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Herkert on hot seat as Supervalu flounders

Yikes! After a monstrous earnings miss, Supervalu suspended its earnings guidance and dividend and said it was exploring strategic alternatives.

Supervalu said its earnings per share for the first quarter ended June 16, fell to 19 cents a share from 35 cents a share and missed analysts’ consensus estimate of 38 cents. Sales declined to $10.6 billion from $11.1 billion. The company said the sales decline was due to the disposition of a majority of its fuel centers in addition to a 3.7% decline in identical-store sales at traditional supermarkets and a 3.4% decline in identical-store sales at the low price oriented Sav-A-Lot division.

The bad news on the sales and profit front was accompanied by the revelation that Supervalu was suspending its dividend and would no longer provide investors with sales and earnings guidance. The company also announced it was working with its financial advisors, Goldman Sachs and Greenhill & Co. to review strategic alternatives and put board member Wayne Sales in charge of the process so management can remain focused on executing what was described as an accelerated business plan.

That plan, as described by president and CEO Craig Herkert, involves further expense reduction and a lowering of prices to improve the retailers competitive positioning.

“While our shift to a fair price plus promotion strategy is right for our business, it is essential that we move even more aggressively to lower prices, and anticipate and respond to competitor actions,” Herkert said. “We expect our business transformation to meet our customers’ demands for great quality at lower prices. We intend to do this while remaining profitable, continuing to pay down debt and investing the capital to maintain and enhance our stores and related assets.”

As a result, the company will pursue deeper and more structural cost savings initiatives and adopting more flexible financing facilities, reducing near-term capital expenditures and suspending the dividend, according to Herkert.

“As we proceed with these actions in an effort to drive more traffic to our stores and ensure we are the destination of choice in the neighborhoods we serve, we remain focused on maintaining our operational and financial strength,” Herkert said. “We are committed to generating operating cash flows of more than $1 billion annually and meeting or exceeding our debt reduction targets. And, to assure we are evaluating the full range of opportunities available to us to create value for shareholders, the company’s board and management, together with its financial advisors, are reviewing strategic alternatives for our business.”

He characterized the moves as bold and necessary to position the company for success, but history has shown that a retailer in decline tends to stay in decline. Supervalu may be able to buck that trend, but the competitive forces contributing to its weakness are not abating. The company is feeling the pinch from a variety of competitors. Among conventional grocers, Kroger (click here for special report on Kroger) remains on a role with eight, yes eight, consecutive years of identical-store sales growth. Meanwhile, while such value players as Dollar General (click here for special report on Dollar General) and Family Dollar continue to open and remodel stores at a blistering pace that contain large assortments of food and consumables. Walmart has regained its footing with core customers who are shopping its large stores more often and spending more per visit as evidenced by company resurgent same-store sales growth. And the company later this year is likely to announce an acceleration of its small format store expansion. Target too has become more of a force in the food world, as upwards of 1,000 of its conventional food stores have been converted to a concept called PFresh that features fresh food and groceries in just the past three years.