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SuperValu 10-K 2009 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file
number: 1-5418
Registrant’s telephone
number, including area code:
(952) 828-4000
Securities registered pursuant
to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting company
o
Indicate by check mark if the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant as of September 5,
2008 was approximately $5,026,733,967 (based upon the closing
price of registrant’s Common Stock on the New York Stock
Exchange).
As of April 24, 2009, there were 211,598,297 shares of
the registrant’s common stock outstanding.
Portions of registrant’s definitive Proxy Statement filed
for the registrant’s 2009 Annual Meeting of Stockholders
are incorporated by reference into Part III, as
specifically set forth in Part III.
SUPERVALU
INC.
Annual
Report on
Form 10-K
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Any statements contained in this Annual Report on
Form 10-K
regarding the outlook for our businesses and their respective
markets, such as projections of future performance, statements
of our plans and objectives, forecasts of market trends and
other matters, are forward-looking statements based on our
assumptions and beliefs. Such statements may be identified by
such words or phrases as “will likely result,”
“are expected to,” “will continue,”
“outlook,” “will benefit,” “is
anticipated,” “estimate,” “project,”
“management believes” or similar expressions. These
forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those discussed in such statements and no
assurance can be given that the results in any forward-looking
statement will be achieved. For these statements, SUPERVALU INC.
claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995. Any forward-looking statement speaks only as of the
date on which it is made, and we disclaim any obligation to
subsequently revise any forward-looking statement to reflect
events or circumstances after such date or to reflect the
occurrence of anticipated or unanticipated events.
Certain factors could cause our future results to differ
materially from those expressed or implied in any
forward-looking statements contained in this Annual Report on
Form 10-K.
These factors include the factors discussed in Part I,
Item 1A of this Annual Report on
Form 10-K
under the heading “Risk Factors,” the factors
discussed below and any other cautionary statements, written or
oral, which may be made or referred to in connection with any
such forward-looking statements. Since it is not possible to
foresee all such factors, these factors should not be considered
as complete or exhaustive.
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Labor
Relations
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PART I
SUPERVALU INC. (“SUPERVALU” or the
“Company”), a Delaware corporation, was organized in
1925 as the successor to two wholesale grocery firms established
in the 1870’s. The Company’s principal executive
offices are located at 11840 Valley View Road, Eden Prairie,
Minnesota 55344 (Telephone:
952-828-4000).
All references to the “Company” or
“SUPERVALU” relate to SUPERVALU INC. and its
majority-owned subsidiaries.
Additional description of the Company’s business is found
in Part II, Item 7 of this Annual Report on
Form 10-K.
SUPERVALU is one of the largest companies in the United States
grocery channel. SUPERVALU conducts its retail operations under
the following banners: Acme Markets, Albertsons, Bristol Farms,
bigg’s, Cub Foods, Farm Fresh, Hornbacher’s,
Jewel-Osco, Lucky,
Save-A-Lot,
Shaw’s Supermarkets, Shop ’n Save, Shoppers
Food & Pharmacy and Star Markets. Additionally, the
Company provides supply chain services, primarily wholesale
distribution, across the United States retail grocery channel.
All dollar and share amounts in this Annual Report on
Form 10-K
are in millions, except per share data and where otherwise noted.
On June 2, 2006, the Company acquired New Albertson’s,
Inc. (“New Albertsons”) consisting of the core
supermarket businesses (the “Acquired Operations”)
formerly owned by Albertson’s, Inc.
(“Albertsons”) operating approximately 1,125 stores
under the banners of Acme Markets, Bristol Farms, Jewel-Osco,
Shaw’s Supermarkets, Star Markets, the Albertsons banner in
the Intermountain, Northwest and Southern California regions,
the related in-store pharmacies under the Osco and Sav-on
banners, 10 distribution centers and certain regional and
corporate offices (the “Acquisition”). As part of the
Acquisition, the Company acquired the Albertsons, Acme Markets,
Bristol Farms, Jewel, Osco, Sav-on and Shaw’s Supermarkets
trademarks and tradenames (the “Acquired Trademarks”).
The Acquisition greatly increased the size of the Company.
Results of operations for fiscal 2007 include 38 weeks of
operating results of the Acquired Operations.
SUPERVALU is focused on long-term retail growth through targeted
new store development, remodel activities, licensee growth and
acquisitions. During fiscal 2009, the Company added 44 new
stores through new store development and closed 97 stores. The
Company leverages its distribution operations by providing
wholesale distribution and logistics and service solutions to
its independent retail customers through its Supply chain
services segment.
The Company makes available free of charge at its internet
website (www.supervalu.com) its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to these reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as soon as
reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange
Commission (the “SEC”). Information on the
Company’s website is not deemed to be incorporated by
reference into this Annual Report on
Form 10-K.
The Company will also provide its SEC filings free of charge
upon written request to Investor Relations, SUPERVALU INC.,
P.O. Box 990, Minneapolis, MN 55440.
The Company’s business is classified by management into two
reportable segments: Retail food and Supply chain services.
These reportable segments are two distinct businesses, one
retail and one wholesale, each with a different customer base,
marketing strategy and management structure. The Retail food
reportable segment is an aggregation of the Company’s
retail operating segments, which are primarily organized based
on geography. The Retail food reportable segment derives
revenues from the sale of groceries at retail locations operated
by the Company (both the Company’s own stores and stores
licensed by the Company). The Supply chain services reportable
segment derives revenues from wholesale distribution to
independently-owned retail food stores, mass merchants and other
customers (collectively referred to as “independent retail
customers”) and logistics support services. Substantially
all of the Company’s operations are domestic. Refer to the
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Consolidated Segment Financial Information set forth in
Part II, Item 8 of this Annual Report on
Form 10-K
for financial information concerning the Company’s
operations by reportable segment.
As of February 28, 2009, the Company conducted its Retail
food operations through a total of 2,421 retail stores,
including 862 licensed
Save-A-Lot
stores. The Company conducts its retail operations throughout
the United States under three retail food store formats:
combination stores (defined as food and pharmacy), food stores
and limited assortment food stores. The Company’s Retail
food operations are supplied by 23 dedicated distribution
centers and nine distribution centers that are part of the
Supply chain services segment providing wholesale distribution
to both the Company’s own stores and stores of independent
retail customers.
Combination stores provide an extensive grocery offering,
pharmacy department and expanded sections of general merchandise
and health and beauty care. As of February 28, 2009, the
Company operated 874 combination stores under the Acme Markets,
Albertsons, bigg’s, Cub Foods, Farm Fresh, Jewel-Osco,
Sav-on, Shaw’s Supermarkets, Shop ’n Save, Shoppers
Food & Pharmacy and Star Markets banners. Typical
combination stores carry about 50,000 items and average
approximately 60,000 square feet.
Food stores focus their product offerings primarily on grocery
departments and generally include many of the same product
offerings as combination stores, but on a more limited basis and
without a pharmacy. As of February 28, 2009, the Company
operated 369 food stores under the Acme Markets, Albertsons,
Bristol Farms, Cub Foods, Farm Fresh, Hornbacher’s, Jewel,
Lucky, Shaw’s Supermarkets, Shop ’n Save, Shoppers
Food & Pharmacy and Star Markets banners. Typical food
stores carry about 40,000 items and average approximately
40,000 square feet.
The Company owns 316 limited assortment food stores operating
under the
Save-A-Lot
banner. The Company licenses 862
Save-A-Lot
stores to independent operators.
Save-A-Lot
holds the number one market position, based on revenues, in the
extreme value grocery-retailing sector.
Save-A-Lot
food stores typically are approximately 15,000 square feet
in size, and stock approximately 1,400 primarily custom-branded
high-volume food items generally in a single size for each
product sold.
The Company’s Supply chain services business primarily
provides wholesale distribution of products to independent
retailers and is the largest public company food wholesaler in
the nation. As of February 28, 2009, the Company was
affiliated with approximately 2,000 stores of independent retail
customers as their primary grocery supplier, in addition to the
Company’s own stores, and approximately 700 additional
stores of independent retail customers as a secondary grocery
supplier. The Company’s wholesale distribution customers
are located in 49 states and include single and multiple
grocery store independent operators, regional and national
chains, mass merchants and the military.
The Company has established a network of strategically located
distribution centers utilizing a multi-tiered logistics system.
The network includes facilities that carry slow turn or fast
turn groceries, perishables, general merchandise and health and
beauty care products. The network is comprised of 22
distribution facilities, nine of which supply the Company’s
own stores in addition to stores of independent retail
customers. Deliveries to retail stores are made from the
Company’s distribution centers by Company-owned trucks,
third-party independent trucking companies or customer-owned
trucks. In addition, the Company provides certain facilitative
services between its independent retailers and vendors related
to products that are delivered directly by suppliers to retail
stores under programs established by the Company. These services
include sourcing, invoicing and payment services.
The Company also offers third-party logistics solutions through
its subsidiary, Total Logistics, Inc. and its Advantage
Logistics operations. These operations provide customers with a
suite of logistics services, including warehouse management,
transportation, procurement, contract manufacturing and
logistics engineering and management services.
Our Own Brands, the Company’s private label program, are
products produced to the Company’s specification by many
suppliers and compete in many areas of the Company’s
stores. Own Brands include: the premium
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brand Culinary
Circletm,
which offers unique, premium quality products in highly
competitive categories; first tier brands, including Wild
Harvesttm,
Flavoritetm,
Richfoodtm,
equalinetm,
HomeLifetm
and several others, which provide shoppers quality national
brand equivalent products at a competitive price; and the value
brand, Shopper’s
Valuetm,
which offers budget conscious consumers a quality alternative to
national brands at substantial savings.
The Company offers a wide variety of nationally advertised brand
name and private brand name products, primarily including
grocery (both perishable and nonperishable), general merchandise
and health and beauty care, pharmacy and fuel, which are sold
through the Company’s own and licensed retail food stores
to shoppers and through its Supply chain services business to
independent retail customers. The Company believes that it has
adequate and alternative sources of supply for most of its
purchased products. The Company’s Net sales include the
product sales of the Company’s own stores, product sales to
stores licensed by the Company and product sales of the
Company’s Supply chain services business to independent
retail customers.
The following table provides additional detail on the percentage
of Net sales for each group of similar products sold in the
Retail food and Supply chain services segments:
The Company offers some independent retail customers the
opportunity to franchise a concept or license a service mark.
This program helps these customers compete by providing, as part
of the franchise or license program, a complete business
concept, group advertising, private-label products and other
benefits. The Company is the franchisor or licensor of certain
service marks such as CUB FOODS,
SAVE-A-LOT,
SENTRY, FESTIVAL FOODS, COUNTY MARKET, SHOP ’N SAVE,
NEWMARKET, FOODLAND, JUBILEE, SUPERVALU and SUPERVALU PHARMACIES.
In connection with the Acquisition, the Company entered into a
trademark license agreement with Albertson’s LLC, the
purchaser of the non-core supermarket business of Albertsons,
under which Albertson’s LLC may use legacy Albertsons
trademarks, such as ALBERTSONS, SAV-ON and LUCKY. Under the
trademark license agreement, Albertson’s LLC is also
allowed to enter into sublicense agreements with transferees of
Albertson’s LLC stores, which allows such transferees to
use many of the same legacy Albertsons trademarks.
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The Company registers a substantial number of its
trademarks/service marks in the United States Patent and
Trademark Office, including many of its private-label product
trademarks and service marks. U.S. trademark and service
mark registrations are generally for a term of 10 years,
renewable every 10 years as long as the trademark is used
in the regular course of trade. The Company considers certain of
its trademarks and service marks to be of material importance to
its Retail food and Supply chain services businesses and
actively defends and enforces such trademarks and service marks.
As of February 28, 2009, working capital consisted of
$4,363 in current assets, calculated after adding back the LIFO
reserve of $258, and $4,472 in current liabilities. Normal
operating fluctuations in these balances can result in changes
to cash flow from operations presented in the Consolidated
Statements of Cash Flows that are not necessarily indicative of
long-term operating trends. There are no unusual industry
practices or requirements relating to working capital items.
The Company’s Retail food and Supply chain services
businesses are highly competitive. The Company believes that the
success of its Retail food and Supply chain services businesses
are dependent upon the ability of its own stores, as well as the
stores of independent retail customers it supplies, to compete
successfully with other retail food stores. Principal
competition comes from regional and national chains operating
under a variety of formats that devote square footage to selling
groceries (i.e., combination food and pharmacy stores, food
stores, limited assortment food stores, membership warehouse
clubs, dollar stores, drug stores, convenience stores, various
formats selling prepared foods and other specialty and discount
retailers), as well as from independent food store operators.
The Company believes that the principal competitive factors
faced by its own stores, as well as the stores of independent
retail customers it supplies, include the location and image of
the store, the price, quality and variety of products and the
quality and consistency of service.
The traditional wholesale distribution component of the
Company’s Supply chain services business competes directly
with a number of grocery wholesalers. The Company believes it
competes in this business on the basis of product price, quality
and assortment, schedule and reliability of deliveries, the
range and quality of services provided, service fees and the
location of distribution facilities. The Company’s
third-party logistics network competes nationwide in a highly
fragmented marketplace, which includes a number of large
international and domestic companies, as well as many smaller,
more regional competitors. The Company believes that it competes
in this business on the basis of warehousing and transportation
logistics expertise, cost and the ability to offer both asset
and non-asset based solutions as well as to design and manage a
customer’s entire supply chain.
As of February 28, 2009, the Company had approximately
178,000 employees. Approximately 110,000 employees are
covered by collective bargaining agreements. During fiscal 2009,
60 collective bargaining agreements covering approximately
29,000 employees were renegotiated. During fiscal 2009, 62
collective bargaining agreements covering approximately
4,500 employees expired without their terms being
renegotiated. Negotiations are expected to continue with the
bargaining units representing the employees subject to those
agreements. During fiscal 2010, 47 collective bargaining
agreements covering approximately 37,000 employees will
expire. The Company is focused on ensuring competitive cost
structures in each market in which it operates while meeting its
employees’ needs for attractive wages and affordable
healthcare and retirement benefits. The Company believes that it
has generally good relations with its employees and with the
labor unions that represent employees covered by collective
bargaining agreements.
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The following table provides certain information concerning the
executive officers of the Company as of April 27, 2009.
The term of office of each executive officer is from one annual
meeting of the Board of Directors until the next annual meeting
of Board of Directors or until a successor is elected. There are
no arrangements or understandings between any executive officer
of the Company and any other person pursuant to which any
executive officer was selected as an officer of the Company.
There are no family relationships between or among any of the
executive officers of the Company.
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Each of the executive officers of the Company has been in the
employ of the Company or its subsidiaries for more than five
consecutive years, except for Duncan C. Mac Naughton, Kevin H.
