SuperValu holds to debt-cutting goals despite disappointing fiscal Q3

By Paul Deckelman

New York, Jan. 11 - SuperValu Inc. found its fiscal third quarter to be difficult and disappointing, and executives of the Eden Prairie, Minn.-based supermarket operator acknowledged on their conference call Tuesday following the release of their numbers that the company underperformed during the quarter, forcing them to lower their full-year guidance.

But the third-largest U.S. supermarket company after Safeway Inc. and Kroger Co. did continue to show improvement in one key area - debt reduction. It chief financial officer, Sherry M. Smith, told analysts on the conference call that the company was increasing its projected debt paydown for the 2011 fiscal year that ends in early February to $850 million.

She said that the company was helped in this regard by the closing at the end of December of its previously announced sale of its Total Logistic Control logistics and supply chain management solutions subsidiary to Ryder Integrated Logistics, Inc. Proceeds from the sale came to about $200 million, which was used to pay down debt.

February bonds next on tap

Smith said that as of the beginning of 2011 last week, the company had now reduced its total outstanding debt on a fiscal year-to-date basis by nearly $700 million, with more debt reduction to come. She said that SuperValu will retire the remaining $392 million of 7½% notes slated to come due on Feb. 15 issued by the former Albertsons, Inc., now a subsidiary of SuperValu.

Looking ahead, Smith projected that as the 2012 fiscal year gets under way early next month, SuperValu will have drawn less than $200 million of the $2.3 billion of borrowing capacity it has available under its credit lines.

She said that bank and public bond debt maturities for fiscal 2012 amount to only $300 million.

The company's president and chief executive officer, Craig Herkert, said on the call that cash from operations remains strong at $1.3 billion on a trailing-12-month basis.

He also noted that since May of 2009, when he took the reins of the company, the company has paid down more than $1 billion of debt.

In compliance with covenants

Smith said meantime that the company remains in compliance with its debt covenants. Its trailing-12-month EBIT is $1.1 billion excluding impairment and certain other costs.

She said that under the terms of the covenants on SuperValu's revolving credit facility, it is required to keep leverage below 4.2 times and maintain a 2.2x minimum to satisfy its fixed-charge requirement; as of the end of the 2011 fiscal year, she said that leverage would be no more than around 3.5x, while it will maintain a 2.6x fixed-charge ratio.

Less focus on debt ahead?

However, while Smith touted the progress the company has made in paying down its debt, she obliquely hinted that priorities might change going forward, particularly given the challenging grocery industry and economic conditions.

Smith said that one of the key functions of her office is balancing the allocation of the company's free cash flow among either investing it back into the business, reducing the level of debt or returning cash to company shareholders via quarterly dividends and/or share repurchases.

Smith - who assumed the CFO position on an interim basis last July but only took over the job permanently last month - said she is in the process of evaluating SuperValu's cash practices and promised updates going forward.

However, she declared that while SuperValu "remains committed to reducing debt and ultimately returning the company to investment grade, it is obvious to me that the best way to de-leverage our balance sheet and create shareholder value is to grow earnings and cash flow. This requires maintaining our store base and investing to improve our competitive position."

No pressure for asset sales

Herkert, in answer to an analyst's question about whether SuperValu might feel a need to sell assets to head off any "potential issues" about covenant compliance down the line, asserted that "we do not feel stressed that we have to do anything. If there are opportunities to do something that are beneficial, we will certainly evaluate them. But we do not feel under pressure that we must divest any particular asset at this point."

He noted that while the company is "mindful of returning value to our shareholders, quite frankly, today's market is a buyer's market, not a seller's. We continue to look at strategic sales - but only if the economics make sense such that it would enhance our performance metrics and provide us with greater operational flexibility."

While acknowledging that SuperValu has underperformed because of problems with promotional initiatives in some of its markets and saying he is "disappointed" with current trends, the CEO proclaimed that "the results this quarter are not indicative of the earning power you [i.e., the financial community] should expect" from the company on a continued basis, noting that unlike other food retailers that have encountered obstacles, his 1,140-store chain has leading market positions in many areas and other advantages it can leverage.

Adjusted earnings off

For the fiscal third quarter ended Dec. 4, SuperValu rang up net sales of $8.7 billion and a net loss of $202 million, or 95 cents per diluted share. Excluding charges and other one-time items, earnings were $50 million, or 24 cents per share - less than the 30 to 32 cents per share Wall Street had been looking for. In the year-ago period, the company earned $109 billion, or 51 cents per share, on net sales of $9.2 billion.

SuperValu projected fiscal fourth-quarter earnings per share of between 30 cents and 40 cents, and it cut its full-year earnings estimate to between $1.25 and $1.35 per share on an adjusted basis from its prior estimates of $1.40 to $1.60 per share.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.