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SuperValu 10-K 2010 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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) 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 11, 2009 was approximately $3,390,462,161 (based
upon the closing price of registrant’s Common Stock on the
New York Stock Exchange).
As of April 16, 2010, there were 212,225,397 shares of the
registrant’s common stock outstanding.
Portions of registrant’s definitive Proxy Statement filed
for the registrant’s 2010 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
Table of Contents
Any statements contained in this Annual Report on
Form 10-K
regarding the outlook for the Company’s businesses and
their respective markets, such as projections of future
performance, guidance, statements of the Company’s plans
and objectives, forecasts of market trends and other matters,
are forward-looking statements based on the Company’s
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 the Company’s 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.
Economic
Conditions
Execution
of Initiatives
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PART I
General
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.
SUPERVALU is one of the largest companies in the United States
grocery channel. SUPERVALU conducts its retail operations under
the Acme, Albertsons, Bristol Farms, Cub Foods, Farm Fresh,
Hornbacher’s, Jewel-Osco, Lucky,
Save-A-Lot,
Shaw’s, Shop ’n Save, Shoppers Food &
Pharmacy and Star Market banners as well as in-store pharmacies
under the Osco and Sav-on banners. Additionally, the Company
provides supply chain services, primarily wholesale
distribution, across the United States retail grocery channel.
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, Albertsons, Bristol Farms,
Jewel-Osco, Shaw’s, Star Market, 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 Acme, Albertsons, Bristol Farms, Jewel,
Osco, Sav-on and Shaw’s trademarks and tradenames (the
“Acquired Trademarks”). The Acquisition greatly
increased the size of the Company.
SUPERVALU is focused on long-term retail growth through targeted
new store development and remodel activities. During fiscal
2010, the Company added 40 new stores through new store
development and closed or sold 112 stores, including planned
disposals. 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.
All dollar and share amounts in this Annual Report on
Form 10-K
are in millions, except per share data and where otherwise noted.
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 organized based on format
(traditional retail food stores and
hard-discount
food stores). 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
Consolidated Segment Financial Information set forth in
Part II, Item 8
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of this Annual Report on
Form 10-K
for financial information concerning the Company’s
operations by reportable segment.
The Company conducts its Retail food operations through a total
of 2,349 traditional and hard-discount retail food stores,
including 855 licensed
Save-A-Lot
stores, located throughout the United States. 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.
The Company operates 1,161 traditional retail food stores under
the Acme, Albertsons, Bristol Farms, Cub Foods, Farm Fresh,
Hornbacher’s, Jewel-Osco, Lucky, Shaw’s, Shop ’n
Save, Shoppers Food & Pharmacy and Star Market banners
ranging in size from approximately 40,000 to 60,000 square
feet. The Company’s traditional retail food stores provide
an extensive grocery offering and, depending on size, a variety
of additional products including, general merchandise, health
and beauty care, pharmacy and fuel.
The Company owns 333 hard-discount food stores operating under
the
Save-A-Lot
banner and licenses an additional 855
Save-A-Lot
stores to independent operators.
Save-A-Lot
holds the number one market position, based on revenues, in the
hard-discount grocery-retailing sector.
Save-A-Lot
food stores typically are approximately 15,000 square feet
in size, and stock 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. The Company’s Supply chain services network
spans 49 states and serves as primary grocery supplier to
approximately 1,940 stores of independent retail customers, in
addition to the Company’s own stores, as well as serving as
secondary grocery supplier to approximately 550 stores of
independent retail customers. The Company’s wholesale
distribution customers 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 21
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.
The Company offers a wide variety of nationally advertised brand
name and private-label 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
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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:
Private-Label
Products
The Company’s private-label products are produced to the
Company’s specification by many suppliers and compete in
many areas of the Company’s stores. Private-label products
include: the premium 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 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.
Normal operating fluctuations in working capital 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 and stores
licensed by the Company, as well as the stores of independent
retail customers it supplies, to compete successfully with other
retail food stores. Principal competition comes from traditional
grocery retailers, including regional and national chains and
independent food store operators, and non-traditional retailers,
such as supercenters, membership warehouse clubs, specialty
supermarkets, drug stores, discount stores, dollar stores,
convenience stores and restaurants. The Company believes that
the principal competitive factors faced by its own stores and
stores licensed by the Company, as well as the stores of
independent retail customers it supplies, include price,
quality, assortment, brand recognition, store location, in-store
marketing and merchandising, promotional strategies and other
competitive activities.
The traditional wholesale distribution component of the
Company’s Supply chain services business competes directly
with a number of traditional grocery wholesalers. The Company
believes it competes in this business on the basis of price,
quality, assortment, schedule and reliability of deliveries,
service fees and distribution facility locations.
As of February 27, 2010, the Company had approximately
160,000 employees. Approximately 106,000 employees are
covered by collective bargaining agreements. During fiscal 2010,
46 collective bargaining agreements covering approximately
16,000 employees were renegotiated and 33 collective
bargaining agreements covering approximately
29,000 employees expired without their terms being
renegotiated. Negotiations are expected to continue with the
bargaining units representing the employees subject to those
expired agreements. During fiscal 2011, 71 collective bargaining
agreements covering approximately 12,000 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 23, 2010.
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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.
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 Craig C. Herkert, Julie Dexter
Berg, Steven J. Jungmann, Peter J. Van Helden and Daniel J.
Zvonek.
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.
Current
economic conditions
Weakness in the economy and reduced consumer confidence
contributed to the decline in consumer spending and to consumers
trading down to a less expensive mix of products or to consumers
trading down to discounters for grocery items. In addition, in
fiscal 2010, the Company experienced low levels of inflation. In
this uncertain economy, it is difficult to forecast whether
fiscal 2011 will be a period of inflation or deflation. Food
deflation could reduce sales growth and earnings, while food
inflation, combined with reduced consumer spending, could reduce
gross profit margins. If these consumer spending patterns
continue or worsen, along with an ongoing soft economy, the
Company’s financial condition and results of operations may
be adversely affected.
