FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period (12 weeks) ended December 3, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ..................... to ........................
Commission file number 1-5418
SUPERVALU INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 41-0617000
................................................................................
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11840 Valley View Road, Eden Prairie, Minnesota 55344
................................................................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 828-4000
..............................
Former name, former address and former fiscal year, if changed since last
report:
N.A.
................................................................................
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
........... ...........
The number of shares outstanding of each of the issuer's classes of Common Stock
as of January 1, 1995 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 71,071,157
PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements
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CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
SUPERVALU INC. and Subsidiaries
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Third Quarter (12 Weeks) Ended
------------------------------------
December 3, 1994 December 4, 1993
- --------------------------------------------------------------------------------
Net sales $3,908,194 $3,670,298
Costs and expenses
Cost of sales 3,547,301 3,339,028
Selling and administrative expenses 279,559 243,553
Amortization of goodwill 4,588 2,715
Restructuring and other charges 244,000 --
Interest
Interest expense 32,563 27,103
Interest income 5,463 6,913
------------------------------
Interest expense, net 27,100 20,190
------------------------------
Total costs and expenses 4,102,548 3,605,486
------------------------------
Earnings (loss) before equity in earnings
of ShopKo and income taxes (194,354) 64,812
Equity in earnings of ShopKo 5,194 6,474
------------------------------
Earnings (loss) before income taxes (189,160) 71,286
Provision for income taxes
Current 37,572 19,224
Deferred (142,609) 6,824
------------------------------
Income taxes (105,037) 26,048
------------------------------
Net earnings (loss) $ (84,123) $ 45,238
==============================
Net earnings (loss) per common share $(1.18) $0.63
Weighted average number of common
shares outstanding 71,487 71,937
Dividends declared per common share $0.235 $0.220
Supplemental information:
After-tax LIFO (expense) $(2,670) $(2,919)
All data subject to year-end audit.
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENT OF EARNINGS
- ----------------------------------------------------------------------------------------
SUPERVALU INC. and Subsidiaries
- ----------------------------------------------------------------------------------------
(in thousands, except per share data)
Year-to-Date (40 Weeks) Ended
---------------------------------------
December 3, 1994 December 4, 1993
- ----------------------------------------------------------------------------------------
Net sales $12,673,034 $12,249,905
Costs and expenses
Cost of sales 11,537,736 11,188,502
Selling and administrative expenses 856,812 777,844
Amortization of goodwill 12,277 9,050
Restructuring and other charges 244,000 --
Interest
Interest expense 100,518 93,529
Interest income 18,910 22,626
----------------------------------
Interest expense, net 81,608 70,903
----------------------------------
Total costs and expenses 12,732,433 12,046,299
----------------------------------
Earnings (loss) before equity in earnings
of ShopKo and income taxes (59,399) 203,606
Equity in earnings of ShopKo 8,769 10,084
----------------------------------
Earnings (loss) before income taxes (50,630) 213,690
Provision for income taxes
Current 83,568 75,652
Deferred (134,203) 5,392
----------------------------------
Income taxes (50,635) 81,044
----------------------------------
Net earnings $ 5 $ 132,646
==================================
Net earnings per common share -- $1.85
Weighted average number of common
shares outstanding 71,540 71,760
Dividends declared per common share $0.690 $0.635
Supplemental information:
After-tax LIFO income (expense) ($4,082) $16
All data subject to year-end audit. See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
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SUPERVALU INC. and Subsidiaries Third Quarter as of Fiscal Year End
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(In thousands) December 3, December 4, February 26,
Assets 1994 1993 1994
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Current Assets
Cash and cash equivalents $ 3,923 $ 2,536 $ 2,846
Receivables, less allowance for losses of
$37,164 at December 3, 1994, $43,331 at
December 4, 1993 and $33,820 at February 26, 1994 412,789 386,962 352,151
Inventories 1,309,453 1,255,632 1,113,937
Other current assets 128,562 79,425 94,379
--------------------------------------------
Total current assets 1,854,727 1,724,555 1,563,313
