Save-A-Lot hinders Supervalu performance ahead of spinoff

JANUARY 13, 2016 | BY MIKE TROY

Supervalu wants to unlock the value of its Save-A-Lot division with a planned spinoff, but the 1,336 store division did little to enhance its appeal to investors with a weak showing in the third quarter.

Supervalu did meet its profitability targets for the period ended Dec. 5, but sales at Save-A-Lot declined to $1.07 billion from $1.09 billion due to some store closures and a 3.4% decline in identical store sales. The division’s adjusted operating profit increased to $50 million from $49 million. Total company sales declined to $4.1 billion from $4.2 billion as sales also declined at Supervalu’s wholesale division and traditional supermarkets. Adjusted net earnings from continuing operations were $46 million, or 16 cents a share, compared to $49 million, or 18 cents a share the prior year.

Commenting on the total company performance, President and CEO Sam Duncan said the operating environment is challenging.

"Improving sales is a primary focus as we look to complete the fiscal year,” Duncan said.

Weak results from the Save-A-Lot division are particularly noteworthy because Supervalu announced last July it was exploring a possible spin-off transaction. In early January, the company took the next step in the spin-off process, approving the separation of the business and filing documents with the Securities and Exchange Commission in which it disclosed plans to open 90 stores this year and next and to maintain mid-to-high single digit rates of new store growth in pursuit of a 3,500 unit domestic opportunity. Timing of the spin-off has not been announced, but upon completion Supervalu shareholders will own at least 80.1% of outstanding shares of common stock of Save-A-Lot, according to the SEC filing.

“As two distinct publicly traded companies, each of Supervalu and Save-A-Lot will be better positioned to focus on its respective businesses, customers and strategic priorities and to capitalize on growth opportunities,” Duncan said in a recently distributed letter to shareholders. “We believe Supervalu will be able to focus on providing wholesale distribution services to independent retail customers and operating its five regionally based traditional-format grocery banners. Save-A-Lot will continue to be a leader in hard discount grocery retailing in the United States.”

Notwithstanding the tepid third quarter results, Supervalu is convinced the hard discount concept (small format, limited assortment, extensive private label) will gain popularity with more shoppers. The typical Save-A-Lot store measures 17,000-sq-ft., stocks about 3,000 items and generates about 60% of sales from proprietary brands. Hard discount concepts in the U.S. only account for about 3% of a U.S. grocery retailing industry Supervalu pegs at more than $1 trillion.

To capitalize on that opportunity, in early December Supervalu said current Save-A-Lot CEO Eric Claus would continue to serve in that role after the spinoff. Claus, a longtime former senior executive with The Great Atlantic & Pacific Tea Company, joined Save-A-Lot in Dec. 2015. Serving as president of Save-A-Lot after the separation will be Ritchie Casteel. The veteran Albertson’s executive join Supervalu as president and CEO of Save-A-Lot in 2013.