Execution
of initiatives
The Company is positioned in the retail food industry as the
only traditional food retailer with multiple formats and
ownership models that can be used to address differing customer
needs across the United States. Management believes that this
diversity of
go-to-market
options differentiates the Company and is part of its vision of
becoming “America’s Neighborhood Grocer.” The
Company has launched certain initiatives to achieve this vision
and enhance performance through a greater focus on the customer
and simplification of the in-store shopping experience combined
with reducing its overall cost structure and further leveraging
its size. The Company plans to significantly increase the number
of hard-discount stores and to reinvest in its existing store
base through remodels and merchandising initiatives tailored to
the unique needs of each particular store’s neighborhood.
If the Company is unable to execute on these initiatives, the
Company’s financial condition and results of operations may
be adversely affected.
High
level of competition in the Retail food and Supply chain
services businesses
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, 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
price, quality, assortment, brand recognition, store location,
in-store marketing and merchandising, 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
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with traditional grocery wholesalers on the basis of price,
quality, assortment, schedule and reliability of deliveries,
service fees and distribution facility locations.
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.
Food and
drug safety concerns and related unfavorable publicity
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
adversely affect the Company’s financial condition and
results of operations.
Substantial
indebtedness
The Company has, and expects to continue to have, a substantial
amount of debt. The Company’s substantial indebtedness may
increase the Company’s borrowing costs and decrease the
Company’s business flexibility, making it more vulnerable
to adverse economic conditions. For example, high levels of debt
could:
Any of these outcomes may adversely affect the Company’s
financial condition and results of operations.
Labor
unions
As of February 27, 2010, the Company is a party to 235
collective bargaining agreements covering approximately 106,000
of its employees, of which 71 covering approximately
12,000 employees are scheduled to expire in fiscal 2011.
These expiring agreements cover approximately 12 percent of
the Company’s union-affiliated employees. In addition,
during fiscal 2010, 33 collective bargaining agreements covering
approximately 29,000 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 disrupt the Company’s
businesses and adversely affect the Company’s financial
condition and results of operations.
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Costs of
employee benefits
The Company provides health benefits 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 and recent legislative and private
sector initiatives regarding healthcare reform could result in
significant changes to the U.S. healthcare system. The
Company is not able at this time to determine the impact that
healthcare reform could have on the Company-sponsored medical
plans. In addition, the Company participates in various
multi-employer health and pension plans for a majority of its
union-affiliated 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. 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 in the
plan. If the Company is unable to control healthcare and pension
costs, the Company may experience increased operating costs,
which may adversely affect the Company’s financial
condition and results of operations.
Governmental
regulations
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 adversely impact
the Company’s business operations and prospects for future
growth and our ability to participate in federal and state
healthcare programs. 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 adversely affect the Company’s financial
condition and results of operations.
Insurance
claims
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
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
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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.
Litigation
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
financial condition and results of operations.
Information
technology systems
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.
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.
Weather
and natural disasters
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 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
Accounting principles generally accepted in the Unites States of
America (“accounting standards”) and interpretations
by various governing bodies, including the SEC, 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
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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.
Impairment
charges for goodwill or other intangible assets
The Company is required to annually test goodwill and intangible
assets with indefinite useful 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 potential changes in economic, industry or
market conditions, changes in business operations, changes in
competition or changes in the Company’s stock price and
market capitalization. Changes in these factors, or changes in
actual performance compared with estimates of the Company’s
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, the Company’s
financial condition and results of operations may be adversely
affected.
None.
Total retail square footage as of February 27, 2010 was
65 million, of which approximately 62 percent was
leased. Additional information on the Company’s properties
can be found in Part I, Item 1 of this Annual Report
on
Form 10-K.
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 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.
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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
assets of the Company to C&S which were located in New
England. Since December 2008, three other retailers have filed
similar complaints in other jurisdictions. The cases have been
consolidated and are proceeding in the United States District
Court for the District of Minnesota. The complaints allege 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 these lawsuits. On September 14,
2009, the United States Federal Trade Commission
(“FTC”) issued a subpoena to the Company requesting
documents related to the C&S transaction as part of the
FTC’s investigation into whether the Company and C&S
engaged in unfair methods of competition. The Company is
cooperating with the FTC. Although this matter 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 or the
FTC investigation will have a material adverse effect on the
Company’s financial condition, results of operations or
cash flows.
In July 2009, a putative class action complaint was filed in the
United States District Court for the Southern District of New
York against the Company, an officer and the Executive Chairman
of the Board alleging fraud under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) and
Rule 10b-5
under the Exchange Act. In October 2009, the lawsuit was
transferred to the United States District Court for the District
of Minnesota. The complaint alleged that the Company withheld
negative information from the market by inflating its fiscal
2010 guidance in order to complete the Company’s note
offering which closed on May 7, 2009. On January 13,
2010, the plaintiff voluntarily dismissed the lawsuit without
prejudice and to date has not re-filed the action.
On January 7, 2010, the Company received a subpoena from
the Office of Inspector General for the Department of Health and
Human Services’ Milwaukee Field Office in connection with
an investigation of possible false or otherwise improper claims
for payment under the Medicaid program. The subpoena requests
retail pharmacy claims data for “dual eligible”
customers (i.e., customers with both Medicaid and private
insurance coverage), information concerning the Company’s
retail pharmacy claims processing systems, copies of pharmacy
payor contracts and other documents and records. The Company is
cooperating with the Office of Inspector General. Management
cannot predict with certainty the timing or outcome of any
review by the government of such information.
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 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.
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The Company’s common stock is listed on the New York Stock
Exchange under the symbol SVU. As of April 16, 2010, there
were 26,934 stockholders of record.
Common Stock Price
Dividend payment dates are on or about the 15th day of
March, June, September and December, subject to the Board of
Directors approval.
Company
Purchases of Equity Securities
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 2005 to the end of fiscal
2010 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 CUMULATIVE TOTAL SHAREHOLDER RETURN AMONG
SUPERVALU, S&P 500 AND PEER GROUP(1)
February 25,
2005 through February 26,
2010(2)
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.
Weakness in the economy continued to negatively impact consumer
confidence throughout fiscal 2010. As a result, consumers are
spending less and trading down to a less expensive mix of
products, both of which impacted the Company’s sales. In
addition, low levels of inflation and heightened competitive
activity in fiscal 2010 pressured sales growth. If these
consumer spending, inflationary and competitive trends continue,
they could further impact the Company’s sales and financial
results in fiscal 2011.