Tripp, Peter J. Van Helden and Adrian J. Downes.
Various risks and uncertainties may affect the Company’s
business. Any of the risks described below or elsewhere in this
Annual Report on
Form 10-K
or the Company’s other SEC filings may have a material
impact on the Company’s business, financial condition or
results of operations.
General economic conditions, which are largely out of the
Company’s control, may adversely affect the Company’s
financial condition and results of operations.
The Company’s Retail food and Supply chain services
businesses are sensitive to changes in general economic
conditions, both nationally and locally. Recessionary economic
cycles, higher interest rates, higher fuel and other energy
costs, inflation, increases in commodity prices, higher levels
of unemployment, higher consumer debt levels, higher tax rates
and other changes in tax laws or other economic factors that may
affect consumer spending or buying habits may adversely affect
the demand for products the Company sells in its stores or
distributes to its independent retail customers. The United
States economy and financial markets have declined and
experienced volatility due to uncertainties related to energy
prices, availability of credit, difficulties in the banking and
financial services sectors, the decline in the housing market,
diminished market liquidity, falling consumer confidence and
rising unemployment rates. As a result, consumers are more
cautious. This may lead to additional reductions in consumer
spending, to consumers trading down to a less expensive mix of
products or to consumers trading down to discounters for grocery
items, all of which may affect the Company’s financial
condition and results of operations. We are unable to predict
when the economy will improve. If the economy does not improve,
the Company’s business, results of operations and financial
condition may be adversely affected.
Furthermore, the Company may experience additional reductions in
traffic in its own stores or stores of independent retail
customers that it supplies, or limitations on the prices the
Company can charge for its products, either of which could may
the Company’s sales and profit margins and have a material
adverse affect on the Company’s financial condition and
results of operations. Also, economic factors such as those
listed above and increased transportation costs, inflation,
higher costs of labor, insurance and healthcare, and changes in
other laws and regulations may increase the Company’s cost
of sales and the Company’s operating, selling, general and
administrative expenses, and otherwise adversely affect the
financial condition and results of operations of the
Company’s Retail food and Supply chain services businesses.
The Company faces a high level of competition in the Retail
food and Supply chain services businesses, which may adversely
affect the Company’s financial condition and results of
operations.
The Company’s Retail food business faces competition for
customers, employees, store sites, products and in other
important areas from traditional grocery retailers, including
regional and national chains and independent food store
operators, and non-traditional retailers, such as supercenters,
membership warehouse clubs, combination food and pharmacy
stores, limited assortment food stores, specialty supermarkets,
drug stores, discount stores, dollar stores, convenience stores
and restaurants. The Company’s ability to attract customers
in this business is dependent, in large part, upon a combination
of product price, quality, assortment, brand recognition, store
location, in-store marketing and design, promotional strategies
and continued growth into new markets. In addition, the nature
and extent to which our competitors implement various pricing
and promotional activities in response to increasing competition
and the Company’s response to these competitive actions,
can adversely affect profitability.
The Company’s Supply chain services business is primarily
wholesale distribution and includes a third-party logistics
component. The distribution component of the Company’s
Supply chain services business competes with traditional grocery
wholesalers on the basis of product price, quality, assortment,
schedule and reliability of deliveries, service fees and
distribution facility locations. The third-party logistics
component of the Company’s Supply chain services business
competes nationwide in a highly fragmented marketplace with a
number of large international and domestic companies and many
smaller, regional companies on the basis of warehousing and
transportation logistics expertise, cost and the ability to
offer asset and non-asset based
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solutions and design and manage customer supply chains.
Competitive pressures on the Company’s Retail food and
Supply chain services businesses may cause the Company to
experience: (i) reductions in the prices at which the
Company is able to sell products at its retail locations or to
its independent retail customers, (ii) decreases in sales
volume due to increased difficulty in selling the Company’s
products and (iii) difficulty in attracting and retaining
customers. Any of these outcomes may adversely affect the
Company’s financial condition and results of operations.
In addition, the nature and extent of consolidation in the
retail food and food distribution industries may affect the
Company’s competitive position or that of the
Company’s independent retail customers in the markets the
Company serves. Although the retail food industry as a whole is
highly fragmented, certain segments are currently undergoing
some consolidation, which may result in increased competition
and significantly alter the dynamics of the retail food
marketplace. Such consolidation may result in competitors with
greatly improved financial resources, improved access to
merchandise, greater market penetration and other improvements
in their competitive positions. Such business combinations may
result in the provision of a wider variety of products and
services at competitive prices by such consolidated companies,
which may adversely affect the Company’s financial
condition and results of operations.
Food and drug safety concerns and related unfavorable
publicity may adversely affect the Company’s sales and
results of operations.
There is increasing governmental scrutiny and public awareness
regarding food and drug safety. The Company may be adversely
affected if consumers lose confidence in the safety and quality
of the Company’s food and drug products. Any events that
give rise to actual or potential food contamination, drug
contamination or food-borne illness may result in product
liability claims and a loss of consumer confidence. In addition,
adverse publicity about these types of concerns whether valid or
not, may discourage consumers from buying the Company’s
products or cause production and delivery disruptions, which may
have an adverse effect on the Company’s sales and results
of operations.
The Company’s substantial indebtedness and lower credit
rating may increase the Company’s borrowing costs, decrease
the Company’s business flexibility and adversely affect the
Company’s financial condition and results of operations.
The Company has, and expects to continue to have, a substantial
amount of debt and a significantly lower debt coverage ratio as
compared to what the Company had before the Acquisition. In
addition, as a result of the Acquisition, the Company’s
debt no longer has an investment-grade rating.
The Company’s level of indebtedness and the reduction of
its credit rating may have important consequences to the
operation of its businesses and may increase its vulnerability
to general adverse economic conditions. For example, they may:
In addition, the Company’s ability to make scheduled
payments or to refinance its obligations with respect to its
indebtedness will depend upon the Company’s operating and
financial performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors
beyond the Company’s control. As a result, the
Company’s substantial indebtedness and lower credit rating
may increase the Company’s borrowing costs, decrease the
Company’s business flexibility and adversely affect the
Company’s financial condition and results of operations.
Furthermore, the turmoil in the financial markets, including the
bankruptcy or restructuring of certain financial institutions,
may adversely impact the availability and cost of
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credit in the future. There can be no assurances that government
responses to the disruptions in the financial markets will
stabilize the markets or increase liquidity and the availability
of credit.
The Company’s inability to successfully negotiate with
labor unions or to maintain good labor relations may lead to
labor disputes and the disruption of the Company’s
businesses, which may adversely affect the Company’s
financial condition and results of operations.
A large number of the Company’s employees are unionized,
and the Company’s relationship with unions, including labor
disputes or work stoppages, may affect the sale and distribution
of the Company’s products and have an adverse impact on the
Company’s financial condition and results of operations. As
of February 28, 2009, the Company is a party to 266
collective bargaining agreements covering approximately 110,000
of its employees, of which 47 covering approximately
37,000 employees are scheduled to expire in fiscal 2010.
These expiring agreements cover approximately 34 percent of
the Company’s union-affiliated employees. In addition,
during fiscal 2009, 62 collective bargaining agreements covering
approximately 4,500 employees expired without their terms
being renegotiated. Negotiations are expected to continue with
the bargaining units representing the employees subject to those
agreements. In future negotiations with labor unions, the
Company expects that, among other issues, rising healthcare,
pension and employee benefit costs will be important topics for
negotiation. There can be no assurance that the Company will be
able to negotiate the terms of any expiring or expired agreement
in a manner acceptable to the Company. Therefore, potential work
disruptions from labor disputes may result, which may disrupt
the Company’s businesses and adversely affect the
Company’s financial condition and results of operations.
Escalating costs of providing employee benefits may adversely
affect the Company’s financial condition and results of
operations.
The Company provides health benefits to and sponsors defined
pension and other post-retirement plans for substantially all
employees not participating in multi-employer health and pension
plans. The Company’s costs to provide such benefits
continue to increase annually. In addition, the Company
participates in various multi-employer health and pension plans
for a majority of its unionized employees, and the Company is
required to make contributions to these plans in amounts
established under collective bargaining agreements. The costs of
providing benefits through such plans have escalated rapidly in
recent years and contributions to these plans may continue to
create collective bargaining challenges. The amount of any
increase or decrease in the Company’s required
contributions to these multi-employer plans will depend upon
many factors, including the outcome of collective bargaining,
actions taken by trustees who manage the plans, government
regulations, the actual return on assets held in the plans and
the potential payment of a withdrawal liability if the Company
chooses to exit a market. Increases in the costs of benefits
under these plans coupled with adverse stock market developments
that have reduced the return on plan assets have caused some
multi-employer plans in which the Company participates to be
underfunded. The unfunded liabilities of these plans may result
in increased future payments by the Company and the other
participating employers, including costs that may arise with
respect to any potential litigation or that may cause the
acceleration of payments to fund any underfunded plan. The
Company’s risk of such increased payments may be greater if
any of the participating employers in these underfunded plans
withdraws from the plan due to insolvency and is not able to
contribute an amount sufficient to fund the unfunded liabilities
associated with its participants of the plan. If the Company is
unable to control healthcare and pension costs, the Company may
experience increased operating costs, which may have a material
adverse effect on the Company’s financial condition and
results of operations.
The Company’s inability to open and remodel a
significant number of stores as planned may have an adverse
effect on the Company’s financial condition and results of
operations.
In fiscal 2010, pursuant to the Company’s 2010 capital
plan, the Company expects to complete 75 to 80 major store
remodels, 30 to 40 minor store remodels, three new combination
and food stores, and 50 to 60 limited assortment stores,
including licensed stores. If, as a result of labor relations
issues, supply issues or environmental and real estate delays, a
significant portion of these capital projects do not stay
reasonably within the time and financial budgets that the
Company has forecasted, the Company’s financial condition
and results of operations may be adversely affected.
Furthermore, the Company cannot ensure that the new or remodeled
stores will achieve anticipated results. As a result, the
Company’s inability to open and remodel a
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significant number of stores as planned may have an adverse
effect on the Company’s financial condition and results of
operations.
If the Company fails to realize the synergies from combining
the Company’s businesses with the businesses the Company
acquired from Albertsons in a successful and timely manner, it
may have an adverse effect on the Company’s business,
financial condition and results of operations.
The Company may not be able to realize the synergies, business
opportunities and growth prospects anticipated in connection
with the Acquisition. The Company may experience increased
competition that limits the Company’s ability to expand its
business, the Company may not be able to capitalize on expected
business opportunities, including retaining the Company’s
current customers, assumptions underlying estimates of expected
cost savings may be inaccurate or general industry and business
conditions may deteriorate. In addition, combining certain of
the Company’s operations with the Acquired Operations has
required significant effort and expense. Personnel have left and
additional associates may be terminated as part of the
integration plan. The Company’s management may have its
attention diverted as it continues to combine certain operations
of both companies. If these factors limit the Company’s
ability to combine such operations successfully or on a timely
basis, the Company’s expectations of future results of
operations, including certain cost savings and synergies
expected to result from the Acquisition, may not be met. If such
difficulties are encountered or if such synergies, business
opportunities and growth prospects are not realized, it may have
an adverse effect on the Company’s business, financial
condition and results of operations.
The industries in which the Company operates have narrow
profit margins, which may adversely affect the Company’s
business.
Profit margins in the grocery industry are very narrow. In order
to increase or maintain the Company’s profit margins,
strategies are used to reduce costs, such as productivity
improvements, shrink reduction, distribution center
efficiencies, energy efficiency programs and other similar
strategies. Changes in product mix also may negatively affect
certain financial measures. If the Company is unable to achieve
forecasted cost reductions there may be an adverse effect on the
Company’s business.
If the Company is unable to comply with governmental
regulations or if there are unfavorable changes in such
government regulations, the Company’s financial condition
and results of operations may be adversely affected.
The Company’s businesses are subject to various federal,
state and local laws, regulations and administrative practices.
These laws require the Company to comply with numerous
provisions regulating health and sanitation standards, equal
employment opportunity, minimum wages and licensing for the sale
of food, drugs and alcoholic beverages. The Company’s
inability to timely obtain permits, comply with government
regulations or make capital expenditures required to maintain
compliance with governmental regulations may affect the
Company’s ability to open new stores or expand existing
facilities, which may adversely impact the Company’s
business operations and prospects for future growth. In
addition, the Company cannot predict the nature of future laws,
regulations, interpretations or applications, nor can the
Company determine the effect that additional governmental
regulations or administrative orders, when and if promulgated,
or disparate federal, state and local regulatory schemes would
have on the Company’s future business. They may, however,
impose additional requirements or restrictions on the products
the Company sells or manner in which the Company operates its
businesses. Any or all of such requirements may have an adverse
effect on the Company’s financial condition and results of
operations.
If the number or severity of claims for which the Company is
self-insured increases, or the Company is required to accrue or
pay additional amounts because the claims prove to be more
severe than the Company’s recorded liabilities, the
Company’s financial condition and results of operations may
be adversely affected.
The Company uses a combination of insurance and self-insurance
to provide for potential liabilities for workers’
compensation, automobile and general liability, property
insurance and employee healthcare benefits. The Company
estimates the liabilities associated with the risks retained by
the Company, in part, by considering historical claims
experience, demographic and severity factors and other actuarial
assumptions which, by their nature, are subject to a degree of
variability. Any actuarial projection of losses concerning
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workers’ compensation and general and automobile liability
is subject to a degree of variability. Among the causes of this
variability are unpredictable external factors affecting future
inflation rates, discount rates, litigation trends, legal
interpretations, benefit level changes and actual claim
settlement patterns.
Some of the many sources of uncertainty in the Company’s
reserve estimates include changes in benefit levels, medical fee
schedules, medical utilization guidelines, vocation
rehabilitation and apportionment. If the number or severity of
claims for which the Company is self-insured increases, or the
Company is required to accrue or pay additional amounts because
the claims prove to be more severe than the Company’s
original assessments, the Company’s financial condition and
results of operations may be adversely affected.
The Company’s policy is to discount its self-insurance
liabilities at a risk-free interest rate, which is appropriate
based on the Company’s ability to reliably estimate the
amount and timing of cash payments. If, in the future, the
Company were to experience significant volatility in the amount
and timing of cash payments compared to the Company’s
earlier estimates, the Company would assess whether it is
appropriate to continue to discount these liabilities.
Litigation may adversely affect the Company’s
businesses, financial condition and results of operations.