Long-term notes receivable 61,580 93,401 66,568
Long-term investment in direct financing leases 80,689 75,364 81,574
Property, plant and equipment
Land 194,577 157,226 172,241
Buildings 868,352 786,825 769,036
Property under construction 68,389 78,057 73,950
Leasehold improvements 128,896 119,579 114,724
Equipment 948,479 834,753 890,050
Assets under capital leases 197,570 165,891 175,891
--------------------------------------------
2,406,263 2,142,331 2,195,892
Less accumulated depreciation and amortization
Owned property, plant and equipment 820,926 730,741 746,027
Assets under capital leases 38,217 30,607 39,742
--------------------------------------------
Net property, plant and equipment 1,547,120 1,380,983 1,410,123
Investment in ShopKo 175,875 170,482 173,567
Goodwill 529,071 427,445 427,559
Other assets 250,086 308,502 319,647
--------------------------------------------
Total assets $4,499,148 $4,180,732 $4,042,351
============================================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ 365,288 $ 204,556 $ 23,082
Accounts payable 1,045,766 945,131 883,088
Current maturities of long-term debt 10,451 6,716 108,728
Current obligations under capital leases 18,624 18,775 19,222
Other current liabilities 166,739 185,259 190,305
--------------------------------------------
Total current liabilities 1,606,868 1,360,437 1,224,425
Long-term debt 1,196,340 1,108,918 1,030,378
Long-term obligations under capital leases 265,566 223,830 232,617
Deferred income taxes -- 90,196 99,734
Other liabilities 233,136 166,912 179,739
Commitments and contingencies -- -- --
Stockholders' equity
Preferred stock 5,908 -- 5,908
Common stock 75,335 75,335 75,335
Capital in excess of par value 13,254 12,785 12,966
Retained earnings 1,209,792 1,231,438 1,268,117
Treasury stock, at cost (107,051) (89,119) (86,868)
--------------------------------------------
Total stockholders' equity 1,197,238 1,230,439 1,275,458
--------------------------------------------
Total liabilities and stockholders' equity $4,499,148 $4,180,732 $4,042,351
============================================
Quarterly data subject to year-end audit. See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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SUPERVALUE INC. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Capital in
Preferred Common Excess of Treasury Retained
Stock Stock Par Value Stock Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
FEBRUARY 27, 1993 $ -- $75,335 $12,584 $(97,473) $1,144,374 $1,134,820
Net earnings -- -- -- -- 185,253 185,253
Sales of common stock
under option plans -- -- 225 10,838 -- 11,063
Cash dividends declared
on common stock -
$.855 per share -- -- -- -- (61,510) (61,510)
Issuance of preferred stock 5,908 -- -- -- -- 5,908
Compensation under employee
incentive plans -- -- 157 (233) -- (76)
----------------------------------------------------------------------------------------------
BALANCES AT
FEBRUARY 26, 1994 5,908 75,335 12,966 (86,868) 1,268,117 1,275,458
Net earnings -- -- -- -- 5 5
Sales of common stock
under option plans -- -- 31 (129) -- (98)
Cash dividends declared
on common stock -
$.69 per share -- -- -- -- (49,410) (49,410)
Compensation under employee
incentive plans -- -- 257 639 -- 896
Puchase of 500 shares
for treasury -- -- -- (20,693) -- (20,693)
Other -- -- -- -- (8,920) (8,920)
-------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 3, 1994 $5,908 $75,335 $13,254 $(107,051) $1,209,792 $1,197,238
===========================================================================================
Interim data subject to year-end audit. See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
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SUPERVALU INC. and Subsidiaries
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(In thousands) Year-to-date
(40 weeks ended)
-------------------------
December 3, December 4,
1994 1993
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net earnings $ 5 $ 132,646
Adjustments to reconcile net earnings to net cash
provided from (used in) operating activities:
Equity in earnings of ShopKo (8,769) (10,084)
Dividends received from ShopKo 4,862 4,863
Depreciation and amortization 155,089 143,039
Provision for losses on receivables 4,212 6,027
Restructuring and other charges 244,000 --
Gain on sale of property, plant and equipment (5,162) (174)
Deferred income taxes (137,874) 5,393
Treasury shares contributed to employee incentive plans -- 18
Change in assets and liabilities:
Receivables (39,160) (35,280)
Inventories (140,806) (121,573)
Other current assets 4,744 (1,540)
Direct financing leases 7,371 6,590
Accounts payable 46,213 80,214
Other liabilities (46,843) (2,298)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 87,882 207,841
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Cash flows from investing activities
Additions to long-term notes receivable (15,818) (30,822)
Payments received on long-term notes receivable 21,158 19,955
Proceeds from sale of property, plant and equipment 37,908 10,103
