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Alexandra Biesada

Supervalu, not looking so super, weighs its options

by Alexandra Biesada | Dun & Bradstreet Editor

July 18, 2012 | No Comments »

BIZMOLOGY — Grocery giant Supervalu is on the industry critical list. After reporting a steep drop in quarterly profits and declining sales, the nation’s third-largest grocery operator announced it may sell all or parts of the company. It also threw out its sales and earnings guidance for the year and halted its dividend. The company is reducing capital expenditures by about a third and will seek to cut expenses by some $250 million over the next two years. CEO Craig Herkert has outlined a turnaround plan for the business that includes instituting a “fair-price-plus-promotions program” at all of its stores by the end of 2013. Skeptics, noting the company’s substantial debt load and the fact that the new pricing scheme will put pressure on profits, are critical of the plan.

Investors took the bad news badly, driving Supervalu’s shares down nearly 50%. A shareholder at the company’s annual meeting in St. Louis yesterday even threatened to file a class action lawsuit against the company for mismanagement. Since Herkert, a Wal-Mart alum, joined Supervalu in 2009 its shares have tumbled 78%. Herkert says bankruptcy is not an option that Supervalu is considering. (While profits have fallen, the company is still profitable and paying down debt.)

What went so wrong? Some trace Supervalu’s current woes back to its acquisition of 1,100 Albertson’s grocery stores in 2006. The massive purchase propelled Supervalu to second-place in the grocery market behind Kroger, but saddled the company with more than $9 billion in debt heading into the recession. Heated price competition in the grocery market from traditional and new competitors (including Costco, Target, and Dollar General) battered the company, whose chains include Jewel-Osco, Cub Foods, and Save-A-Lot.  Some go back even further to blame Supervalu’s shift in focus from grocery wholesaling (it’s one of the nation’s largest grocery wholesalers) to retailing in the 1980s.

While some argue about what went wrong, the market wants to know what management intends to do to right Supervalu. News that the company will begin reporting the financial performance of its Save-A-Lot hard discount grocery division separately from its other retail operations led to speculation that it will try to sell Save-A-Lot, which competes in an attractive sector of the grocery market. Its Jewel-Osco chain could attract interest from Kroger. Supervalu’s other retail assets may be harder to sell in today’s economic environment. Or, given its deeply depressed share price, the entire company could become the target of a private equity firm. Stay tuned.

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