The Company’s businesses are subject to the risk of
litigation by employees, consumers, suppliers, stockholders or
others through private actions, class actions, administrative
proceedings, regulatory actions or other litigation. The outcome
of litigation, particularly class action lawsuits and regulatory
actions, is difficult to assess or quantify. Plaintiffs in these
types of lawsuits may seek recovery of very large or
indeterminate amounts, and the magnitude of the potential loss
relating to such lawsuits may remain unknown for substantial
periods of time. The cost to defend future litigation may be
significant. There may also be adverse publicity associated with
litigation that may decrease consumer confidence in the
Company’s businesses, regardless of whether the allegations
are valid or whether the Company is ultimately found liable. As
a result, litigation may adversely affect the Company’s
businesses, financial condition and results of operations.
Difficulties with the Company’s information technology
systems may adversely affect the Company’s results of
operations.
The Company has complex information technology systems that are
important to the operation of its businesses. The Company may
encounter difficulties in developing new systems or maintaining
and upgrading existing systems. Such difficulties may lead to
significant expenses or losses due to disruption in business
operations and, as a result, may adversely affect the
Company’s results of operations.
Threats or potential threats to security or the occurrence of
a widespread health epidemic may adversely affect the
Company’s financial condition and results of operations.
The Company’s businesses may be severely impacted by
wartime activities, threats or acts of terror or a widespread
regional, national or global health epidemic, such as pandemic
flu. Such activities, threats or epidemics may adversely impact
the Company’s businesses by disrupting production and
delivery of products to its stores or to its independent retail
customers, by affecting the Company’s ability to
appropriately staff its stores and by causing customers to avoid
public gathering places or otherwise change their shopping
behaviors.
Additionally, data theft, information espionage or other
criminal activity directed at the grocery or drug store
industry, the transportation industry, or computer or
communications systems may adversely affect the Company’s
businesses by causing the Company to implement costly security
measures in recognition of actual or potential threats, by
requiring the Company to expend significant time and expense
developing, maintaining or upgrading its information technology
systems and by causing the Company to incur significant costs to
reimburse third parties for damages. Such activities may also
adversely affect the Company’s financial condition and
results of operations by reducing consumer confidence in the
marketplace and by modifying consumer spending habits.
Severe weather, natural disasters and adverse climate changes
may adversely affect the Company’s financial condition and
results of operations.
Severe weather conditions such as hurricanes, earthquakes or
tornadoes, as well as other natural disasters, in areas in which
the Company has stores or distribution facilities or from which
the Company obtains products
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may adversely affect the Company’s results of operations.
Such conditions may cause physical damage to the Company’s
properties, closure of one or more of the Company’s stores
or distribution facilities, lack of an adequate work force in a
market, temporary disruption in the supply of products,
disruption in the transport of goods, delays in the delivery of
goods to the Company’s distribution centers or stores and a
reduction in the availability of products in the Company’s
stores. In addition, adverse climate conditions and adverse
weather patterns, such as drought or flood, that impact growing
conditions and the quantity and quality of crops yielded by food
producers may adversely affect the availability or cost of
certain products within the grocery supply chain. Any of these
factors may disrupt the Company’s businesses and adversely
affect the Company’s financial condition and results of
operations.
Changes in accounting standards may materially impact the
Company’s financial condition and results of operations.
Accounting principles generally accepted in the Unites States
and related accounting pronouncements, implementation
guidelines, and interpretations for many aspects of the
Company’s business, such as accounting for insurance and
self-insurance, inventories, goodwill and intangible assets,
store closures, leases, income taxes and stock-based
compensation, are complex and involve subjective judgments.
Changes in these rules or their interpretation may significantly
change or add significant volatility to the Company’s
reported earnings without a comparable underlying change in cash
flow from operations. As a result, changes in accounting
standards may materially impact the Company’s financial
condition and results of operations.
An impairment in the carrying value of the Company’s
goodwill or other intangible assets may adversely affect the
Company’s financial condition and results of operations.
The Company is required to annually test goodwill and intangible
assets with indefinite lives, including the goodwill associated
with past acquisitions and any future acquisitions, to determine
if impairment has occurred. Additionally, interim reviews must
be performed whenever events or changes in circumstances
indicate that impairment may have occurred. If the testing
performed indicates that impairment has occurred, the Company is
required to record a non-cash impairment charge for the
difference between the carrying value of the goodwill or other
intangible assets and the implied fair value of the goodwill or
other intangible assets in the period the determination is made.
The testing of goodwill and other intangible assets for
impairment requires the Company to make significant estimates
about our future performance and cash flows, as well as other
assumptions. These estimates can be affected by numerous
factors, including changes in economic, industry or market
conditions, changes in business operations, changes in
competition or potential changes in the Company’s stock
price and market capitalization. Changes in these factors, or
changes in actual performance compared with estimates of our
future performance, may affect the fair value of goodwill or
other intangible assets, which may result in an impairment
charge. The Company cannot accurately predict the amount and
timing of any impairment of assets. Should the value of goodwill
or other intangible assets become impaired, there may be an
adverse effect on the Company’s financial condition and
results of operation.
None.
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Retail Food
The Company’s own stores are located in 40 states. The
table below is a summary of the Company’s own stores by
state including the principal retail formats and retail
distribution centers in the Retail food segment as of
February 28, 2009:
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Supply Chain Services
The following table is a summary of the Company’s principal
distribution centers utilized in the Company’s Supply chain
services segment as of February 28, 2009 and does not
include the distribution centers dedicated exclusively to the
Retail food segment:
Additional Property
The Company owns and leases office buildings in various
locations. The primary facilities are located in the
Minneapolis, Minnesota area and in Boise, Idaho.
Additional information on the Company’s properties can be
found in Note 8—Leases in the accompanying Notes to
Consolidated Financial Statements set forth in Part II,
Item 8 of this Annual Report on
Form 10-K.
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Management of the Company believes that its physical facilities
and equipment are adequate for the Company’s present needs
and businesses.
The Company is subject to various lawsuits, claims and other
legal matters that arise in the ordinary course of conducting
business, none of which, in management’s opinion, is
expected to have a material adverse impact on the Company’s
financial condition, results of operations or cash flows.
In April 2000, a class action complaint was filed against
Albertsons, as well as American Stores Company, American Drug
Stores, Inc., Sav-on Drug Stores, Inc. (“Sav-on Drug
Stores”) and Lucky Stores, Inc. (“Lucky Stores”),
wholly-owned subsidiaries of Albertsons, in the Superior Court
for the County of Los Angeles, California (Gardner, et
al. v. American Stores Company, et al.) by assistant
managers seeking recovery of overtime based on the
plaintiffs’ allegation that they were improperly classified
as exempt under California law. In May 2001, the Court certified
a class with respect to Sav-on Drug Stores assistant managers. A
case with very similar claims, involving the Sav-on Drug Stores
assistant managers and operating managers, was also filed in
April 2000 against Sav-on Drug Stores in the Superior Court for
the County of Los Angeles, California (Rocher, Dahlin, et
al. v. Sav-on Drug Stores, Inc.), and was certified as a
class action in June 2001 with respect to assistant managers and
operating managers. The two cases were consolidated in December
2001. New Albertsons was added as a named defendant in November
2006. Plaintiffs seek overtime wages, meal and rest break
penalties, other statutory penalties, punitive damages,
interest, injunctive relief and the attorneys’ fees and
costs. The parties have entered into a memorandum of
understanding regarding settlement of this matter and are
currently negotiating terms of a preliminary settlement
agreement. Although this lawsuit is subject to the uncertainties
inherent in the litigation process, based on the information
presently available to the Company, management does not expect
that the ultimate resolution of this lawsuit will have a
material adverse effect on the Company’s financial
condition, results of operations or cash flows.
In September 2008, a class action complaint was filed against
the Company, as well as International Outsourcing Services, LLC
(“IOS”), Inmar, Inc., Carolina Manufacturer’s
Services, Inc., Carolina Coupon Clearing, Inc. and Carolina
Services, in the United States District Court in the Eastern
District of Wisconsin. The plaintiffs in the case are a consumer
goods manufacturer, a grocery co-operative and a retailer
marketing services company who allege on behalf of a purported
class that the Company and the other defendants
(i) conspired to restrict the markets for coupon processing
services under the Sherman Act and (ii) were part of an
illegal enterprise to defraud the plaintiffs under the Federal
Racketeer Influenced and Corrupt Organizations Act. The
plaintiffs seek monetary damages, attorneys’ fees and
injunctive relief. The Company intends to vigorously defend this
lawsuit, however all proceedings have been stayed in the case
pending the result of the criminal prosecution of certain former
officers of IOS. Although this lawsuit is subject to the
uncertainties inherent in the litigation process, based on the
information presently available to the Company, management does
not expect that the ultimate resolution of this lawsuit will
have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
In December 2008, a class action complaint was filed in the
United States District Court for the Western District of
Wisconsin against the Company alleging that a 2003 transaction
between the Company and C&S Wholesale Grocers, Inc.
(“C&S”) was a conspiracy to restrain trade and
allocate markets. In the 2003 transaction, the Company purchased
certain assets of the Fleming Corporation as part of Fleming
Corporation’s bankruptcy proceedings and sold certain of
the assets of the Company to C&S which were located in New
England. The complaint alleges that the conspiracy was concealed
and continued through the use of non-compete and
non-solicitation agreements and the closing down of the
distribution facilities that the Company and C&S purchased
from the other. Plaintiffs are seeking monetary damages,
injunctive relief and attorneys’ fees. The Company is
vigorously defending this lawsuit. Although this lawsuit is
subject to the uncertainties inherent in the litigation process,
based on the information presently available to the Company,
management does not expect that the ultimate resolution of this
lawsuit will have a material adverse effect on the
Company’s financial condition, results of operations or
cash flows.
The Company is also involved in routine legal proceedings
incidental to its operations. Some of these routine proceedings
involve class allegations, many of which are ultimately
dismissed. Management does not expect
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that the ultimate resolution of these legal proceedings will
have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
The statements above reflect management’s current
expectations based on the information presently available to the
Company, however, predicting the outcomes of claims and
litigation and estimating related costs and exposures involves
substantial uncertainties that could cause actual outcomes,
costs and exposures to vary materially from current
expectations. In addition, the Company regularly monitors its
exposure to the loss contingencies associated with these matters
and may from time to time change its predictions with respect to
outcomes and its estimates with respect to related costs and
exposures and believes recorded reserves are adequate. It is
possible, although management believes it is remote, that
material differences in actual outcomes, costs and exposures
relative to current predictions and estimates, or material
changes in such predictions or estimates, could have a material
adverse effect on the Company’s financial condition,
results of operations or cash flows.
There was no matter submitted during the fourth quarter of
fiscal 2009 to a vote of the security holders of the Company.
The Company’s common stock is listed on the New York Stock
Exchange under the symbol SVU. As of April 24, 2009 there
were 211,598,297 (not in millions) shares of common stock
outstanding. As of that date, there were 15,087 stockholders of
record, excluding individual participants in security position
listings. The information called for by Item 5 as to the
sales price for the Company’s common stock on a quarterly
basis during the last two fiscal years and dividend information
is found under the heading “Common Stock Price” in
Part II, Item 7 of this Annual Report on
Form 10-K.
The following table sets forth the Company’s purchases of
equity securities for the periods indicated:
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The following graph compares the yearly change in the
Company’s cumulative shareholder return on its common stock
for the period from the end of fiscal 2004 to the end of fiscal
2009 to that of the Standard & Poor’s
(“S&P”) 500 and a group of peer companies in the
retail grocery industry. The stock price performance shown below
is not necessarily indicative of future performance.
COMPARISON
OF FIVE-YEAR TOTAL RETURN AMONG
SUPERVALU, S&P 500 AND PEER GROUP(1)
February 27, 2004 through February 27,
2009(2)
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The performance graph above is being furnished solely to
accompany this Annual Report on
Form 10-K
pursuant to Item 201(e) of
Regulation S-K,
is not being filed for purposes of Section 18 of the
Exchange Act, and is not to be incorporated by reference into
any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such
filing.
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Historical data is not necessarily indicative of the
Company’s future results of operations or financial
condition. See discussion of “Risk Factors” in
Part I, Item 1A of this Annual Report on
Form 10-K.
SUPERVALU is one of the largest companies in the United States
grocery channel. The Company operates in two segments of the
grocery industry, Retail food and Supply chain services,
primarily wholesale distribution. As of February 28, 2009,
the Company conducted its retail operations through a total of
2,421 stores of which 862 are licensed locations. Principal
formats include combination stores (defined as food and
pharmacy), food stores and limited assortment food stores. As of
February 28, 2009, the Company’s Supply chain services
network spans 49 states and the Company serves as primary
grocery supplier to approximately 2,000 stores, in addition to
the Company’s own stores, as well as serving as secondary
grocery supplier to approximately 700 stores.
On June 2, 2006, the Company acquired New Albertson’s,
Inc. (“New Albertsons”) consisting of the core
supermarket businesses (the “Acquired Operations”)
formerly owned by Albertson’s, Inc.
(“Albertsons”) operating approximately 1,125 stores,
the related in-store pharmacies, 10 distribution centers and
certain regional and corporate offices (the
“Acquisition”). The Acquisition greatly increased the
size of the Company. Results of operations for fiscal 2007
includes only the 38 weeks of operating results of the
Acquired Operations.
The retail grocery industry can be characterized as one of
continued consolidation and rationalization, with the
Acquisition being one of the largest acquisitions in the history
of the industry. Grocery retailers also continue to compete
against an increasing number of competitive formats that are
adding square footage devoted to food and non-food products,
such as supercenters, membership warehouse clubs, mass
merchandisers, dollar stores, drug stores and other alternate
formats.
The unprecedented decline in the economy and credit market
turmoil during fiscal 2009 combined with high food inflation and
energy costs negatively impacted consumer confidence and
spending. If these trends continue, it could lead to further
reduced consumer spending, to consumers trading down to a less
expensive mix of products or to consumers trading down to
discounters for grocery items, all of which could impact the
Company’s sales growth. Food deflation could reduce sales
growth, while food inflation, combined with reduced consumer
spending, could reduce gross profit margins.
The Company believes it can be successful against this industry
backdrop with its retail formats that focus on local execution,
merchandising and consumer knowledge. In addition, the
Company’s operations will benefit
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from its efficient and low-cost supply chain and new economies
of scale as it leverages its Retail food and Supply chain
services operations. The Company plans to expand retail square
footage through targeted new store development, remodel
activities, licensee growth and acquisitions.
The Company is in the third year of implementing its integration
plan that commenced with the Acquisition, including initiatives
to leverage scale and reduce costs in the Company’s Retail
food and Supply chain services businesses to enhance the overall
performance of the newly combined company, which it expects to
substantially complete in fiscal 2010. The Company has a
long-term goal for approximately 80 percent of its store
fleet to be new or newly remodeled within the last seven years.