Purchase of property, plant and equipment (232,576) (138,826)
Business acquisitions, net of cash acquired (111,083) --
Other investing activities 31,374 31,712
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Net cash used in investing activities (269,037) (107,878)
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Cash flows from financing activities
Net issuance (reduction) of short-term notes payable 338,650 (46,940)
Proceeds from issuance of long-term debt 150,000 3,000
Repayment of long-term debt (222,899) (5,901)
Reduction of obligations under capital leases (14,160) (13,503)
Proceeds (payments) from the sale or purchase of common stock under option plans (134) 7,907
Dividends paid (48,532) (43,763)
Payment for purchase of treasury stock (20,693) --
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Net cash provided by (used in) financing activities 182,232 (99,200)
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Net increase in cash and cash equivalents 1,077 763
Cash and cash equivalents at beginning of year 2,846 1,773
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Cash and cash equivalents at end of third quarter $ 3,923 $ 2,536
============================================================================================================
All data subject to year-end audit. See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies
- -------------------
The summary of significant accounting policies is included in the notes to
consolidated financial statements in the 1994 annual
report of SUPERVALU INC. ("SUPERVALU" or the "company").
Restructure and Other Charges
- -----------------------------
The third quarter results include restructuring and other charges totaling
$244.0 million which provide for the implementation of the plan formulated under
SUPERVALU ADVANTAGE, the sale, closure or restructure of certain retail
businesses and the recognition of certain asset impairments.
The aggregate charges include $204.8 million for activities under the
restructuring plan and an additional $39.2 million for asset impairment. The
asset impairment charge covers intangibles in businesses where future
undiscounted cash flow is not sufficient to recover the book value of the
recorded intangible.
The aggregate charges include $53.1 million for severance, pension and
outplacement which is based on the projected impact of the plan on employee
levels in both food distribution and retail food. The company expects
approximately 4,300 employees to be eliminated over the next 18 months under the
re-engineering efforts, 1,700 of which are employed in retail food operations.
Also included in the charge is a $20.0 million provision in food distribution
which represents expected losses on the sale of tangible assets and expenses
under non-cancelable leases as a result of the strategic shift.
The restructuring charges include $87.8 million provision for property and lease
discontinuances at retail locations, resulting primarily from various exit
strategies and payment of portions of non-cancelable lease obligations.
Approximately 30 retail stores are expected to be sold or closed, primarily in
fiscal 1995 and 1996. The retail units covered by the reserve had aggregate
sales and pre-tax losses of $67.2 and $6.2 million, respectively, for the third
quarter compared with $65.3 and $5.8 million for the same period last year.
Year-to-date, the retail units covered by the reserve had aggregate sales and
pre-tax losses of $215.6 and $14.1 million, respectively, compared with $213.4
and $14.1 million for the same period last year.
The final component of the aggregate charges is a $43.9 million impairment
provision representing the effect of the strategic shift on the recoverability
of certain assets. The company holds land for development, transition stores
for wholesale market share, certain warehouse properties and miscellaneous sites
which will be disposed of as soon as practicable.
Income Taxes
- ------------
The Internal Revenue Service ("IRS") completed its review for the tax years
ending 1991 and 1992. The IRS review concluded that the
7
partial disposition of ShopKo in October, 1991, was a non-taxable transaction.
Therefore, the $40.8 million of taxes provided by the company in the financial
statements was reversed and reflected in the consolidated statement of earnings.
Treasury Stock Purchase Program
- -------------------------------
In December 1994, the Board of Directors instituted a new treasury stock
purchase program. The company may repurchase up to 5.0 million shares in open
market purchases. No shares were repurchased under the program during the third
quarter.
Statement of Registrant
- -----------------------
The data presented herein is unaudited but, in the opinion of management,
includes all adjustments necessary for a fair presentation of the consolidated
financial position of the company and its subsidiaries at December 3, 1994 and
December 4, 1993 and the results of the company's operations and cash flows for
the periods then ended. These interim results are not necessarily indicative of
the results of the fiscal years as a whole.
