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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: SVU - Q2 2012 Date: 11/1/2011 10:19 AM
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Hi everyone,

Release: http://sec.gov/Archives/edgar/data/95521/000115752311005800/...
Transcript: http://seekingalpha.com/article/300600-supervalu-s-ceo-discu...

Not a bad quarter. It continues the turnaround, working its way from pretty bad to so-so bad. Who knows? It might actually work its way to so-so good.

It handily beat earnings estimates, coming in flat YoY at $0.28 per share (vs. $0.21 predicted). Management narrowed (by lowering the top end) of full year guidance to $1.20 to $1.30. One question on the call asked about this, saying if the company would turn out to be just flat for the rest of the year, it would meet the top end of guidance at $1.30. The answer was a bit of hemming and hawing without really saying why it kept the low end there. Will it actually see lower YoY results or is it guiding for a beat? Analysts actually upped consensus by a couple of pennies to $1.25 for the year compared to a month ago.

One item that could really help the company is something it's calling hyper-local retailing. This is giving more power to the local store manager, letting him tailor the store and promotions and marketing to let the store capture local events. The example pulled out in the call was the Albertsons store in Cheyenne, Wyom. during Frontier Days last July, one of the biggest rodeos in the country. The local store director put up a walk-in display like a horse stable, turned part of the parking lot into a petting zoo, and tied in promotional displays for a national vendor that was sponsoring the rodeo. Employees dressed in cowboy hats and shirts. Sales were driven pretty well, with healthy comps (same-store sales) during that time. If it loosens the corporate control strings a bit across the country, the individual stores could become more local, giving customers the best of both worlds -- a consistent national retail feel with local flavor for loyalty.

Other promotions that worked well were games that drove multiple visits and more of those are going to be rolled out.

Overall, the costs of these promotions were more than covered by increases in volume sold. In other words, they're working.


Its slowing down the opening of new Sav-a-Lot stores, cutting down from the 160 or so expected to 80 - 90 or so. Probably a smart move given a relatively new SaL CEO. Also lets the company increase its remodeling campaign, which it is doing.


Finally, a nice point is that it increased guidance (by raising the lower boundary) of expected debt payback, currently saying $525 to $550 million. Aggressively paying off debt is what we want to see and as long as cash flow supports it, that's a great use of capital. Interest payment savings were $9 million for the quarter.

I know many would prefer that it suspend its dividend and divert that to debt repayment as well, but I'm not so sure that's a good idea. Despite positive framing, cutting or removing the dividend would probably be viewed as a bad thing, possibly as an act of desperation. Keeping the dividend where it is tells investors that management is confident that it will stay on track to pay down debt, use cash to open new stores and remodel existing ones, and share in the earnings of the company with investors. Besides, dividend-paying companies actually outperform non-dividend paying companies as a class, so it's in good company.

All in all a decent quarter with what appears to be a pretty good plan to continue the turnaround and get this company back on its feet. I'll continue to hold and watch.

Cheers,
Jim
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Author: TMFTypeoh Big red star, 1000 posts Home Fool CAPS All Star Global Fool SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 566 of 1206
Subject: Re: SVU - Q2 2012 Date: 11/1/2011 11:02 AM
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One item that could really help the company is something it's calling hyper-local retailing. This is giving more power to the local store manager, letting him tailor the store and promotions and marketing to let the store capture local events. The example pulled out in the call was the Albertsons store in Cheyenne, Wyom. during Frontier Days last July, one of the biggest rodeos in the country. The local store director put up a walk-in display like a horse stable, turned part of the parking lot into a petting zoo, and tied in promotional displays for a national vendor that was sponsoring the rodeo. Employees dressed in cowboy hats and shirts. Sales were driven pretty well, with healthy comps (same-store sales) during that time. If it loosens the corporate control strings a bit across the country, the individual stores could become more local, giving customers the best of both worlds -- a consistent national retail feel with local flavor for loyalty.

Sounds a lot like the strategy walmart has been using, giving the local managers a lot more flexibility.

I think this is an excellent strategy, and it can also increase employee happiness/decrease turnover. After all, don't we all want more flexibility in our jobs to perform without corporate getting in the way?

This just tells me that this new CEO really knows what he is doing, and is clearly bringing his walmart experience with him.

The only thing I will disagree with you on is paying the dividend. While I am sure that if they cut the dividend that the stock will drop (probably hard), anything they can do to accelerate debt repayment should be seen as a good thing. After all, wouldn't doing so bring them a few steps closer to a higher credit rating, which would REALLY be a huge catalyst to propel the stock higher?

Yes, dividends are great, and yes they do wonders over time. But this turnaround story is all about debt repayment (look at Ford's stock for a good example). The dividend will be great to reinstate 5 years from now .

Overall, I think SVU is doing its job, and the dividend is more nit picking than a general gripe. Nice pick Jim!

Brian
SA/RB Welcome Fool

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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: SVU - Q2 2012 Date: 11/1/2011 11:47 AM
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Hi Brian,

Definitely agree with your point about employee happiness being another benefit.

Regarding the dividend and debt repayment, eliminating the dividend wouldn't have that big of an effect on the amount of debt repaid. At least, in my opinion, to overcome the negatives for signaling and fiscal discipline.

Over the past year, the company's paid back $1,072 million in debt while issuing $405 million (essentially rolling that much forward). Net payback was $667 million. Dividends paid were $74 million, about 11% of that total.

If the fraction was more like 30% or 50%, then sure, divert it to debt payback. But at the current rate of payback, and assuming a goal of paying back $4,768 million (to bring the debt level down to a manageable $2 billion), the difference between staying at the current rate and staying at the current rate plus adding all of the dividend is just 9 months (86 months vs. 77 months). Is reaching the targeted debt level 9 months sooner (and note I'm making up that target for illustration) worth eliminating the dividend for over six years? Management is saying it's not and I can't really argue too strongly against that at this point.

Cheers,
Jim

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