During fiscal 2009, the Company opened 14 new combination and
food stores and completed approximately 161 major store
remodels, which aligns the Company with making progress towards
this goal. The Company’s capital spending for fiscal 2010
is projected to be approximately $750, including capital leases,
which will include 75 to 80 major store remodels and three new
combination and food stores. The Company also plans to reduce
debt by approximately $700 in fiscal 2010.
Highlights of results of operations as reported and as a percent
of Net sales are as follows:
In fiscal 2009, the Company achieved Net sales of $44,564,
compared with $44,048 last year. Net loss for fiscal 2009 was
$2,855 and diluted net loss per share was $13.51, compared with
net earnings of $593 and diluted net earnings per share of $2.76
last year. Results for fiscal 2009 include charges of $3,762
before tax ($3,470 after tax, or $16.40 per diluted share)
comprised of goodwill and intangible asset impairment charges of
$3,524 before tax ($3,326 after tax, or $15.71 per diluted
share), charges primarily related to the closure of
non-strategic stores of $200 before tax ($121 after tax, or
$0.58 per diluted share), settlement costs for a pre-Acquisition
Albertsons litigation matter of $24 before tax ($15 after tax,
or $0.07 per diluted share) and other Acquisition-related costs
(defined as one-time transaction costs, which primarily include
supply chain consolidation costs, employee-related benefit costs
and consultant fees) of $14 before tax ($8 after tax, or $0.04
per diluted share). Results for fiscal 2008 include
Acquisition-related costs of $73 before tax ($45 after tax, or
$0.21 per diluted share).
Net sales for fiscal 2009 were $44,564, compared with $44,048
last year. Retail food sales were 77.8 percent of Net sales
and Supply chain services sales were 22.2 percent of Net
sales for fiscal 2009, compared with 78.0 percent and
22.0 percent, respectively, last year.
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Retail food sales for fiscal 2009 were $34,664, compared with
$34,341 last year, primarily reflecting the extra week of sales
of approximately $578 in fiscal 2009, partially offset by the
impact of store closures and negative identical store retail
sales growth (defined as stores operating for four full
quarters, including store expansions and excluding fuel and
planned store closures). For fiscal 2009, as compared to fiscal
2008, identical store retail sales growth was negative
1.2 percent based on the same 52-week period for both
years, as a result of a soft sales environment and higher levels
of competitive activity.
During fiscal 2009, the Company added 44 new stores through new
store development and closed 97 stores.
Total retail square footage as of the end of fiscal 2009 was
approximately 69 million, a decrease of 2.8 percent
from the end of fiscal 2008. Total retail square footage,
excluding store closures, increased 1.4 percent from the
end of fiscal 2008.
Supply chain services sales for fiscal 2009 were $9,900,
compared with $9,707 last year, primarily reflecting the extra
week of sales of approximately $165 in fiscal 2009 as well as
the pass through of inflation and new business growth, partially
offset by the on-going transition of a national retailer’s
volume to self distribution.
Gross profit, as a percent of Net sales, was 22.7 percent
for fiscal 2009 compared with 22.9 percent last year. The
decrease is primarily attributable to investments in price and
higher levels of promotional spending, higher LIFO charges and
inventory valuation charges, partially offset by lower shrink.
Selling and administrative expenses, as a percent of Net sales,
were 19.6 percent for fiscal 2009, compared with
19.1 percent last year. The increase in Selling and
administrative expenses, as a percent of Net sales, is
attributable to charges primarily related to the closure of
non-strategic stores in the fourth quarter of fiscal 2009,
higher employee-related costs and higher occupancy costs,
partially offset by lower Acquisition-related costs.
In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets,” the Company applies a fair value-based
impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and on an
interim basis if certain events or circumstances indicate that
an impairment loss may have occurred. For the third quarter of
fiscal 2009, the Company’s stock price had a significant
and sustained decline and book value per share substantially
exceeded the stock price. Consistent with
SFAS No. 142, the Company recorded impairment charges
of $3,524, comprised of $3,223 to goodwill at certain Retail
food reporting units and $301 to indefinite-lived trademarks and
tradenames related to the Acquired Trademarks and other
intangible assets. The impairment of goodwill and
indefinite-lived intangible assets reflects the significant
decline in the market price of the Company’s common stock
as of the end of the third quarter of fiscal 2009 as well as the
impact of the unprecedented decline in the economy on the
Company’s plan.
Operating loss for fiscal 2009 was $2,157, compared with
operating earnings of $1,684 last year. Retail food operating
loss for fiscal 2009 was $2,315, compared with operating
earnings of $1,550 last year, reflecting $3,524 of goodwill and
intangible asset impairment charges and $162 of charges
primarily related to the closure of non-strategic stores with
the remaining decrease of $179, or 52 basis points,
attributable to investments in price, higher promotional
spending, higher employee-related costs and higher occupancy
costs. Supply chain services operating earnings for fiscal 2009
were $307, or 3.1 percent of Supply chain services net
sales, compared with $274, or 2.8 percent of Supply chain
services net sales last year, primarily reflecting improved
sales leverage and cost reduction initiatives.
Net interest expense was $622 in fiscal 2009, compared with $707
last year, primarily reflecting lower debt levels and the
benefit of lower borrowing rates on floating rate debt in fiscal
2009.
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Income tax expense was $76, or 2.7 percent of loss before
income taxes, for fiscal 2009 compared with $384, or
39.3 percent of earnings before income taxes, last year.
The tax rate for fiscal 2009 reflects the impact of the goodwill
and intangible asset impairment charges, the majority of which
are non-deductible for income tax purposes, as well as a benefit
attributable to favorable state tax items, non-taxable life
insurance proceeds and a reduction in the statutory rate.
Net loss was $2,855, or $13.51 per basic and diluted share, for
fiscal 2009 compared with net earnings of $593, or $2.80 per
basic share and $2.76 per diluted share last year. Net loss for
fiscal 2009 includes charges of $3,470 after tax, or $16.40 per
diluted share, comprised of goodwill and intangible asset
impairment charges, charges primarily related to the closure of
non-strategic stores, settlement costs for a pre-Acquisition
Albertsons litigation matter and other Acquisition-related
costs. Net earnings for fiscal 2008 include Acquisition-related
costs of $45 after tax, or $0.21 per diluted share.
In fiscal 2008, the Company achieved Net sales of $44,048,
compared with $37,406 for fiscal 2007. Net earnings for fiscal
2008 were $593 and diluted net earnings per share were $2.76,
compared with net earnings of $452 and diluted net earnings per
share of $2.32 for fiscal 2007. Results for fiscal 2008 include
Acquisition-related costs of $45 after tax, or $0.21 per diluted
share, compared to $40 after tax, or $0.20 per diluted share, of
Acquisition-related costs in fiscal 2007. Results for fiscal
2007 also include charges related to the Company’s disposal
of 18 Scott’s banner stores of $23 after tax, or $0.12 per
diluted share, which were all disposed of in fiscal 2008.
Net sales for fiscal 2008 were $44,048, compared with $37,406
for fiscal 2007, an increase of 17.8 percent. Retail food
sales were 78.0 percent of Net sales and Supply chain
services sales were 22.0 percent of Net sales for fiscal
2008, compared with 74.9 percent and 25.1 percent,
respectively, for fiscal 2007.
Retail food sales for fiscal 2008 were $34,341, compared with
$28,016 for fiscal 2007, an increase of 22.6 percent. The
increase was due primarily to the Acquisition. Identical store
retail sales growth for fiscal 2008, as compared to fiscal 2007,
was 0.1 percent. Identical store retail sales growth on a
combined basis, as if the Acquired Operations stores were in the
store base for four full quarters, was 0.5 percent.
During fiscal 2008, the Company added 73 new stores through new
store development, acquired eight stores and closed 85 stores,
28 of which were acquired through the Acquisition.
Total retail square footage as of the end of fiscal 2008 was
approximately 71 million, a decrease of 2.5 percent
from the end of fiscal 2007. Total retail square footage,
excluding store closures, increased 2.3 percent from the
end of fiscal 2007.
Supply chain services sales for fiscal 2008 were $9,707,
compared with $9,390 for fiscal 2007, an increase of
3.4 percent. This increase primarily reflects new business
growth, which was partially offset by customer attrition.
Gross profit, as a percent of Net sales, was 22.9 percent
for fiscal 2008 compared with 21.8 percent for fiscal 2007.
The increase in Gross profit, as a percent of Net sales, is
primarily due to the impact of the Acquisition on business
segment mix which includes 52 weeks of results of the
Acquired Operations in fiscal 2008 compared with 38 weeks
in fiscal 2007. The Acquired Operations are part of the Retail
food segment which has a higher Gross profit percentage than
Supply chain services.
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Selling and administrative expenses, as a percent of Net sales,
were 19.1 percent for fiscal 2008, compared with
18.3 percent for fiscal 2007. The increase in Selling and
administrative expenses, as a percent of Net sales, is primarily
due to the impact of the Acquisition on the business segment mix
which includes 52 weeks of results of the Acquired
Operations in fiscal 2008 compared with 38 weeks in fiscal
2007. The Acquired Operations are part of the Retail food
segment which has a higher Selling and administrative expenses
percentage than Supply chain services. The impact of the
business segment mix more than offset the decrease in
employee-related costs and lower depreciation expense as a
percent of Net sales.
Operating earnings for fiscal 2008 increased to $1,684, compared
with $1,305 for fiscal 2007, primarily reflecting the results
from the Acquisition. Retail food Operating earnings for fiscal
2008 were $1,550, or 4.5 percent of Retail food sales,
compared with $1,179, or 4.2 percent of Retail food sales,
for fiscal 2007, primarily reflecting the results from the
Acquisition. Supply chain services Operating earnings for fiscal
2008 were $274, or 2.8 percent of Supply chain services
sales, compared with $257, or 2.7 percent of Supply chain
services sales, for fiscal 2007.
Net interest expense was $707 in fiscal 2008, compared with $558
in fiscal 2007. The increase primarily reflects interest expense
related to assumed debt and new borrowings related to the
Acquisition.
The effective tax rates were 39.3 percent and
39.5 percent in fiscal 2008 and fiscal 2007, respectively.
Net earnings were $593 for fiscal 2008, compared with $452 for
fiscal 2007. Results for fiscal 2008 include Acquisition-related
costs of $45 after tax. Results for fiscal 2007 include
Acquisition-related costs of $40 after tax and charges related
to the disposal of 18 Scott’s banner stores of $23 after
tax.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant accounting policies are discussed in
Note 1—The Company and Summary of Significant
Accounting Policies in the Notes to Consolidated Financial
Statements. Management believes the following critical
accounting policies reflect its more subjective or complex
judgments and estimates used in the preparation of the
Company’s consolidated financial statements.
The Company receives funds from many of the vendors whose
products the Company buys for resale in its stores. These vendor
funds are provided to increase the sell-through of the related
products. The Company receives vendor funds for a variety of
merchandising activities: placement of the vendors’
products in the Company’s advertising; display of the
vendors’ products in prominent locations in the
Company’s stores; supporting the introduction of new
products into the Company’s retail stores and distribution
system; exclusivity rights in certain categories; and to
compensate for temporary price reductions offered to customers
on products held for sale at retail stores. The Company also
receives vendor funds for buying activities such as volume
commitment rebates, credits for purchasing products in advance
of their need and cash discounts for the early payment of
merchandise purchases. The majority of the vendor fund contracts
have terms of less than a year, with a small proportion of the
contracts longer than one year.
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The Company recognizes vendor funds for merchandising activities
as a reduction of Cost of sales when the related products are
sold in accordance with Emerging Issues Task Force
(“EITF”) Issue
No. 02-16,
“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor.”
Vendor funds that have been earned as a result of completing the
required performance under the terms of the underlying
agreements but for which the product has not yet been sold are
recognized as reductions of inventory. The amount and timing of
recognition of vendor funds as well as the amount of vendor
funds remaining in ending inventory requires management judgment
and estimates. Management determines these amounts based on
estimates of current year purchase volume using forecast and
historical data and review of average inventory turnover data.
These judgments and estimates impact the Company’s reported
operating earnings and inventory amounts. The historical
estimates of the Company have been reliable in the past, and the
Company believes the methodology will continue to be reliable in
the future. Based on previous experience, the Company does not
expect there will be a significant change in the level of vendor
support. However, if such a change were to occur, cost of sales
and advertising expense could change, depending on the specific
vendors involved. If vendor advertising allowances were
substantially reduced or eliminated, the Company would consider
changing the volume, type and frequency of the advertising,
which could increase or decrease its advertising expense.
Similarly, the Company is not able to assess the impact of
vendor advertising allowances on creating additional revenues as
such allowances do not directly generate revenue for the
Company’s stores. For fiscal 2009, a 100 basis point
change in total vendor funds earned, including advertising
allowances, with no offsetting changes to the base price on the
products purchased, would impact gross profit by 10 basis
points.
Inventories are valued at the lower of cost or market.
Substantially all of the Company’s inventory consists of
finished goods.
Approximately 81 percent and 82 percent of the
Company’s inventories were valued using the
last-in,
first-out (“LIFO”) method for fiscal 2009 and 2008,
respectively. The Company uses a combination of the retail
inventory method (“RIM”) and replacement cost method
to determine the current cost of its inventory before any LIFO
reserve is applied. Under RIM, the current cost of inventories
and the gross margins are calculated by applying a
cost-to-retail ratio to the current retail value of inventories.
Under the replacement cost method, the most current unit
purchase cost is used to calculate the current cost of
inventories. The
first-in,
first-out method (“FIFO”) is used to determine cost
for some of the remaining highly perishable inventories. If the
FIFO method had been used to determine cost of inventories for
which the LIFO method is used, the Company’s inventories
would have been higher by approximately $258 and $180 as of
February 28, 2009 and February 23, 2008, respectively.
During fiscal 2009, 2008 and 2007, inventory quantities in
certain LIFO layers were reduced. These reductions resulted in a
liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the cost of fiscal
2009, 2008 and 2007 purchases. As a result, Cost of sales
decreased by $10, $5 and $6 in fiscal 2009, 2008 and 2007,
respectively.
In addition, the Company evaluates inventory shortages
throughout the year based on actual physical counts in its
facilities. Allowances for inventory shortages are recorded
based on the results of these counts to provide for estimated
shortages as of the financial statement date. Although the
Company has sufficient current and historical information
available to record reasonable estimates for inventory
shortages, it is possible that actual results could differ. As
of February 28, 2009, each 25 basis point change in
the estimated inventory shortages would impact the allowances
for inventory shortages by approximately $13.
