Food players grow cautious as economy woes continue

MINNEAPOLIS —Supervalu managed to post some decent numbers for its first quarter the week of July 22, but it was still forced to recast its guidance in anticipation of tough trends in the second half of the year. Inflation in energy and key merchandise categories including food and housewares is taking a toll.

Some food retailers still are managing to muddle along. A week earlier, Safeway posted net income of $234.3 million, or 53 cents per diluted share, in its second quarter, versus $218.2 million, or 49 cents per diluted share, in the year-earlier period. Total sales gained 3% to $10.1 billion in the quarter, but non-fuel, identical-store sales declined 0.3%. Safeway blamed the development, in part, on a shift in the Easter holiday sales period, adding that without the Easter impact non-fuel idents would have gained 1%. Safeway said its good fortune derived from Lifestyle stores contributions, as well as higher fuel sales and an increase in the Canadian dollar exchange rate.

Standard & Poor’s analyst Joseph Agnese, in a research note, said of the Safeway numbers, “We believe sales growth will be pressured as consumers continue to trade down to lower-priced goods in a difficult economic environment. However, we are forecasting margin expansion based on benefits from cost-reduction initiatives and increasing demand for wider margin private label products.”

Supervalu, while providing decent numbers in its first quarter, scaled back its per-diluted-share estimate for the current fiscal year to the range of $3 to $3.16 from previous guidance in a range between $3.06 and $3.22. Guidance for identical-store sales growth, excluding fuel, is now projected to be 0.5%, versus previous guidance of 1% to 2%.

Supervalu chairman and ceo Jeff Noddle, in reporting financials and trimming guidance, said, “The ongoing weakness in the economy, combined with higher food and energy inflation, has created conditions that make us take a more cautious view for the balance of the fiscal year.”

In lowering her Supervalu estimate, Lehman Bros. analyst Meredith Adler, in a research note, cautioned that Supervalu could see additional problems as “market share may have shifted somewhat to lower-priced food retailers, and consumers are buying less expensive items.”

In terms of actual numbers, Supervalu posted first-quarter net sales of $13.35 billion, close to flat from last year’s $13.29 billion, with net earnings up 9% to $162 million and diluted earnings per share up 10% to 76 cents.

While it may have turned a wary eye on the immediate future, Supervalu continues to test new ideas for the long term. The company will try out a new small-store format, opening a scaled-down Jewel/Osco variation this year under the banner “Urban Fresh.” The 16,000-square-foot store is located in Chicago’s Lincoln Park section and will debut this fall. To tempt the neighborhood’s young professional population, Urban Fresh will offer ready-to-go meals along with a selection of fresh meats, seafood and produce.

Urban Fresh isn’t the first small-format innovation for Jewel/Osco. Another small-format unit opened in 2003 on Ohio and State streets, tailored to its Chicago environment, one chock full of new condominium projects and other residential additions. In fact, the Urban Fresh facility isn’t even the first test in the building where it is located. “That is the old Sunflower Market space,” said Supervalu spokeswoman Haley Meyer. Sunflower Market was a value organic and natural food store test Supervalu abandoned last year.