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 September 6, 1997.
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11840 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344
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(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
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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
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The number of shares outstanding of each of the issuer's classes of Common Stock
as of October 10, 1997 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 60,200,000
PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements
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CONSOLIDATED STATEMENTS OF EARNINGS
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SUPERVALU INC. and Subsidiaries
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(In thousands, except per share data)
Second Quarter (12 Weeks) Ended
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September 6, 1997 % of sales September 7, 1996 % of sales
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Net sales $ 3,866,012 100.00% $ 3,778,745 100.00%
Costs and expenses:
Cost of sales 3,472,726 89.83 3,398,505 89.94
Selling and administrative expenses 303,649 7.85 291,616 7.72
Amortization of goodwill 4,557 0.12 4,193 0.11
Interest
Interest expense 29,846 0.77 31,171 0.83
Interest income 3,912 0.10 3,601 0.10
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Interest expense, net 25,934 0.67 27,570 0.73
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Total costs and expenses 3,806,866 98.47 3,721,884 98.50
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Earnings before equity in earnings and
gain on sale of ShopKo and income taxes 59,146 1.53 56,861 1.50
Equity in earnings and gain on sale of ShopKo 90,034 2.33 1,798 0.05
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Earnings before income taxes 149,180 3.86 58,659 1.55
Provision for income taxes
Current 58,756 18,292
Deferred 1,309 4,503
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Income tax expense 60,065 1.55 22,795 0.60
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Net earnings $ 89,115 2.31% $ 35,864 0.95%
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Net earnings per common share $ 1.44 $ .53
Weighted average number of common
shares outstanding 62,059 67,466
Dividends declared per common share $ .260 $ .250
Supplemental information:
After-tax LIFO (expense) $ (1,140) $ (1,120)
All data subject to year-end audit. See notes to consolidated financial statements.
2
PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements
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CONSOLIDATED STATEMENTS OF EARNINGS
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SUPERVALU INC. and Subsidiaries
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(In thousands, except per share data)
Year-to-date (28 Weeks) Ended
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September 6, 1997 % of sales September 7, 1996 % of sales
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Net sales $ 8,899,315 100.00% $ 8,757,506 100.00%
Costs and expenses:
Cost of sales 8,004,900 89.95 7,897,853 90.18
Selling and administrative expenses 683,951 7.68 656,060 7.50
Amortization of goodwill 10,594 0.12 9,784 0.11
Interest
Interest expense 71,167 0.80 72,534 0.83
Interest income 9,030 0.10 8,628 0.10
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Interest expense, net 62,137 0.70 63,906 0.73
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Total costs and expenses 8,761,582 98.45 8,627,603 98.52
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Earnings before equity in earnings and
gain on sale of ShopKo and income taxes 137,733 1.55 129,903 1.48
Equity in earnings and gain on sale of ShopKo 93,364 1.05 4,446 0.05
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Earnings before income taxes 231,097 2.60 134,349 1.53
Provision for income taxes
Current 87,387 45,777
Deferred 4,829 6,726
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Income tax expense 92,216 1.04 52,503 0.60
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Net earnings $ 138,881 1.56% $ 81,846 0.93%
================================================================
Net earnings per common share $ 2.14 $ 1.21
Weighted average number of common
shares outstanding 64,870 67,475
Dividends declared per common share $ .510 $ .495
Supplemental information:
After-tax LIFO income (expense) $ (1,545) $ 1,670
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 Second Quarter as of Fiscal Year End
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(In thousands) September 6, September 7, February 22,
Assets 1997 1996 1997
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Current Assets
Cash and cash equivalents $ 39,173 $ 6,501 $ 6,539
Receivables, less allowance for losses of $15,294 at
September 6, 1997, $17,417 at September 7, 1996 and
$17,806 at February 22, 1997 380,465 378,031 403,835
Inventories 1,063,070 1,082,294 1,091,805
Other current assets 91,199 121,604 98,620
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Total current assets 1,573,907 1,588,430 1,600,799
Long-term notes receivable 68,403 49,076 45,588
Long-term investment in direct financing leases 87,184 71,429 84,350
Property, plant and equipment
Land 138,643 144,284 140,427
Buildings 937,401 949,573 957,815
Property under construction 32,870 30,267 28,030
Leasehold improvements 143,781 143,707 150,040
Equipment 1,121,377 1,057,940 1,113,486
Assets under capital leases 282,978 299,955 298,757
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2,657,050 2,625,726 2,688,555
Less accumulated depreciation and amortization
Owned property, plant and equipment 1,018,644 929,003 983,229
Assets under capital leases 58,870 53,218 56,802
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Net property, plant and equipment 1,579,536 1,643,505 1,648,524
