

And I’m sorry, the second part of your question?

Susan Anderson – Citigroup

And then also can you just talk a little bit about how you’re marketing the remodels to the consumers, and then also any new promotions or innovation with promotions that you’re doing?

Jeffrey Noddle

Well, there’s a number of things that we are ads, we are marketing the remodels. One of our big areas of emphasis is in the fresh and perishable side of the business, as one would expect. Particularly in the newer solutions. We have a number of new merchandising initiatives centered around that and I won’t take the time to detail them all here. That’s a big part of our Go To Market. We are also trying to make a very strong connectivity to our pharmacy business and that comes into the premium fresh and healthy part of, we have a very strong marketing competency that we inherited with Albertson’s and we have over 900 pharmacies. Where we can we’re adding fuel stations as well. We think that cross marketing is important and that’s something we’ll have a little better capacity on technologically in the second half of the year this year.

So there’s a number of initiatives that are going on. Loyalty card where using our loyalty card in a number of ways. I mentioned earlier, our analytics that we have and all the information that we now have we can do very specific marketing to consumers directly. Not all that shows up in the store, but some of those are offers that go directly to the home.

There really is a whole basket of detail and if you should wish I’d be happy to get you together with Duncan MacNaughton, our head of marketing merchandising, who can discuss that further if you’d like even today.

Susan Anderson – Citigroup

Okay. Great. And then just one more question. How do you expect the new chief operating officer to share his responsibilities with Duncan? And then also do you have any early reads on his plans for running the marketing organization?

Jeffrey Noddle

Well, I think you’re referring to our new chief marketing officer, Steve Michaelson, who does report to Duncan MacNaughton. Duncan is responsible for all our merchandising and marketing. Yes, we do have some insights into his initial thinking, none of which we’re ready to share, but very excited to have Steve on board. He’s got a great background and experience. Fortunately a lot of the detail work has been done previous to his arrival and he really can help us take the information and put it to work, and that’s what’s in process as we speak.

Susan Anderson – Citigroup

Okay. Great. Thanks.

Pamela Knous

And Susan, I would just ask that you would extend our best to Deborah. We might know why she’s not on the call today. We hope everything’s going well.

Susan Anderson – Citigroup

I will. Definitely.

Pamela Knous

Thank you.

Operator

Your next question comes from Neill Currie – UBS.

Neill Currie – UBS

Good morning and thanks for taking my question. I just wanted to go over a statement you said earlier about trying to differentiate the retail business in the minds of customers. When you laid out the plans you have, which include price, meal solutions, remodels, you mentioned fuel stations recently, some of these things, in fact most of these things a lot of your competitors are also doing right now. Some of them have been doing them for five or six years. What point do these things become an opportunity or what point, if you’re late to the party, if this is the cost of doing business? Within a lot of these things is there anything more differentiated you could point to in terms of these new things that you’re bringing to the marketplace?

Jeffrey Noddle

Well, Neill, that’s a very broad reaching question. I would just say, yeah, I think there’s a certain number of things that anybody has to do to stay in the game. Even though they have been at it longer than we have, there’s not much we can do about that because we’ve only been at this a little over two years now with the Albertson’s properties. So we are trying to do I think on an accelerated basis what others have done similar things in six or seven years to stay in the game. But we’re certainly not just trying to be at parity. We are very much going to be more locally relevant by market. In each distinct market, whether it be Farm Fresh, whether it be Acme, whether it be Jewel in Chicago, Albertson’s in the West, Cub in Minnesota, and on and on and on, we are very much tailoring activities in specific things which for competitive reason I won’t detail that we think will set us aside for consumers in those markets. We are not trying to do necessarily just the same thing across our enterprises, although there are some important components that we will do the same across the enterprise. We want to be known by those local banners and everyone has a little bit different Go To Market strategy. What we’ll be able to do is use this information that I described in our marketing information as a toolbox and apply them differently in markets. I think that we will be distinctive in that we will be more local and relevant to the consumers in those local markets.

The Premium Fresh and Healthy opportunities are tailored that way. We’re just beginning to deliver our national scale, which others have as well. And we’ve always said that we have a very unique connection with our consumers in the pharmacy business and we’re just on the cusp of really delivering a lot of services, health care services beyond just filling prescriptions.

There are a number of things that are very specific to us that we think will make us different as opportunistic than the rest and there are certain things we’ve got to do to bring these stores up to date and then can initiate and put our full plans in that really differentiates us by market. I’m not going to detail those by market, but that gives you a general description.

Neil Curry – UBS

Thank you. And good luck on doing that. I also wondered, do you have an assessment of what sort of market share in the markets we operate is taken up by traditionally considered weaker share? I.e. the mom and pops smaller regional chains that don’t have your scale or some of the large competitor’s scale discount chains.

Jeffrey Noddle

I’m not sure I understand completely.

Neil Curry – UBS

I’m just wondering how much available market share there is out there to soak up for two or three scale players in your markets.

