Remodeling Supervalu

Facing a gloomy economy brimming with layoffs, housing value slumps and weakening credit, consumers have sought out cheap food in nearly every supermarket aisle. The trend has largely benefitted supercenters such as Wal-Mart, Costco and SuperTarget.

And it's keeping traditional supermarkets on their toes. That was the theme for Eden Prairie-based Supervalu Inc. on Wednesday, as it reported decidedly mixed results for its most recent quarter.

Yes, consumers are still eating at home more and, yes, they're still "trading down" as they shop the aisles. For example, eating less steak and more chicken and forgoing fresh-cut flowers. But, Supervalu executives noted that they're also shopping based on price, and that can mean losing customers to Wal-Mart and the like.

Supervalu said it, too, will accelerate a program of "price investment," to lower prices across the company while moving away from the more traditional model of selling some products at higher prices and some at lower prices.

"We're listening to the customer," Supervalu CEO Jeff Noddle said in a phone interview Wednesday.

Noddle didn't give specifics about price changes yet to come, but he said it will be done market-to-market, mentioning New England. The nation's Northeast has some of the highest average food prices in the nation, according to data from the Bureau of Labor Statistics.

Nationwide, food costs rose 6.8 percent between November 2007 and November 2008, according to the most recent government data.

It's not just consumers complaining about higher prices, Noddle told analysts: Supermarkets are doing it, too, telling food manufacturers that prices must come down.

"Especially in light of the current fall in commodity prices and fuel costs," he said. "We're going to put tremendous pressure on suppliers for relief. That's the battleground that I foresee."

Friction between retailers and manufacturers is real, said Bill Bishop, chairman of Willard Bishop, a marketing firm near Chicago.

"Prices in the market at every level are changing faster than anybody's ever seen," he said. There is huge contention in the supply chain over whether prices should be going up or down and who's turn it is to move."

Earnings released Wednesday showed a $3 billion loss for the quarter ended Nov. 30, but that was because of accounting rules that required a write-down because of the company's sunken stock price.

The paper loss, which amounts to the worst quarter in the company's history, wasn't an accurate portrayal of the quarter, Noddle said.

Earnings of 62 cents per diluted share beat analyst estimates by 2 cents.

Revenue was essentially flat, at $10.17 billion for the quarter, down slightly from $10.21 billion a year earlier. Same-store sales, an important measure in the supermarket industry, were down 0.5 percent for the quarter compared with the same period a year earlier.

The stock rose 8.2 percent Wednesday, to $16.33.

Electronics and clothing retailers are suffering through much worse, including a holiday sales season that was "astonishingly bad," Noddle told analysts.

"We're local to people. We sell the basics of life."

Noddle said analyst estimates of earnings of $2.69 per diluted share for next year were at the bottom end of what he expects to see, but said the company won't give its own guidance until the fiscal year ends next month.

Still, it's a tough economy for food retailers battling Wal-Mart Stores Inc. Supervalu plans to shutter 50 stores before the end of the fourth quarter. That's on top of 25 closures already this fiscal year. It's not known which stores will close, but Noddle said that he doesn't expect many closures, if any, in the Twin Cities.

A slowdown of store remodeling next fiscal year will see Supervalu lay out about $850 million in capital expenditures, less than the $1.2 billion spent this year, he added.

Generic drugs and store brands were more popular with customers looking to save, Noddle told analysts Wednesday during a morning call.

Even a wave of new promotions may not be enough to counteract rising unemployment and a "value-seeking consumer," said analyst Robert Summers at Pali Research, who wrote in a note that he sees negative same-store sales through the next fiscal year.