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Supervalu Sliced by 'Two-Edged Sword'

Increased demand, new business strains wholesale capacity in Q3

Supervalu, whose appetite for wholesale growth over the past year added nearly $1 billion to its third-quarter sales, is also encountering a little indigestion.

The Minneapolis-based wholesaler said financial results in the quarter reflected increased costs for logistics, trucking and worker overtime pay as some of its distribution centers faced capacity issues in connection with growing sales and holiday season demand. In a conference call discussing results for the period on Wednesday, CEO Mark Gross characterized the issue as a “two-edged sword,” noting that while issues with capacity had not been a significant issue for Supervalu for a while, the company “didn’t execute the way we wanted to” in the face of it.

“Sometimes you can have too much inventory on hand and too much coming in, and you jam your warehouses, and it becomes a very tough cycle,” Gross explained. While the issues were limited to “a handful” of its distribution centers, Gross acknowledged at least some issues were related to servicing new business the company absorbed from the Central Grocers bankruptcy last year.

Associated Wholesale Grocers, a competing distributor that also added new business as a result of the Central bankruptcy, similarly experienced logistical issues as it adjusted to strains on its capacity, the company disclosed last year.

Supervalu acquired Central’s Joliet, Ill., warehouse in the Central auction, which Gross said would help ease those issues going forward, along with new facilities acquired in Supervalu’s Unified Grocers and Associated Grocers of Florida deals over the last year.

Gross maintained its logistics issues were “temporary,” but in turn contributed to a decline in companywide profits as a percent of sales during the quarter. Adjusted wholesale operating earnings of 1.7% of net sales was down from 2.7% a year ago. The acquisition of Unified Grocers, which brought along a lower-margin business, also contributed to the slower profit growth, the company said.

The company also said the stumble would likely result in its fiscal year EBITDA to be at the lower end of its expected range. Supervalu stock was down by more than 13% midday Wednesday.

Chuck Cerankosky, an analyst for Northcoast Research, told WGB the issues would put additional pressure on Supervalu to harvest synergies from its acquisitions in the coming months.

Overall sales for the period, which ended Dec. 2, increased by 31% to $3.9 billion.

Supervalu’s retail division continued to struggle during the period, with overall sales down by 4.1% to $1 billion. The sales decline included effects of closed stores as well as a same-store sales decline of 3.5%.

Gross said the company would continue investing capital behind stores and banners that show growth potential, but that struggling stores would be managed for cash and would receive just maintenance capital. While Gross declined to name the struggling divisions, Burt P. Flickinger III, managing partner of Strategic Resource Group, said Gross was likely referring to its Shop n’ Save and Shoppers divisions.

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