The Company has launched certain initiatives to enhance
performance through a greater focus on the customer and
simplification of the in-store shopping experience combined with
reducing its overall cost structure and further leveraging its
size. In addition, the Company will continue to provide capital
spending to fund retail store remodeling activity and new retail
stores.
Highlights of results of operations as reported and as a percent
of Net sales are as follows:
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Comparison
of fifty-two weeks ended February 27, 2010 (fiscal
2010) with fifty-three weeks ended February 28, 2009
(fiscal 2009):
For fiscal 2010, Net sales were $40,597, compared with $44,564
last year. Net earnings for fiscal 2010 were $393 and diluted
net earnings per share were $1.85, compared with net loss of
$2,855 and diluted net loss per share of $13.51 last year.
Results for fiscal 2010 include net charges of $62 before tax
($39 after tax, or $0.18 per diluted share) related to the
planned retail market exits, closure of non-strategic stores
announced in fiscal 2009 and fees received from the early
termination of a supply agreement. 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 announced in fiscal 2009 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).
Net sales for fiscal 2010 were $40,597, compared with $44,564
last year. Retail food sales were 77.9 percent of Net sales
and Supply chain services sales were 22.1 percent of Net
sales for fiscal 2010, compared with 77.8 percent and
22.2 percent, respectively, last year.
Retail food sales for fiscal 2010 were $31,637, compared with
$34,664 last year. Approximately $578 of fiscal 2009 Retail food
sales is attributable to the extra week. The remaining decrease
primarily reflects negative identical store retail sales growth
(defined as stores operating for four full quarters, including
store expansions and excluding fuel and planned store
dispositions) and the impact of store dispositions. For fiscal
2010, as compared to fiscal 2009, identical store retail sales
growth was negative 5.1 percent based on the same 52-week
period for both years. Identical store retail sales performance
was primarily the result of a challenging economic environment,
heightened competitive activity and investments in price and
promotions.
During fiscal 2010, the Company added 40 new stores through new
store development and sold or closed 112 stores, including
planned dispositions.
Total retail square footage as of the end of fiscal 2010 was
approximately 65 million, a decrease of 6.2 percent
from the end of fiscal 2009. Total retail square footage,
excluding actual and planned store dispositions, increased
0.8 percent from the end of fiscal 2009.
Supply chain services sales for fiscal 2010 were $8,960,
compared with $9,900 last year. Approximately $165 of fiscal
2009 Supply chain services sales is attributable to the extra
week. The remaining decrease primarily reflects the completion
of a national retail customer’s previously announced plans
to transition certain volume to self-distribution.
Gross profit, as a percent of Net sales, was 22.5 percent
for fiscal 2010 compared with 22.7 percent last year,
primarily reflecting a higher promotional sales mix and
increased investments in price, partially offset by a lower LIFO
charge.
Selling and administrative expenses, as a percent of Net sales,
were 19.6 percent for fiscal 2010, compared with
19.6 percent last year. Savings from ongoing cost-reduction
initiatives and lower store disposition-related costs compared
to last year were offset by reduced sales leverage.
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No goodwill impairment charges were recorded in fiscal 2010.
During fiscal 2009 the Company recorded impairment charges of
$3,524 due to 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 earnings for fiscal 2010 were $1,201 compared with an
operating loss of $2,157 last year. Retail food operating
earnings for fiscal 2010 were $989, or 3.1 percent of
Retail food net sales, reflecting $55, or 0.2 percent of
Retail food net sales, of charges related to planned retail
market exits. Retail food operating loss for fiscal 2009 was
$2,315, or negative 6.7 percent of Retail food net sales
last year, reflecting $3,524, or 10.2 percent of Retail
food sales, of goodwill and intangible asset impairment charges
and $162, or 0.5 percent of Retail food sales, of charges
primarily related to the closure of non-strategic stores. The
remaining decrease of $327, or 70 basis points, primarily
reflects the impact of a challenging economic environment,
heightened competitive activity, a higher promotional sales mix,
increased investments in price and reduced sales leverage,
partially offset by a lower LIFO charge. Supply chain services
operating earnings for fiscal 2010 were $299, or
3.3 percent of Supply chain services net sales, compared
with $307, or 3.1 percent of Supply chain services net
sales, last year. The 20 basis point increase in Supply
chain services operating earnings as a percent of Supply chain
services net sales primarily reflects a lower LIFO charge and
fees received from the early termination of a supply agreement
in fiscal 2010.
Net interest expense was $569 in fiscal 2010, compared with $622
last year, primarily reflecting lower interest rates and debt
levels as well as one less week in fiscal 2010.
Income tax expense was $239, or 37.8 percent of earnings
before income taxes, for fiscal 2010 compared with $76, or
2.7 percent of loss 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 earnings were $393, or $1.86 per basic share and $1.85 per
diluted share, for fiscal 2010 compared with net loss of $2,855,
or $13.51 per basic and diluted share last year. Net earnings
for fiscal 2010 include net charges of $39 after tax, or $0.18
per diluted share, related to the planned retail market exits,
closure of non-strategic stores announced in fiscal 2009 and
fees received from the early termination of a supply agreement.
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 announced in fiscal 2009,
settlement costs for a pre-Acquisition Albertsons litigation
matter and other Acquisition-related costs.
Comparison of fifty-three weeks ended February 28, 2009
(fiscal 2009) with fifty-two weeks ended February 23,
2008 (fiscal 2008):
In fiscal 2009, the Company achieved Net sales of $44,564,
compared with $44,048 in fiscal 2008. 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 for fiscal 2008. 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
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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
for fiscal 2008. 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, for fiscal 2008.
Retail food sales for fiscal 2009 were $34,664, compared with
$34,341 for fiscal 2008, primarily reflecting the extra week of
sales of approximately $578 in fiscal 2009, partially offset by
the impact of store dispositions and negative identical store
retail sales growth (defined as stores operating for four full
quarters, including store expansions and excluding fuel and
planned store dispositions). 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, including planned
dispositions.
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 dispositions, increased 1.4 percent from
the end of fiscal 2008.
