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

SUPERVALU (NYSE:SVU)

Q2 2013 Earnings Call

October 18, 2012 10:00 am ET

Executives

Steve Bloomquist

Wayne C. Sales - Executive Chairman, Chief Executive Officer, President and Chairman of Corporate Governance and Nominating Committee

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

Analysts

Meredith Adler - Barclays Capital, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Stephen Shin - Morgan Stanley, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Shane Higgins - Deutsche Bank AG, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the SUPERVALU Second Quarter Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Steve Bloomquist, Director of Investor Relations. Sir, you may begin your conference.

Steve Bloomquist

Thank you, Ashley, and good morning, everyone. I want to welcome everyone to SUPERVALU's Second Quarter Fiscal 2013 Earnings Conference Call. Joining me today are Wayne Sales, President, Chief Executive Officer and Chairman; and Sherry Smith, Executive Vice President and Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. [Operator Instructions]

The information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor 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 www.supervalu.com.

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

Wayne C. Sales

Thanks, Steve, and good morning. I want to thank everyone for joining us today. This is month 3 in my new role as CEO and President of SUPERVALU. And today is my first opportunity to formally address each of you, our shareholders and analysts. I met some of you already and look forward to meeting the rest of you soon.

I suspect many of you have already read my background, but let me just share a few highlights that I think are important for you to know about me. A good portion of my career was spent with Canadian Tire, where I arrived just ahead of the expansion of several U.S. retailers into Canada, and during that time, when the company was fairly successful. However, I knew that we needed to change. Our change would be made for us. So I began preparing us to not only withstand the heightened competition, but to successfully grow and prosper. When I took over as CEO of Canadian Tire in 2000, we built the company by focusing on the things that made us special, by leveraging the products, people and operational excellence that truly differentiated us and our business from others, while, at the same time, ensuring that we have the right cost structure to support the business.

As I look at SUPERVALU, I see many similar challenges, but I also see some of the same opportunities. And a lot of that opportunity begins with leadership, which I consider the most important element of a successful company. By leadership, I'm not just referring to the CEO. Leadership, it is about every person in this company doing the right thing every day to take care of our customers. As we move forward, you may see comparisons drawn to what we did at Canadian Tire, but you will also see new ideas brought to life. I want to make it clear that I am excited to be here in this new position. This is not an interim role. I'm here for the long haul, and I am committed to helping this company create customer and shareholder value to the greatest extent possible.

Now let's talk about where we are headed. When I assumed my position, I outlined 4 strategic imperatives that I thought was critical to positioning the company for success: driving profitable sales in SUPERVALU retail, grow Save-A-Lot, build on our legacy of serving independent retailers and taking cost out of the business. These are not necessarily new, but in outlining them for the team, we brought greater clarity to what is the most critical efforts right now for improving the business.

As we begin to define the strategies underlying each of these imperatives, we will focus on first, what are the elements where we will be competitive? These are areas where we will not disappoint and lose a customer. And secondly, what are the things that we will do to differentiate ourselves? What are the things that will attract and retain customers? And what are the things that we will be famous for, that we can exploit or things we can develop that makes our stores a destination?

By looking at the business in this manner, we are refocusing the organization on the basic fundamentals of retailing and clearly defining points of differentiation. As we chart our path forward, we will move quickly, decisively and intelligently to improve our performance. I remain committed to doing the things necessary to return SUPERVALU to profitable growth and to move with speed and an absolute sense of urgency. And I look forward to updating you on our progress in the upcoming quarters.

Now let's move to the quarter, where this morning, we announced sales of $8 billion and adjusted earnings of $0.00 per share. Operating earnings were down in each of our business segments, and our press release provided some insights into the drivers behind these declines. These results and, quite frankly, our performance over last quarters, are not acceptable. I've spent the last 90 days visiting stores, meeting team members, talking with customers and suppliers and listening to our independent retailers and licensees. And I can tell you that I am optimistic about our company and the work we do for our customers. We have a good foundation here. We're moving with a new sense of urgency and with a team that is absolutely committed to improving our business. But I'm also a realist, and I'll be the first to admit that we still have much work to do.

Now let me give you some of the business performance highlights, starting with our SUPERVALU Retail Food segment. We delivered sales of $5.2 billion for the quarter, with comparable ID negative sales of 4.3%. Total retail food sales were impacted by last year's disposition of fuel centers, which added about $158 million in sales last year. Looking deeper into ID sales, about 90 basis points of the decline is the result of our strategic lowering of prices and increasing our promotional activity. Further, the entire sequential change from quarter 1 was a result of incremental price investments, most notably at Jewel, on top of what we have previously done in our produce department and elsewhere across the retail network. We've continued to have a market-leading price position amongst conventional food retailers in 3 markets. We have improved or remained constant in 7 others and have deteriorated in only 1 market. We are pleased with the outcomes and the progress we are making.

