Supervalu CEO: 'Good Stuff' Will Make Up for Retail Sales Loss

Analysts say efforts to restore wholesale clout are on the right track

Supervalu, which for years saw retail as the nose it couldn’t cut off to spite its wholesale face, is looking at itself a little differently now.

Following last month’s decision to break up and close its Farm Fresh banner, the company this week said it will divest its Shop ’n Save stores in St. Louis and the Eastern U.S. The moves—which accompanied a $483 million warehouse sale-leaseback—indicate the company’s confidence in its strategic direction under CEO Mark Gross, who has endured pressure from impatient investors while recasting the company as a wholesaler.

Supervalu has long felt pressure to cling to money-losing retail operations because its volumes were too important to the health of its wholesale business. Gross said in a conference call this week the company will look to preserve as much wholesale volume as it could as it divests stores, but that ultimately it was counting on “the good stuff going on the rest of the business” to overcome the loss in sales. The "good stuff" includes wholesale momentum from recent acquisitions of Associated Grocers of Florida and Unified Grocers, new customer wins, and expansion of its fresh and specialty Market Centre division.

Supervalu said the stores it now classifies as discontinued operations lost $3 million last year on sales of $1.5 billion. Those stores include 38 Shop ’n Save locations in the greater St. Louis area; 22 Shop ’n Save East stores in Pennsylvania, West Virginia, Maryland and Virginia; and the Farm Fresh chain that is being sold to Kroger, Harris Teeter and Food Lion.

“You would want to keep as much volume as you can. But ultimately, this is balancing of the bottom line for the company,” Gross told analysts. “Our preference would be that we keep the supply. But that is not a requirement. It’s whatever is in the best interest of shareholders.”

Burt P. Flickinger III, managing director of Strategic Resource Group, believes struggling chains such as Farm Fresh and Shop ’n Save “should have been sold five or six CEOs ago.”

He expects that Shop ’n Save, like Farm Fresh, would likely be sold to multiple operators. “It’s a combination of good sites, some in-between sites and some not-so-good,” he said, attributing its struggles in part to a lack of local merchandising decisions. However, he indicated that independent operators might better succeed with those sites.

David Livingston, managing partner of DJL Research, said market leader Schnucks Markets would likely be interested in some St. Louis Shop ’n Saves, but he also expected the chain would probably be sold among multiple buyers and uses.

Paul Simon, a spokesman for St. Louis-based Schnucks, declined comment to WGB on its potential interest in the sites.

Around 3,300 St. Louis Shop ’n Save workers are represented by the United Food & Commercial Workers (UFCW) union.

“Announcements impacting this many hard-working families are always concerning. It’s times like these that the men and women working for this company need their union family the most,” UFCW Local 655 President David Cook said in a statement. “Local 655 is committed to protecting the good union jobs at Shop ‘n Save. I will remain in close contact with Supervalu as well as any future employer to ensure the promise that unions make to all workers: a better life for them and their families.”

The 22 Shop ‘n Save East stores date to Supervalu’s 2016 acquisition of Food Lion stores, spun off as part of the Ahold-Delhaize merger. It has been long speculated Supervalu would distribute those stores among independent retailers operating Shop ‘n Save stores in that region, but no deals have been yet announced.

Meanwhile, analysts and investors applauded Supervalu’s moves, with its stock up by more than 6% midday on Wednesday. Analyst Bill Kirk of RBC Capital Markets called the announcements “the quarter we’ve been waiting for.” They came as Supervalu announced higher-than-expected sales in the quarter and a forecast for mid-single-digit organic wholesale growth, as well as the sale-leaseback transaction.

“With modest inflation, a strong wholesale win pipeline, underappreciated real estate, IT services wins and accretive acquisitions, we believe Supervalu is very attractive,” Kirk said.

Flickinger said investor pressure from Blackwells Capital—which has engaged in a high-profile proxy fight with Supervalu—is due some credit for the company’s actions this week. During this week's call with analysts, Gross declined to address questions about Blackwells' board nominees or reports that surfaced recently that the company was discussing a potential sale with investors.

A Blackwells spokesman declined comment to WGB Wednesday.



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