Supply chain services sales for fiscal 2009 were $9,900,
compared with $9,707 for fiscal 2008, 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 for fiscal 2008.
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 for fiscal 2008. 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 accounting standards, the Company applies a
fair value-based impairment test to the net book value of
goodwill and intangible assets with indefinite useful lives 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. The Company recorded impairment charges of $3,524,
comprised of $3,223 to goodwill at certain Retail food reporting
units and $301 to trademarks and tradenames related to the
Acquired Trademarks and other intangible assets. The impairment
of goodwill and intangible assets with indefinite useful lives
reflects the significant decline in the market price of the
Company’s common
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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 for fiscal 2008. Retail food
operating loss for fiscal 2009 was $2,315, compared with
operating earnings of $1,550 for fiscal 2008, 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 for fiscal 2008, primarily reflecting
improved sales leverage and cost reduction initiatives.
Net interest expense was $622 in fiscal 2009, compared with $707
for fiscal 2008, primarily reflecting lower debt levels and the
benefit of lower borrowing rates on floating rate debt in fiscal
2009.
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, for fiscal
2008. 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 for fiscal 2008. 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.
The preparation of consolidated financial statements in
conformity with accounting standards 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 included in Part II, Item 8 of this Annual
Report on
Form 10-K.
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.
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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.
The Company recognizes vendor funds for merchandising activities
as a reduction of Cost of sales when the related products are
sold. 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 2010, a 1 percent 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 less than 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 79 percent and
81 percent of the Company’s inventories were valued
using the
last-in,
first-out (“LIFO”) method for fiscal 2010 and 2009,
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 $264 and $258 as of
February 27, 2010 and February 28, 2009, respectively.
During fiscal 2010, 2009 and 2008, 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
2010, 2009 and 2008 purchases. As a result, Cost of sales
decreased by $22, $10 and $5 in fiscal 2010, 2009 and 2008,
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
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historical information available to record reasonable estimates
for inventory shortages, it is possible that actual results
could differ. As of February 27, 2010, each 25 basis
point change in the estimated inventory shortages would impact
the allowances for inventory shortages by approximately $12.
Reserves
for Closed Properties and Property, Plant and Equipment-Related
Impairment Charges
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. 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. 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. 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 $128, net
of estimated sublease recoveries of $55, as of February 27,
2010 and $167, net of estimated sublease recoveries of $77, as
of February 28, 2009. The Company recognized asset
impairment charges of $52, $75 and $12 in fiscal 2010, 2009 and
2008, 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 by using both the market approach,
applying a multiple of earnings based on guideline for publicly
traded companies, and the income approach, 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
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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.
For the fourth quarter ended February 27, 2010, the review
of goodwill for impairment indicated that the fair value for one
reporting unit with $2,754 of goodwill exceeded the carrying
value by less than 5 percent and the fair value for another
reporting unit with $807 of goodwill exceeded the carrying value
by greater than 10 percent. The remaining $136 of goodwill
is at a reporting unit with fair value that substantially
exceeds the carrying value. If the Company’s stock price
experiences a significant and sustained decline, the Company
would reassess the fair value of the implied goodwill compared
to the carrying 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. These
estimates are impacted by variable factors including inflation,
the general health of the economy and market competition. During
fiscal 2010, the Company recorded impairment charges of $20 to
its Acquired Trademarks as a result of certain market exits.
During fiscal 2009, the Company recorded impairment charges of
$301 to its Acquired Trademarks as a result of its review for
impairment.
For the fourth quarter ended February 27, 2010, the review
of intangible assets with indefinite useful lives for impairment
indicated that the fair value for certain Acquired Trademarks
approximated the carrying value of $970 due to the impairment
charges recorded in fiscal 2010 and 2009. The fair value for the
remaining $79 of intangible assets with indefinite useful lives
substantially exceeds the carrying value. If the variable
factors discussed above change significantly, the Company would
reassess the fair value of the intangible assets with indefinite
useful lives compared to the carrying value.
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
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approximately $1,101, net of the discount of $191, and $1,142,
net of the discount of $223, as of February 27, 2010 and
February 28, 2009, respectively. As of February 27,
2010, each 25 basis point change in the discount rate would
impact the self-insurance liabilities by approximately $1.
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 27, 2010 and February 28, 2009,
the average rate of return on plan assets was approximately
4 percent and 2 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 of 8 percent. In accordance with accounting
standards, actual results that differ from the Company’s
assumptions are accumulated and amortized over future periods
and, therefore, affect expense and obligations in future periods.
During fiscal 2010, the Company contributed $126 to its pension
plans and $6 to its postretirement benefit plans, and expects to
contribute $81 to its pension plans and $8 to its postretirement
benefit plans in fiscal 2011.
For fiscal 2011, each 25 basis point reduction in the
discount rate would increase pension expense by approximately $8
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 2010 by approximately $10 and the service and interest
cost by $1 in fiscal 2011. 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
$143, $147 and $142 to these plans for fiscal 2010, 2009 and
2008, 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.
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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. 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 27, 2010 and February 28, 2009, the
Company had $133 and $114 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 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 $161 and $165 as of
February 27, 2010 and February 28, 2009, respectively.
Net cash provided by operating activities was $1,474, $1,534 and
$1,732 in fiscal 2010, 2009 and 2008, respectively. The decrease
in cash provided by operating activities in fiscal 2010 compared
to fiscal 2009 is primarily attributable to decreased Net
earnings, adjusted for the impact of non-cash impairment
charges, depreciation and amortization and LIFO expense,
substantially offset by the changes in deferred income taxes and
operating assets and liabilities. The decrease in cash provided
by operating activities in fiscal 2009 compared to fiscal 2008
is primarily attributable to changes in deferred income taxes.
Net cash used in investing activities was $459, $1,014 and $968
in fiscal 2010, 2009 and 2008, respectively. The decrease in
cash used in investing activities in fiscal 2010 compared to
fiscal 2009 is primarily attributable to lower capital spending
and higher proceeds from the sale of assets. The increase in
cash used in investing activities in fiscal 2009 compared to
fiscal 2008 is primarily attributable to lower proceeds from the
sale of assets.