The Company maintains reserves for costs associated with
closures of retail stores, distribution centers and other
properties that are no longer being utilized in current
operations in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities.” The Company provides for closed property
operating lease liabilities using a discount rate to calculate
the present value of the remaining noncancellable lease payments
after the closing date, reduced by estimated subtenant rentals
that could be reasonably obtained for the property. The closed
property lease liabilities usually are paid over the remaining
lease terms, which
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generally range from one to 20 years. The Company estimates
subtenant rentals and future cash flows based on the
Company’s experience and knowledge of the market in which
the closed property is located, the Company’s previous
efforts to dispose of similar assets and existing economic
conditions. Adjustments to closed property reserves primarily
relate to changes in subtenant income or actual exit costs
differing from original estimates. Adjustments are made for
changes in estimates in the period in which the changes become
known.
Owned properties, capital lease properties, and the related
equipment and leasehold improvements at operating leased
properties that are closed are reduced to their estimated fair
value in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” The Company estimates fair value based on its
experience and knowledge of the market in which the closed
property is located and, when necessary, utilizes local real
estate brokers.
The expectations on timing of disposition and the estimated
sales price or subtenant rentals associated with closed
properties, owned or leased, are impacted by variable factors
including inflation, the general health of the economy,
resultant demand for commercial property, the ability to secure
subleases, the creditworthiness of sublessees and the
Company’s success at negotiating early termination
agreements with lessors. While management believes the current
estimates of reserves for closed properties and related
impairment charges are adequate, it is possible that market and
economic conditions in the real estate market could cause
changes in the Company’s assumptions and may require
additional reserves and asset impairment charges to be recorded.
The Company’s reserve for closed properties was $167, net
of estimated sublease recoveries of $77, as of February 28,
2009 and $97, net of estimated sublease recoveries of $81, as of
February 23, 2008. The Company recognized asset impairment
charges of $75, $12 and $7 in fiscal 2009, 2008 and 2007,
respectively.
The Company reviews goodwill for impairment during the fourth
quarter of each year, and also if an event occurs or
circumstances change that would more-likely-than-not reduce the
fair value of a reporting unit below its carrying amount. The
reviews consist of comparing estimated fair value to the
carrying value at the reporting unit level. The Company’s
reporting units are the operating segments of the business. Fair
values are determined primarily by discounting projected future
cash flows based on management’s expectations of the
current and future operating environment. The rates used to
discount projected future cash flows reflect a weighted average
cost of capital based on the Company’s industry, capital
structure and risk premiums including those reflected in the
current market capitalization. If management identifies the
potential for impairment of goodwill, the fair value of the
implied goodwill is calculated as the difference between the
fair value of the reporting unit and the fair value of the
underlying assets and liabilities, excluding goodwill. An
impairment charge is recorded for any excess of the carrying
value over the implied fair value. Fair value calculations
contain significant judgments and estimates related to each
reporting unit’s projected future revenues, profitability
and cash flows. When preparing these estimates, management
considers each reporting unit’s historical results, current
operating trends, and specific plans in place. These estimates
are impacted by variable factors including inflation, the
general health of the economy, and market competition. The
Company has sufficient current and historical information
available to support its judgments and estimates. However, if
actual results are not consistent with the Company’s
estimates, future operating results may be materially impacted.
The Company also reviews intangible assets with indefinite
useful lives, which primarily consist of trademarks and
tradenames, for impairment during the fourth quarter of each
year, and also if events or changes in circumstances indicate
that the asset might be impaired. The reviews consist of
comparing estimated fair value to the carrying value. Fair
values of the Company’s trademarks and tradenames are
determined primarily by discounting an assumed royalty value
applied to projected future revenues associated with the
tradename based on management’s expectations of the current
and future operating environment. The royalty cash flows are
then discounted using rates based on the weighted average cost
of capital discussed above and the specific risk profile of the
tradenames relative to the Company’s other assets. These
estimates are impacted by variable factors including inflation,
the general health of the economy, and market competition.
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Goodwill and intangible assets with indefinite useful lives were
$3,748 and $1,069 as of February 28, 2009, respectively,
and $6,957 and $1,370 as of February 23, 2008,
respectively. For the third quarter of fiscal 2009, the
Company’s stock price had a significant and sustained
decline and book value per share substantially exceeded the
stock price. Consistent with SFAS No. 142, the Company
recorded impairment charges of $3,524, comprised of $3,223 to
goodwill at certain Retail food reporting units and $301 to
indefinite-lived trademarks and tradenames related to the
Acquired Trademarks and other intangible assets. The impairment
of goodwill and indefinite-lived intangible assets reflects the
significant decline in the market price of the Company’s
common stock as of the end of the third quarter of fiscal 2009
as well as the impact of the unprecedented decline in the
economy on the Company’s plan. The Company did not record
any impairment losses related to goodwill or intangible assets
during 2008.
The Company is primarily self-insured for workers’
compensation, healthcare for certain employees and general and
automobile liability costs. It is the Company’s policy to
record its self-insurance liabilities based on management’s
estimate of the ultimate cost of reported claims and claims
incurred but not yet reported and related expenses, discounted
at a risk-free interest rate.
In determining its self-insurance liabilities, the Company
performs a continuing review of its overall position and
reserving techniques. Since recorded amounts are based on
estimates, the ultimate cost of all incurred claims and related
expenses may be more or less than the recorded liabilities. Any
projection of losses concerning workers’ compensation,
healthcare and general and automobile liability is subject to a
degree of variability. Among the causes of this variability are
unpredictable external factors affecting future inflation rates,
discount rates, litigation trends, legal interpretations,
regulatory changes, benefit level changes and actual claim
settlement patterns. The majority of the self-insurance
liability for workers’ compensation is related to claims
occurring in California. California workers’ compensation
has received intense scrutiny from the state’s politicians,
insurers, and providers. In recent years, there has been an
increase in the number of legislative reforms and judicial
rulings affecting the handling of claim activity. The impact of
many of these variables on ultimate costs is difficult to
estimate. The effects of changes in such estimated items are
included in results of operations in the period in which the
estimates are changed. Such changes may be material to the
results of operations and could occur in a future period. If, in
the future, the Company was to experience significant volatility
in the amount and timing of cash payments compared to its
earlier estimates, the Company would assess whether to continue
to discount these liabilities. The Company had self-insurance
liabilities of approximately $1,142, net of the discount of
$223, and $1,132, net of the discount of $226, as of
February 28, 2009 and February 23, 2008, respectively.
As of February 28, 2009, each 25 basis point change in
the discount rate would impact the self-insurance liabilities by
approximately $2.
The Company sponsors pension and other postretirement plans in
various forms covering substantially all employees who meet
eligibility requirements. The determination of the
Company’s obligation and related expense for
Company-sponsored pension and other postretirement benefits is
dependent, in part, on management’s selection of certain
actuarial assumptions used in calculating these amounts. These
assumptions include, among other things, the discount rate, the
expected long-term rate of return on plan assets and the rates
of increase in compensation and healthcare costs. The discount
rate is based on current investment yields on high-quality
fixed-income investments. The expected long-term rate of return
on plan assets is based on the historical experience of the
Company’s investment portfolio and the projected returns by
asset category. Over the
10-year
period ended February 28, 2009 and February 23, 2008,
the average rate of return on plan assets was approximately
2 percent and 8 percent, respectively. The decrease in
the 10-year
average rate of return on pension assets was due to the
unprecedented decline in the economy and continuing credit
market turmoil during fiscal 2009. The Company expects that the
markets will eventually recover to the assumed long-term rate of
return used by the Company. In accordance with generally
accepted accounting principles, actual results that differ from
the Company’s assumptions are accumulated and amortized
over future periods and, therefore, affect expense and
obligation in future periods.
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During fiscal 2009, the Company contributed $28 to its pension
plans and $13 to its postretirement benefit plans, and expects
to contribute $74 to its pension plans and $7 to its
postretirement benefit plans in fiscal 2010.
For fiscal 2010, each 25 basis point reduction in the
discount rate would increase pension expense by approximately $6
and each 25 basis point reduction in expected return on
plan assets would increase pension expense by approximately $4.
Similarly, for postretirement benefits, a 100 basis point
change in the healthcare cost trend rate would impact the
accumulated postretirement benefit obligation as of the end of
fiscal 2009 by approximately $9 and the service and interest
cost by $1 in fiscal 2010. Although the Company believes that
its assumptions are appropriate, the actuarial assumptions may
differ from actual results due to changing market and economic
conditions, higher or lower withdrawal rates, and longer or
shorter life spans of participants.
In addition, the Company contributes to various multi-employer
pension plans under collective bargaining agreements, primarily
defined benefit pension plans. These plans generally provide
retirement benefits to participants based on their service to
contributing employers. Based on available information, the
Company believes that some of the multi-employer plans to which
it contributes are underfunded. Company contributions to these
plans are likely to continue to increase in the near term.
However, the amount of any increase or decrease in contributions
will depend on a variety of factors, including the results of
the Company’s collective bargaining efforts, investment
return on the assets held in the plans, actions taken by the
trustees who manage the plans, and requirements under the
Pension Protection Act of 2006 and Section 412(e) of the
Internal Revenue Code of 1986, as amended (the “Internal
Revenue Code”). Furthermore, if the Company were to exit
certain markets or otherwise cease making contributions to these
plans at this time, it could trigger a withdrawal liability that
would require the Company to fund its proportionate share of a
plan’s unfunded vested benefits. The Company contributed
$147, $142 and $122 to these plans for fiscal 2009, 2008 and
2007, respectively.
The Company’s current and deferred tax provision is based
on estimates and assumptions that could materially differ from
the actual results reflected in its income tax returns filed
during the subsequent year and could significantly affect the
effective tax rate and cash flows in future years. The Company
records adjustments based on filed returns when it has
identified and finalized them, which is generally in a
subsequent period.
The Company recognizes deferred tax assets and liabilities for
the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported
amounts using enacted tax rates in effect for the year in which
it expects the differences to reverse.
The Company’s effective tax rate is influenced by tax
planning opportunities available in the various jurisdictions in
which the Company operates. Management’s judgment is
involved in determining the effective tax rate and in evaluating
the ultimate resolution of any uncertain tax positions. In
addition, the Company is currently in various stages of audits,
appeals or other methods of review with taxing authorities from
various taxing jurisdictions. The Company establishes
liabilities for unrecognized tax benefits in a variety of taxing
jurisdictions when, despite management’s belief that the
Company’s tax return positions are supportable, certain
positions may be challenged and may need to be revised.
Unrecognized tax benefits are accounted for in accordance with
Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement
No. 109.” The Company adjusts these liabilities in
light of changing facts and circumstances, such as the progress
of a tax audit. The effective income tax rate includes the
impact of reserve provisions and changes to those reserves. The
Company also provides interest on these liabilities at the
appropriate statutory interest rate. The actual benefits
ultimately realized for tax positions may differ from the
Company’s estimates due to changes in facts, circumstances
and new information. As of February 28, 2009 and
February 23, 2008, the Company had $114 and $146 of
unrecognized tax benefits, respectively.
The Company records a valuation allowance to reduce the deferred
tax assets to the amount that it is more-likely-than-not to
realize. Forecasted earnings, future taxable income and future
prudent and feasible tax planning strategies are considered in
determining the need for a valuation allowance. In the event the
Company
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was not able to realize all or part of its net deferred tax
assets in the future, the valuation allowance would be
increased. Likewise, if it was determined that the Company was
more-likely-than-not to realize the net deferred tax assets, the
applicable portion of the valuation allowance would reverse. The
Company had a valuation allowance of $165 as of
February 28, 2009 and February 23, 2008.
Net cash provided by operating activities was $1,534, $1,732 and
$801 in fiscal 2009, 2008 and 2007, respectively. The decrease
in cash provided by operating activities in fiscal 2009 compared
to fiscal 2008 is primarily attributable to the impact of
deferred income taxes. The increase in cash provided by
operating activities in fiscal 2008 compared to fiscal 2007 is
primarily attributable to the impact of the Acquired Operations
on Net earnings, Depreciation and amortization and working
capital.
Net cash used in investing activities was $1,014, $968 and
$2,760 in fiscal 2009, 2008 and 2007, respectively. Fiscal 2009
and 2008 investing activities primarily reflect capital spending
to fund retail store remodeling activity, new retail stores and
technology expenditures. Fiscal 2007 investing activities
primarily reflect the net assets acquired in the Acquisition and
capital spending to fund retail store remodeling and new stores.
Net cash (used in) provided by financing activities was $(523),
$(806) and $1,443 in fiscal 2009, 2008 and 2007, respectively.
Fiscal 2009 financing activities primarily reflect net payments
of long-term debt and capital lease obligations and payment of
dividends. Fiscal 2008 financing activities primarily reflect
net payments of long-term debt and capital lease obligations,
payment of dividends and purchases of treasury shares offset by
proceeds received from the sale of common stock under the
Company’s stock option plans. Fiscal 2007 financing
activities primarily reflect the debt incurred in connection
with the Acquisition and senior notes issued in October 2006,
partially offset by repayment of long-term debt of Albertsons
standalone drug business payables related to the sale of
Albertsons.
Management expects that the Company will continue to replenish
operating assets with internally generated funds. There can be
no assurance, however, that the Company’s business will
continue to generate cash flow at current levels. The Company
will continue to obtain short-term or long-term financing from
its credit facilities. Long-term financing will be maintained
through existing and new debt issuances. Maturities of debt
issued will depend on management’s views with respect to
the relative attractiveness of interest rates at the time of
issuance and other debt maturities. Although there can be no
assurances in these difficult economic times for financial
institutions, the Company believes that the lenders
participating in its credit facilities will be willing and able
to provide financing to the Company in accordance with their
legal obligations under the credit facilities. While the
Company’s short-term and long-term financing abilities are
believed to be adequate as a supplement to internally generated
cash flows to fund capital expenditures and acquisitions as
opportunities arise, the current decline in the global financial
markets may negatively impact the Company’s ability to
access the capital markets in a timely manner and on attractive
terms. While management believes that the Company’s cash
flows and revolving credit facility will be more than sufficient
to meet the Company’s financing needs through fiscal 2011,
the Company is also evaluating appropriate timing for accessing
the debt markets, which have shown recent improvement. In
addition, the Company expects to renew its accounts receivable
securitization program which expires in May 2009.
Certain of the Company’s credit facilities and long-term
debt agreements have restrictive covenants and cross-default
provisions which generally provide, subject to the
Company’s right to cure, for the acceleration of payments
due in the event of a breach of the covenant or a default in the
payment of a specified amount of indebtedness due under certain
other debt agreements. The Company was in compliance with all
such covenants and provisions for all periods presented.
