When Craig Herkert left Walmart a few years ago to become president and CEO of Supervalu the situation that unfolded earlier this week at the grocer was not what he had in mind.
Herkert, who served as Walmart’s president and CEO of the Americas until 2009, had the displeasure of watching the Supervalu shares tumble after the company reported earnings per share of 19 cents that were about half of what analysts expected. And if that weren’t bad enough, he also announced suspension of the company’s dividend and said Supervalu would no longer provide sales and earnings guidance. Then for good measure he threw in the revelation that the company was also looking at strategic alternatives.
The bad news was part of an earnings report that saw sales decline to $10.6 billion from $11.1 billion. The company said the 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. Herkert’s solution: preserve liquidity, cut expenses and invest more in a pricing strategy called “fair plus promotion.”
“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 remains on a role with eight, yes eight, consecutive years of identical store sales growth. Meanwhile, while such value players as 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.