Net cash used in financing activities was $1,044, $523 and $806
in fiscal 2010, 2009 and 2008, respectively. The increase in
cash used in financing activities in fiscal 2010 compared to
fiscal 2009 is primarily attributable to higher levels of debt
reduction. The decrease in cash used in financing activities in
fiscal 2009 compared to fiscal 2008 is primarily attributable to
higher levels of borrowing.
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 and its credit
facilities. 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. 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.
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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.
On April 5, 2010, the Company entered into an Amended and
Restated Credit Agreement (the “Credit Agreement”).
The Credit Agreement provides for an extension of the maturity
of portions of the senior secured credit facilities provided
under the original credit agreement, which included a five-year
revolving credit facility (the “Revolving Credit
Facility”), a five-year term loan (“Term Loan A”)
and a six-year term loan (“Term Loan B”). Under the
Credit Agreement, $1,500 of the Revolving Credit Facility was
extended until April 5, 2015 and $500 of Term Loan B was
extended until October 5, 2015. The remaining $600 of the
Revolving Credit Facility will expire on June 2, 2011 and
the remaining $502 of Term Loan B will mature on June 2,
2012. The maturity date of Term Loan A was not extended and will
mature on June 2, 2011.
The fees and rates in effect on outstanding borrowings under the
Credit Agreement are based on the Company’s current credit
ratings. Borrowings under the non-extended portion of the
Revolving Credit Facility, if any, carry an interest rate of
LIBOR plus 1.00 percent, borrowings under Term Loan A carry
an interest rate of LIBOR plus 0.875 percent and borrowings
under the non-extended portion of Term Loan B carry an interest
rate of LIBOR plus 1.25 percent. Borrowings under the
extended portion of the Revolving Credit Facility, if any, carry
an interest rate of LIBOR plus 2.25 percent and borrowings
under the extended portion of Term Loan B carry an interest rate
of LIBOR plus 2.75 percent. Facility fees under the
non-extended and extended portions of the Revolving Credit
Facility are 0.20 percent and 0.50 percent,
respectively. The Company pays fees of up to 2.50 percent
on the outstanding balance of the letters of credit issued under
the extended Revolving Credit Facility. Borrowings under the
extended and non-extended term loans may be repaid, in full or
in part, at any time without penalty.
The Credit Agreement reset covenants which are generally less
restrictive than the covenants that existed prior to
April 5, 2010. Specifically, the Company must maintain a
leverage ratio no greater than 4.25 to 1.0 through
December 30, 2011, 4.0 to 1.0 from December 31, 2011
through December 30, 2012 and 3.75 to 1.0 thereafter.
Additionally, the Company must maintain an interest expense
coverage ratio of not less than 2.20 to 1.0 through
December 30, 2011, 2.25 to 1.0 from December 31, 2011
through December 30, 2012 and 2.30 to 1.0 thereafter.
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, such that the
respective debt issued need not be equally and ratably secured.
In May 2009, the Company amended and extended its
364-day
accounts receivable securitization program. The Company can
borrow up to $200 on a revolving basis, with borrowings secured
by eligible accounts receivable, which remain under the
Company’s control. The facility fee in effect on
February 27, 2010, based on the Company’s current
credit ratings, was 1.00 percent. The Company intends to
execute a new $200 program in May 2010.
As of February 27, 2010, the Company had $479 of debt 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.
Annual cash dividends declared for fiscal 2010, 2009 and 2008,
were $0.6100, $0.6875 and $0.6750 per share, respectively. In
October 2009, the Board of Directors of the Company voted to
revise the Company’s dividend policy, with the expectation
of reducing the regular quarterly dividend to $0.0875 per share
from $0.175 per share, effective for the dividend payment to
stockholders of record on March 1, 2010. The dividend
reduction would provide annual cash of approximately $75. The
Company’s dividend policy will continue to emphasize a high
level of earnings retention for growth.
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Capital spending for fiscal 2010 was $691, including $10 of
capital leases. Capital spending primarily included store
remodeling activity, new retail stores and technology
expenditures. The Company’s capital spending for fiscal
2011 is projected to be approximately $700, including capital
leases.
Fiscal 2011 total debt reduction is estimated to be
approximately $600.
OFF-BALANCE
SHEET ARRANGEMENTS
Guarantees
The Company has guaranteed certain leases, fixture financing
loans and other debt obligations of various retailers as of
February 27, 2010. 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 20 years, with a weighted average
remaining term of approximately nine 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 27, 2010, the maximum amount of undiscounted
payments the Company would be required to make in the event of
default of all guarantees was approximately $127 and represented
approximately $93 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 not aware of any matters
that are expected to result in a material liability.
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 was 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 contributed
$143, $147 and $142 to these plans for fiscal 2010, 2009 and
2008, respectively.
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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.
The following table represents the Company’s significant
contractual obligations as of February 27, 2010.
Unrecognized tax benefits as of February 27, 2010 of $133
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 $10, net, of unrecognized tax benefits within
the next 12 months.
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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.
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. For
notes receivable, the table presents the expected collection of
principal cash flows and weighted average interest rates by
expected maturity dates.
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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 27, 2010 and
February 28, 2009, 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 27, 2010. In connection with our audits of the
consolidated financial statements, we have also audited the
accompanying financial statement schedule for each of the fiscal
years in the three-year period ended February 27, 2010. We
also have audited SUPERVALU INC.’s internal control over
financial reporting as of February 27, 2010, 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 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
U.S. 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 U.S. 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.
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 27, 2010 and February 28, 2009, and the
results of their operations and their cash flows for each of the
fiscal years in the three-year period ended February 27,
2010, in conformity with U.S. generally accepted accounting
principles. In our opinion, the accompanying 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
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our opinion, SUPERVALU INC. maintained, in all material
respects, effective internal control over financial reporting as
of February 27, 2010, based on criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/S/ KPMG LLP
Minneapolis, Minnesota
April 23, 2010
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SUPERVALU
INC. and Subsidiaries
CONSOLIDATED
SEGMENT FINANCIAL INFORMATION
(In
millions)
Refer to Note 15—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)
NOTE 1—SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
SUPERVALU INC. (“SUPERVALU” or the
“Company”) is one of the largest companies in the
United States grocery channel. SUPERVALU conducts its retail
operations under the Acme, Albertsons, Bristol Farms, Cub Foods,
Farm Fresh, Hornbacher’s, Jewel-Osco, Lucky,
Save-A-Lot,
Shaw’s, Shop ’n Save, Shoppers Food &
Pharmacy and Star Market banners as well as in-store pharmacies
under the Osco and Sav-on banners. Additionally, the Company
provides supply chain services, primarily wholesale
distribution, across the United States retail grocery channel.