Investment in ShopKo - 195,180 209,789
Goodwill 499,206 499,883 491,427
Other assets 199,899 247,962 202,849
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Total assets $ 4,008,135 $ 4,295,465 $ 4,283,326
============================================================
Liabilities and Stockholders' Equity
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Current Liabilities
Notes payable $ 86,975 $ 113,914 $ 134,272
Accounts payable 956,829 1,031,870 923,958
Accrued vacation, compensation and benefits 83,896 79,943 89,458
Current maturities of long-term debt 137,539 12,634 72,905
Current obligations under capital leases 21,928 21,434 21,544
Other current liabilities 132,750 98,296 126,941
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Total current liabilities 1,419,917 1,358,091 1,369,078
Long-term debt 896,805 1,147,169 1,087,162
Long-term obligations under capital leases 318,876 321,235 333,429
Deferred income taxes 42,883 43,910 38,054
Other liabilities 138,146 165,696 148,180
Stockholders' equity
Preferred stock 5,908 5,908 5,908
Common stock 75,335 75,335 75,335
Capital in excess of par value 22,873 12,951 13,296
Retained earnings 1,550,708 1,385,270 1,444,755
Treasury stock, at cost (463,316) (220,100) (231,871)
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Total stockholders' equity 1,191,508 1,259,364 1,307,423
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Total liabilities and stockholders' equity $ 4,008,135 $ 4,295,465 $ 4,283,326
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Quarterly data subject to year-end audit. See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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SUPERVALU INC. and Subsidiaries
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(In thousands, except per share data)
Capital in
Preferred Common Excess of Treasury Retained
Stock Stock Par Value Stock Earnings Total
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Balances at February 24, 1996 $5,908 $ 75,335 $ 12,737 $ (214,746) $ 1,336,942 $ 1,216,176
Net earnings - - - - 175,044 175,044
Sales of common stock
under option plans - - 378 3,786 - 4,164
Cash dividends declared
on common stock -
$.995 per share - - - - (67,231) (67,231)
Compensation under employee
incentive plans - - 181 650 - 831
Purchase of shares for treasury - - - (21,561) - (21,561)
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Balances at February 22, 1997 5,908 75,335 13,296 (231,871) 1,444,755 1,307,423
Net earnings - - - - 138,881 138,881
Sales of common stock
under option plans - - 2,668 28,226 - 30,894
Cash dividends declared
on common stock -
$.51 per share - - - - (32,928) (32,928)
Compensation under employee
incentive plans - - 6,909 5,522 - 12,431
Purchase of shares for treasury - - - (265,193) - (265,193)
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Balances at September 6, 1997 $5,908 $ 75,335 $ 22,873 $ (463,316) $ 1,550,708 $ 1,191,508
=================================================================================================================================
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)
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Year-to-date
(28 weeks ended)
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September 6, September 7,
1997 1996
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Cash flows from operating activities
Net earnings $ 138,881 $ 81,846
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in earnings and gain on sale of ShopKo (93,364) (4,446)
Dividends received from ShopKo - 3,241
Depreciation and amortization 122,617 121,963
Provision for losses on receivables 3,221 2,716
Deferred income taxes 4,829 6,726
Other adjustments, net (1,780) (1,562)
Changes in assets and liabilities:
Receivables 16,952 1,430
Inventory 29,162 (49,147)
Accounts payable 19,944 33,363
Other assets and liabilities 30,650 28,963
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Net cash provided by operating activities 271,112 225,093
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Cash flows from investing activities
Proceeds from sale of ShopKo stock 305,153 -
Additions to long-term notes receivable (40,799) (28,211)
Proceeds received on long-term notes receivable 17,984 15,866
Proceeds from sale of property, plant and equipment 60,252 20,496
Purchase of property, plant and equipment (106,441) (126,452)
Business acquisitions, net of cash acquired (23,523) (4,996)
Other investing activities (5,597) (24,380)
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Net cash provided by (used in) investing activities 207,029 (147,677)
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Cash flows from financing activities
Net increase in checks outstanding, net of deposits 12,192 24,019
Net reduction of short-term notes payable (47,297) (44,113)
Proceeds from issuance of long-term debt - -
Repayment of long-term debt (125,723) (4,683)
Reduction of obligations under capital leases (12,756) (12,278)
Proceeds from the sale of common stock under option plans 27,220 1,372
Dividends paid (33,948) (33,212)
Payments for purchase of treasury stock (265,195) (7,235)
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Net cash used in financing activities (445,507) (76,130)
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Net increase in cash and cash equivalents 32,634 1,286
Cash and cash equivalents at beginning of year 6,539 5,215
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Cash and cash equivalents at end of second quarter $ 39,173 $ 6,501
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All data subject to year-end audit. See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies
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The summary of significant accounting policies is included in the notes to
consolidated financial statements in the 1997 annual report of SUPERVALU INC.