The decline in operating earnings this quarter can be attributed to our price investments and becoming more promotional in several markets. The intent here was to provide greater value and to improve our ID sales. The promotional environment can be attributed to the weak consumer and marketplace, where the promotional environment become more intense during the quarter. The negative IDs also drove some expense deleveraging, a portion of which we offset with our cost reduction initiatives.

Operationally, we've talked at length about Jewel-Osco and our efforts underway in Chicago. I'm pleased to share that we've completed our price initiative there and are competitively priced across the store. Although it has only been about 6 weeks since we completed our pricing work, the results we have seen have largely tracked to our expectations. Average unit retails are down, while unit movement trends are improving as anticipated.

As we look toward our next move on pricing, we're still measuring the results at Jewel and considering a number of approaches on how, when and where we will take action. But I have to tell you that my leadership team is working on more things than simply price. We're developing strategic plans that will help differentiate our stores and build upon our strengths, our people, our products, our services and our convenient locations, so that we can begin to attract customers back to our stores. Price is important, and we know, as I outlined before, we must be competitive. But competitive pricing is only one component of articulating a total value proposition and delighting our customers and keeping them coming back to our stores. By taking this more holistic approach, we will be modifying our plans and therefore, will not complete our pricing actions in half of our stores as previously announced by the end of the fiscal year. But we will continue to meaningfully impact our price position at the shelf.

Moving to our hard discount format. Save-A-Lot revenues for the quarter was $973 million versus $972 million last year, although 47 more stores were open compared to a year ago. Network ID sales of negative 3.7% were below expectations and offset all of the volume associated with the new store growth. The weakness was primarily seen in our retail corporate store IDs and was largely driven by customer count erosion. As we are doing with our retail food stores, we're taking a fresh look at our strategic initiatives to assure ourselves that we are taking the appropriate steps to drive this business forward. The team has been testing several traffic driving ideas in one market that is showing encouraging initial results and which we plan to implement more broadly in the coming quarters. Operating earnings were down in dollar terms, primarily from lower volumes. As a percent of sales, the adjusted rate was down 160 basis points, primarily from lower gross margin rates, resulting from competitive price investments. In addition, incremental admin costs tied to our growth strategy combined to pressure operating margin.

On the development side, 16 new stores opened in the past quarter, highlighted by a new product store in St. Louis, where Save-A-Lot's President, Santiago Roces, and his team are testing a revitalized Save-A-Lot format, including a new merchandising and display approach, enhanced marketing messaging, as well as new products, in a more labor-efficient manner. Late this quarter, we introduced 140 new items to our offering and have another 100 in the queue for the back half of the year. These items broaden our appeal, should help us capture a greater share of wallet and will enable us to remove slower moving, less relevant, inefficient SKUs from the assortment. I remain committed to the growth potential of this business and believe that we are moving in the right direction with Save-A-Lot, building on our strengths, expanding within existing and new markets and leveraging the knowledge and strengths of our strong network of licensees.

Turning to our Independent Business. We reported sales of $1,870,000,000 this quarter, an increase of a little over 1% compared to last year. This improvement is largely due to greater sales to our existing customers, retailers who have collectively opened 42 new or replacement stores this year and completed 54 remodels, impressive numbers and ones that show their desire to grow. We have long-standing relationships with some of the most successful independent grocers in the America. This is not by accident. Our history with this group goes back many years and we pride ourselves on providing the products, services, logistics expertise and industry experience that our retailers need to be successful. Our Independent Business remains a priority for SUPERVALU as it has been for more than a century.

In terms of our operating margin this quarter, this year was below last year as a result of some gross margin investment we made during the quarter. We also announced this morning that our President of Independent Business, Leon Bergmann, will be leaving the company. While we are disappointed to be losing a talented executive in Leon, we are fortunate that Janel Haugarth is able to step right into that position and provide an immediate wealth of experience, leadership and stability. She has over 35 years with the company and much of her time has been spent in leadership roles with the wholesale business.

Now I'd like to provide an update on some of the things we accomplished during the quarter, specifically calling your attention to the areas we've been focused on in my first 90 days. One of these important efforts includes the completion of our debt refinancing in late August. SUPERVALU continues to have a strong operating cash flow. Finishing this deal was an important step that gave us greater flexibility in operating our business.