Jeffrey Noddle

It really varies by markets. You know, Pam commented on Chicago for example. Wal-Mart is completing its strategy in Chicago. They’ve opened 15 stores in the last year. Yet if you get into the city of Chicago there’s independents that have grown, some of the ethnic independents have grown very well in Chicago. You get into other markets in California, the independents have grown. I can go to other markets where you don’t see that to be the case. It’s really, really hard to be specific across the whole enterprise. You’ve seen strength in our supply chain business because we are picking up some of the larger groups who’ve moved some of the things offer them in terms of support.

We recently just announced last week that in Chicago we’re going to open a small store. This has been in the works for quite some time. It’s called Urban Fresh by Jewel. It’ll be in Lincoln Park area, a smaller store serving a very specific clientele; young professionals primarily in that market. It’s going to be tailored to that. It should be opening in September and we’ll certainly have more to say about that on our next call.

Neil Curry – UBS

Okay. Thanks for taking the time to answer my questions.

Operator

Your next question comes from Carla Cassella – J. P. Morgan.

Gretchen Hoey – J. P. Morgan

Hi. This is actually Gretchen Hoey for Carla Cassella. A couple housekeeping questions. Can you tell us which term loan you paid down with the $100 million voluntary payment?

Pamela Knous

B.

Gretchen Hoey – J. P. Morgan

It was the term loan B. Okay. Great. And then how much was out under the accounts receivable facility?

Pamela Knous

About 300.

Gretchen Hoey – J. P. Morgan

And then just wanted to ask about if you do any fuel surcharges to your wholesale customers.

Jeffrey Noddle

Yes, we do. That’s automatically adjusted every week based on current fuel prices. So it’s complete pass through.

Gretchen Hoey – J. P. Morgan

Okay. So you’ve done that for a while now?

Jeffrey Noddle

Years.

Gretchen Hoey – J. P. Morgan

Okay.

Jeffrey Noddle

Even before fuel became an issue.

Gretchen Hoey – J. P. Morgan

Okay. And just lastly, what percentage of your total cost was fuel makeup?

Pamela Knous

We don’t publicly disclose that. I’m sorry.

Jeffrey Noddle

Yeah. And I don’t have it in front of me, but it makes up more than it did before. That’s for sure.

Gretchen Hoey – J. P. Morgan

Sure. Okay. Thank you.

Operator

Your next question comes from Emily Shanks – Lehman Brothers.

Emily Shanks – Lehman Brothers

Good morning. Thank you for taking the call. Around competitive openings you do sight in the press release as being higher levels, can you speak at all about whether that’s traditional supermarket operators or you’re seeing it more from the discounters or the big box guys?

Jeffrey Noddle

The thing is the impact comes from the discounters generally speaking. We’re opening only 15 new stores this year. I think I saw Safeway said they were opening 20, for example. I don’t know Kroeger’s number. There’s not an enormous, compared to historical, there’s not a lot of new stores opening. But discounters such as we mentioned in Chicago, for example, this happens to be Wal-Mart, I mean, those are more impactful certainly in the near term.

Emily Shanks – Lehman Brothers

Great. That’s helpful. And then you spoke around the price investment that you’re making on the retail side of the business and it sounds to me, if you can correct me if I’m right or wrong, that you are choosing by category which, where you pass through the higher product costs. Are you passing it all through in this category or is it more of a partial pass through? And then can you speak if you’re seeing your competitors do the same?

Jeffrey Noddle

Some markets competitors are doing the same and in some markets they are not. Generally speaking, we’re trying to take certain categories that we think lend themselves better to everyday low price and may be less on occasional promotions and try to level that playing field a little bit.

In other markets we’re going to do it different than that. We may become even more promotional in certain categories. We look very specific by market.

But generally, if I were to say there was anything that you could apply across it would be the view that certain categories – and they’re not necessarily those that are going up in price; you mentioned that. We’re looking at the important categories regardless of whether there’s price inflation there or not and making pricing decisions for the longer term.

Emily Shanks – Lehman Brothers

Okay. Thank you for the clarification. And then just one last housekeeping item. Can you give us a sense of what the actual LIFO expense charge is expected to be for this year? This coming year?

Pamela Knous

Well, you know, unfortunately that’s not an item that we give out guidance. To help you may be somewhat get there is you’re supposed to estimate your LIFO expense for the entire year and somewhat prorate it across the course of the year. So I think if you look at the first quarter that would give you a good guide. And then also in my comments today we did say it’s about double that of last year. Hopefully within that range you can come up with an estimate that you’re comfortable with.

Emily Shanks – Lehman Brothers

That’s helpful. Thank you.

Operator

Your next question comes from Scott Mushkin – Jeffries and Co.

Scott Mushkin – Jeffries & Co.

Hey, guys. A couple questions. I guess broadly, do you think the pricing in the markets is reflecting the inflation that we’re seeing coming through the pipeline on the producer level is one.

And then I guess, you know, if you had to use maybe a baseball analogy that gets over used, but where are we, I know you’ve referenced that Wal-Mart is now moving to Chicago, Acme price investments, and Shaw’s pricing investments, where are we in those markets in comparison to where you want to be? I know I think Stop ‘n Shop is 75% their VIP program in the Northeast.