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 the Company and its wholly-owned
subsidiary New Albertsons, Inc., the February 27, 2010 and
February 28, 2009 Consolidated Balance Sheets include the
assets and liabilities related to New Albertsons, Inc. as of
February 25, 2010 and February 26, 2009, respectively.
The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America (“accounting
standards”) 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. Sales tax is excluded from Net
sales.
Revenues and costs from third-party logistics operations are
recorded gross 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. 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 $137, $184 and $162
for fiscal 2010, 2009 and 2008, respectively.
The Company recognizes vendor funds for merchandising and buying
activities as a reduction of Cost of sales when the related
products are sold. 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 27, 2010 and February 28, 2009, the Company
had net book overdrafts of $330 and $389, 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 receivables was $12 and $15
in fiscal 2010 and 2009, respectively. Bad debt expense was $4,
$7 and $10 in fiscal 2010, 2009 and 2008, respectively.
Inventories are valued at the lower of cost or market.
Substantially all of the Company’s inventory consists of
finished goods.
As of February 27, 2010 and February 28, 2009
approximately 79 percent and 81 percent, respectively,
of the Company’s inventories were valued using the
last-in,
first-out (“LIFO”) method. The Company uses a
combination of the replacement cost method and the retail
inventory method (“RIM”) to determine the current cost
of its inventory before any LIFO reserve is applied. Under the
replacement cost method, the most current unit purchase cost is
used to calculate the current cost of inventories. 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. 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
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for which the LIFO method is used, the Company’s
inventories would have been higher by approximately $264 and
$258 as of February 27, 2010 and February 28, 2009,
respectively.
During fiscal 2010, 2009 and 2008, 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
2010, 2009 and 2008 purchases. As a result, Cost of sales
decreased by $22, $10 and $5 in fiscal 2010, 2009 and 2008,
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. The Company provides for closed property 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
capitalized lease assets. Interest on property under
construction of $6, $14 and $8 was capitalized in fiscal 2010,
2009 and 2008, 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 by using both the market approach,
applying a multiple of earnings based on guideline publically
traded companies, and the income approach, 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.
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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 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 group of assets being
tested. If impairment is identified for long-lived assets to be
held and used, the fair value is compared to the carrying value
of the group of assets 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. Fair value is based on current
market values or discounted future cash flows. 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 operating 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 percent to 5.1 percent for
fiscal 2010 and fiscal 2009 and 2.4 percent to
5.1 percent for fiscal 2008.
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 $191 and $223 as of
February 27, 2010 and February 28, 2009, respectively.
The Company recognizes the funded status of its sponsored
defined benefit plans in its Consolidated Balance Sheets and
gains or losses and prior service costs or credits not yet
recognized as a component of other comprehensive income, net of
tax. The Company sponsors pension and other postretirement plans
in various
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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 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 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 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 of stock
options 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.
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 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. The Company adjusts these
liabilities in light of changing facts and circumstances, such
as the progress of a tax audit. The Company also provides
interest on these liabilities at the appropriate statutory
interest rate. The Company recognizes interest related to
unrecognized tax benefits in interest expense and penalties in
Selling and administrative expenses in the Consolidated
Statements 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.
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Changes in the Company’s Goodwill and Intangible assets
consisted of the following:
As a result of the planned retail market exits, as of
February 27, 2010 the Company reclassified $36 of Goodwill
and $79 of Property, plant, and equipment and other intangible
assets to assets held for sale. Assets held for sale is a
component of Other current assets in the Consolidated Balance
Sheets. Also, the Company recorded the sale of assets, which
included $14 of Goodwill, and impairment charges of $20 to its
trademarks and tradenames.
During fiscal 2009, the Company recorded impairment charges of
$3,524, comprised of $3,223 to goodwill at certain Retail food
reporting units and $301 to trademarks and tradenames related to
the tradenames acquired in the New Albertsons, Inc. acquisition.
Amortization expense of intangible assets with definite useful
lives of $59, $65 and $55 was recorded in fiscal 2010, 2009 and
2008, respectively. Future amortization expense will be
approximately $46 per year for each of the next five years.
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Changes in the Company’s reserves for closed properties
consisted of the following:
During fiscal 2010 and 2009, the Company recorded additional
reserves primarily related to the closure of non-strategic
stores announced in fiscal 2009. Adjustments to reserves for
closed properties are primarily related to changes in subtenant
income.
Property,
Plant and Equipment-Related Impairment Charges
During fiscal 2010, the Company recorded $52 of property, plant
and equipment-related impairment charges, of which $43 were
recorded in the fourth quarter as a result of the planned retail
market exits. During fiscal 2009, the Company recorded $75 of
property, plant and equipment-related impairment charges related
to the closure of non-strategic stores announced in fiscal 2009.
During 2008, the Company recorded $14 of property, plant and
equipment-related impairment and other charges.
Additions and adjustments to the reserves for closed properties
and property, plant and equipment-related impairment charges for
fiscal 2010, 2009 and 2008 were primarily related to the Retail
food segment, and were recorded as a component of Selling and
administrative expenses in the Consolidated Statements of
Earnings.
Property, plant and equipment, net, consisted of the following:
Depreciation expense was $852, $945 and $911 for fiscal 2010,
2009 and 2008, respectively. Amortization expense related to
capitalized lease assets was $64, $67 and $64 for fiscal 2010,
2009 and 2008, respectively.
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Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Assets and liabilities recorded at fair value are categorized
using defined hierarchical levels directly related to the amount
of subjectivity associated with the inputs to fair value
measurements, as follows:
Impairment charges recorded during fiscal 2010 discussed in
Note 2—Goodwill and Intangible Assets and
Note 3—Reserves for Closed Properties and Property,
Plant and Equipment-Related Impairment Charges were measured at
fair value using Level 3 inputs.