A limited review of this data has been performed by the company's independent
certified public accountants, Deloitte & Touche LLP. A copy of their report is
attached as an exhibit to this report.
8
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
The following table sets forth items from the company's Consolidated Statements
of Earnings as percentages of net sales:
Third Quarter Year-to-Date
(12 weeks) Ended (40 weeks) Ended
--------------------------------------
Fiscal Fiscal Fiscal Fiscal
1995 1994 1995 1994
-------- -------- -------- ------
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales (90.77) (90.97) (91.04) (91.34)
Selling and administrative (7.27) (6.71) (6.86) (6.42)
Restructuring and other charges (6.24) -- (1.93) --
Interest expense (.83) (.74) (.79) (.76)
Interest income .14 .18 .15 .18
-------- -------- -------- ------
Earnings before equity in earnings
of ShopKo and income taxes (4.97) 1.76 (.47) 1.66
Equity in earnings of ShopKo .13 .18 .07 .08
Provision for income taxes 1.65 (.71) .08 (.66)
ShopKo deferred tax credit 1.04 -- .32 --
-------- -------- -------- ------
Net earnings (2.15%) 1.23% --% 1.08%
======== ======== ======== ======
NET SALES:
Net sales increased 6.5% and 3.5% over last year for the third quarter and year-
to-date periods, respectively. The increase was achieved despite year-to-date
deflation as measured by the company of .7% compared with inflation of .2% for
the same period last year and a continuing competitive market.
Food distribution net sales increased 4.0% and 2.8% over last year for the
quarter and year-to-date, respectively. Sales were favorably impacted by the
acquisition of Sweet Life Foods and Texas T Stores during the year. New store
openings in the company's retail food chains also contributed to the sales
increase over last year. The added sales contributions from acquisitions and
new store openings were partially offset by lost sales due to wholesale
consolidation and competitive market conditions at the retail level. While
recent acquisitions and new store openings will favorably impact the company's
sales in the future, continuing consolidation activity in several locations will
affect sales comparisons until the projects are completed and the impact cycled.
Retail food net sales increased 21.0% and 12.0% over last year for the third
quarter and year-to-date periods, respectively. The increase was primarily due
to the acquisition of Hyper Shoppes, Inc. New store openings and the
acquisition of the Texas T Stores also contributed to the increase in sales over
last year. Same-store corporate retail sales for the third quarter and year-to-
date declined 1% compared with last year.
9
Net Sales by Segment
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(In thousands)
Third Quarter (12 weeks)
---------------------------------------------------
December 3, 1994 December 4, 1993
------------------------ -----------------------
Net Sales % of total Net Sales % of total
---------- ---------- ----------- ----------
Food distribution $3,502,119 89.6% $3,366,030 91.7%
Retail food 1,029,474 26.4% 850,843 23.2%
Sales eliminations (623,399) (16.0%) (546,575) (14.9%)
----------- ----- ----------- -----
$3,908,194 100.0% $3,670,298 100.0%
=========== ===== ========== =====
Year-to-date (40 weeks)
------------------------------------------------------
December 3, 1994 December 4, 1993
---------------------- -------------------------
Net Sales % of total Net Sales % of total
----------- ---------- ------------- ---------
Food distribution $11,437,020 90.2% $11,121,820 90.8%
Retail food 3,064,648 24.2% 2,736,533 22.3%
Sales eliminations (1,828,634) (14.4%) (1,608,448) (13.1%)
----------- ----- ----------- -----
$12,673,034 100.0% $12,249,905 100.0%
=========== ===== =========== =====
GROSS PROFIT:
Gross profit as a percentage of net sales increased to 9.2% and 9.0% for the
third quarter and year-to-date periods, respectively, compared with 9.0% and
8.7% for last year. The increases were due primarily to the growing proportion
of the higher margined retail food business within the company's total sales
mix.
Food distribution gross margin was affected by an increase in insurance expense,
a LIFO expense year-to-date compared with a LIFO credit last year, a reduction
in off invoice allowances offered by certain vendors and an increase in expenses
associated with the company's wholesale consolidation activities. These effects
were partially offset by increases in other components of gross profit.
Retail food gross margins were down slightly for the third quarter, but
consistent year-to-date compared with last year. Competitive pressures
continuing in certain regions and recent retail acquisitions resulted in lower
gross margins for the quarter.