The Company has senior secured credit facilities in the amount
of $4,000. These facilities were provided by a group of lenders
and consist of a $2,000 five-year revolving credit facility (the
“Revolving Credit Facility”), a $750 five-year term
loan (“Term Loan A”) and a $1,250 six-year term loan
(“Term Loan B”). The rates in effect on outstanding
borrowings under the facilities as of February 28, 2009,
based on the Company’s current credit ratings, were
0.20 percent for the facility fees, LIBOR plus
0.875 percent for Term Loan A, LIBOR plus 1.25 percent
for Term Loan B, LIBOR plus 1.00 percent for revolving
advances and Prime Rate plus 0.00 percent for base rate
advances.
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All obligations under the senior secured credit facilities are
guaranteed by each material subsidiary of the Company. The
obligations are also secured by a pledge of the equity interests
in those same material subsidiaries, limited as required by the
existing public indentures of the Company and subsidiaries such
that the respective debt issued need not be equally and ratably
secured.
The senior secured credit facilities also contain various
financial covenants, including a minimum interest expense
coverage ratio and a maximum debt leverage ratio. The interest
expense coverage ratio shall not be less than 2.25 to 1 for each
of the fiscal quarters ending up through December 30, 2009,
and moves progressively to a ratio of not less than 2.30 to 1
for the fiscal quarters ending after December 30, 2009. The
debt leverage ratio shall not exceed 4.00 to 1 for each of the
fiscal quarters ending up through December 30, 2009 and
moves progressively to a ratio not to exceed 3.75 to 1 for each
of the fiscal quarters ending after December 30, 2009. As
of February 28, 2009, the Company was in compliance with
the covenants of the senior secured credit facilities.
Borrowings under Term Loan A and Term Loan B may be repaid, in
full or in part, at any time without penalty. Term Loan A has
required repayments, payable quarterly, equal to
2.50 percent of the initial drawn balance for the first
four quarterly payments (year one) and 3.75 percent of the
initial drawn balance for each quarterly payment in years two
through five, with the entire remaining balance due at the five
year anniversary of the inception date. Term Loan B has required
repayments, payable quarterly, equal to 0.25 percent of the
initial drawn balance, with the entire remaining balance due at
the six year anniversary of the inception date. Prepayments
shall be applied pro rata to the remaining amortization payments.
As of February 28, 2009, there were $298 of outstanding
borrowings under the Revolving Credit Facility, Term Loan A had
a remaining principal balance of $506, of which $113 was
classified as current, and Term Loan B had a remaining principal
balance of $1,116, of which $11 was classified as current.
Letters of credit outstanding under the Revolving Credit
Facility were $345 and the unused available credit under the
Revolving Credit Facility was $1,357. The Company also had $2 of
outstanding letters of credit issued under separate agreements
with financial institutions. These letters of credit primarily
support workers’ compensation, merchandise import programs
and payment obligations. The Company pays fees, which vary by
instrument, of up to 1.40 percent on the outstanding
balance of the letters of credit.
In May 2008, the Company amended and extended its
364-day
accounts receivable securitization program. The Company can
continue to borrow up to $300 on a revolving basis, with
borrowings secured by eligible accounts receivable, which remain
under the Company’s control. Facility fees under this
program range from 0.225 percent to 2.00 percent,
based on the Company’s credit ratings. The facility fee in
effect on February 28, 2009, based on the Company’s
current credit ratings, is 0.25 percent. As of
February 28, 2009, there were $353 of accounts receivable
pledged as collateral, classified in Receivables in the
Consolidated Balance Sheet. Due to the Company’s intent to
renew the facility or refinance it with the Revolving Credit
Facility, the facility is classified in Long-term debt in the
Consolidated Balance Sheets.
As of February 28, 2009, the Company had $701 of debt, in
addition to the Accounts Receivable Securitization Facility,
with current maturities that are classified in Long-term debt in
the Consolidated Balance Sheets due to the Company’s intent
to refinance such obligations with the Revolving Credit Facility
or other long-term debt.
The Company has $191 of debentures that contain put options
exercisable in May 2009 classified as current that would require
the Company to repay borrowed amounts prior to the scheduled
maturity in May 2037.
The Company remains in compliance with all of its debt covenants.
Annual cash dividends declared for fiscal 2009, 2008 and 2007,
were $0.6875, $0.6750 and $0.6575 per share, respectively. The
Company’s dividend policy will continue to emphasize a high
level of earnings retention for growth.
Capital spending for fiscal 2009 was $1,212, including $26 of
capital leases. Capital spending primarily included store
remodeling activity, new retail stores and technology
expenditures. The Company’s capital spending for fiscal
2010 is projected to be approximately $750, including capital
leases.
Fiscal 2010 debt reduction is estimated to be approximately $700.
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The Company has guaranteed certain leases, fixture financing
loans and other debt obligations of various retailers as of
February 28, 2009. These guarantees were generally made to
support the business growth of independent retail customers. The
guarantees are generally for the entire terms of the leases or
other debt obligations with remaining terms that range from less
than one year to 21 years, with a weighted average
remaining term of approximately 10 years. For each
guarantee issued, if the independent retail customer defaults on
a payment, the Company would be required to make payments under
its guarantee. Generally, the guarantees are secured by
indemnification agreements or personal guarantees of the
independent retail customer. The Company reviews performance
risk related to its guarantees of independent retail customers
based on internal measures of credit performance. As of
February 28, 2009, the maximum amount of undiscounted
payments the Company would be required to make in the event of
default of all guarantees was approximately $168 and represented
approximately $110 on a discounted basis. Based on the
indemnification agreements, personal guarantees and results of
the reviews of performance risk, the Company believes the
likelihood that it will be required to assume a material amount
of these obligations is remote. Accordingly, no amount has been
recorded in the Consolidated Balance Sheets for these contingent
obligations under the Company’s guarantee arrangements.
The Company is contingently liable for leases that have been
assigned to various third parties in connection with facility
closings and dispositions. The Company could be required to
satisfy the obligations under the leases if any of the assignees
are unable to fulfill their lease obligations. Due to the wide
distribution of the Company’s assignments among third
parties, and various other remedies available, the Company
believes the likelihood that it will be required to assume a
material amount of these obligations is remote.
The Company is a party to a variety of contractual agreements
under which the Company may be obligated to indemnify the other
party for certain matters, which indemnities may be secured by
operation of law or otherwise, in the ordinary course of
business. These contracts primarily relate to the Company’s
commercial contracts, operating leases and other real estate
contracts, financial agreements, agreements to provide services
to the Company and agreements to indemnify officers, directors
and employees in the performance of their work. While the
Company’s aggregate indemnification obligation could result
in a material liability, the Company is aware of no current
matter that it expects to result in a material liability.
The Company is a party to various legal proceedings arising from
the normal course of business as described in Part I,
Item 3, under the caption “Legal Proceedings” and
in Note 14—Commitments, Contingencies and Off-Balance
Sheet Arrangements in the Notes to Consolidated Financial
Statements, none of which, in management’s opinion, is
expected to have a material adverse impact on the Company’s
financial condition, results of operations or cash flows.
The Company contributes to various multi-employer pension plans
under collective bargaining agreements, primarily defined
benefit pension plans. These plans generally provide retirement
benefits to participants based on their service to contributing
employers. Based on available information, the Company believes
that some of the multi-employer plans to which it contributes
are underfunded. Company contributions to these plans could
increase in the near term. However, the amount of any increase
or decrease in contributions will depend on a variety of
factors, including the results of the Company’s collective
bargaining efforts, investment returns on the assets held in the
plans, actions taken by the trustees who manage the plans and
requirements under the Pension Protection Act and
Section 412(e) of the Internal Revenue Code. Furthermore,
if the Company were to significantly reduce contributions, exit
certain markets or otherwise cease making contributions to these
plans, it could trigger a partial or complete withdrawal that
would require the Company to fund its proportionate share of a
plan’s unfunded vested benefits.
The Company also makes contributions to multi-employer health
and welfare plans in amounts set forth in the related collective
bargaining agreements. A small minority of collective bargaining
agreements contain reserve requirements that may trigger
unanticipated contributions resulting in increased healthcare
expenses. If these healthcare provisions cannot be renegotiated
in a manner that reduces the prospective healthcare cost as the
Company intends, the Company’s Selling and administrative
expenses could increase in the future.
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The following table represents the Company’s significant
contractual obligations as of February 28, 2009.
Unrecognized tax benefits as of February 28, 2009 of $114
are not included in the contractual obligations table presented
above because the timing of the settlement of unrecognized tax
benefits cannot be fully determined. However, the Company
expects to resolve $14, net, of unrecognized tax benefits within
the next 12 months.
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SUPERVALU’s common stock is listed on the New York Stock
Exchange under the symbol SVU. As of the end of fiscal 2009,
there were 20,990 stockholders of record compared with 28,890 as
of the end of fiscal 2008.
Dividend payment dates are on or about the 15th day of
March, June, September and December, subject to the Board of
Directors approval.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” SFAS No. 157
clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an
asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.
Under SFAS No. 157, fair value measurements are
separately disclosed by level within the fair value hierarchy.
In February 2008, the FASB approved FASB Staff Position
(“FSP”)
FAS 157-2,
“Effective Date of FASB Statement No. 157,” that
permits companies to partially defer the effective date of
SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
FSP
FAS 157-2
did not permit companies to defer recognition and disclosure
requirements for financial assets and financial liabilities or
for nonfinancial assets and nonfinancial liabilities that are
remeasured at least annually. SFAS No. 157 became
effective for the Company on February 24, 2008 for
financial assets and financial liabilities and for nonfinancial
assets and nonfinancial liabilities that are remeasured at least
annually and did not have a material effect on the
Company’s consolidated financial statements. The Company
will defer adoption of SFAS No. 157 for one year for
nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The Company is evaluating
the effect the implementation of FSP
FAS 157-2
will have on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS No. 141(R)”).
SFAS No. 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of
an acquisition, including the issuance of equity securities, to
be determined on the acquisition date. SFAS No. 141(R)
also requires that all assets, liabilities and any
non-controlling interest in an acquired business be recorded at
fair value at the acquisition date. In addition,
SFAS No. 141(R) requires that acquisition costs
generally be expensed as incurred, restructuring costs generally
be expensed in periods subsequent to the acquisition date and
changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the
measurement period impact income tax expense.
SFAS No. 141(R) is effective for the Company’s
fiscal year beginning March 1, 2009 on a prospective basis
for all business combinations for which the acquisition date is
on or after the effective date, with the exception of the
accounting for adjustments to income tax-related amounts, which
is applied to acquisitions that closed prior to the effective
date. The adoption of SFAS No. 141(R) to prior
acquisitions is not expected to have a material effect on the
Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements—an Amendment of ARB No. 51.”
SFAS No. 160 changes the accounting and reporting for
minority interests such that minority interests will be
recharacterized as noncontrolling interests and will be required
to be reported as a component of equity, and requires that
purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and,
upon a loss of control,
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requires the interest sold, as well as any interest retained, to
be recorded at fair value with any gain or loss recognized in
earnings. SFAS No. 160 is effective for the
Company’s fiscal year beginning March 1, 2009, with
early adoption prohibited. The adoption of
SFAS No. 160 is not expected to have a material effect
on the Company’s consolidated financial statements.
In April 2008, the FASB approved FSP
FAS 142-3,
“Determination of the Useful Life of Intangible
Assets.” FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142. FSP
FAS 142-3
is effective for the Company’s fiscal year beginning
March 1, 2009 on a prospective basis to intangible assets
acquired on or after the effective date, with early adoption
prohibited.
In May 2008, the FASB approved FSP APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP APB
14-1
clarifies that convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) are
not addressed by paragraph 12 of Accounting Principles
Board (“APB”) Opinion No. 14, “Accounting
for Convertible Debt and Debt issued with Stock Purchase
Warrants.” Additionally, FSP APB
14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entity’s nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is
effective for the Company’s fiscal year beginning
March 1, 2009. The adoption of FSP APB
14-1 is not
expected to have a material effect on the Company’s
consolidated financial statements.
In June 2008, the FASB issued FSP
EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” FSP
EITF 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, need to be included in computing earnings per share
under the two-class method described in SFAS No. 128,
“Earnings Per Share.” FSP
EITF 03-6-1
requires companies to treat unvested share-based payment awards
that have non-forfeitable rights to dividend or dividend
equivalents as a separate class of securities in calculating
earnings per share. FSP
EITF 03-6-1
will be effective for the Company’s fiscal year beginning
March 1, 2009, with early adoption prohibited. The adoption
of FSP
EITF 03-6-1
is not expected to have a material effect on the Company’s
consolidated financial statements.
In December 2008, the FASB issued FSP FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit
Plan Assets.” FSP FAS 132(R)-1 provides additional
guidance regarding disclosures about plan assets of defined
benefit pension or other postretirement plans. FSP
FAS 132(R)-1 will be effective for the Company’s
fiscal year beginning March 1, 2009. The adoption of FSP
FAS 132(R)-1 will result in enhanced disclosures, but will
not otherwise have an impact on the Company’s consolidated
financial statements.
The Company is exposed to market pricing risk consisting of
interest rate risk related to debt obligations outstanding, its
investment in notes receivable and, from time to time,
derivatives employed to hedge interest rate changes on variable
and fixed rate debt. The Company does not use financial
instruments or derivatives for any trading or other speculative
purposes.
The Company manages interest rate risk through the strategic use
of fixed and variable rate debt and, to a limited extent,
derivative financial instruments. Variable interest rate debt
(bank loans, industrial revenue bonds and other variable
interest rate debt) is utilized to help maintain liquidity and
finance business operations. Long-term debt with fixed interest
rates is used to assist in managing debt maturities and to
diversify sources of debt capital.
The Company makes long-term loans to certain Supply chain
customers and as such, holds notes receivable in the normal
course of business. The notes generally bear fixed interest
rates negotiated with each retail customer. The market value of
the fixed rate notes is subject to change due to fluctuations in
market interest rates.
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The table below provides information about the Company’s
financial instruments that are sensitive to changes in interest
rates, including notes receivable and debt obligations. For debt
obligations, the table presents principal payments and related
weighted average interest rates by maturity dates, excluding the
net discount on acquired debt and original issue discounts.
Fiscal 2010 includes $191 of fixed interest rate debentures that
contain put options exercisable in May 2009. For notes
receivable, the table presents the expected collection of
principal cash flows and weighted average interest rates by
expected maturity dates.
All other schedules are omitted because they are not applicable
or not required.