In September, we shared the decision to close 60 underperforming stores across the company. I've said that we will make tough decisions and we will make them quickly, and this is one example of the pace with which we are moving. Although I prefer to opening stores, not closing them, the closure of these locations will allow us to better focus our efforts on driving profitable sales in the rest of our network.

We also announced a few changes to our executive leadership team, specifically done to better align our marketing, merchandising and store operations team within our SUPERVALU retail leadership team. As we work to drive profitable sales in our retail stores, Kevin Holt, Tim Lowe, Michael Moore and Chuck Elias will be charged with creating programs that build on our strengths, help reposition us on price and drive excitement and customer loyalty. I believe this new structure will better assure that we are working together towards a shared objective.

I mentioned a minute ago that Janel will be taking over as President of our Independent Business as well as overseeing our work dedicated to optimizing our business, both improving our processes and organizational efficiency and taking cost out of our operations. We are moving quickly around these efforts and feel good about the progress to identify efficiencies and the preparation needed to streamline operations and lower our cost structure.

Last quarter, we announced a goal to remove an additional $250 million from our business over the next 2 years, which was on top of the original $75 million we have previously planned to take out our business this fiscal year. With an executive-level leader focused on this objective, we have greater confidence in our ability to exceed this target, and more importantly, we now have a higher level of accountability, better defined focus and a greater sense of urgency to deliver the savings. We're still finalizing our plans in this area, and we'll have more to say about this next quarter.

Lastly, I want to note that we are continuing with a review of strategic alternatives. The company has, as stated in our release, received a number of indications of interest and is in active dialogue with several parties. There can be no assurance that this process will result in any transaction and we will not provide any further update today.

With that, I'd like to turn it over to Sherry.

Sherry M. Smith

Thank you, and good morning, everyone. As outlined in this morning's press release, total sales for the second quarter were $8 billion, and our earnings per share was $0.00 when adjusted for the charges related to various, primarily noncash, charges in the quarter. These results fell significantly short of our internal expectations and, as Wayne outlined, we are working on the strategies under our 4 imperatives to improve results.

During the quarter, we successfully completed the financing transaction we outlined on our Q1 call, namely, a new asset-based revolving line of credit totaling $1.65 billion and secured by the company's inventory, credit card receivables and certain other assets; and an $850 million term loan secured by a portion of the company's real estate and equipment. These financings do not contain the operating covenants to which we were previously bound and replaced our senior secured credit facility, which was composed of a $1.5 billion revolver and 2 term loans, which totaled slightly over $1 billion. At the end of the second quarter, borrowings under our new revolver totaled about $460 million and letters of credit amounted to approximately $360 million, meaning our available capacity came to more than $800 million. We are comfortable with our liquidity position, our ability to maintain our inventory levels to meet all our obligations, to serve our customers and the flexibility inherent in our current capital structure as we execute against our turnaround plan.

Turning to fiscal '13 cash flow. Year-to-date, we have produced over $400 million in operating cash flow and expect to generate between $800 million and $850 million for the full year. In addition, asset sales are anticipated to generate an additional $100 million in proceeds, which in total, provides us with over $900 million in cash that can be used for paying down debt or investing in the business. Although this does not quite get to the $1 billion goal we discussed last quarter, partially as a result of our soft second quarter, it is still a significant level of cash flow and will allow us to make $400 million to $450 million in cash payments towards reducing debt. Given that we have no material maturities coming due for the remainder of this fiscal year, cash payments toward debt reduction will go towards the outstanding revolver balance. From a balance sheet perspective, total debt reduction will be less due to a limited number of leases tied to existing properties, not new assets, that will be added on both the asset and liability side, similar to the ones I commented on during our Q4 call.

Full year cash capital spending is projected to be in the range of $450 million to $500 million, including abnormally high cash payments associated with fourth quarter fiscal '12 projects that we paid for this fiscal year and will include continuing investment in our existing store fleet, including 40 store remodels. We expect to add 20 net new stores to the Save-A-Lot network by the end of this fiscal year, a number which includes the closures announced in early September.

Finally, this quarter's press release includes a new supplemental table, which reconciles net income to adjusted EBITDA over a rolling 4-quarter period, both for the most recent 52 weeks and for the preceding 52 weeks. On this basis, SUPERVALU generated about $1.65 billion in EBITDA over the last 4 quarters, which has allowed us to service our interest cost, invest in our business and reduce our outstanding debt.

With that, I will now turn the call back over to Wayne for some final comments.