SELLING AND ADMINISTRATIVE EXPENSES:
Selling and administrative expenses as a percentage of net sales were 7.3% and
6.9% for the third quarter and year-to-date, respectively, compared with 6.7%
and 6.4% for the same periods last year. The higher percentages were primarily
due to a growing proportion of the company's retail food segment which operates
at a higher selling and administrative expense percentage than the food
distribution segment. Also affecting the third quarter and year-to-date selling
and administrative expenses were the acquisition of Sweet Life, wholesale
consolidation activity in several markets, expenses related to new store
openings and the SUPERVALU Advantage project ("SUPERVALU ADVANTAGE").
Expenses under SUPERVALU ADVANTAGE totaling $3.2 million and $9.9 million have
been incurred in the quarter and year-to-date, primarily for studying
10
the fundamentals of our business and the industry and developing a restructuring
plan. It is expected that expenses on this project should approximate $4.0 to
$5.0 million for the remainder of the year. The company anticipates a modest
increase in expenses related to this initiative next year, however, a net
earnings contribution from this initiative is anticipated in fiscal 1997.
RESTRUCTURING AND OTHER CHARGES
On December 2, 1994 the company announced a change in operating strategy which
included the decision to restructure certain of its operations and reassess the
recoverability of underlying assets. Restructuring and other charges totaling
$244.0 million were recorded to provide for the implementation of the plan
formulated under SUPERVALU ADVANTAGE, and the sale, closure or restructure of
certain retail businesses. The aggregate charges also include the recognition
of certain asset impairments based on the company's established process of
reviewing intangibles on a periodic recurring basis.
Management's objective under SUPERVALU ADVANTAGE is to fundamentally change its
business processes to improve the effectiveness and efficiency of the company's
food distribution system thus lowering the cost of goods to the company's
customers. Its retail food objective is to improve retail performance by
eliminating certain operations and assets that do not add shareholder value and
focusing on building its winning retail formats. The restructuring plan, which
was approved by the Board of Directors, resulted from a comprehensive review of
industry trends and company operations, and represents a new business vision for
the company. The restructuring plan anticipates four main initiatives:
creation of three regional "upstream" distribution facilities; resets and
mechanized inventory sort at "downstream" distribution facilities; elimination
of certain retail businesses and assets; and a re-engineering of both food
distribution and retail food organizations and operations.
Under the plan, food distribution costs are expected to be reduced through
enhanced logistic and warehousing procedures. This is expected to be
accomplished by better balancing the trade-offs of lower prices from volume
buying against handling, storage and transportation expenses. Planned upstream
facilities will provide regional distribution of general merchandise, health and
beauty care products and slow-moving grocery items. Construction of the
Anniston, Alabama prototype "upstream" facility is underway. A second facility,
a 530,000 square-foot distribution center in Perryman, MD has been acquired and
will be used both for relocation of the company's Maryland division and for
selected upstream functions. The company believes that the regional upstream
facilities will allow better price brackets for certain items and categories
plus reduced freight expenses. Extensive mechanization is planned for most
facilities and inventory levels are expected to decline substantially. Changes
in the pricing of goods and services are also planned. It is management's
belief that when fully implemented, SUPERVALU will have the ability to deliver
product into the marketplace on a competitively advantageous basis.
The retail changes involve a refocusing of the company's corporate retail
efforts on formats which it believes will produce the best results in the
future. The Twin Valu supercenters are being closed and Laneco will re-focus on
food-driven formats and exit certain non-food operations.
11
The aggregate charges include $204.8 million for activities under the
restructuring plan and an additional $39.2 million for asset impairment. The
asset impairment charge covers intangibles in businesses where future
undiscounted cash flow is not sufficient to recover the book value of the
recorded intangible. The restructuring charges do not cover certain aspects of
the plan, including new information systems, anticipated operating losses,
implementation costs associated with SUPERVALU ADVANTAGE, employee relocation
and training. These costs are not considered exit activities and will be
recognized as incurred. Cash expenditures related to the aggregate charges are
estimated at $2.3 million during the fourth quarter of fiscal 1995, $31.2
million in fiscal 1996, and $24.3 million thereafter. These cash expenditures
cover severance, pension, outplacement and carrying costs of impaired food
distribution real estate. Management anticipates that the cash requirements
will be funded through internally generated cash, principally from inventory and
property reductions, and existing credit facilities.