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The Board of Directors and Stockholders
SUPERVALU INC.:
We have audited the accompanying consolidated balance sheets of
SUPERVALU INC. and subsidiaries as of February 28, 2009 and
February 23, 2008, and the related consolidated statements
of earnings, stockholders’ equity, and cash flows for each
of the fiscal years in the three-year period ended
February 28, 2009. In connection with our audits of the
consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying
index. We also have audited SUPERVALU INC.’s internal
control over financial reporting as of February 28, 2009,
based on criteria established in Internal
Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
SUPERVALU INC.’s management is responsible for these
consolidated financial statements and financial statement
schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule, and an opinion on SUPERVALU INC.’s
internal control over financial reporting, based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
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In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of SUPERVALU INC. and subsidiaries as of
February 28, 2009 and February 23, 2008, and the
results of their operations and their cash flows for each of the
fiscal years in the three-year period ended February 28,
2009, in conformity with U.S. generally accepted accounting
principles. In our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. Also in
our opinion, SUPERVALU INC. maintained, in all material
respects, effective internal control over financial reporting as
of February 28, 2009, based on criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial
statements, SUPERVALU INC. and subsidiaries adopted the
measurement provisions of Statement of Financial Accounting
Standards No. 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans” as
of February 25, 2007.
/S/ KPMG LLP
Minneapolis, Minnesota
April 27, 2009
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SUPERVALU
INC. and Subsidiaries
CONSOLIDATED
SEGMENT FINANCIAL INFORMATION
(In
millions)
Refer to Note 16—Segment Information in the
accompanying Notes to Consolidated Financial Statements for
additional information concerning the Company’s reportable
segments.
See Notes to Consolidated Financial Statements.
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SUPERVALU
INC. and Subsidiaries
(In
millions, except per share data)
See Notes to Consolidated Financial Statements.
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SUPERVALU
INC. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
(In
millions, except per share data)
See Notes to Consolidated Financial Statements.
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SUPERVALU
INC. and Subsidiaries
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
millions, except per share data)
See Notes to Consolidated Financial Statements.
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SUPERVALU
INC. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
See Notes to Consolidated Financial Statements.
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SUPERVALU
INC. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data, unless otherwise noted)
SUPERVALU INC. (“SUPERVALU” or the
“Company”), a Delaware corporation, was organized in
1925 as the successor of two wholesale grocery firms established
in the 1870’s. SUPERVALU is one of the largest companies in
the United States grocery channel. SUPERVALU conducts its retail
operations throughout the United States under three retail food
store formats: combination stores (defined as food and
pharmacy), food stores and limited assortment food stores.
Additionally, the Company provides supply chain services,
primarily wholesale distribution, across the United States
retail grocery channel.
On June 2, 2006 (the “Acquisition Date”), the
Company acquired New Albertson’s, Inc. (“New
Albertsons”) consisting of the core supermarket businesses
(the “Acquired Operations”) formerly owned by
Albertson’s, Inc. (“Albertsons”).
The consolidated financial statements include the accounts of
the Company and all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
References to the Company refer to SUPERVALU INC. and
Subsidiaries.
Fiscal
Year
The Company’s fiscal year ends on the last Saturday in
February. The Company’s first quarter consists of
16 weeks while the second, third and fourth quarters each
consist of 12 weeks, except for the fourth quarter of
fiscal 2009 which included 13 weeks. Because of differences
in the accounting calendars of New Albertsons and the Company,
the February 28, 2009 and February 23, 2008
Consolidated Balance Sheets include the assets and liabilities
related to New Albertsons as of February 26, 2009 and
February 21, 2008, respectively. The accompanying
Consolidated Statements of Earnings and Cash Flows for fiscal
2007 include 38 weeks of operating results of the Acquired
Operations.
The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenues from product sales are recognized at the point of sale
for the Retail food segment and upon delivery for the Supply
chain services segment. Typically, invoicing, shipping, delivery
and customer receipt of Supply chain services product occur on
the same business day. Revenues from services rendered are
recognized immediately after such services have been provided.
Discounts and allowances provided to customers by the Company at
the time of sale, including those provided in connection with
loyalty cards, are recognized as a reduction in Net sales as the
products are sold to customers in accordance with Emerging
Issues Task Force (“EITF”) Issue
No. 01-9
“Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s
Products).” Sales tax is excluded from Net sales.
Revenues and costs from third-party logistic operations are
recorded in accordance with EITF Issue
No. 99-19,
“Reporting Revenue Gross as a Principal Versus Net as an
Agent.” Generally, when the Company is the primary obligor
in a transaction, is subject to inventory or credit risk, has
latitude in establishing price and selecting suppliers, or has
several, but not all of these indicators, revenue is recorded
gross. If the Company is not the primary obligor and amounts
earned have little or no credit risk, revenue is recorded net as
management fees earned.
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Cost of sales includes cost of inventory sold during the period,
including purchasing and distribution costs and shipping and
handling fees.
Retail food advertising expenses are a component of Cost of
sales in the Consolidated Statements of Earnings and are
expensed as incurred. Retail food advertising expenses, net of
cooperative advertising reimbursements, were $193, $162 and $157
for fiscal 2009, 2008 and 2007, respectively.
The Company recognizes vendor funds for merchandising and buying
activities as a reduction of Cost of sales when the related
products are sold in accordance with EITF Issue
No. 02-16,
“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor.” Vendor funds
that have been earned as a result of completing the required
performance under the terms of the underlying agreements but for
which the product has not yet been sold are recognized as
reductions of inventory. When payments or rebates can be
reasonably estimated and it is probable that the specified
target will be met, the payment or rebate is accrued. However,
when attaining the milestone is not probable, the payment or
rebate is recognized only when and if the milestone is achieved.
Any upfront payments received for multi-period contracts are
generally deferred and amortized on a straight-line basis over
the life of the contracts.
Selling and administrative expenses consist primarily of store
and corporate employee-related costs, such as salaries and
wages, health and welfare, worker’s compensation and
pension benefits, as well as rent, occupancy and operating
costs, depreciation and amortization and other administrative
costs.
The Company considers all highly liquid investments with a
maturity of three months or less at the time of purchase to be
cash equivalents. The Company’s banking arrangements allow
the Company to fund outstanding checks when presented to the
financial institution for payment, resulting in book overdrafts.
Book overdrafts are recorded in Accounts payable in the
Consolidated Balance Sheets and are reflected as an operating
activity in the Consolidated Statements of Cash Flows. As of
February 28, 2009 and February 23, 2008, the Company
had net book overdrafts of $389 and $371, respectively.
Management makes estimates of the uncollectibility of its
accounts and notes receivable portfolios. In determining the
adequacy of the allowances, management analyzes the value of the
collateral, customer financial statements, historical collection
experience, aging of receivables and other economic and industry
factors. The allowance for losses on current and long-term
receivables was $15 and $20 in fiscal 2009 and 2008,
respectively. Bad debt expense was $7, $10 and $2 in fiscal
2009, 2008 and 2007, respectively.
Inventories are valued at the lower of cost or market.
Substantially all of the Company’s inventory consists of
finished goods.
Approximately 81 percent and 82 percent of the
Company’s inventories were valued using the
last-in,
first-out (“LIFO”) method for fiscal 2009 and 2008,
respectively. The Company uses a combination of the retail
inventory method (“RIM”) and replacement cost method
to determine the current cost of its inventory before any LIFO
reserve is applied. Under RIM, the current cost of inventories
and the gross margins are calculated by applying a
cost-to-retail ratio to the current retail value of inventories.
Under the replacement cost method, the most current unit
purchase cost is used to calculate the current cost of
inventories. The
first-in,
first-out method (“FIFO”) is primarily used to
determine cost for some of the remaining highly perishable
inventories. If the FIFO method had been used to determine cost
of inventories for which the LIFO method is used, the
Company’s inventories would have been higher by
approximately $258 and $180 as of February 28, 2009 and
February 23, 2008, respectively. In addition, the LIFO
reserve was reduced by $28 as a result of the finalization of
the fair value of inventory for the Acquired Operations during
the first quarter of fiscal 2008.
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During fiscal 2009, 2008 and 2007, inventory quantities in
certain LIFO layers were reduced. These reductions resulted in a
liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the cost of fiscal
2009, 2008 and 2007 purchases. As a result, Cost of sales
decreased by $10, $5 and $6 in fiscal 2009, 2008 and 2007,
respectively.
The Company evaluates inventory shortages throughout each fiscal
year based on actual physical counts in its facilities.
Allowances for inventory shortages are recorded based on the
results of these counts to provide for estimated shortages as of
the end of each fiscal year.
The Company maintains reserves for costs associated with
closures of retail stores, distribution centers and other
properties that are no longer being utilized in current
operations in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities.” The
Company provides for closed property operating lease liabilities
using a discount rate to calculate the present value of the
remaining noncancellable lease payments after the closing date,
reduced by estimated subtenant rentals that could be reasonably
obtained for the property. The closed property lease liabilities
usually are paid over the remaining lease terms, which generally
range from one to 20 years. Adjustments to closed property
reserves primarily relate to changes in subtenant income or
actual exit costs differing from original estimates. Adjustments
are made for changes in estimates in the period in which the
changes become known.
Property, plant and equipment are carried at cost. Depreciation
is based on the estimated useful lives of the assets using the
straight-line method. Estimated useful lives generally are 10 to
40 years for buildings and major improvements, three to
10 years for equipment, and the shorter of the term of the
lease or expected life for leasehold improvements and assets
under capital leases. Interest on property under construction of
$14, $8 and $11 was capitalized in fiscal 2009, 2008 and 2007,
respectively.
The Company reviews goodwill for impairment during the fourth
quarter of each year, and also if an event occurs or
circumstances change that would more-likely-than-not reduce the
fair value of a reporting unit below its carrying amount. The
reviews consist of comparing estimated fair value to the
carrying value at the reporting unit level. The Company’s
reporting units are the operating segments of the business. Fair
values are determined primarily by discounting projected future
cash flows based on management’s expectations of the
current and future operating environment. The rates used to
discount projected future cash flows reflect a weighted average
cost of capital based on the Company’s industry, capital
structure and risk premiums including those reflected in the
current market capitalization. If management identifies the
potential for impairment of goodwill, the fair value of the
implied goodwill is calculated as the difference between the
fair value of the reporting unit and the fair value of the
underlying assets and liabilities, excluding goodwill. An
impairment charge is recorded for any excess of the carrying
value over the implied fair value. The Company also reviews
intangible assets with indefinite useful lives, which primarily
consist of trademarks and tradenames, for impairment during the
fourth quarter of each year, and also if events or changes in
circumstances indicate that the asset might be impaired. The
reviews consist of comparing estimated fair value to the
carrying value. Fair values of the Company’s trademarks and
tradenames are determined primarily by discounting an assumed
royalty value applied to projected future revenues associated
with the tradename based on management’s expectations of
the current and future operating environment. The royalty cash
flows are then discounted using rates based on the weighted
average cost of capital discussed above and the specific risk
profile of the tradenames relative to the Company’s other
assets. Intangible assets with estimable useful lives are
amortized on a straight-line basis with estimated useful lives
ranging from less than one to 35 years.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” the
Company monitors the recoverability of its long-lived assets
whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable, including current period
losses combined with a
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history of losses or a projection of continuing losses, a
significant decrease in the market value of an asset or the
Company’s plans for store closures. When such events or
changes in circumstances occur, a recoverability test is
performed by comparing projected undiscounted future cash flows
to the carrying value of the asset or group of assets as defined
in SFAS No. 144. If impairment is identified for
long-lived assets to be held and used, the discounted future
cash flows are compared to the asset’s current carrying
value and an impairment charge is recorded for the excess of the
carrying value over the discounted future cash flows. For
long-lived assets that are classified as assets held for sale,
the Company recognizes impairment charges for the excess of the
carrying value plus estimated costs of disposal over the
estimated fair value. The Company estimates fair value based on
the Company’s experience and knowledge of the market in
which the property is located and, when necessary, utilizes
local real estate brokers. Long-lived asset impairment charges
are a component of Selling and administrative expenses in the
Consolidated Statements of Earnings.
The Company recognizes rent holidays, including the time period
during which the Company has access to the property prior to the
opening of the site, as well as construction allowances and
escalating rent provisions, on a straight-line basis over the
term of the lease. The deferred rents are included in Other
current liabilities and Other long-term liabilities in the
Consolidated Balance Sheets.
The Company is primarily self-insured for workers’
compensation and general and automobile liability costs. It is
the Company’s policy to record its self-insurance
liabilities based on management’s estimate of the ultimate
cost of reported claims and claims incurred but not yet reported
and related expenses, discounted at a risk-free interest rate.
The present value of such claims was calculated using discount
rates ranging from 1.1 to 5.1 percent for fiscal 2009, 2.4
to 5.1 percent for fiscal 2008 and 4.7 to 5.0 percent
for fiscal 2007.
Changes in the Company’s self-insurance liabilities
consisted of the following:
The current portion of the reserves for self-insurance is
included in Other current liabilities and the long-term portion
is included in Other liabilities in the Consolidated Balance
Sheets. The self-insurance liabilities as of the end of the
fiscal year are net of discounts of $223, $226 and $148 for
fiscal 2009, 2008 and 2007, respectively.
Effective for fiscal 2007, the Company adopted
SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106 and
132(R),” except for the measurement date provision which
was adopted as of February 25, 2007. SFAS No. 158
requires recognition of the funded status of the Company’s
sponsored defined benefit plans in its Consolidated Balance
Sheets and gains or losses and prior service costs or credits as
a component of other comprehensive income, net of tax. The
Company sponsors pension and other postretirement plans in
various forms covering substantially all employees who meet
eligibility requirements. The determination of the
Company’s obligation and related expense for
Company-sponsored pension and other postretirement benefits is
dependent, in part, on management’s selection of certain
assumptions in calculating these amounts. These assumptions
include, among other things, the discount rate, the expected
long-term rate of return on plan assets and the rates of
increase in compensation and healthcare costs.
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The Company accounts for derivatives pursuant to
SFAS No. 133, “Accounting for Derivatives and
Hedging Activities,” and SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS No. 133.”
SFAS No. 133 and SFAS No. 138 require that
all derivative financial instruments are recorded on the
Consolidated Balance Sheet at their respective fair value.
The Company’s limited involvement with derivatives is
primarily to manage its exposure to changes in interest rates
and foreign exchange rates. The Company uses derivatives only to
manage well-defined risks. The Company does not use financial
instruments or derivatives for any trading or other speculative
purposes.
The Company accounts for stock-based compensation in accordance
with SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123(R)”). The
Company uses the straight-line method to recognize compensation
expense based on the fair value on the date of grant, net of the
estimated forfeiture rate, over the requisite service period
related to each award. The fair value is estimated using the
Black-Scholes option pricing model, which incorporates certain
assumptions, such as risk-free interest rate, expected
volatility, expected dividend yield and expected life of options.