Wayne C. Sales

Thank you, Sherry. Before taking questions, I want to summarize a few final thoughts. I can't change where we have been as a company, but I can influence where we are going. In the second half of our fiscal year, we will continue moving with urgency to grow sales and improve our performance while focusing time and attention to taking costs out of our business.

The 4 business imperatives, driving profitable sales in SUPERVALU retail, growing Save-A-Lot, building our Independent Business and taking costs out of our business, will guide us as we move forward and develop the specific strategies underlying each. I am excited about the progress we have made in a relatively short period of time on defining these strategies and the specific initiatives for each of our businesses and look forward to providing more detail on our third quarter call.

SUPERVALU has a great team in place. We're moving quickly on our priorities and we're working hard every single day to deliver products and services our customers want. And when we do that, and when we deliver for our customers, we will absolutely improve our business.

Thank you and with that, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Meredith Adler with Barclays.

Meredith Adler - Barclays Capital, Research Division

I guess I would like to talk a little bit of -- you talked about management changes, and maybe you could talk a little bit more about the structure. I think at one time, Janel was supposed to be working in the merchandising and marketing area? Merchandising, really. But obviously, she's moved on to be responsible for something else very important. But could you talk about kind of the structure now and who will be responsible for dealing with vendors and working to improve your, I guess, the customers' value image of the companies?

Wayne C. Sales

Thank you, Meredith, and good morning. This is Wayne. When I came in, I looked at the overall structure. And clearly, when you look at our Save-A-Lot business, we have a President there that is providing leadership across the entire merchandising, marketing and store operations. When I looked at Independent Business with Leon, the President of Independent Business, also providing daily leadership in that business. And I felt that, from a SUPERVALU retail perspective, we needed a president with extensive retail background, which Kevin brings to the organization, and provides a leadership in terms of working very closely with myself and the entire team in creating a strategic agenda that is designed for growth, that will enable us to compete in those areas that we must compete like competitive pricing, but also create strategies and execution from a customer back [ph] to differentiate ourselves in the marketplace. And by appointing Kevin as President of SUPERVALU Retail, I then looked across the organization and we had Tim Lowe, who was working with Janel at that point in time in merchandising, appointed him as Executive VP of Merchandising, working very closely with Michael Moore from a marketing promotions and sales perspective, so we have a much closer connection between merchandising and marketing, and then of course, continuing to leverage the expertise that Chuck Elias brings from a store operations perspective, very much aligning to the ban of [ph] precedence and issuing direction and articulating our strategies in what must be done both from an operational efficiency perspective, operational execution of our merchandising and marketing programs at store level. And so I felt that structure would improve our decision making, both in terms of strategic decisions and the speed of those decisions and clarity of accountability. We were extremely fortunate to have someone of Janel's leadership qualities in the organization. She's been with us for over 35 years, and asking Janel to take on a very important strategic imperative of business optimization, improving efficiencies and taking costs out. In order for us to fund our continued investment in competitive pricing, in order for us to improve our profitability, in order for us to improve what we do in terms of strategy, development and implementation and funding these strategies, I felt that was a very critical role. And someone of Janel's skills, talent and knowledge of our complex business, again, I felt that was appropriate in terms of working with AlixPartners that we brought in to solely focus on costs out to leverage their expertise. They worked with over half of the Fortune 100 companies and put a very structured and disciplined process in place in terms of both managing all of our retail businesses as well as the cost out initiative.

Meredith Adler - Barclays Capital, Research Division

Great. And then I guess my follow-up question would be maybe to talk a little bit about your comments on pricing. You talked about 3 markets that are priced better than the conventional competition and 7 that are even. Could you just talk about what has happened, what the changes have been? And also, what are you basing that on? Is this based on surveys of consumers or some other outside source?

Wayne C. Sales

These are actually competitive price indexing that we do in each of our markets. Being a bit more specific, obviously, as we announced, the -- what we call value transformation, price investment and Jewel, I have to tell you I'm very excited about what we've done there, not only in terms of continuing to move towards our competitive pricing strategy. This tops out the great work that's been going on with our competitive pricing initiative to get produce pricing competitive across all banners, our investment and lowering [ph] prices in all banners and investment in promotional pricing. And specifically, the -- what I call a complete merchandising and marketing initiative that went behind the price investments that we went -- that we made in Jewel, I think was just absolutely excellent work on behalf of the marketing team, the merchandising team, store operations at banner level with our store team members there. So it really does put us on -- what I call on strategy in that market, and these other investments continues to move us forward on achieving our ultimate competitive pricing position.