And then the third question is, if inflation went to zero what would your comp be?

Jeffrey Noddle

In terms of pricing inflation with producers, there was comments over the last few days by some of the large manufacturers saying they’ve got more in the pipeline. So until we see some abatement in energy costs, until we see some improvement in commodities, although we’re seeing a little bit in commodities now, I think corn has been down recently, I’m hopeful that later in the year we’ll see some abatement at least in the rate of inflation. We’re not ones to predict how that might be, but most of the manufacturers say they haven’t yet caught up to what’s already on their plate in terms of cost increases. Although, I would add that I think the consumer is going to push back and I think more increases will be more difficult for them to get through. But that remains to be seen.

The second part of your question I was a little bit confused on, Scott. You mentioned Shaw’s. Could you just state that again, please?

Scott Mushkin – Jeffries & Co.

Sure. And actually, just to go back to your first answer, Jeff, I guess what I’m looking for is you think that right now at the consumer level it’s being reflected, but price increases that are seen in the producer level, you know, I mean, do you feel like you’re being able, broadly in the market, not just SUPERVALU, that the prices are able to come up to the consumer?

And then my second question to clarify was basically, you referenced three markets where things competitively are a little bit more difficult and you’re making some price investment. I just wanted to know where we are on that. You’ve been doing it, I guess, in Shaw’s for about six to nine months. You’ve talked about Acme in the past. Now we’ve kind of thrown in Chicago. Just on a baseball analogy, where are we in that move to invest in price?

And then the third question was the inflation question: if it was at zero what would the comp be?

Jeffrey Noddle

Back to the first part of the question; the price increases that have occurred in the market place generally are being passed through. Obviously those that haven’t yet come have not yet and we’ll see if those go through. I said, I think the consumer is going to be the final determinative and I think there will be some resistance. But generally there is a pass through by everyone and it’s been fairly orderly and I’ve said that now for the last year.

I’m not going to comment specific again by market or where our pricing initiative may or may not go. I have mentioned Shaw’s and Acme because Acme was one that we did recently. You mentioned Chicago. I just mentioned that Wal-Mart is completing its strategy in Chicago. Again, all these markets we take a very specific approach to, so I’m not going to comment on where those might go, but we do comment. We have said that as we go through this three-year journey there are markets where we want to position ourselves somewhat differently in price. We have begun that. I made the comment earlier that I think now in this environment we may have to do some things earlier rather than later and those are reflected in the current guidance that we gave you.

If inflation should go to zero I expect our initiatives to deliver the results that I have talked about. I expect the back half of the year for us to have positive comps. Obviously we’re assuming a higher inflation level as we go to the next year. We still are targeting toward and have very specific things that we think by line item we’ll contribute to sometime during the year us getting to a 3% level or more, which we think is maybe an average of what the industry might produce at that point in time as best we can look forward. No matter what inflation is doing I expect us to have positive comps.

Scott Mushkin – Jeffries & Co.

And is inflation a help right now or a hindrance, do you think, to your numbers?

Jeffrey Noddle

I think anything that’s bad to the consumer is a hindrance and I think we’ve got that going on. And the trading down factor that Pam talked about, we tried to quantify that. We came up with and looked at a lot of information and said we think it was 100 basis points to trading down. Trading down to buy more promotion, using more coupons, more owned brands, shifting out of some items in certain categories into others. I think that this inflation at this level is not good for consumers and ultimately that means it’s not good for us.

Scott Mushkin – Jeffries & Co.

Great. Thanks for taking all my questions.

Jeffrey Noddle

All right. We’ll take one more question.

Operator

Your next question comes from Mark Wiltamuth – Morgan Stanley.

Mark Wiltamuth – Morgan Stanley

Hi. I just want to follow up a little more on private label and inflation. If you could just maybe outline which of the categories you’ve seen the highest inflation and are you seeing more trading down to private label in those categories and have you seen any back off in demand in the highest inflationary categories?

Jeffrey Noddle

Yeah, I think if you look over the last year dairy and fresh produce probably have had the highest inflation, if you just look year to year, have had the higher inflationary impact. And have there been some consumer resistance, the answer is yes. Dairy, at least raw milk has backed off a little. Retail prices don’t reflect that much yet. But in fresh produce we have seen some resistance to higher prices. Some of the key crops were later this year also, which had some impact. We shouldn’t expect any different. If prices go higher in some of these categories we’re going to see some resistance, but we’re also seeing bigger opportunities for private label in those categories and we do see those results as well, Mark.

Mark Wiltamuth – Morgan Stanley

Okay. So center of the store where you really have seen packaged food numbers go up on price, you are seeing more private label there?

Jeffrey Noddle

Yes.

Mark Wiltamuth – Morgan Stanley

Okay. Thank you very much.

Operator

And there are no further questions, Sir.

Jeffrey Noddle

At the conclusion of the call I am available for questions so feel free to reach out to me. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: SUPERVALU Inc. F1Q09 (Qtr End 6/30/08) Earnings Call Transcript
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