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 $1 as of February 27, 2010. The
estimated fair value of notes receivable was less than book
value by approximately $8 as of February 28, 2009. 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 $54 and $452 as of February 27, 2010 and
February 28, 2009, respectively. The estimated fair value
was based on market quotes, where available, or market values
for similar instruments.
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The Company’s long-term debt and capital lease obligations
consisted of the following:
Future maturities of long-term debt, excluding the net discount
on the debt and capital lease obligations, as of
February 27, 2010 consist of the following:
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.
During fiscal 2007, the Company entered into senior secured
credit facilities provided by a group of lenders consisting of a
five-year revolving credit facility (the “Revolving Credit
Facility”), a five-year term loan (“Term Loan A”)
and a six-year term loan (“Term Loan B”). As of
February 27, 2010, there was $16 of outstanding borrowings
under the Revolving Credit Facility at 3.25 percent, Term
Loan A had a remaining
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principal balance of $394 at LIBOR plus 0.875 percent, of
which $113 was classified as current, and Term Loan B had a
remaining principal balance of $1,005 at LIBOR plus
1.25 percent, of which $10 was classified as current.
Letters of credit outstanding under the Revolving Credit
Facility were $333 and the unused available credit under the
Revolving Credit Facility was $1,651. The Company also had $4 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.
On April 5, 2010, the Company entered into an Amended and
Restated Credit Agreement (the “Credit Agreement”),
which provides for an extension of the maturity of portions of
the senior secured credit facilities provided under the original
credit agreement. Specifically, $1,500 of the Revolving Credit
Facility was extended until April 5, 2015 and $500 of Term
Loan B was extended until October 5, 2015. The remaining
$600 of the Revolving Credit Facility will expire on
June 2, 2011 and the remaining $502 of Term Loan B will
mature on June 2, 2012. The maturity date of Term Loan A
was not extended and will mature on June 2, 2011.
The fees and rates in effect on outstanding borrowings under the
Credit Agreement are based on the Company’s current credit
ratings. Borrowings under the non-extended portion of the
Revolving Credit Facility, if any, carry an interest rate of
LIBOR plus 1.00 percent, borrowings under Term Loan A carry
an interest rate of LIBOR plus 0.875 percent and borrowings
under the non-extended portion of Term Loan B carry an interest
rate of LIBOR plus 1.25 percent. Borrowings under the
extended portion of the Revolving Credit Facility, if any, carry
an interest rate of LIBOR plus 2.25 percent and borrowings
under the extended portion of Term Loan B carry an interest rate
of LIBOR plus 2.75 percent. Facility fees under the
non-extended and extended portions of the Revolving Credit
Facility are 0.20 percent and 0.50 percent,
respectively. The Company pays fees of up to 2.50 percent
on the outstanding balance of the letters of credit issued under
the extended Revolving Credit Facility. Borrowings under the
extended and non-extended term loans may be repaid, in full or
in part, at any time without penalty.
The Credit Agreement reset covenants which are generally less
restrictive than the covenants that existed prior to
April 5, 2010. Specifically, the Company must maintain a
leverage ratio no greater than 4.25 to 1.0 through
December 30, 2011, 4.0 to 1.0 from December 31, 2011
through December 30, 2012 and 3.75 to 1.0 thereafter.
Additionally, the Company must maintain an interest expense
coverage ratio of not less than 2.20 to 1.0 through
December 30, 2011, 2.25 to 1.0 from December 31, 2011
through December 30, 2012 and 2.30 to 1.0 thereafter.
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, such that the
respective debt issued need not be equally and ratably secured.
In May 2009, the Company issued $1,000 in senior notes, which
rank equally with all of the Company’s other senior
unsecured indebtedness. In conjunction with the debt issuance,
the Company paid off $191 of 7.50% Debentures due May 2037
that contained put options exercised in May 2009, early redeemed
$60 of 6.77% Medium Term Notes due July 2009 and purchased
pursuant to a tender offer $232 of 7.875% Notes due August
2009, $177 of 6.95% Notes due August 2009 and $110 of
8.35% Notes due May 2010 for an aggregate payment of $777
in cash. The remainder of the debt issuance proceeds was used to
reduce borrowings under the Revolving Credit Facility.
In May 2009, the Company amended and extended its
364-day
accounts receivable securitization program. The Company can
borrow up to $200 on a revolving basis, with borrowings secured
by eligible accounts receivable, which remain under the
Company’s control. The facility fee in effect on
February 27, 2010, based on the Company’s current
credit ratings, was 1.00 percent. The Company intends to
execute a new $200 program in May 2010.
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As of February 27, 2010, the Company had $479 of debt with
current maturities that are classified as long-term debt due to
the Company’s intent to refinance such obligations with the
Revolving Credit Facility or other long-term debt.
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 minimum lease payments to be
made by the Company for noncancellable operating leases and
capital leases as of February 27, 2010 consist of the
following:
Total future minimum obligations have not been reduced for
future minimum subtenant rentals of $308 under certain operating
subleases.
Rent expense and subtenant rentals under operating leases
consisted of the following:
The Company leases certain property to third parties under both
operating and direct financing leases. Under the direct
financing leases, the Company leases buildings to independent
retail customers with terms ranging
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from five to 20 years. Future minimum lease and subtenant
rentals under noncancellable leases as of February 27, 2010
consist of the following:
The carrying value of owned property leased to third parties
under operating leases was as follows:
The provision for income taxes consisted of the following:
The difference between the actual tax provision and the tax
provision computed by applying the statutory federal income tax
rate to earnings (losses) before income taxes is attributable to
the following:
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Deferred income taxes reflect the net tax effects of temporary
differences between the bases of assets and liabilities for
financial reporting and income tax purposes. The Company’s
deferred tax assets and liabilities consisted of the following:
The Company has valuation allowances to reduce deferred tax
assets to the amount that is more-likely-than-not to be
realized. The Company currently has state net operating loss
(“NOL”) carryforwards of $851 for tax purposes. The
NOL carryforwards expire beginning in 2011 and continuing
through 2028 and have a $20 valuation allowance. The remaining
valuation allowance is for capital loss carryforwards which
expire in fiscal 2011.