Operator

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

Deborah L. Weinswig - Citigroup Inc, Research Division

Price [ph] in the Chicago area has absolutely seen the price gap narrow with your competitors. And how fast are customers changing in the Jewel market as a result of the transformation in the stores and the pricing? And are the results so far as you would have expected?

Wayne C. Sales

Yes, again, I'm glad you reinforced exactly what I was saying in terms of the great job the entire team did in terms of executing that integrated program there. We -- one of the things that I'm extremely pleased with is the forecasting of projections that we put into place. You may be aware that we leverage the expertise and knowledge of Oliver Wyman, who had assisted other retailers in this initiative. And we were able to leverage this experience in developing our forecast, and we have seen an immediate increase in unit sales. It is tracking slightly above the projection, and not only in terms of actual sales, but the halo effect in terms of perception. We've gone back into the marketplace. We have surveyed our customers. And on critical aspects of our business, there is a dramatic improvement in the halo in terms of how they think about the quality of the products we sell, how they feel about the service they get in various departments. And so we are pleased not only in terms of the actual unit sales increase, but also changing the perception of Jewel. And to be frank with you we continue to have the #1 market share there. We have always had a leading market share position in Jewel and customers love Jewel. And so this reinforces why they need to continue to shop with us.

Deborah L. Weinswig - Citigroup Inc, Research Division

And then I don't know if you can be more specific at this point of the game, but what are you learning from Jewel that you can take to the other banners? And how long do you think it will take to do that?

Wayne C. Sales

Well, certainly, in this approach, we had a 3-phase approach to allow us to have excellent execution. We want to monitor by category how each category is performing. We need to determine if we need to make the same, less or more investment in categories or across the store. We need to learn the rate in which we experience unit increase to the point of when we get back to a breakeven or above breakeven on the sales and profitability perspective. Because as you would suspect with an investment of this nature, it does immediately decrease your selling values and total sales on an ID basis, and it is a hit on profitability, so we need to learn that. We certainly -- well, I really -- I'm excited about the job that the team did in terms of the integrated marketing and merchandising program. We need to learn things that we can do better, and those are the things that we're looking at.

Deborah L. Weinswig - Citigroup Inc, Research Division

And just last one on Save-A-Lot. It seems like there is a bit of disparity between owned and franchise stores. Can you maybe just give us some color to the future in terms of how you might close that gap and what's the opportunity there?

Wayne C. Sales

It really is a difference in how I think about strategies and how I think about really understanding underlying reasons for results. When we look at the profitability of our corporate stores versus our licensed stores, the licensee stores are a lot more productive in terms of profitability. Sherry and I were down at Save-A-Lot last Thursday, and we saw an excellent presentation by Santiago and our team there, where we really deconstructed the operating model and reverse engineered a operating model that would more closely mirror that of a licensee store. Looking at -- for example, our average sales in a corporate store is actually higher than the average sales of a licensee store. We don't get the same gross margin rate as a licensee, so deconstructing that, understanding why that is, so that you can move forward [ph] changes things, the same thing on SG&A as well as development costs, so we made a lot of progress there. And what you see going forward is, as we completely understand that operating model and test the execution of that new model if our results are what we think it will be, it would actually allow us to spend -- expand and grow the number of stores in 2 ways, not only in terms of speed of rolling out stores, but also in specific strategic markets that we want to grow in to leverage the infrastructure that we currently have in place that it literally requires no additional capital to expand.

Operator

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

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Past there was a very clear expectation that, at least conceptually, the targeted price investments had to be 100% prefunded through cost savings. So I'm just trying to clarify if that's still at least your intended approach on price investments or if that prefunding guideline is basically gone out the window.

Wayne C. Sales

The prefunding guideline still remains. To be frank with you, a lot of the investments we've made have not been prefunded. We've fallen short. Hence, you will see a shortfall in margin rate for the quarter. The significant change that has occurred there is while that requirement is in place, how we go about that has changed fundamentally with the appointment of Janel and working with AlixPartners. And the total commitment and engagement by the entire leadership team across all of our businesses in all aspects of our business and the process that we're going through and the disciplines that we're putting into place. And I think that this is absolutely critical for us to continue to execute our competitive pricing strategy, and also to fund the investment in growth of strategies that we're designing in a more holistic fashion.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And just as a follow-up, you mentioned you don't see yourself in an interim role. But can you talk a little bit about how much time you're spending on dealing with the day-to-day operational aspects of the business, and to what extent you are focused on the strategic review process? Because based on all the issues that you're dealing with right now, I'm just wondering if you and some of the other members of the leadership team are just completely overextended. Do you have any comment?