The aggregate charges include $53.1 million for severance, pension and
outplacement which is based on the projected impact of the plan on employee
levels in both food distribution and retail food. The company expects
approximately 4,300 positions will be eliminated over the next 18 months under
the re-engineering efforts, 1,700 of which are employed in retail food
operations. Also included is a $20.0 million provision in food distribution
which represents expected losses on the sale of tangible assets and expenses
under non-cancelable leases as a result of the strategic shift.
The restructuring charges include a $87.8 million provision for property and
lease discontinuances at retail locations, resulting primarily from various exit
strategies and payment of portions of non-cancelable lease obligations. A
portion of this amount was established to provide for the exiting of the
company's Twin Valu business. The company has a purchase and sale agreement
covering one Twin Valu supercenter and a vacant parcel which had been acquired
for another supercenter. The second operating supercenter will be closed.
Another portion of this provision covers a substantial restructuring of the
company's Laneco division. This will involve the sale or other disposition of 7
stores, including all department store retail units. The company is involved in
active negotiation for certain of these units. The retail related reserves also
will provide for the sale or closing of certain other retail units which have
not been publicly identified at this time. The company intends to sell these
units on a going-concern basis. The timing of individual retail transactions
will vary. Because operating losses are not covered by any reserve, the effect
on the balance of fiscal 1995 or fiscal 1996 is not possible to predict. The
retail units covered by the reserve had aggregate sales and pre-tax losses of
$67.2 and $6.2 million, respectively, for the third quarter compared with $65.3
and $5.8 million for the same period last year. Year-to-date, the retail units
covered by the reserve had aggregate sales and pre-tax losses of $215.6 and
$14.1 million, respectively, compared with $213.4 and $14.1 million for the same
period last year. Approximately 30 retail stores are expected to be sold or
closed, primarily in fiscal 1995 and 1996.
The final component of the aggregate charges is a $43.9 million impairment
provision representing the effect of the strategic shift on the recoverability
of certain assets. The company holds land for development,
12
transition stores for wholesale market share, certain warehouse properties and
miscellaneous sites which will be disposed of as soon as practicable.
OPERATING EARNINGS:
The company's pre-tax operating earnings (earnings before interest, corporate
expenses, equity in earnings of ShopKo Stores, Inc. ("ShopKo"), and taxes)
resulted in an operating loss of $146.9 million for the third quarter compared
with operating earnings of $90.4 million for last year. Year-to-date operating
earnings were $59.5 million compared with $294.7 million for last year. The
decrease in operating earnings was due to the restructuring and other charges
recorded in the third quarter. Excluding the restructuring and other charges,
operating earnings decreased 6.5% to $84.5 million and 1.3% to $290.9 million
for the third quarter and year-to-date, respectively.
Food distribution operating earnings before the restructuring and other charges
decreased 5.1% to $80.0 million and 4.0% to $263.3 million for the third quarter
and year-to-date, respectively. The food distribution operating earnings trend
was affected by increased insurance expenses, a LIFO charge, wholesale
consolidation expenses and integration costs of recent acquisitions.
Retail food operating earnings before the restructuring and other charges
decreased 26.5% to $4.5 million for the third quarter and increased 34.3% to
$27.6 million year-to-date. Retail food operating earnings for the quarter were
affected primarily by reduced gross margins resulting from competitive pressures
and expenses related to new store openings. The year-to-date increase is due to
strong gross profit margins from the first quarter.
The company expects spending on SUPERVALU ADVANTAGE, wholesale consolidation
activities and acquisition integration efforts to impact its ability to show
significant growth in operating earnings short-term.
INTEREST INCOME AND EXPENSE:
Interest income decreased to $5.5 and $18.9 million for the third quarter and
year-to-date, respectively, compared with $6.9 and $22.6 million for the same
periods last year. The decrease in interest income is due to the reduction in
notes receivable as a result of the sale of notes in the ordinary course of
business. Interest expense increased to $32.6 and $100.5 million for the third
quarter and year-to-date, respectively, compared with $27.1 and $93.5 million
for the same periods last year. The increase was due primarily to the issuance
of $150 million in debt securities in July of 1994, part of which was used to
repay a maturing issue in the amount of $100 million, and an increase in short-
term borrowing rates.