The Company provides for deferred income taxes in accordance
with SFAS No. 109, “Accounting for Income
Taxes.” Deferred income taxes represent future net tax
effects resulting from temporary differences between the
financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to be settled or realized.
The Company accounts for unrecognized tax benefits in accordance
with Financial Accounting Standards Board (“FASB”)
Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB
Statement No. 109.” FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with
SFAS No. 109, and prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, FIN 48 provides
guidance on subsequent derecognition of tax positions, financial
statement reclassification, recognition of interest and
penalties, accounting in interim periods and disclosure
requirements. The Company recognizes interest related to
unrecognized tax benefits in Interest expense and penalties in
Selling and administrative expenses in the Consolidated
Statement of Earnings.
Net
Earnings (Loss) Per Share
Basic net earnings (loss) per share is calculated using net
earnings (loss) available to stockholders divided by the
weighted average number of shares outstanding during the period.
Diluted net earnings (loss) per share is similar to basic net
earnings (loss) per share except that the weighted average
number of shares outstanding is after giving effect to the
dilutive impacts of stock options, restricted stock awards and
outstanding convertible securities. In addition, for the
calculation of diluted net earnings (loss) per share, net
earnings (loss) is adjusted to eliminate the after-tax interest
expense recognized during the period related to contingently
convertible debentures.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” SFAS No. 157
clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an
asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.
Under SFAS No. 157, fair value measurements are
separately disclosed by level within the fair value hierarchy.
In February 2008, the FASB approved FASB Staff Position
(“FSP”)
FAS 157-2,
“Effective Date of FASB Statement No. 157,” that
permits companies to partially defer the effective date of
SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
FSP
FAS 157-2
did not permit companies to defer recognition and disclosure
requirements for financial assets and financial liabilities or
for nonfinancial assets and nonfinancial liabilities that are
remeasured at least annually. SFAS No. 157 became
effective for the Company on February 24, 2008 for
financial assets and financial liabilities and for nonfinancial
assets and nonfinancial
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liabilities that are remeasured at least annually and did not
have a material effect on the Company’s consolidated
financial statements. The Company will defer adoption of
SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
The Company is evaluating the effect the implementation of FSP
FAS 157-2
will have on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS No. 141(R)”).
SFAS No. 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of
an acquisition, including the issuance of equity securities, to
be determined on the acquisition date. SFAS No. 141(R)
also requires that all assets, liabilities and any
non-controlling interest in an acquired business be recorded at
fair value at the acquisition date. In addition,
SFAS No. 141(R) requires that acquisition costs
generally be expensed as incurred, restructuring costs generally
be expensed in periods subsequent to the acquisition date and
changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the
measurement period impact income tax expense.
SFAS No. 141(R) is effective for the Company’s
fiscal year beginning March 1, 2009 on a prospective basis
for all business combinations for which the acquisition date is
on or after the effective date, with the exception of the
accounting for adjustments to income tax-related amounts, which
is applied to acquisitions that closed prior to the effective
date. The adoption of SFAS No. 141(R) to prior
acquisitions is not expected to have a material effect on the
Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements—an Amendment of ARB No. 51.”
SFAS No. 160 changes the accounting and reporting for
minority interests such that minority interests will be
recharacterized as noncontrolling interests and will be required
to be reported as a component of equity, and requires that
purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and,
upon a loss of control, requires the interest sold, as well as
any interest retained, to be recorded at fair value with any
gain or loss recognized in earnings. SFAS No. 160 is
effective for the Company’s fiscal year beginning
March 1, 2009, with early adoption prohibited. The adoption
of SFAS No. 160 is not expected to have a material
effect on the Company’s consolidated financial statements.
In April 2008, the FASB approved FSP
FAS 142-3,
“Determination of the Useful Life of Intangible
Assets.” FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP
FAS 142-3
is effective for the Company’s fiscal year beginning
March 1, 2009 on a prospective basis to intangible assets
acquired on or after the effective date, with early adoption
prohibited.
In May 2008, the FASB approved FSP APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP APB
14-1
clarifies that convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) are
not addressed by paragraph 12 of Accounting Principles
Board (“APB”) Opinion No. 14, “Accounting
for Convertible Debt and Debt issued with Stock Purchase
Warrants.” Additionally, FSP APB
14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entity’s nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is
effective for the Company’s fiscal year beginning
March 1, 2009. The adoption of FSP APB
14-1 is not
expected to have a material effect on the Company’s
consolidated financial statements.
In June 2008, the FASB issued FSP
EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” FSP
EITF 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, need to be included in computing earnings per share
under the two-class method described in SFAS No. 128,
“Earnings Per Share.” FSP
EITF 03-6-1
requires companies to treat unvested share-based payment awards
that have non-forfeitable rights to dividend or dividend
equivalents as a separate class of securities in calculating
earnings per share. FSP
EITF 03-6-1
will be effective for the Company’s fiscal year beginning
March 1, 2009, with early adoption prohibited. The adoption
of FSP
EITF 03-6-1
is not expected to have a material effect on the Company’s
consolidated financial statements.
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In December 2008, the FASB issued FSP FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit
Plan Assets.” FSP FAS 132(R)-1 provides additional
guidance regarding disclosures about plan assets of defined
benefit pension or other postretirement plans. FSP
FAS 132(R)-1 will be effective for the Company’s
fiscal year beginning March 1, 2009. The adoption of FSP
FAS 132(R)-1 will result in enhanced disclosures, but will
not otherwise have an impact on the Company’s consolidated
financial statements.
Changes in the Company’s Goodwill and Intangible assets
consisted of the following:
In accordance with SFAS No. 142, the Company applies a
fair value-based impairment test to the net book value of
goodwill and indefinite-lived intangible assets on an annual
basis and on an interim basis if certain events or circumstances
indicate that an impairment loss may have occurred. For the
third quarter of fiscal 2009, the Company’s stock price had
a significant and sustained decline and book value per share
substantially exceeded the stock price. Consistent with
SFAS No. 142, the Company performed an interim
impairment test of goodwill and indefinite-lived intangible
assets at the end of the third quarter of fiscal 2009. Although
this analysis had not been completed due to its complexity, the
Company recorded a preliminary estimate of impairment charges in
the third quarter of $3,250, comprised of $3,000 to goodwill at
certain Retail food reporting units and $250 to indefinite-lived
trademarks and tradenames related to the Acquired Trademarks. In
the fourth quarter, the Company finalized the impairment
analysis and recorded additional impairment charges of $274,
comprised of $223 to goodwill for the same Retail food reporting
units and $51 to the same indefinite-lived trademarks and
tradenames and other intangible assets. The impairment of
goodwill and indefinite-lived intangible assets reflects the
significant decline in the market price of the Company’s
common stock as of the end of the third quarter of fiscal 2009
as well as the impact of the unprecedented decline in the
economy on the Company’s plan. The Company did not record
any impairment losses related to goodwill or intangible assets
during fiscal 2008.
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The increase in Goodwill from $5,921 as of February 24,
2007 to $6,957 as of February 23, 2008 resulted primarily
from final purchase accounting adjustments for the Acquired
Operations of $958 in the first quarter of fiscal 2008 and other
purchase accounting adjustments during fiscal 2008 for income
tax-related amounts. Goodwill also increased $57 related to
other store acquisitions.
Amortization expense of intangible assets with a definite life
of $65, $55 and $48 was recorded in fiscal 2009, 2008 and 2007,
respectively. Future amortization expense will be approximately
$53 per year for each of the next five years.
Changes in the Company’s reserves for closed properties
consisted of the following:
During the fourth quarter of fiscal 2009, the Company recorded
$70 of additional reserves related to closing certain
non-strategic stores and $22 of adjustments primarily related to
changes in subtenant income.
Fiscal 2007 additions included approximately $19 of reserves for
closed properties from the Acquired Operations, which were
recorded in purchase accounting. Fiscal 2007 adjustments related
to the fair value of liabilities recognized in purchase
accounting as of the Acquisition Date for acquired closed
property lease liabilities.
During fiscal 2009, the Company recorded $75 of property, plant
and equipment-related impairment charges related to the closing
of certain non-strategic stores, of which $69 was recorded in
the fourth quarter.
During fiscal 2008, the Company recorded $14 of property, plant
and equipment-related impairments and other charges.
During fiscal 2007, the Company recorded a charge of $26 related
to the disposal of 18 Scott’s retail stores which included
property, plant and equipment-related impairment charges of $6,
goodwill impairment charges of $19 and other charges of $1.
Additions and adjustments to the reserves for closed properties
and asset impairment charges for fiscal 2009, 2008 and 2007 were
all related to the Retail food segment, and were recorded as a
component of Selling and administrative expenses in the
Consolidated Statements of Earnings, except for amounts related
to the Acquired Operations as noted above.
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Property, plant and equipment, net, consisted of the following:
Depreciation expense was $945, $911 and $793 for fiscal 2009,
2008 and 2007, respectively. Amortization expense related to
capital leased assets was $67, $64 and $54 for fiscal 2009, 2008
and 2007, respectively.
For certain of the Company’s financial instruments,
including cash and cash equivalents, receivables and accounts
payable, the fair values approximate book values due to their
short maturities.
The estimated fair value of notes receivable was less than the
book value by approximately $8 as of February 28, 2009. The
estimated fair value of notes receivable approximated the book
value as of February 23, 2008. Notes receivable are valued
based on a discounted cash flow approach applying a rate that is
comparable to publicly traded instruments of similar credit
quality.
The estimated fair value of the Company’s long-term debt
(including current maturities) was less than the book value by
approximately $452 and $42 as of February 28, 2009 and
February 23, 2008, respectively. The estimated fair value
was based on market quotes, where available, or market values
for similar instruments.
The Company’s long-term debt and capital lease obligations
consisted of the following:
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Future maturities of long-term debt other than capital lease
obligations as of February 28, 2009 consist of the
following:
In the table above, future maturities of long-term debt exclude
the net discount on acquired debt and original issue discounts.
Fiscal 2010 includes $191 of debentures that contain put options
exercisable in May 2009.
Certain of the Company’s credit facilities and long-term
debt agreements have restrictive covenants and cross-default
provisions which generally provide, subject to the
Company’s right to cure, for the acceleration of payments
due in the event of a breach of the covenant or a default in the
payment of a specified amount of indebtedness due under certain
other debt agreements. The Company was in compliance with all
such covenants and provisions for all periods presented.
The Company has senior secured credit facilities in the amount
of $4,000. These facilities were provided by a group of lenders
and consist of a $2,000 five-year revolving credit facility (the
“Revolving Credit Facility”), a $750 five-year term
loan (“Term Loan A”) and a $1,250 six-year term loan
(“Term Loan B”). The rates in effect on outstanding
borrowings under the facilities as of February 28, 2009,
based on the Company’s current
56
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credit ratings, were 0.20 percent for the facility fees,
LIBOR plus 0.875 percent for Term Loan A, LIBOR plus
1.25 percent for Term Loan B, LIBOR plus 1.00 percent
for revolving advances and Prime Rate plus 0.00 percent for
base rate advances.
All obligations under the senior secured credit facilities are
guaranteed by each material subsidiary of the Company. The
obligations are also secured by a pledge of the equity interests
in those same material subsidiaries, limited as required by the
existing public indentures of the Company and subsidiaries such
that the respective debt issued need not be equally and ratably
secured.
The senior secured credit facilities also contain various
financial covenants, including a minimum interest expense
coverage ratio and a maximum debt leverage ratio. The interest
expense coverage ratio shall not be less than 2.25 to 1 for each
of the fiscal quarters ending up through December 30, 2009,
and moves progressively to a ratio of not less than 2.30 to 1
for the fiscal quarters ending after December 30, 2009. The
debt leverage ratio shall not exceed 4.00 to 1 for each of the
fiscal quarters ending up through December 30, 2009 and
moves progressively to a ratio not to exceed 3.75 to 1 for each
of the fiscal quarters ending after December 30, 2009. As
of February 28, 2009, the Company was in compliance with
the covenants of the senior secured credit facilities.
Borrowings under Term Loan A and Term Loan B may be repaid, in
full or in part, at any time without penalty. Term Loan A has
required repayments, payable quarterly, equal to
2.50 percent of the initial drawn balance for the first
four quarterly payments (year one) and 3.75 percent of the
initial drawn balance for each quarterly payment in years two
through five, with the entire remaining balance due at the five
year anniversary of the inception date. Term Loan B has required
repayments, payable quarterly, equal to 0.25 percent of the
initial drawn balance, with the entire remaining balance due at
the six year anniversary of the inception date. Prepayments
shall be applied pro rata to the remaining amortization payments.
As of February 28, 2009, there were $298 of outstanding
borrowings under the Revolving Credit Facility, Term Loan A had
a remaining principal balance of $506, of which $113 was
classified as current, and Term Loan B had a remaining principal
balance of $1,116, of which $11 was classified as current.
Letters of credit outstanding under the Revolving Credit
Facility were $345 and the unused available credit under the
Revolving Credit Facility was $1,357. The Company also had $2 of
outstanding letters of credit issued under separate agreements
with financial institutions. These letters of credit primarily
support workers’ compensation, merchandise import programs
and payment obligations. The Company pays fees, which vary by
instrument, of up to 1.40 percent on the outstanding
balance of the letters of credit.
In May 2008, the Company amended and extended its
364-day
accounts receivable securitization program. The Company can
continue to borrow up to $300 on a revolving basis, with
borrowings secured by eligible accounts receivable, which remain
under the Company’s control. Facility fees under this
program range from 0.225 percent to 2.00 percent,
based on the Company’s credit ratings. The facility fee in
effect on February 28, 2009, based on the Company’s
current credit ratings, is 0.25 percent. As of
February 28, 2009, there were $353 of accounts receivable
pledged as collateral, classified in Receivables in the
Consolidated Balance Sheet. Due to the Company’s intent to
renew the facility or refinance it with the Revolving Credit
Facility, the facility is classified in Long-term debt in the
Consolidated Balance Sheets.
As of February 28, 2009, the Company had $701 of debt, in
addition to the Accounts Receivable Securitization Facility,
with current maturities that are classified in Long-term debt in
the Consolidated Balance Sheets due to the Company’s intent
to refinance such obligations with the Revolving Credit Facility
or other long-term debt.
The Company remains in compliance with all of its debt covenants.
The Company leases certain retail stores, distribution centers,
office facilities and equipment from third parties. Many of
these leases include renewal options and, to a limited extent,
include options to purchase. Future
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minimum lease payments to be made by the Company for
noncancellable operating leases and capital leases as of
February 28, 2009 consist of the following:
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