("SUPERVALU" or the "company").
ShopKo Stores, Inc. Sale
- ------------------------
On July 2, 1997, the company exited its 46 percent investment in ShopKo through
two simultaneous and cross-conditional transactions: selling 8,174,387 shares
back to ShopKo for an aggregate of $150 million and a secondary public offering
of 6,557,280 shares. The transactions resulted in proceeds of $305 million and
a net gain of $53.7 million. Proceeds were primarily used to repurchase shares
of SUPERVALU stock.
Treasury Stock Purchase Program
- -------------------------------
On June 11, 1997, the Board of Directors approved an additional treasury stock
purchase program authorizing the company to repurchase up to 8.5 million shares
in anticipation of the sale of its ShopKo holdings. In the quarter, the company
repurchased 6.9 million shares in conjunction with the ShopKo stock sale. These
shares were purchased at a cost of $236.5 million. Six million of these shares
were purchased from a financial intermediary through an accelerated stock
purchase transaction at $34 per share, subject to a market price adjustment
provision. In order to complete the transaction, the financial intermediary has
borrowed SUPERVALU common shares and is purchasing replacement shares in the
open market. The ultimate price per share will be adjusted for changes in the
market price of SUPERVALU common stock prior to settlement and a reimbursement
for dividends paid on the borrowed shares. The final purchase price and
settlement is expected in February and will be in either cash or shares of
SUPERVALU common stock, at the company's option. The settlement cost, currently
estimated at $30 million, will increase the cost of treasury stock as of the
date the final purchase price is determined.
Statement of Registrant
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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 September 6, 1997 and
September 7, 1996 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.
7
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
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Results of Operations
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RESULTS FOR THE QUARTER:
The company recorded record sales of $3.9 billion and earnings per share of $.57
after excluding the non-recurring gain from the sale of its investment in ShopKo
Stores, Inc. ("ShopKo"). Last year sales were $3.8 billion and earnings per
share were $.53. The following table sets forth net sales by segment:
Net Sales by Segment
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(In thousands) Second Quarter (12 weeks)
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September 6, 1997 September 7, 1996
Net Sales % of Total Net Sales % of Total
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Food distribution $3,387,404 87.6 % $3,310,689 87.6 %
Retail food 1,081,245 28.0 1,085,125 28.7
Less: Eliminations (602,637) (15.6) (617,069) (16.3)
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Total net sales $3,866,012 100.0 % $3,778,745 100.0 %
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NET SALES
Net sales were favorable compared to last year, positively impacted by a 2.3%
increase in food distribution sales. Retail food sales declined .4% for the
quarter.
Food distribution sales increased over last year due to the addition of new
customers and the growth of Save-A-Lot, despite last year's planned
discontinuance of service to a major customer in the Southeast and competitive
market conditions. Food price inflation, as measured by the company was .3% for
the quarter. Retail food sales decreased slightly compared to last year
primarily due to the closing or sale of nine Cub Food stores over the past
twelve months and a decrease in same-store sales of 1.6% due to competitive
activities.
GROSS PROFIT
Gross profit as a percentage of net sales was 10.2% compared with 10.1% last
year, and was essentially unchanged for both retail and food distribution.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were 8.0% of net sales compared with 7.8%
last year. The increase was primarily in the retail food segment due to store
remodels and upgrades and fixed expenses as a percent of lower sales. Food
distribution expenses continue to be negatively impacted by increased technology
related spending primarily in support of the ADVANTAGE program as well as to
make systems year 2000 compliant.
