Supervalu sees tough future after dismal earnings report

Shares of Eden Prairie-based Supervalu are down about 45 percent in trading so far today. The plunge follows the grocery chain's announcement Wednesday of news that spooked the market.

The company reported dismal first-quarter sales and earnings, suspended its dividend payments and announced plans to potentially put itself up for sale.

The grocer's stock has now lost more than 90 percent of its value since the summer of 2007.

Supervalu reported a 45 percent year-over-year drop in net earnings in its first quarter, $41 million, down from $74 million a year earlier. Revenue dropped to $10.59 billion from $11.11 billion.

Supervalu CEO Craig Herkert said the poor quarter means price cuts for shoppers and a serious review of the company's future prospects.

"The actions will allow us to address the price gap that exists, drive more traffic to our stores and be more responsive to the needs of our customers," he said. "We are also reviewing strategic alternatives for our business."

In an email message to employees, Herkert said that review will include the possible sale of all or parts of the company.

"You can expect over the next several months, there will be a lot of rumors and speculation about this process in the media and among financial analysts who follow the company. Unfortunately during this period, for legal, business and other reasons we will not be commenting on these rumors and speculation," he said in the email.

In a conference call with analysts, he vowed, however, that bankruptcy is not going to be considered as an option. The company will cut costs by a quarter-billion dollars over several years and take other actions to fund price cuts at its 1,100 stores, including some four dozen company-owned Cub Foods stores in Minnesota.

"Our long-term strategy is to bring pricing in line with our primary conventional competitors and to narrow the gaps to discounters," he said. "We're taking the steps necessary to move this along much faster."

The nation's third-largest grocery chain has been trying for years to turn around its struggling business and compete on pricing with the likes of rivals Walmart, Target and Costco.

Supervalu brought in Herkert, a former Walmart executive, in 2009 to help shake things up. The company subsequently emphasized lower prices, but analysts say most of Supervalu's stores around the country are struggling none the less.

"They've got some retail, like in Minneapolis, that performs relatively well," said David Livingston, a Milwaukee-based grocery industry analyst. "The rest of the country, not so well."

"The problem with Supervalu is they can't come up with way to figure out how to sell groceries cheaper than Walmart and they can't figure out how to put quality and service into their stores when you've got skeleton crews because they've cut their labor back," he said. "They've laid off thousands of people over the past few years."

Livingston expects Supervalu will end up selling off parts of the company.

"They'll probably just cease to exist at some point," he said. "The same thing has happened to many other grocers that have gotten in over their heads in debt."

Morningstar retail analyst Michael Keera says the odds are 50-50 -- at best-- that Supervalu survives. The problem for Supervalu, he says, is that it depends on food sales for profits. And many of its competitors don't.

"It's very difficult for traditional supermarkets because you have other concepts that don't rely on selling food for profit," he said. "They sell food to drive traffic in the store. And as long those other concepts are out there, it's going to be difficult for supermarket operators to deal with the mass merchants , the super centers."

Rivals such as Target and Walmart also have non-union workforces that get paid less, making it easier to undercut traditional unionized grocers on price.

Supervalu posted a net loss of $1 billion in its most recently completed fiscal year and a loss of $1.5 billion in the previous fiscal year.

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