Wayne C. Sales

I don't think we're overextended. I have to tell you, we're all working hard. When you show up at 6:30 here and meetings are already taking place, it shows you how committed the team is. And in terms of specifics, I spend the vast majority of my time on working with the executive leaders here in terms of day-to-day operations and strategic design, spending a lot of time traveling across the U.S., visiting our stores, working with the store directors, our banner offices, our independent grocers, our Save-A-Lot team -- suppliers -- are working very closely with suppliers, focused on our strategic growth agenda plus cost out and spending the appropriate amount of time in terms of the strategic review process.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And just finally, Wayne...

Wayne C. Sales

And it's just -- that's been fun.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

That's great to hear. I recall just based on one of your internal communications with the SUPERVALU associates, I believe you indicated that a lot's been written about SUPERVALU and you would sort of prove the skeptics wrong. And I'm sure you know there's a very big contingent of investors that doesn't think SUPERVALU can survive at the rate that things are going, and maybe that there's nothing substantive that's going to come out of the -- this strategic review. So my question is, is there anything specific that you think that skeptics are just completely missing? Is that something you're willing to comment on at all?

Wayne C. Sales

Yes. I think we often forget about our strengths in terms of -- we're still a $37 billion organization. We have a diverse portfolio of businesses, from the Independent Business to the hard discount business that has clear points of differentiation; the network of stores that we have across the country, where over 50% of them have had capital investments over the past 10 years; and you look at the #1, #2 market position that we have still in a number of our markets, we are still in the top 5 for all of our suppliers. In my meetings with our suppliers, it's very clear how important we are to them, how much they want us to win. And I think what you will see here is just a shift in how we think about our game plan, if you will, in each one of our businesses. I think it's important that as you think about leadership, as Meredith's first question around structure was important, around definition of strategies and clarity around those and those that will make us competitive versus those that will differentiate ourselves, and how you approach our strategy in terms of making sure that you allocate the right resources, both human and financial resources, to it so you don't starve a strategy is important. As you look at our ability to take costs, I think there's huge capabilities there with the team, the commitment that we've got. When you look at the fact that we have about $8.6 billion worth of addressable costs in the organization and we're targeting between 8% and 12% of that to improve our efficiency and to fund the investments that we need to make. So the strengths that we've got -- and then of course, the greatest strength that we have in this organization is our people. As I travel across the U.S. and see the absolute will to win, the experience that we have in the organization, meeting the 15- and 20- and 25- and 30- and 35-year team members that have traveled coast to coast and been from one banner to another, one job to another, these are assets that we can absolutely leverage going forward.

Operator

Your next question comes from Mark Wiltamuth with Morgan Stanley.

Stephen Shin - Morgan Stanley, Research Division

Stephen Shin on for Mark Wiltamuth. I just want to like walk through. What is your -- walk through your change in the reduction in cash flow guidance for the year. And like what you think that implies for the back half of the year?

Sherry M. Smith

This is Sherry. So as we certainly have some soft earnings, we reduced the cash flow guidance down about $50 million on the range that we had. So we have $400 million to $450 million as the goal or guidance that we've provided there. Certainly, as you look at our cash flows, we have spent more in our capital in the first half of the year than we will in the back half. And that's a difference in timing from last year that will generate more cash flow available, the earnings from the back half. And certainly as well, we have no dividend payments in the back half. So those will all be sources funds for that debt paydown.

Stephen Shin - Morgan Stanley, Research Division

But [ph] your expectation is that there is -- the back half probably is somewhat similar in trend to what you had in the first half of the year?

Sherry M. Smith

Yes, yes. So we have operating cash flow of about $415 million in the first half. And as we said, the operating cash flow will be in the $800 million to $850 million in total for the year and then an additional $100 million of proceeds from various asset sales that allows for a combined $900 million to $950 million of available cash flow.

Stephen Shin - Morgan Stanley, Research Division

Okay. And then as a -- another question is that the kind of -- you guys have said that you were planning to reposition half of your stores by the end of the fiscal 2013. Now, you're extending that deadline. Does that mean that you guys are also kind of taking a slower tone in terms of your category repositioning? Because you had mentioned that you would also concurrently try to take down prices in certain categories throughout this year as well.

Wayne C. Sales

Most of our slowdown is trying to balance a number of things. First of all, balance the learnings that we're getting from Jewel, balancing in terms of focusing and developing our growth strategies going forward and understanding the roles of each of our categories, the indexing that we want to achieve, our ability to prefund, this is a critical part of that, and also managing our profitability.