8
OPERATING EARNINGS
The company's pre-tax operating earnings (earnings before interest, corporate
expenses, equity in earnings and gain on sale of ShopKo, and taxes) increased
to $90.7 million compared with $89.6 million last year. Retail food operating
earnings increased 6.9% to $20.3 million due to improved gross margin. Food
distribution operating earnings were $70.4 million, flat to last year.
INTEREST EXPENSE AND INCOME
Interest expense decreased to $29.8 million compared with $31.2 million last
year, reflecting a reduction in debt levels relating to the timing of cash flows
from the ShopKo transactions. Interest income increased to $3.9 million
compared with $3.6 million last year, primarily due to the addition of notes
receivable and new capital subleases.
EQUITY IN EARNINGS AND GAIN ON SALE OF SHOPKO
On July 2, 1997, the company exited its 46 percent investment in ShopKo through
two simultaneous and cross-conditional transactions: selling 8,174,387 shares
back to ShopKo for an aggregate of $150 million and a secondary public offering
of 6,557,280 shares. The transactions resulted in proceeds of $305 million and
a pretax gain of $90.0 million. The gain resulted in $.87 earnings per share in
the quarter. Due to the sale, there was no equity in earnings recorded in the
quarter compared with $1.8 million last year.
INCOME TAXES
The effective tax rate increased to 40.3% in the quarter compared with 38.9%
last year. The increase in the effective tax rate was due to the elimination of
ShopKo earnings.
NET EARNINGS
Net earnings were $89.1 million or $1.44 per share compared with last year's
$35.9 million or $.53 per share. Excluding Shopko, net earnings would have been
$35.5 million or $.57 per share compared with last year's $34.1 million or $.50
per share. Weighted average shares declined to 62.1 million compared with last
year's 67.5 million primarily due to the repurchase of 6.9 million shares
relating to the ShopKo transaction.
9
YEAR-TO-DATE RESULTS:
The following table sets forth net sales by segment:
Net Sales by Segment
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(In thousands) Year-to-Date (28 weeks)
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September 6, 1997 September 7, 1996
Net Sales % of Total Net Sales % of Total
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Food distribution $ 7,834,284 88.0 % $ 7,729,600 88.3 %
Retail food 2,446,098 27.5 2,410,111 27.5
Less: Eliminations (1,381,067) (15.5) (1,382,205) (15.8)
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Total net sales $ 8,899,315 100.0 % $ 8,757,506 100.0 %
=====================================================================================
NET SALES
Net sales were favorable compared to last year, positively impacted by a 1.4%
increase in food distribution sales and a 1.5% increase in retail food sales.
Food distribution sales increased over last year due to the addition of new
customers and the growth of Save-A-Lot, despite last year's planned
discontinuance of service to a major customer in the Southeast and competitive
market conditions. Food price inflation, as measured by the company was .5%
year-to-date.
Retail food sales were favorable compared to last year primarily due to new
store openings, partially offset by the closing or sale of underperforming
stores and a decrease in same-store sales of 1.8% due to competitive activities.
GROSS PROFIT
Gross profit as a percentage of net sales increased to 10.1% compared with 9.8%
last year. The increase was due principally to a strong retail food gross
profit margin resulting from ongoing merchandising and promotional activities in
all of the retail concepts. In addition, food distribution gross profit margin
was favorable primarily due to merchandising initiatives, offset somewhat by
higher LIFO expense incurred in the first quarter due to increased coffee
prices.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were 7.8% of net sales compared with 7.6%
last year. The increase was primarily due to higher food distribution expenses
which continue to be negatively impacted by increased technology related
spending primarily in support of the ADVANTAGE program as well as to make
systems year 2000 compliant. In addition, retail food expenses were impacted by
store remodel and upgrade costs.
OPERATING EARNINGS
The company's pre-tax operating earnings (earnings before interest, corporate
expenses, equity in earnings and gain on sale of ShopKo, and taxes) increased
to $213.6 million compared with $206.1 million last year. Retail food operating
earnings increased 20.1% to $56.5 million due to improved gross margin and the
sale
10
or closing of underperforming retail stores. Food distribution operating
earnings decreased 1.2% to $157.2 million due to higher technology related
spending in support of the ADVANTAGE program.