Changes in the Company’s unrecognized tax benefits
consisted of the following:
Included in the balance of unrecognized tax benefits as of
February 27, 2010, February 28, 2009 and
February 23, 2008 are tax positions of $58, net of tax,
$57, net of tax, and $29, net of tax, respectively, that would
reduce the Company’s effective tax rate if recognized in
future periods.
The Company expects to resolve $10, net, of unrecognized tax
benefits within the next 12 months, representing several
individually insignificant income tax positions. These
unrecognized tax benefits represent items in which the Company
may not prevail with certain taxing authorities, based on
varying interpretations of the applicable tax law. The Company
is currently in various stages of audits, appeals or other
methods of review with taxing authorities from various taxing
jurisdictions. The resolution of these unrecognized tax benefits
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would occur as a result of potential settlements from these
negotiations. Based on the information available as of
February 27, 2010, the Company does not anticipate
significant additional changes to its unrecognized tax benefits.
The Company recognized (income) expense related to interest and
penalties, net of settlement adjustments, of $(2), $26 and $14
for fiscal 2010, 2009 and 2008, respectively. In addition to the
liability for unrecognized tax benefits, the Company had a
liability of $44 and $67 as of February 27, 2010 and
February 28, 2009, respectively, related to accrued
interest and penalties for uncertain tax positions recorded in
Other current liabilities and Other liabilities in the
Consolidated Balance Sheets. The Company settled various audits
during fiscal 2010 resulting in payments of $21 for interest and
penalties.
The Company is currently under examination or other methods of
review in several tax jurisdictions and remains subject to
examination until the statute of limitations expires for the
respective taxing jurisdiction or an agreement is reached
between the taxing jurisdiction and the Company. As of
February 27, 2010, the Company is no longer subject to
federal income tax examinations for fiscal years before 2007 and
with few exceptions is no longer subject to state income tax
examinations for fiscal years before 2004.
As of February 27, 2010, the Company has stock options and
restricted stock awards (collectively referred to as
“stock-based awards”) outstanding under the following
plans: 2007 Stock Plan, 2002 Stock Plan, 1997 Stock Plan, 1993
Stock Plan, SUPERVALU/Richfood Stock Incentive Plan, Albertsons
Amended and Restated 1995 Stock-Based Incentive Plan and the
Albertsons 2004 Equity and Performance Incentive Plan. The
Company’s 2007 Stock Plan, as approved by stockholders in
May 2007, is the only plan under which stock-based awards may be
granted. The 2007 Stock Plan provides that the Board of
Directors or the Leadership Development and Compensation
Committee of the Board (the “Compensation Committee”)
may determine at the time of grant whether each stock-based
award granted will be a non-qualified or incentive stock-based
award under the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”). The terms of each
stock-based award will be determined by the Board of Directors
or the Compensation Committee. Generally, stock-based awards
granted prior to fiscal 2006 have a term of 10 years and
effective in fiscal 2006, stock-based awards granted will not be
for a term of more than seven years.
Stock options are granted to key salaried employees and to the
Company’s non-employee directors to purchase common stock
at an exercise price not less than 100 percent of the fair
market value of the Company’s common stock on the date of
grant. Generally, stock options vest over four years. Restricted
stock awards are also awarded to key salaried employees. The
vesting of restricted stock awards granted is determined at the
discretion of the Board of Directors or the Compensation
Committee. The restrictions on the restricted stock awards
generally lapse between one and five years from the date of
grant and the expense is recognized over the lapsing period.
The Company reserved 35 shares for grant as part of the
2007 Stock Plan. As of February 27, 2010, there were
23 shares available for grant. Common stock is delivered
out of treasury stock upon the exercise of stock-based awards.
The provisions of future stock-based awards may change at the
discretion of the Board of Directors or the Compensation
Committee.
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Stock options granted, exercised and outstanding consisted of
the following:
The weighted average grant date fair value of all stock options
granted during fiscal 2010, 2009 and 2008 was $4.92, $7.91 and
$8.97 per share, respectively. The total intrinsic value of
stock options exercised during fiscal 2010, 2009, and 2008 was
$1, $4 and $93, respectively. Intrinsic value is measured using
the fair market value as of the date of exercise for stock
options exercised and the fair market value as of
February 27, 2010, less the applicable exercise price.
The fair value of each stock option is estimated as of the date
of grant using the Black-Scholes option pricing model. Expected
volatility is estimated based on an average of actual historical
volatility and implied volatility corresponding to the stock
option’s estimated expected term. The Company believes this
approach to determine volatility is representative of future
stock volatility. The expected term of a stock option is
estimated based on analysis of stock options already exercised
and foreseeable trends or changes in behavior. The risk-free
interest rates are based on the U.S. Treasury securities
maturities as of each applicable grant date. The dividend yield
is based on analysis of actual historical dividend yield.
The significant weighted average assumptions relating to the
valuation of the Company’s stock options consisted of the
following:
Restricted stock award activity consisted of the following:
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The components of pre-tax stock-based compensation expense
(included primarily in Selling and administrative expenses in
the Consolidated Statements of Earnings) and related tax
benefits were as follows:
The Company realized excess tax benefits (shortfalls) of $(1),
$1, and $20 related to stock-based awards during fiscal 2010,
2009 and 2008, respectively.
As of February 27, 2010, there was $33 of unrecognized
compensation expense related to unvested stock-based awards
granted under the Company’s stock plans. The expense is
expected to be recognized over a weighted average remaining
vesting period of approximately two years.
On May 28, 2009, the Board of Directors of the Company
adopted and announced a new annual share repurchase program
authorizing the Company to purchase up to $70 of the
Company’s common stock. Stock purchases will be made from
the cash generated from the settlement of stock options. This
annual authorization program replaced all existing share
repurchase programs and continues through June 2010. As of
February 27, 2010, there remained $70 available to
repurchase the Company’s common stock.
The Company did not purchase any shares during fiscal 2010.
During 2009 and 2008, the Company purchased 0.2 shares and
5 shares, respectively, under former share repurchase
programs.
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The following table reflects the calculation of basic and
diluted net earnings (loss) per share:
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