Operator

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

John Heinbockel - Guggenheim Securities, LLC, Research Division

Wayne, if you think about Save-A-Lot, I guess, a lot of us are surprised that Save-A-Lot isn't doing better, right, in a market that's tailor-made for it. So why -- I conclude, maybe it's more execution than positioning, but why is that? And then secondarily, do you think -- does it make sense to slow the growth until the comps turn consistently positive?

Wayne C. Sales

I -- frankly, we made a leadership change there a year ago. We brought Santiago in. He has done an excellent job of rebuilding the executive team there from a marketing and merchandising store operations perspective. I believe that this is symptomatic of what I call, in the retail sector, often you find companies getting off -- what I call off of strategy, meaning that over the course of time, they do things that is not consistent with the strategic agenda that should be differentiating themselves in the marketplace. An example here is, I believe that we had gotten all strategy from a merchandising perspective with the assortment that we had, where we had gone too much in terms of a national branded product and deleverage or deweighted, if you will, our private brand product, which provides the ultimate in terms of value proposition for our customers and allowing us to be extremely competitively priced there. When you look at some of the cost structure, the inefficiencies that was in the system, the lack of clarity and definition of roles, the lack of appropriate and balanced marketing there, the communications that we evolved to in terms of the consumer communications, both internally, when they're in the stores, and the external communications, I think had gotten off strategy. Having said that, the time that Santiago has been there, he's done a great job of articulating what we need to do to get back on strategy. We have a group of 11 test stores in the St. Louis area. And when Sherry and I were down last week, we see extremely exciting progress in these test stores. As we implement and test the strategy, we're actually layering one on top of the other and when you see in this quarter's results, the number of private brand items that we added and the amount of sales that it added there. So getting back on strategy, I think we're on track to do that. Once we understand the impact of that in terms of increasing ID sales and our profitability, I think it will prove out to be the growth strategy that we all believe it should be.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Is it too early to tell if the -- are the test stores, they're turning positive? Or is it way too early to get a read on that?

Wayne C. Sales

It's turning positive, very positive.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. And secondly, when you think about what you've done at Jewel, if we -- in terms of customer perception, recognizing what you've done with price and the process of bottoming out on gross profit dollars. I know perception lags sales, so perception may not have turned yet, but can you speak to that? And then have gross profit dollars bottomed and begun to improve yet?

Wayne C. Sales

The gross profit dollars have not started to improve. It's too early in that process. But as I noted earlier, the halo effect of the implementation of our pricing strategy there in terms of the execution of the prices themselves plus the communications and the marketing, both internally, when customers shop our stores, and externally, you see just massive communications. It has had a halo effect on how customers feel about Jewel in a holistic way in addition to improved pricing.

Operator

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

Shane Higgins - Deutsche Bank AG, Research Division

It's Shane Higgins on for Chuck. Wayne, how did ID sales trend during the quarter, and where are sales, quarter -- third quarter to date?

Wayne C. Sales

When you -- we won't give you any indication on third quarter. But as you saw in Q2, it's basically the same. When you extract the price impact of competitive pricing, specifically in Jewel, from our 4.3% ID sales decline, it's basically on the same trend as Q1.

Shane Higgins - Deutsche Bank AG, Research Division

Okay, great. That's helpful. And speaking of Jewel, what kind of competitive response have you seen to your stepped up price investments and promotions in the market?

Wayne C. Sales

What I typically find in retail and what we've seen in Jewel and how I would describe it is when you launch a major program such as that, typically, you don't see retailers respond and change their fundamental strategy, their fundamental pricing strategy. But you do see tactical, what I call tactical responses to this. And that's I think exactly what we've seen in Chicago with again tactical. But I haven't seen any fundamental change in how our competitors go about their pricing strategy in their game.

Shane Higgins - Deutsche Bank AG, Research Division

Great, that's helpful. And one last question. What are the changes you guys are making at Jewel other than price? I know you emphasized earlier that this isn't just about getting your pricing in line, but other aspects of the business, service levels for example. Have you done anything there to -- I know you talked about the halo effect earlier, but anything else you're doing? Because I get a lot of questions from investors who are concerned that you're cutting expenses so aggressively that you guys might compromise service levels.