EQUITY IN EARNINGS OF SHOPKO:
Equity in earnings of ShopKo decreased to $5.2 and $8.8 million in the third
quarter and year-to-date compared with $6.5 and $10.1 million for the same
periods last year. As reported by ShopKo, sales increased 5.5% to $470.9
million and net earnings decreased 19.7% for the third quarter compared with
last year. For the quarter, net earnings were affected by decreased gross
margins resulting from an increase in promotional sales mix
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and continued competitive pressures. These effects were partially offset by an
increase in income from prescription management services and a small decrease in
selling and administrative expenses resulting from tight expense control.
PROVISION FOR INCOME TAXES:
The effective tax rate before the restructuring charges increased .6% in the
third quarter compared with last year. This increase was due to the increase in
goodwill resulting from recent acquisitions.
The Internal Revenue Service ("IRS") completed its review for tax years ending
in 1991 and 1992 during the third quarter. The IRS review period included the
transaction and related tax expense recorded in connection with the partial
disposition of ShopKo in October, 1991. Income taxes were provided for this
disposition at the transaction date, although the company maintained that the
transaction resulted in no tax for income tax purposes. Upon completion of their
review, the IRS concluded that the partial disposition of ShopKo was a non-
taxable transaction. Therefore, the $40.8 million of taxes provided by the
company in the financial statements was reversed and reflected in the
consolidated statement of earnings.
LIQUIDITY AND CAPITAL RESOURCES
Internally-generated funds, principally from the company's food distribution
operations, continue to be the major source of capital for liquidity and capital
growth. Cash provided from operations year-to-date, which was not affected by
the restructuring charge, was $87.9 million compared with $207.8 million last
year. The change in cash provided from operations was primarily affected by
accounts payable trends. Last year the $207.8 million cash provided was
impacted by the centralization of Wetterau accounts payable resulting in better
cash management and a $34.0 million increase in accounts payable. Since the
centralization of accounts payable, the payable trend has only been affected by
inventory levels. Increasing levels of inventory and reductions in other
liabilities also negatively impacted operating cash in the current year. Cash
provided from operations and the issuance of short-term and long-term debt of
$488.7 million was used to repay long-term debt and finance capital expenditures
and acquisitions. The company financed $232.6 million in capital expenditures
and repaid $117.5 million of long-term debt assumed as part of the acquisitions
of Sweet Life Foods, Hyper Shoppes, Inc., Texas T Stores, Wetterau Properties
Inc. and Delice de France.
The company will continue to use short-term and long-term debt as a supplement
to internally-generated funds to finance its activities. The company issued
$150 million in debt securities in the second quarter. The proceeds were used
to refund $100 million of notes due August 15, 1994; to repay $32 million of
certain mortgage indebtedness assumed by the company in connection with the
acquisition of Wetterau Properties; and the remaining proceeds were used to
repay short-term borrowings. The company is in the process of registering $400
million of shelf debt securities which could be used to refinance existing debt
or for other corporate purposes. Management does not anticipate the need for
any additional long-term external financing except for leases or if significant
acquisitions are completed. The company has $400 million of short-term credit
available.
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It is the company's intent to invest about $175 million into SUPERVALU
Advantage with the majority of the expenditures occurring in fiscal 1996. The
monies will be used to fund regional facilities, technology and various
mechanization systems. The company expects that the investment in SUPERVALU
ADVANTAGE will be recovered by the reduction in inventory and property levels,
and existing credit facilities.
At the end of the third quarter, the Board of Directors instituted a new
treasury stock purchase program. The company may repurchase up to 5 million
shares at market value.
The company's long-term debt ratings are considered strong with an A rating from
Standard and Poor's and an A3 rating from Moody's. These strong ratings, the
available credit facilities and the internally generated funds provide the
company with the financial flexibility to meet its anticipated liquidity needs.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed with this Form 10-Q:
(15) Letters from Deloitte & Touche regarding unaudited interim
financial information.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended December
3, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERVALU INC. (Registrant)
By: /s/ Isaiah Harris
--------------------------------------
Isaiah Harris
Date: January 17, 1995 Vice President and Controller
(Chief Accounting Officer and
duly authorized officer
of Registrant)