INTEREST EXPENSE AND INCOME
Interest expense decreased to $71.2 million compared with $72.5 million last
year, reflecting a reduction in debt levels relating to the timing of cash flows
from the ShopKo transactions. Interest income increased to $9.0 million
compared with $8.6 million last year, primarily due to the addition of notes
receivable and new capital subleases.
EQUITY IN EARNINGS AND GAIN ON SALE OF SHOPKO
On July 2, 1997, the company exited its 46 percent investment in ShopKo through
two simultaneous and cross-conditional transactions: selling 8,174,387 shares
back to ShopKo for an aggregate of $150 million and a secondary public offering
of 6,557,280 shares. The transactions resulted in proceeds of $305 million and
a pretax gain of $90.0 million. Equity in earnings for the year were $3.3
million compared with $4.4 million last year.
INCOME TAXES
The effective tax rate increased to 39.9% compared with 39.1% last year due to
the elimination of ShopKo earnings.
NET EARNINGS
Net earnings were $138.9 million or $2.14 per share compared with last year's
$81.8 million or $1.21 per share. Excluding ShopKo, net earnings would have
been $81.9 million or $1.26 per share compared with last year's $77.4 million or
$1.14 per share. Weighted average shares declined to 64.9 million compared with
last year's 67.5 million primarily due to the repurchase of 6.9 million shares
in the second quarter relating to the ShopKo transaction.
11
Liquidity and Capital Resources
- -------------------------------
Internally generated funds, principally from the company's food distribution
business, continued to be the major source of capital for liquidity and capital
growth. Cash provided from operations year-to-date was $271.1 million compared
with $225.1 million last year. The increase was primarily due to decreased
inventory levels in food distribution resulting from efforts to reduce
inventory. Cash provided from operations of $271.1 million was primarily used
to finance capital expenditures of $106.4 million and repay long-term debt and
short-term notes payable of $173.0 million.
The proceeds from the ShopKo transaction were used to repurchase shares under
the June 1997 treasury stock purchase program. During the quarter, the company
repurchased 6.9 million shares at a cost of $236.5 million. Six million of
these shares were purchased from a financial intermediary through an accelerated
stock purchase transaction, subject to a market price adjustment provision. In
order to complete the transaction, the financial intermediary has borrowed
SUPERVALU common shares and is purchasing replacement shares in the open market
through February 1998. The market price adjustment is currently estimated at
$30 million and will increase the cost of treasury stock as of the date the
final purchase price is determined. An additional .6 million shares were
repurchased in the second quarter and .5 million shares were purchased following
quarter end at a cost of $25.4 million and $19.0 million, respectively, under
the August 1996 treasury stock program to be used for employee stock option
exercises and compensation programs.
SUPERVALU will continue to use short-term and long-term debt as a supplement to
internally generated funds to finance its activities. The company has a shelf
registration in effect pursuant to which the company could issue $242.5 million
of additional debt securities. In October, the company renegotiated its $400
million revolving credit agreement to obtain more favorable terms and extend the
expiration date to October 2002. Maturities of debt issued will depend on
management's views with respect to the relative attractiveness of interest rates
at the time of issuance.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The information in this 10Q includes forward-looking statements. Important
risks and uncertainties that could cause actual results to differ materially
from those discussed in such forward looking statements are detailed in Exhibit
99.1; other risks or uncertainties may be detailed from time to time in the
company's future Securities and Exchange Commission filings.
12
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits filed with this Form 10-Q:
(10)a. Separation Agreement and General Release dated July 11, 1997
between Jeffrey C. Girard and SUPERVALU INC.
(10)b. SUPERVALU INC. Non-Employee Directors Deferred Stock Plan, as
amended.
(10)c. SUPERVALU INC. Deferred Compensation Plan for Non-Employee
Directors, as amended.
(15) Letters from Deloitte & Touche regarding unaudited interim
financial information.
(27) Financial Data Schedule.
(99.1) Cautionary Statements pursuant to the Securities Litigation
Reform Act.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
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)
Dated: October 21, 1997 By: /s/ Pamela K. Knous
-------------------
Pamela K. Knous
Executive Vice President, Chief
Financial Officer
(Authorized officer of Registrant)
13