Wayne C. Sales

No, anytime we approach reducing costs at store level, we're very, very mindful of making sure that we don't do anything that would compromise the customer experience. In addition to the price investment and the communications and the marketing there, you see change in uniforms. You see changes in our communications inside of the store in terms of signage. We also spend a tremendous amount of time in terms of resets, in terms of our assortments and the plan of grounds [ph] in the stores. We have worked very closely with Brian, our banner president there, and the entire operating team in terms of focus on customer service and operational excellence in the stores because we felt that it was a very important that when we invite them back through competitive pricing that we need to keep them based on the total experience, not just the pricing experience.

Operator

Your next question comes from the line of Edward Kelly with Crédit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

I know you don't want to comment on the strategic review, but my question is a little bit bigger picture. And obviously, the business has its challenges. And my question is can you fix it without becoming a smaller organization? And what I mean by that is how important is it to narrow your focus around fixing a smaller number of problems within your organization?

Wayne C. Sales

Well, I think that we have made a lot of good progress in terms of defining our strategies at Save-A-Lot, testing those strategies. Certainly, our Independent Business, leveraging the strength that we've got there, they are pretty low maintenance, if you will. And most of our time is spent in SUPERVALU Retail. And I believe it can be fixed with the right amount of balance in terms of doing those things that make us competitive, like competitive pricing, taking costs out of the business, and then articulating points of differentiation, when we think about leveraging the strong foundation we have in areas such as Everyday Essentials and our private label program, as we look at potential segmentation of our stores. So we will focus on execution in each one of our banners. There will be a part of any ongoing business, a constant review of assets that may not be as productive as you want. And you make decisions at that point in time, such as we did within the quarter with the closure of 60 stores.

Edward J. Kelly - Crédit Suisse AG, Research Division

All right. And just related to the pricing strategy again, and I hate to harp on this, but I guess I'm just a little confused, because I know last quarter, and I recognize it was different leadership. But in the last quarter, you -- as the company talked about accelerating price investments, we're hearing today about Jewel and excitement around what's happening there, but yet you guys are slowing investments and then the quarter was disappointing. So how do we sort of pull all that together to get a sense as to whether the strategy on the pricing side is really working or not?

Wayne C. Sales

There is -- in terms of retailing, one of the fundamentals of retailing is being competitively priced, and -- but you have to think more holistically beyond competitively priced and that's what we're doing. That's what we're developing in terms of our strategies that is an architecture from the customer back. When they walk into our stores, not only will they get competitive pricing, but they will experience something different than what they've experienced before. And I wanted to make sure that we take the necessary time to learn from Jewel, make sure that we have identified and can prefund our investments and trying to balance our efforts in terms of improving our ID sales trend, but also making sure that we continue to balance the need for earnings to be profitable, produce the cash flow that we need to fund these strategic initiatives, pay down and continue to pay down debt and maintain that financial flexibility that we currently have. So it's more of balancing. I mean, make no mistake about it, we made a lot of progress in the last 2 years in terms of competitive pricing across the country. And we have -- we continue to make those investments. When you look at our very strong promotional program that we have and other price tools, if you will, that we employ everyday across the network.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And just last thing for me. On supply chain in the press release, you talked about gross margin investment, which -- it's the first time we really kind of heard that used with supply chain. Could you just help us understand what's going on there?

Wayne C. Sales

The investment there would be a sensitivity to passing along any acquisition cost increases to our independent wholesalers and independent retailers.

Edward J. Kelly - Crédit Suisse AG, Research Division

So inflation-related?

Wayne C. Sales

Yes.

Operator

Our final question comes from the line of Stephen Grambling with Goldman Sachs.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

This is just actually a follow-up to something asked earlier on guidance for the back half. It sounds like a key factor that drove the weaker operating results in the quarter was from a more promotional environment. Is that a fair assessment and where is that pressure coming from specifically? And then in relation to your guidance, what has actually factored in, in the back half from a competitive standpoint?

Wayne C. Sales

As I noted before, Steve, we won't give guidance for the third or fourth quarter. I can tell you that we are working very hard in terms of balancing those things that I spoke of earlier. Certainly, in terms of trying to improve our ID sales trend, one of the levers that we have in the organization is our promotional program. And we developed promotional programs based on what we think is required to increase our customer traffic into our stores and to improve ID sales. So that was our focus in terms of that, not necessarily responding to any specific competitor. It's part of playing our game, noting, however, that we continue to operate in an economically challenged environment. Customers are clearly value oriented and looking for a deal, if you will, when you -- which is important for us to continue to communicate the value that we bring to them. So it is that focus on balancing our profitability, driving traffic and improving ID sales versus response of a specific competitor.

Steve Bloomquist

Okay. Thank you for joining us, everybody. I will be in my office later today if you have follow-up questions. And with that, we will wrap the call.

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 Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts