April 2008

On April 17, Supervalu reported record sales and earnings for the fourth quarter of fiscal 2008 ended February 23. The Eden Prairie, MN based retailer/wholesaler reported fourth quarter net sales of $10.4 billion compared to $10.3 billion last year; net earnings of $156 million, an increase of 30 percent compared to $120 million last year; and record diluted earnings per share of $0.73, an increase of 28 percent compared to $0.57 last year.

However, identical store retail sales were flat compared with a meager 0.5 percent ID store sales gain last period. Overall, fourth quarter retail net sales were $8.1 billion compared to $8.2 billion last year, primarily reflecting the impact of store closures in the acquired operations. Retail square footage decreased 2.5 percent from the fourth quarter of fiscal 2007 with the previously announced closure of underperforming stores which more than offset new store square footage. When excluding store closures, total retail square footage increased 2.3 percent over the fourth quarter of fiscal 2007.

Fourth quarter supply chain services net sales were $2.3 billion compared to $2.1 billion last year, an increase of 7.2 percent, primarily reflecting new business growth and lower than normal customer attrition.

Supervalu’s fourth quarter fiscal 2008 and fourth quarter fiscal 2007 results included after-tax charges for one-time acquisition-related costs of $9 million and $11 million, respectively, or $0.04 and $0.05 per diluted share, respectively. Fourth quarter diluted earnings per share increased 5 percent to $0.77 compared to $0.73 last year when adjusting for one-time acquisition-related costs in both years and non-cash charges of $23 million after-tax, or $0.11 per diluted share in fiscal 2007 related to the sale of Scott’s Food and Pharmacy.

For fiscal 2008 n its entirety, also ended February 23, Supervalu reported record net sales of $44.0 billion, an increase of 18 percent compared to $37.4 billion last year, record net earnings of $593 million, an increase of 31 percent compared to $452 million last year, and record diluted earnings per share of $2.76, an increase of 19 percent compared to $2.32 last year. Fiscal 2008 and fiscal 2007 results included after-tax charges for one-time acquisition-related costs of $45 million and $40 million, respectively, or $0.21 and $0.20 per diluted share, respectively. Full year diluted earnings per share increased 13 percent to $2.97 compared to $2.64 last year when adjusting for one-time acquisition-related costs in both years and non-cash charges of $23 million after-tax or $0.12 per diluted share in fiscal 2007 related to the sale of Scott’s Food and Pharmacy. Fiscal 2008 results include 52 weeks of the acquired operations compared to 38 weeks last year as a result of the June 2, 2006 acquisition of Albertson’s, Inc. premier retail properties.

Jeff Noddle, Supervalu’s chairman and chief executive officer said, “In fiscal 2008, we achieved many important milestones, including record net sales and earnings, $40 million in pretax synergies and a second year of double-digit diluted earnings per share growth following our transformational acquisition. Looking to fiscal 2009, we remain focused on our integration initiatives, including the implementation of key merchandising programs and the continued roll-out of our Premium, Fresh and Healthy remodel program. We are confident the steps we are taking in fiscal 2009 position us well to maximize the future potential of the company.”

He added food inflation has been running in the high three percent range. Customers are coming to Supervalu stores less often, but spending more each time.

“We are seeing evidence of customers managing their budget and focusing on value” by waiting for sales and promotions, clipping coupons, and buying economy sizes and store brands, he said. Supervalu has been rapidly expanding its own store brands recently, which are currently about 16 percent of retail sales.

The company’s business segment mix changed slightly in the fourth quarter this year compared to last year. Retail net sales in the fourth quarter represented 78 percent of total net sales compared to 79 percent last year. Supply chain services net sales increased to 22 percent compared to 21 percent last year.

Gross profit margin in the fourth quarter decreased as a percent of net sales 20 basis points to 23.3 percent. When adjusting for the 30 basis point impact from the business segment mix change, gross profit margin increased by 10 basis points.

Selling and administrative expenses in the fourth quarter as a percent of net sales decreased 50 basis points to 19.3 percent. When adjusting for the 30 basis point impact from the business segment mix change, selling and administrative expenses decreased 20 basis points primarily reflecting lower depreciation expense as well as cycling the prior year charge related to the sale of Scott’s Food and Pharmacy.

Reported operating earnings for the fourth quarter were a record $417 million, or 4.0 percent of sales compared to $379 million, or 3.7 percent of sales last year. Retail food operating earnings were a record $374 million, or 4.6 percent of sales, compared with $363 million, or 4.5 percent of sales last year. Supply chain services operating earnings were a record $75 million, or 3.3 percent of sales, compared with $55 million, or 2.6 percent of sales last year.

Net interest expense for the fourth quarter was $157 million compared to $173 million last year reflecting lower borrowing levels and interest rates.

Supervalu’s effective tax rate for the fourth quarter was 40.0 percent in contrast to the 41.9 percent rate in the fourth quarter last year. Excluding the impact in both years of goodwill write-offs in connection with the disposal of assets, the annual effective tax rates for fiscal 2008 and fiscal 2007 were 39.0 percent and 38.6 percent, respectively.

Capital spending for fiscal 2008 was $1.3 billion, including the in-market acquisition of eight stores in Wyoming and approximately $36 million in capital leases. In fiscal 2008, the company completed 141 major remodels, 25 minor remodels and 27 new stores. Capital spending primarily included new retail stores, store remodeling activity and technology expenditures.

Total debt to capital was 60 percent at the end of fiscal 2008 compared to 64 percent at fiscal 2007 year-end. The total debt to capital ratio is calculated as total debt, which includes current and long-term debt and obligations under capital leases, divided by the sum of total debt and total stockholders’ equity.

Commenting on debt reduction Noddle noted, “Our strong cash flow management has enabled us to significantly reduce debt, beating our goal of $400 million by June 2008. In fact since the acquisition we have achieved $698 million in debt reduction, due in part to lower cash tax payments related to the Albertsons transaction. We are again committing to an additional $400 million reduction for fiscal 2009.”

The company has been paying down debt since buying most of Albertsons’ stores in 2006. Supervalu debt now stands at $8.8 billion, down from $9.5 billion a year ago. Its interest costs dropped to $157 million for the quarter, compared with $173 million a year ago.

Noddle said the company is ahead of its own schedule of paying off $400 million by June, and will pay off about the same amount in the current fiscal year. About 30 percent of its debt is at variable rates which have been falling, a factor that has helped the company. Supervalu said it would use the extra savings for sales initiatives.

In fiscal 2009, Supervalu forecast earnings of $3.10 to $3.25 per share excluding costs. Analysts had been anticipating $3.07 per share. It expects sales of $45 billion to $45.5 billion, including $800 million from an extra week during the fiscal year.

Supervalu warned that inflation and a sluggish economy will influence customer spending. It said it expects same-store sales to grow 1 percent to 2 percent not counting fuel, with much of that growth happening in the second half of the year.

This year costs are rising because higher commodity prices are showing up in packaged foods. Higher fuel prices are also a factor, Noddle said.

“Inflation continues at about the same pace and strength that we saw at the end of the third quarter,” he said.

Diluted weighted-average shares outstanding for the fourth quarter were 213 million shares compared to 211 million shares last year. As of February 23, 2008, Supervalu had 212 million shares outstanding.

The company affirmed its fiscal 2009 earnings guidance range of $3.06 to $3.22 per diluted share on a GAAP basis and $3.10 to $3.25 on an adjusted basis when excluding one-time acquisition-related costs.

Supervalu’s fiscal 2009 guidance includes the following assumptions:

Net sales are estimated to be approximately $45.0 to $45.5 billion, including an approximate benefit of $800 million from the 53rd week in the fiscal year; diluted earnings per share will benefit approximately $0.06 from the 53rd week; identical store sales growth, excluding fuel, is projected to be in the range of 1 to 2 percent; sales attrition in the traditional food distribution business will be approximately 2 to 4 percent for the year. This rate is exclusive of new business and the multi-year migration of Target Corporation volume to self distribution; consumer spending will continue to be pressured by inflation and the economy; capital spending is projected to be approximately $1.3 billion, which will include 165 major store remodels, approximately 15 new traditional supermarkets and 55 to 65 limited assortment stores, including 30 licensed stores; debt reduction is estimated to be $400 million; incremental synergy benefits in fiscal 2009, relating to the Albertsons acquisition, are estimated to be approximately $40 to $50 million pre-tax; one-time acquisition-related costs are expected to be approximately $11 to $16 million pre-tax in fiscal 2009; and the effective tax rate is estimated to be approximately 39 percent.