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supervalu annual report 2004

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Dear Shareholder: This year, I am proud that SUPERVALU’s business operations delivered a standout year in fiscal 2004 marked by significant accomplishments and strong financial results. SUPERVALU continued to build momentum. We stayed the course on our business strategies and made substantial progress in our financial metrics. Unlike last year, which was clouded by macro-economic factors, fiscal 2004 was a year of changing industry dynamics. A long-time wholesale competitor declared bankruptcy; health care costs and pension expenses continued to increase at double-digit rates, which challenged union contract negotiations across the country; and moderate price inflation returned in some food categories. Today, we are witnessing transformation in the food retailing industry as companies embark on large-scale infrastructure initiatives to respond to more intense competition and drive sales improvements. It is truly an exciting time in our industry, and I believe SUPERVALU is well positioned to continue our success in this ever-changing environment. Our accomplishments in fiscal 2004 attest to our ability to adapt in a changing landscape while maintaining our long-term strategies. In fiscal 2004, we reported: ‰ Sales of $20.2 billion ‰ Net earnings of $280 million ‰ Diluted earnings per share of $2.07 ‰ Debt to capital ratio of 46.7 percent, the lowest in more than a decade ‰ Return on Invested Capital (ROIC), calculated on a 52-week basis, of 14.1 percent Even with the extra week in fiscal 2004 compared to fiscal 2003’s 52-week year, we showed good progress. The extra week contributed approximately $360 million in revenues and $0.07 in diluted earnings per share in the fourth quarter. Key Accomplishments Fiscal 2004 performance is the result of many initiatives undertaken during the year. Our key accomplishments in our two business engines will provide the fuel for continued success in fiscal 2005. Our retail team did an exceptional job again in fiscal 2004. Throughout the year, we generated industry leading retail comparable store sales growth that was broad based across our markets. Our strong merchandising and store level execution continued to drive improvement in important benchmarks such as higher customer counts and average ticket on a like-store basis. At Save-A-Lot, our fastest growing retail format, we completed much of the staging work necessary to accelerate the growth of this unique retail offering. In fiscal 2004: ‰ We tested the new combination store prototype, which features both grocery products and general merchandise at extreme value prices, and increased the pace of store conversions to this combination store format; ‰ We ended the fiscal year with nearly 200 combination stores within our 37-state Save-A-Lot store network, including licensees. This was driven by the conversion of existing stores to combination units and 75 new stores, including licensed stores, that we added to our network during the year; ‰ We continued to invest in our distribution infrastructure with the relocation of three food distribution centers and the opening of a general merchandise distribution center; ‰ We expanded the general merchandise sourcing programs to support future growth; and ‰ We began to install new technologies to enhance core systems in procurement and inventory management.
Also in retail during fiscal 2004, our “in-market” efforts with category management and banner branding enhanced our excellent foothold in key markets where we continue to invest with new stores and remodels. A few examples are: ‰ Cub Foods in Minnesota improved its market share position by adding four new stores to its network. Cub Foods plans to open four more stores in Minnesota in fiscal 2005. ‰ We converted the Metro stores in Baltimore, Maryland, to Shoppers Food and Pharmacy, our strong price impact format in Washington, D.C., which promises to extend our success to another major market. ‰ Farm Fresh in Virginia continued to grow market share through strong quality and service. In fiscal 2005, an exciting smaller store, uniquely located on the ground floor of a luxury high-rise condo development, will further broaden Farm Fresh’s appeal to consumers. ‰ Shop ’n Save in St. Louis, Missouri, continued its strong price impact merchandising programs, including a pilot program featuring Deal$-sourced dollar store merchandise within the larger Shop ’n Save stores. SUPERVALU’s distribution business made significant progress in fiscal 2004. We took bold steps to advance our strategy including focusing on aggressive asset management to carefully align productive assets to drive solid business returns, continuing the implementation of efficiency initiatives and delivering growth in our non-asset based business platform. Through a unique asset exchange with C&S Wholesale Grocers, Inc. to affiliate former Fleming retailers in the Midwest, we successfully brought on and integrated new business into our existing network. The overall square footage reduction and the complementary increase in capacity utilization rates was a component of our overall ROIC improvement for the year. Even though the wholesale distribution business is a mature industry, we have numerous efficiency initiatives in place across our logistics network generating improvements in our productivity. Supporting our nearly 3,200 customers are strong programs, founded on an activity-based pricing philosophy, which drive competitiveness at the grocery shelf level. Whether it is warehouse efficiencies or our business-to-business portal SVHarbor® with more than eight million customer transactions per month, we continuously leverage the application of technology for process improvement and efficiency. Our non-asset based logistics service business, Advantage Logistics, made progress in fiscal 2004. We began serving two new facilities in Denver, including Atkins Nutritionals, a new manufacturing customer specializing in controlled carbohydrate food products. Since the end of fiscal 2004, we have been awarded our second Atkins facility. Another hybrid to the traditional brick and mortar offering is our Target-dedicated facility in Fort Worth, Texas, which serves 49 of the 118 SuperTarget stores we currently supply. As these new business offerings and solutions gain scale and momentum, they provide a new iteration of growth for our logistics business over the long term. All these business strategies across SUPERVALU work hand-in-hand to drive progress on our financial goals. In fiscal 2004, we continued to strengthen our financial condition. We continued our prudent capital spending program, with spending for fiscal 2004 at $371.5 million, including $43.3 million in capitalized leases. As in previous years, our capital spending primarily supports retail store expansion and remodels, new Save-A-Lot distribution facilities and technology enhancements. During the year, SUPERVALU reduced debt levels by more than $220 million. As a result, our debt to capital ratio at year end was 46.7 percent, our lowest level in more than a decade. Subsequent to the end of the fiscal year, we sold our equity interest in a West Coast retailer named WinCo. Our decision to sell this equity interest was to monetize an asset over which we had limited control and that contributed no cash earnings, but had significant unrealized appreciation. We received approximately $150 million in after-tax proceeds for our interest in WinCo, which will be utilized to support further debt reduction. 2
Business Outlook I believe SUPERVALU has a promising future with many exciting activities underway. ‰ We have a strong growth plan for Save-A-Lot with the addition of a general merchandise offering and an increase in store expansion with an estimated 110 to 140 new stores in fiscal 2005. ‰ We continue to sharpen our regional retail excellence across multiple banners. Through new stores and our remodeling program we have achieved a modern fleet with 80 percent of our regional stores either new or newly remodeled in the last seven years. ‰ Our diligent efforts in Distribution to rationalize our network to improve capacity utilization rates, implement “best in class” efficiency programs, and expand our non-asset based logistics platform remain an excellent formula to support a business model with strong cash flow characteristics. ‰ Our strong financial position provides the flexibility needed to support our future growth. ‰ Lastly, we expect ROIC in fiscal 2005 to benefit from the strategic activities undertaken during fiscal 2004. Our continued focus on ROIC supports a prudent and profitable approach to decision making that should contribute to meaningful improvements in ROIC in fiscal 2005 as well. We are confident that SUPERVALU is deploying the best short-term and long-term strategies aimed at the changing retail environment, the evolving needs of the grocery channel and the improvement in our financial metrics. These business strategies will be carried out by the 55,200 hard working employees who in fiscal 2004 renewed their pledge to our Mission Statement’s commitment to serve our customers better than anyone else can, each and every day. Our customers include retail partners, store consumers and communities. As we diligently work to create a growing, profitable company, we will continue to deliver value for all of our stakeholders. Jeff Noddle Chairman and Chief Executive Officer SUPERVALU Mission Statement Our mission at SUPERVALU always will be to serve our customers better than anyone else could serve them. We will provide our customers with value through our products and services, committing ourselves to providing the quality, variety and convenience they expect. Our success requires us to trust in our employees, respect their individual contributions and make a commitment to their continued development. This environment will allow us to attract the best people and provide opportunities through which they can achieve personal and professional satisfaction. Our commitment is to support the communities in which our employees and customers live and work. We will use our time and resources to preserve our role as a partner, neighbor and friend. Our responsibility to our investors is clear – continuous profit growth while ensuring our future success. SUPERVALU will prosper through a balance of innovation and good business decisions that enhances our operations and creates superior value for our customers. By pursuing these goals, SUPERVALU will continue to build on our foundation as a world-class retailer and distributor that values long-standing ties with its constituents, and conducts its business with integrity and ethics. We will continue to foster strong relationships with the diverse people and organizations with whom we work. Through open communication with our customers, employees, communities and shareholders, we will adapt to changing times while holding true to the fundamentals that support both our growth and stability. We shall pursue our mission with a passion for what we do and a focus on priorities that will truly make a difference in our future. 3
SUPERVALU Corporate Officers Jeffrey Noddle Sherry M. Smith David M. Oliver Chairman, CEO & President Senior Vice President, Vice President, Controller Finance & Treasurer David L. Boehnen Yolanda M. Scharton Executive Vice President Ronald C. Tortelli Vice President, Investor Relations Senior Vice President, & Corporate Communications John H. Hooley Human Resources Executive Vice President; James L. Stoffel President & COO, Retail Foods Karen T. Borman Vice President, Vice President, Distribution Financial Planning Michael L. Jackson Financial Planning & Analysis Executive Vice President; Richard N. Finkbeiner President & COO, Distribution Leland J. Dake President, Advantage Logistics Vice President, Pamela K. Knous Edward J. McManus Merchandising, Distribution Executive Vice President & CFO President, Cub Foods Kristin A. Hayes Eastern Region Robert W. Borlik Vice President, Senior Vice President & CIO John P. Breedlove Strategic Planning Associate General Counsel J. Andrew Herring Stephen P. Kilgriff Corporate Secretary Senior Vice President; Vice President, Legal Executive Vice President, Warren E. Simpson Retail Pharmacies Edward B. Mitchell Senior Corporate Counsel Vice President, Assistant Secretary Gregory C. Heying Employee Relations Senior Vice President, Distribution Investor Information Transfer Agent and Registrar Investor Inquiries For general inquiries about SUPERVALU For a copy of the annual report or any documents common stock, such as: filed with the SEC, please request in writing to: ‰ Dividend reinvestment ‰ Automatic deposit of dividend checks John Breedlove ‰ Certificate replacements Corporate Secretary ‰ Account maintenance SUPERVALU INC ‰ Transfer of shares PO Box 990 ‰ Name or address changes Minneapolis, MN 55440 Please contact: Documents filed with the SEC may be Wells Fargo Shareowner Services accessed through the company’s web site at PO Box 64854 www.supervalu.com. St. Paul, MN 55164-0854 Phone: 877-536-3555 For investor relations inquiries, visit the www.wellsfargo.com/com/shareowner_services company’s web site at www.supervalu.com or contact: Yolanda Scharton, Common Stock Vice President, Investor Relations & Corporate SUPERVALU’s common stock is listed on the Communications New York Stock Exchange under symbol SVU. SUPERVALU INC As of April 1, 2004, there were approximately PO Box 990 6,811 shareholders of record and approximately Minneapolis, MN 55440 44,000 shareholders in street name. 4
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2004 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-5418 SUPERVALU INC. (Exact name of registrant as specified in its charter) Delaware 41-0617000 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11840 Valley View Road Eden Prairie, Minnesota 55344 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (952) 828-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $1.00 per share New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes È No ‘ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 6, 2003 was approximately $3,257,057,854 (based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on September 5, 2003). Number of shares of $1.00 par value Common Stock outstanding as of April 24, 2004: 135,328,998. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant’s definitive Proxy Statement filed for the Registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Part III, as specifically set forth in Part III.
PART I ITEM 1. BUSINESS General Development SUPERVALU is one of the largest companies in the United States grocery channel. SUPERVALU conducts its retail operations under three retail food store formats: extreme value stores primarily under the retail banner Save-A-Lot; price superstores, under the regional retail banners of Cub Foods, Shop ’n Save, Shoppers Food Warehouse and bigg’s; and supermarkets, under the regional retail banners of Farm Fresh, Scott’s and Hornbacher’s. As of the close of the fiscal year, the company conducted its retail operations through 1,483 stores, including 821 licensed extreme value stores. SUPERVALU also provides food distribution and related logistics support services across the United States retail grocery channel. As of the close of the fiscal year, the company served as the primary grocery supplier to approximately 2,470 retail food stores in 48 states, in addition to its own regional banner store network, and as a secondary supplier to approximately 660 stores. SUPERVALU is focused on retail growth through targeted new store development, remodel activities, licensee growth and acquisitions. During fiscal 2004, the company added 66 net new stores through new store development. The company’s plans also include leveraging its distribution operations by providing logistics and service solutions through an efficient supply chain, which will allow it to affiliate new independent customers and expand its recently launched Advantage Logistics third party logistics business. Consolidation opportunities in the food distribution industry may provide another avenue for growth. In September 2003, the company acquired certain grocery distribution operations in the Midwest, formerly owned by Fleming, in exchange for its New England operations, pursuant to an Asset Exchange Agreement with C&S Wholesale Grocers (the “Asset Exchange”). Overall revenues declined as a result of the Asset Exchange, but the efficiency of the company’s operations were enhanced as the new business was absorbed by the company’s existing Midwestern facilities. The company has estimated that the Asset Exchange will benefit full year fiscal 2005 earnings by $0.07 to $0.10 per share. SUPERVALU INC., 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). Unless the discussion in this Annual Report on Form 10-K indicates otherwise, all references to the “company,” “SUPERVALU” or “Registrant” relate to SUPERVALU INC. and its majority-owned subsidiaries. The company makes available free of charge at its internet website (www.supervalu.com) various corporate governance materials, 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 soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. 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 the Corporate Secretary, SUPERVALU INC., P.O. Box 990, Minneapolis, MN 55440. Additional description of the company’s business is found in Part II, Item 7 of this report. Financial Information About Reportable Segments The company’s business is classified by management into two reportable segments: Retail food and food distribution. Retail food operations include three retail food store formats: extreme value stores, regional price superstores and regional supermarkets. The retail formats include results of food stores owned and results of 2
sales to extreme value stores licensed by the company. Food distribution operations include results of sales to affiliated food stores, mass merchants and other customers, and other logistics arrangements. Management utilizes more than one measurement and multiple views of data to assess segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the consolidated financial statements. The financial information concerning the company’s operations by reportable segment for the years ended February 28, 2004, February 22, 2003 and February 23, 2002 is contained on page F-5. Retail Food Operations Overview. At February 28, 2004, the company conducted its retail food operations through a total of 1,483 retail stores, including 821 licensed extreme value stores. Its principal retail food formats include extreme value stores, regional price superstores and regional supermarkets. These diverse formats enable the company to operate in a variety of markets under widely differing competitive circumstances. Based on revenues, the company was the 11th largest grocery retailer in the United States as of February 28, 2004. In fiscal 2005, the company anticipates opening approximately 110 to 140 new extreme value stores and eight to 10 regional banner stores and continuing its store remodeling program. Extreme Value Stores. The company operates extreme value stores primarily under the Save-A-Lot banner. Save-A-Lot holds the number one market position, based on revenues, in the extreme value grocery- retailing sector. Save-A-Lot food stores typically are approximately 15,000 square feet in size, and stock approximately 1,250 high volume food items generally in a single size for each product sold. At a Save-A-Lot store, the majority of the products offered for sale are custom branded products. The specifications for the Save- A-Lot custom branded product emphasize quality and characteristics that the company believes are comparable to national brands. The company’s attention to the packaging of Save-A-Lot products has resulted in the company registering a number of its custom labels. After the company’s fiscal 2003 acquisition of a small dollar store general merchandise operator, Deal$ Nothing Over A Dollar (“Deals”), the company started testing several new prototypes of an extreme value combination store, offering both food and dollar-priced general merchandise. During fiscal 2004, the company converted or opened 166 combination stores. At fiscal year end, there were 1,225 extreme value stores located in 37 states, of which 821 were licensed. These stores are supplied from 16 dedicated distribution centers. Price Superstores. The company’s price superstores hold the number one, two or three market position in most of their markets. The price superstore focus is on providing every day low prices and product selection across all departments. Most of the company’s price superstores offer traditional dry grocery departments, along with strong perishable departments and pharmacies. Price superstores carry over 45,000 items and generally range in size from 45,000 to 100,000 square feet with an average size of approximately 64,000 square feet. At fiscal year end, the company owned and operated 199 price superstores under the Cub Foods, Shop ’n Save, Shoppers Food Warehouse and bigg’s banners in 12 states; an additional 29 stores were franchised to independent retailers under the Cub Foods banner. In-store pharmacies are operated in 176 of the price superstores. The owned Cub Food stores operate primarily in the Minneapolis/St. Paul and Chicago markets; Shop ’n Save operates primarily in the St. Louis and Pittsburgh markets; Shoppers Food Warehouse operates in the Washington D.C. and Baltimore markets; and bigg’s operates primarily in the Cincinnati market. Supermarkets. The company’s traditional supermarkets hold the number one or two market positions in their principal markets. This format combines a grocery store that offers traditional dry grocery and fresh food departments, and a variety of specialty departments that may include floral, seafood, expanded health and beauty care, video rental, cosmetics, photo finishing, delicatessen, bakery, as well as an in-store bank and a traditional 3
drug store that includes a pharmacy. A typical supermarket carries approximately 32,000 items and generally ranges in size from 30,000 to 65,000 square feet with an average size of approximately 50,000 square feet. At fiscal year end, the company operated 59 supermarkets under the Farm Fresh, Scott’s and Hornbacher’s banners. The Farm Fresh stores operate primarily in the Virginia Beach, Virginia market; the Scott’s stores operate in the Fort Wayne, Indiana market; and the Hornbacher’s stores operate in the Fargo, North Dakota market. In-store pharmacies are operated in 29 of the supermarkets. Food Distribution Operations Overview. SUPERVALU provides logistics and service solutions to retailers for food and non-food products and is the largest public company food wholesaler in the nation. At February 28, 2004, the company was affiliated with approximately 2,470 stores as their primary supplier, excluding the company’s own regional banner store network, and approximately 660 additional stores as a secondary supplier. SUPERVALU’s customers include single and multiple grocery store independent operators, regional and national chains, mass merchants and the military. Such customers are located in 48 states, and range in size from small convenience stores to 200,000 square foot supercenters. Products Supplied. The company offers and supplies its distribution customers with a wide variety and selection of food and non-food products, including groceries, meats, dairy products, frozen foods, deli, bakery, fresh fruits and vegetables, health and beauty aids, general merchandise, seasonal items and tobacco products. Such products include national and regional brands, the company’s own lines of private label products and the private label products of its independent customers. The company has no significant long-term purchase obligations and considers that it has adequate and alternative sources of supply for most of its purchased products. SUPERVALU offers two tiers of private label products to its customers: first quality products under such private labels as CUB, FLAVORITE, HOMEBEST, IGA, RICHFOOD, SHOP ’N SAVE, SUPERCHILL, HEALTHY GENERATIONS, DAILY SOURCE, NUTRIPLAN and CHEF’S CIRCLE; and economy products under the private label of SHOPPERS VALUE. SUPERVALU supplies private label merchandise over a broad range of products in the majority of departments in the store. These products are produced to the company’s specifications by many suppliers. Logistics Network. 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 comprises 24 distribution facilities. The company believes that its multi-tiered distribution network increases buying scale, improves operating efficiencies and lowers costs of operations. The company is continuing to work on business initiatives that will deliver lower costs of operations. 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, many types of meats, dairy products, bakery and other products purchased from the company are delivered directly by suppliers to retail stores under programs established by the company. The company also offers third party logistics solutions, primarily to the grocery industry, through its Advantage Logistics operation which was formed in 2002. Trademarks The company offers some customers the opportunity to franchise a concept or license a service mark. This program helps the customer 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, DEAL$ NOTHING OVER A DOLLAR, 4
ADVANTAGE LOGISTICS, SENTRY, FESTIVAL FOODS, COUNTY MARKET, SHOP ’N SAVE, NEWMARKET, IGA, FOODLAND, JUBILEE, SUPERVALU and SUPERVALU PHARMACIES. 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. See “Retail Food Operations—Extreme Value Stores” and “Food Distribution Operations—Products Supplied” for further information. The company considers certain of its trademarks and service marks to be of material importance to its business and actively defends and enforces such trademarks and service marks. Competition The company’s retail food and food distribution businesses are highly competitive. The company believes that the success of its retail food and food distribution businesses are dependent upon the ability of the company’s retail food operations, and the retail food stores with whom it is affiliated as a supplier, to compete successfully with other retail food stores in a consolidating market. Principal competition comes from local, regional and national chains operating under a variety of formats that devote square footage to selling food (i.e. supercenters, supermarkets, extreme value stores, membership warehouse clubs, dollar stores, drug stores, convenience stores, various formats selling prepared foods, and other specialty and discount retailers), as well as from independent food stores. The company believes that the principal competitive factors that face its owned stores, as well as the stores owned by retailers it supplies, include the location and image of the store, the price, quality and variety of products, and the quality and consistency of service. The food distribution business competes directly with a number of food wholesalers. The company believes it competes in this supply chain on the basis of product price, quality and assortment, schedule and reliability of deliveries, the range and quality of services provided, service fees, and the location of distribution facilities. Employees At February 28, 2004, the company had approximately 55,200 employees. Approximately 23,600 employees are covered by collective bargaining agreements. During fiscal 2004, 15 collective bargaining agreements covering 3,500 employees were re-negotiated. The only work stoppage in fiscal 2004 was a 28-day strike in the third quarter in the St. Louis market where the company operates 21 regional banner stores. In fiscal 2005, 22 collective bargaining agreements covering approximately 9,300 employees will expire. The company believes that it has generally good relations with its employees. 5
ITEM 2. PROPERTIES Retail Food Operations The following table is a summary of the corporate retail stores operated by the company under its principal retail formats as of February 28, 2004: Square Square Footage Footage Location and Number Owned Leased Retail Format Banner of Corporate Stores (Approximate) (Approximate) Save-A-Lot1 ExtremeValue Alabama (1), Arizona (2), Arkansas (1), 665,000 3,586,000 Stores California (19), Connecticut (5), Delaware (6), Florida (73), Georgia (17), Illinois (18), Louisiana (10), Maryland (12), Massachusetts (9), Mississippi (5), Missouri (10), New Jersey (11), New York (5), Ohio (31), Pennsylvania (24), Rhode Island (3), South Carolina (3), Tennessee (5), Vermont (1), Virginia (7), Wisconsin (2) Deals/Super Alabama (2), Arkansas (4), Georgia (3), — 1,244,000 Deals Illinois (21), Indiana (9), Iowa (2), Kansas (6), Kentucky (9), Michigan (1), Missouri (28), Ohio (27), Oklahoma (3), Pennsylvania (1), Tennessee (6), West Virginia (1), Wisconsin (1) Save-A-Lot California (1), Florida (1), Georgia (1), 2,779,000 1,697,000 Distribution Illinois (1), Indiana (1), Kentucky (1), Centers Louisiana (1), Maryland (1), Michigan (1), Missouri (1), New York (1), Ohio (2), Tennessee (1), Texas (1), Wisconsin (1) Cub Foods2 Price Superstores Illinois (29), Iowa (3), Minnesota (35), 2,547,000 2,807,000 Wisconsin (9) Shop ’n Save Illinois (14), Missouri (21), Pennsylvania (19) 471,000 2,362,000 Shoppers Food Delaware (1) Maryland (37), Virginia (20) — 3,206,000 Warehouse bigg’s Indiana (1), Kentucky (1), Ohio (9) 158,000 1,129,000 Supermarkets Farm Fresh Virginia (36) — 1,736,000 Hornbacher’s Minnesota (1), North Dakota (4) 107,000 113,000 Scott’s Indiana (18) 293,000 680,000 1 Excludes 821 Save-A-Lot stores that are licensed by independent retailers. 2 Excludes 29 Cub Foods stores that are franchised by independent retailers. The extreme value stores that are leased by the company generally have terms of 5 to 10 years plus renewal options. The price superstores and supermarkets that are leased by the company generally have terms of 15 to 25 years plus renewal options. 6
Food Distribution Operations The following table is a summary of the company’s principal distribution centers and office space utilized in the company’s food distribution operations as of February 28, 2004: Square Square Footage Footage Owned Leased Region Location and Number of Distribution Centers (Approximate) (Approximate) Central Region Indiana (1), Ohio (1), Pennsylvania (2), West Virginia (1) 2,159,000 372,000 Midwest Region Illinois (2), Missouri (1), Texas (1), Wisconsin (2) 2,394,000 823,000 Northern Region Minnesota (1), North Dakota (2) 2,132,000 90,000 Northwest Region Montana (1), Washington (2) 1,557,000 — Southeast Region Alabama (2), Florida (1), Mississippi (1) 1,528,000 627,000 Eastern Region Maryland (1), Pennsylvania (1), Virginia (1) 1,145,000 926,000 Additional Property The company’s principal executive offices are located in a 180,000 square foot corporate headquarters facility located in Eden Prairie, Minnesota, a western suburb of Minneapolis, Minnesota. This headquarters facility is located on a site of 140 acres owned by the company. Other facilities allocated for corporate use, include approximately 189,000 square feet of leased office space located in Chanhassen, Minnesota, 53,000 square feet of owned office space located in Stillwater, Minnesota and 35,000 square feet of leased office space in Denver, Colorado. Additional information on the company’s properties can be found on pages F-24 through F-26 in the Leases note in the accompanying Notes to Consolidated Financial Statements. Management of the company believes its physical facilities and equipment are adequate for the company’s present needs and businesses. ITEM 3. LEGAL PROCEEDINGS In July and August 2002, several class action lawsuits were filed against the company and certain of its officers and directors in the United States District Court for the District of Minnesota on behalf of purchasers of the company’s securities between July 11, 1999 and June 26, 2002. The lawsuits have been consolidated into a single action, in which it is alleged that the company and certain of its officers and directors violated Federal securities laws by issuing materially false and misleading statements relating to its financial performance. On April 29, 2004, the District Court for the District of Minnesota granted preliminary approval to a stipulation of settlement between the company and plaintiffs. A hearing for final approval of the settlement is scheduled for August 16, 2004. The settlement will have no material impact to the company’s consolidated statement of earnings or consolidated financial position. The company is a party to various other legal proceedings arising from the normal course of business activities, none of which, in management’s opinion, is expected to have a material adverse impact on the company’s consolidated statement of earnings or consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted during the fourth quarter of fiscal year 2004 to a vote of the security holders of the Registrant. 7
EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information concerning the executive officers of the company as of April 15, 2004. Year Elected to Present Other Positions Recently Held Name Age Present Position Position With the company Jeffrey Noddle 57 Chairman of the Board of 2002 Director, Chief Executive Officer Directors, Chief Executive Officer and President, 2001-2002; Director, and President President and Chief Operating Officer, 2000-2001; Executive Vice President, President and Chief Operating Officer, Wholesale Food Companies, 1995-2000 David L. Boehnen 57 Executive Vice President 1997 John H. Hooley 52 Executive Vice President; President 2002 Senior Vice President; President and Chief Operating Officer, Retail and Chief Executive Officer, Cub Foods Foods, 2000-2002; Vice President; President and Chief Executive Officer, Cub Foods, 1992-1999 Michael L. Jackson 50 Executive Vice President; President 2001 Senior Vice President, Retail Food and Chief Operating Officer, Companies, 1999-2001; President, Distribution Northwest Region, 1995-1999 Pamela K. Knous 50 Executive Vice President and Chief 1997 Financial Officer Robert W. Borlik 55 Senior Vice President, Chief 1999 Information Officer J. Andrew Herring 45 Senior Vice President; Executive 2002 Senior Vice President, Corporate Vice President, Retail Pharmacies Development 1999-2002; Vice President, Corporate Development and External Relations, 1998-1999 Gregory C. Heying 55 Senior Vice President, Distribution 1994 Sherry M. Smith 42 Senior Vice President, Finance and 2002 Vice President, Corporate Treasurer Controller, 1998-2002 Ronald C. Tortelli 57 Senior Vice President, Human 1988 Resources Leland J. Dake 47 Vice President, Merchandising, 1998 Distribution Food Companies Stephen P. Kilgriff 62 Vice President, Legal 2000 Associate General Counsel, 1996- 2000 David M. Oliver 46 Vice President, Controller 2004 The term of office of each executive officer is from one annual meeting of the directors until the next annual meeting of directors or until a successor for each is elected. There are no arrangements or understandings between any of the executive officers of the company and any other person pursuant to which any of the executive officers were 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 John H. Hooley and David M. Oliver. Mr. Hooley was elected to his current position in April 2002. From November 2000 to April 2002, he was Senior Vice President and President and Chief Executive Officer, Cub Foods. From February 2000 to September 8
2000, he was Executive Vice President of Partner Alliances, 24K.com, a loyalty marketing company and affiliate of the Carlson Companies, Inc. From November 1992 to September 1999, he was presient and Chief Executive Officer of Cub Foods. Mr. Oliver was elected to his current position in April 2004. From November 1999 to April 2004, he was Chief Financial Officer, Arden Group, Inc. From August 1998 until joining Arden Group, Inc. in November 1999, he was an independent consultant. DIRECTORS OF THE REGISTRANT The following table provides certain information concerning the directors of the company as of April 15, 2004. Present Position With the Company Name Age and Committees of the Board Professional Background Irwin Cohen 63 Director since 2003 Retired; Partner with Deloitte & Touche Audit Committee LLP (a professional services firm, Finance Committee providing accounting, tax and consulting services), 1972-2003, Global Managing Partner of the Consumer Products, Retail and Services Practice of Deloitte & Touche LLP, 1997-2003, Managing Partner of Deloitte & Touche LLP’s U.S. Retail Practice, 1980-2002; Director of Phoenix House Foundation and Beall’s Inc. Ronald E. Daly 57 Director since 2003 Chief Executive Officer and President Executive Personnel and of Oce USA Holding, Inc., a subsidiary ´ Compensation Committee of Oce N.V. (a supplier of digital ´ Finance Committee document management technology services), 2002-present; President of RR Donnelley Print Solutions (a print solutions company), 1997-2002; President of RR Donnelley Telecommunications (a telecommunications industry printing company), 1995-2001; Board of Executive Directors of Oce N.V. ´ Lawrence A. Del Santo 70 Director since 1997 Retired; Chief Executive Officer of The Director Affairs Committee Vons Companies (a retail grocery Chairman company), 1994-1997; Executive Personnel and Director of PETsMART, Inc. Compensation Committee Susan E. Engel 57 Director since 1999 Chairwoman of the Board and Chief Audit Committee Executive Officer of Department 56, Executive Personnel and Inc. (a designer, importer and distributor Compensation Committee of fine quality collectibles and other giftware products), 1997-present; Director of Wells Fargo & Company Edwin C. Gage 63 Director since 1986 Chairman and Chief Executive Officer Director Affairs Committee of GAGE Marketing Group, L.L.C. (an Executive Personnel and integrated marketing services company), Compensation Committee, Chairman 1991–present Garnett L. Keith, Jr. 68 Director since 1984 Chairman and Chief Executive Officer Audit Committee, Chairman of SeaBridge Investment Advisors, LLC Finance Committee (a registered investment advisor), 1996- present; Director of AEA Investors LLC, Whitecap Capital LLC, Pan- Holding Societe Anonyme and Phillippe Investment Management 9
Present Position With the Company Name Age and Committees of the Board Professional Background Richard L. Knowlton 71 Director since 1994 Chairman of the Hormel Foundation (a Director Affairs Committee charitable foundation controlling 46.2% Executive Personnel and Compensation of Hormel Foods Corporation), 1995- Committee present; Director of ING America Insurance Holdings, Inc. Charles M. Lillis 62 Director since 1995 General Partner, LoneTree Capital Audit Committee Management (a private equity company), Finance Committee, Chairman 2000-present; Chairman, President and Chief Executive Officer of MediaOne Group, Inc. (a broadband communications company), 1998-2000; Director of Charter Communications Inc. and Williams Companies, Inc. Jeffrey Noddle 57 Director since 2000 See table “Executive Officers of the Chairman of the Board, Registrant” above; Chief Executive Officer and President Director of Donaldson Company, Inc. of the Company, 2002-present and General Cable Corporation Finance Committee Harriet Perlmutter* 72 Director since 1978 Trustee of the Papermill Playhouse (the Executive Personnel and Compensation State Theatre of New Jersey) Committee Finance Committee Marissa Peterson 42 Director since 2003 Executive Vice President, Worldwide Director Affairs Committee Operations and Services and Chief Finance Committee Customer Advocate for Sun Microsystems, Inc. (a provider of hardware, software and services) 2002- present. Executive Vice President, Worldwide Operations 1998-2002; Director of Couisint, Lucille Packard Children’s Hospital and a member of the Board of Trustees of Kettering Univeristy Steven S. Rogers 46 Director since 1998 Clinical Professor of Finance and Director Affairs Committee Management at J.L. Kellogg Graduate Audit Committee School of Management at Northwestern University, 1995-present; Director of Duquesne Light, Inc. and S.C. Johnson & Son, Inc. * In accordance with Board policies, Ms. Perlmutter is retiring from the Board of Directors on May 26, 2004. PART II ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company’s common stock is listed on the New York Stock Exchange under the symbol SVU. As of April 24, 2004, there were 135,328,998 shares of common stock outstanding. At that date, there were 6,782 stockholders of record, excluding individual participants in security position listings. The information called for by Item 5 as to the sales price for the company’s common stock on a quarterly basis during the last two fiscal years and dividend information is found under the heading “Common Stock Price” in Part II, Item 7 below. During the fiscal year ended February 28, 2004, the company issued 17,000 shares of unregistered restricted common stock as stock bonuses to certain employees. The issuance of such shares did not constitute a “sale” within the meaning of Section 2(3) of the Securities Act of 1933, as amended. 10
ITEM 6. SELECTED FINANCIAL DATA The information called for by Item 6 is found within the Five Year Financial and Operating Summary on page F-2. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW SUPERVALU is one of the largest grocery companies in the United States. We operate within two complementary businesses in the grocery food industry, grocery retail and food distribution. At February 28, 2004, we conducted our retail operations through a total of 1,483 stores, including 821 licensed locations. Principal formats include extreme value stores, regional price superstores and regional supermarkets. Our food distribution operations network spans 48 states and we serve as primary grocery supplier to approximately 2,470 stores, in addition to our own regional banner store network, as well as serving as secondary grocery supplier to approximately 660 stores. For the past several years, the approximate $500 billion revenue grocery food industry has been consolidating. As a result, market share has been concentrated in the larger grocery food companies. We participated in that consolidation through selective acquisition activities and the exit of certain markets. Based on revenues today, we would be ranked as the largest extreme value food retailer, 11th largest grocery retailer, and largest public company food wholesaler in the United States. In addition to consolidation activities, the grocery industry has experienced store saturation driven primarily by the continued increase in square footage devoted to food in supercenters, club stores, mass merchandisers, dollar stores, drug stores and other alternate formats as well as organic growth by traditional supermarket operators. As a result, same-store sales growth for the industry has been soft, pressuring profitability levels in the industry as operating costs continue to rise at a rate faster than sales growth. We expect this industry environment to continue for the foreseeable future. In fiscal 2004, our businesses benefited from the bankruptcy of Fleming Companies, Inc., formerly one of our largest food wholesale competitors. By entering into an asset exchange with C&S, we were able to affiliate certain former Fleming distribution operations in the Midwest in exchange for our New England operations. Even though overall revenues declined, approximately $200 million on an annual basis, as a result of the Asset Exchange, the efficiencies of our remaining operations were greatly enhanced as volume was concentrated in our existing facilities. It is expected that this transaction will provide incremental net earnings per share in fiscal 2005 of $.07 to $.10 per share. The grocery industry is also affected by the general economic environment and its impact on consumer spending behavior. In fiscal 2003, we experienced moderate deflation in our product costs in a weak economic environment. We would characterize fiscal 2004 as a year with a modestly improving economy and more normal levels of consumer spending and product cost inflation. For fiscal 2005, we expect a modest inflationary environment and further economic recovery. In fiscal 2004, most US businesses, including the labor intensive grocery industry were impacted by another year of rapidly rising health care and pension costs. These rising costs impacted the overall profitability levels of the food industry and have become a pivotal issue in labor negotiations for unionized employees who bargain for health and retirement benefits in addition to wages. Approximately 42% of SUPERVALU’s employees are unionized. In the St. Louis market, where we operate 21 regional supermarkets, we experienced a 28-day strike in the third quarter of fiscal 2004 (the “St. Louis Strike”). Approximately 40% of our unionized workforce are represented by contracts that are up for renewal in fiscal 2005. All of these industry factors impact our food distribution customer base. As a result, we continue to experience revenue attrition in our food distribution operations in a historical range of approximately 2% to 4%. 11
All the above factors will continue to impact our industry and our company in fiscal 2005. We believe we can be successful against this industry backdrop with our regional retail formats that focus on local execution, merchandising, and consumer knowledge. In addition, our operations benefit from our efficient and low-cost supply chain and economies of scale as we leverage our retail and distribution operations. Save-A-Lot, our extreme value format, has nationwide potential, and currently operates in 37 states. After our fiscal 2003 acquisition of Deals, we tested in fiscal 2004 several new prototypes of an extreme value combination store, offering both food and dollar general merchandise. We are pleased with the performance of the new prototypes and the majority of our new extreme value food stores will be a type of combination store in the future. We plan to expand regional retail banner square footage through selective new store growth in key markets where we have significant market share. In addition, we will supplement regional retail store growth with continued focus on remodel activities. Given the life cycle maturity of our distribution business with its inherent attrition rate, future growth in food distribution will be modest and primarily achieved through serving new independent customers, net growth from existing customers and further consolidation opportunities. We will remain committed to streamlining our operations and improving our return on invested capital through a variety of initiatives. RESULTS OF OPERATIONS Highlights of results of operations as reported were as follows: February 28, February 22, February 23, 2004 2003 2002 (53 weeks) (52 weeks) (52 weeks) (In millions) Net sales $20,209.7 100.0% $19,160.4 100.0% $20,293.0 100.0% Cost of sales 17,372.4 85.9 16,567.4 86.5 17,704.2 87.2 Selling and administrative expenses 2,220.4 11.0 2,020.2 10.5 2,037.7 10.1 Restructure and other charges 15.5 0.1 2.9 — 46.3 0.2 Operating earnings $ 601.4 3.0 $ 569.9 3.0 $ 504.8 2.5 Interest expense 165.6 0.8 182.5 1.0 194.3 1.0 Interest income (19.1) (0.1) (20.6) (0.1) (21.5) (0.1) Earnings before income taxes $ 454.9 2.3 $ 408.0 2.1 $ 332.0 1.6 Income tax expense 174.8 0.9 151.0 0.8 133.7 0.6 Net earnings $ 280.1 1.4% $ 257.0 1.3% $ 198.3 1.0% In fiscal 2003, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, which required it to cease amortizing goodwill and test annually for impairment. Goodwill amortization of $48.4 million was included in fiscal 2002. Comparison of fifty-three weeks ended February 28, 2004 (2004) with fifty-two weeks ended February 22, 2003 (2003): In fiscal 2004, the company achieved net sales of $20.2 billion compared with $19.2 billion last year. Net earnings for fiscal 2004 were $280.1 million and diluted earnings per share were $2.07 compared with net earnings of $257.0 million and diluted earnings per share of $1.91 last year. Fiscal 2004 was a 53 week fiscal year, resulting in an extra week in the fourth quarter, which generated approximately $360.0 million in net sales and contributed approximately $.07 to diluted earnings per share. Fiscal 2004 operating results include the impact of the Asset Exchange, the sale or closure of its Denver based operations that included nine retail stores and a food distribution facility (the “Denver Disposition”) and the St. Louis Strike. 12
Net Sales Net sales for fiscal 2004 were $20.2 billion, an increase of 5.5 percent from last year. Retail food sales were 52.2 percent of net sales for fiscal 2004 compared with 51.4 percent last year. Food distribution sales were 47.8 percent of net sales for fiscal 2004 compared with 48.6 percent last year. Retail food sales for fiscal 2004 increased 7.1 percent compared with last year, primarily reflecting new store openings, increases in same-store sales and the benefit of the extra week. Same-store retail sales for fiscal 2004 were positive 2.1 percent. Fiscal 2004 store activity, including licensed units, resulted in 107 new stores opened and 41 stores closed, including the sale or closure of our Denver based stores, for a total of 1,483 stores at year end. Total square footage increased approximately 3.8 percent over the prior year. Food distribution sales for fiscal 2004 increased 3.7 percent compared with last year, primarily reflecting the impact of new customer affiliations and the benefit of the extra week, which more than offset customer attrition, and the net revenue loss as a result of the Asset Exchange. Gross Profit Gross profit (calculated as net sales less cost of sales), as a percent of net sales, was 14.1 percent for fiscal 2004 compared with 13.5 percent last year. The increase in gross profit, as a percent of net sales, primarily reflects improved merchandising execution for retail, including the expansion of general merchandise in the extreme value format, and the growing proportion of our retail food business, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business. Selling and Administrative Expenses Selling and administrative expenses, as a percentage of net sales, were 11.0 percent for fiscal 2004 compared with 10.5 percent last year. The increase in selling and administrative expenses, as a percent of net sales, primarily reflects increases in employee benefit and incentive related costs, costs associated with the Denver Disposition, including related reserves for closed stores, $10.8 million in additional reserves for non- operating properties and approximately $5 million in net litigation settlements. Restructure and Other Charges In fiscal 2004, the company incurred $15.5 million, or 0.1 percent of net sales, in pre-tax restructure and other charges, consisting of $8.5 million for changes in estimates on exited real estate in certain markets for food distribution and $7.0 million for increased liabilities associated with employee benefit related costs from previously exited food distribution facilities. Operating Earnings Operating earnings for fiscal 2004 increased 5.5 percent to $601.4 million compared with $569.9 million last year. Fiscal 2004 operating earnings include $15.5 million in pre-tax restructure and other charges. Fiscal 2003 operating earnings include $2.9 million in pre-tax restructure and other charges. Retail food operating earnings for fiscal 2004 increased 1.7 percent to $444.0 million, or 4.2 percent of net sales, from last year’s operating earnings of $436.5 million, or 4.4 percent of net sales. The increase in retail food operating earnings was primarily due to growth of new stores, improved merchandising execution and the benefit of the extra week which were substantially offset by increases in employee benefit and incentive related costs, costs associated with the Denver Disposition, including related reserves for closed stores and the impact of the St. Louis Strike. Food distribution operating earnings for fiscal 2004 increased 29.6 percent to $222.5 million, or 2.3 percent of net sales, from last year’s operating earnings of $171.6 million, or 1.8 percent of net sales. The increase in food distribution operating earnings primarily reflects the increase in sales volume, benefits of efficiency initiatives implemented during the course of the prior year and the benefit of the extra week. 13
Net Interest Expense Interest expense was $165.6 million in fiscal 2004 compared with $182.5 million last year. The decrease primarily reflects lower borrowing levels that more than offset $5.8 million in pre-tax costs related to the early redemption of $100 million of debt at a price of 103.956 percent in the third quarter of fiscal 2004. Interest income was $19.1 million in fiscal 2004 compared with $20.6 million last year. Income Taxes The effective tax rate was 38.4 percent and 37.0 percent in fiscal 2004 and fiscal 2003, respectively. The increase in the effective tax rate in the current year was due to $7.6 million of taxes due on the Asset Exchange. Net Earnings Net earnings were $280.1 million, or $2.07 per diluted share, in fiscal 2004 compared with net earnings of $257.0 million, or $1.91 per diluted share last year. Weighted average diluted shares increased to 135.4 million fiscal 2004 compared with 134.9 million shares last year, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program. Comparison of fifty-two weeks ended February 22, 2003 (2003) with fifty-two weeks ended February 23, 2002 (2002): Net Sales Net sales for 2003 were $19.2 billion, a decrease of 5.6 percent from 2002. Retail food sales were 51.4 percent of net sales for 2003 compared with 47.1 percent for 2002. Food distribution sales were 48.6 percent of net sales for 2003 compared with 52.9 percent for 2002. Retail food sales for 2003 increased 3.1 percent compared to 2002, primarily as a result of new store growth. Same-store retail sales for 2003 were negative 1.1 percent, impacted by approximately 1.2 percent of planned in- market expansion. Other factors contributing to the decline in same store sales performance include a weakened economy and a more intense promotional environment. Fiscal 2003 store activity, including licensed units, resulted in 198 new stores opened and acquired, including the acquisition of 50 Deals stores and 41 stores closed or sold for a total of 1,417 stores at year end. Total square footage increased approximately 6.6 percent over the prior year. Food distribution sales for 2003 decreased 13.3 percent compared to 2002, primarily reflecting customers lost in 2002 including the exit of the Kmart supply contract and the loss of Genuardi’s as a customer and sales losses from restructure activities, which accounted for approximately eight percent, three percent and one percent, respectively, of the decrease in food distribution sales. Gross Profit Gross profit (calculated as net sales less cost of sales), as a percentage of net sales, was 13.5 percent for 2003 compared to 12.8 percent for 2002. The increase in gross profit, as a percentage of net sales, reflects the growing proportion of the company’s retail food business, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business, including the higher gross profit margin of the recently acquired and opened Deals stores. Gross profit in retail benefited from improved merchandising execution. Gross profit in distribution was negatively impacted by a change in our distribution customer mix. 14
Selling and Administrative Expenses Selling and administrative expenses, as a percentage of net sales, were 10.5 percent for 2003 compared to 10.1 percent for 2002. Selling and administrative expenses include $12.5 million in store closing reserves recorded in fiscal 2002. Fiscal 2002 also includes goodwill amortization of $48.4 million. The increase in selling and administrative expenses, as a percentage of net sales, reflects the growing proportion of the company’s retail food business, which operates at a higher selling and administrative expense as a percentage of net sales than does the food distribution business, including the higher selling and administrative expense ratio of the recently acquired and opened Deals stores. Operating Earnings The company’s operating earnings were $569.9 million for 2003 compared to $504.8 million for 2002, a 12.9 percent increase. Fiscal 2003 operating earnings include $2.9 million for restructure and other charges. Fiscal 2002 operating earnings include $46.3 million for restructure and other charges and $12.5 million in store closing reserves. Retail food 2003 operating earnings increased 20.2 percent to $436.5 million, or 4.4 percent of net sales, from 2002 operating earnings of $363.3 million, or 3.8 percent of net sales. Fiscal 2002 retail food operating earnings include goodwill amortization of $25.3 million. The remaining increase in retail food operating earnings was primarily due to growth of new stores and improved merchandising execution in retail. Food distribution 2003 operating earnings decreased 24.4 percent to $171.6 million, or 1.8 percent of net sales, from 2002 operating earnings of $227.0 million, or 2.1 percent of net sales. Fiscal 2002 food distribution operating earnings included goodwill amortization of $23.1 million. The decrease in food distribution operating earnings primarily reflects the decrease in sales volume and a change in our distribution customer mix. Net Interest Expense Interest expense decreased to $182.5 million in 2003 compared with $194.3 million in 2002, reflecting lower borrowing levels and lower average interest rates, largely due to the interest rate swap agreements entered into in 2003. Interest income decreased to $20.6 million in 2003 compared with $21.5 million in 2002. Income Taxes The effective tax rate was 37.0 percent in 2003 compared with 40.3 percent in 2002. The decrease in the effective tax rate was due to the discontinuation of goodwill amortization as of February 24, 2002, which is not deductible for income tax purposes. Net Earnings Net earnings were $257.0 million, or $1.91 per diluted share, in 2003 compared with net earnings of $198.3 million, or $1.48 per diluted share in 2002. Weighted average diluted shares increased to 134.9 million in 2003 compared with 2002 weighted average diluted shares of 134.0 million, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program. RESTRUCTURE AND OTHER CHARGES For fiscal 2004, the company recognized pre-tax restructure and other charges of $15.5 million. The charges reflect the net adjustments to the restructure reserves and asset impairment charges of $0.6 million, $14.4 million and $0.5 million for restructure 2002, 2001 and 2000, respectively. The increases are due to continued softening of real estate in certain markets and higher than anticipated employee benefit related costs. The following information includes only those restructure and other charges that are the result of previously initiated restructure activities. In addition, the company maintains reserves and has recorded certain impairments for properties that have been closed as part of management’s ongoing operating decisions. Those reserves and impairment charges are disclosed within the Reserves for Closed Properties and Asset Impairment section. 15
Fiscal 2004 net cash outflows relating to all restructure plans were approximately $20 million. Remaining future net cash outflows primarily relate to expected net future payments on exited real estate and employee related costs, net of after-tax proceeds from the sale of owned properties. Cash outflows will be funded by cash from operations. Restructure 2002 In fiscal 2002, the company identified additional efforts that would allow it to extend its food distribution efficiency program that began early in fiscal 2001. The additional food distribution efficiency initiatives identified resulted in pre-tax restructure charges of $16.3 million, primarily related to personnel reductions in administrative and transportation functions. Management began the initiatives in fiscal 2003 and the majority of these actions were completed by the end of fiscal 2003. In fiscal 2003, the fiscal 2002 restructure charges were decreased by $3.6 million, including a decrease of $1.4 million due to lower than anticipated lease related costs in transportation efficiency initiatives and a decrease of $2.2 million in employee related costs due to lower than anticipated severance costs. In fiscal 2004, the fiscal 2002 restructure charges were increased by $0.6 million due to higher than anticipated severance costs for certain employees. Remaining reserves for the fiscal 2002 restructure plan represent future lease payments. Details of the fiscal 2002 restructure activity for fiscal 2004 are as follows: Balance Fiscal Balance February 22, 2004 Fiscal 2004 February 28, 2003 Usage Adjustment 2004 (In thousands) Lease related costs: Transportation efficiency initiatives $1,054 $ (816) $ (43) $195 1,054 (816) (43) 195 Employee related costs: Administrative realignment 2,390 (3,019) 629 — 2,390 (3,019) 629 — Total restructure charges $3,444 $(3,835) $586 $195 Details of the fiscal 2002 restructure activity as it relates to the number of terminated employees are as follows: Employees Balance Employees Balance Original Terminated February 22, Terminated February 28, Estimate in Fiscal 2003 2003 in Fiscal 2004 2004 Employees 800 (650) 150 (150) — Restructure 2001 In fiscal 2001, the company completed a strategic review that identified certain assets that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments. This review process culminated in the company recording pre-tax restructure and other charges of $181.6 million, including $89.7 million for asset impairment charges, $52.1 million for lease subsidies, lease cancellation fees, future payments on exited real estate and guarantee obligations and $39.8 million for severance and employee related costs. In fiscal 2002, the fiscal 2001 restructure and other charges were increased by $17.8 million as a result of changes in estimates primarily due to the softening real estate market, including $19.1 million for increased lease liabilities in exiting the non-core retail markets and the disposal of non-core assets, offset by a net decrease of $1.3 million in restructure reserves for the consolidation of distribution centers. 16
In fiscal 2003, the fiscal 2001 restructure and other charges were increased by $8.1 million, including an $11.7 million increase to the restructure reserves offset by a decrease in asset impairment charges of $3.6 million. The reserve increase of $11.7 million was a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sale, sublease or assignment in certain markets, including approximately $5 million relating to the consolidation of distribution centers, $6 million relating to the exit of non-core retail markets and $1.2 million in higher than anticipated employee related costs primarily in the exit of non-core retail markets. For fiscal 2004, the fiscal 2001 restructure and other charges were increased by $14.4 million, including an $11.7 million increase to the restructure reserves and a $2.7 million increase in asset impairment charges. The reserve increase of $11.7 million was a result of changes in estimates on employee benefit related costs from previously exited food distribution facilities and changes in estimates on exited real estate in certain markets for food distribution properties. Included in the asset impairment charges in fiscal 2001 of $89.7 million were $57.4 million of charges related to retail food properties and $32.3 million of charges related to food distribution properties. Writedowns for property, plant and equipment, goodwill and other intangibles, and other assets were $58.4 million, $21.8 million and $9.5 million, respectively, and were reflected in the “Restructure and other charges” line in the Consolidated Statements of Earnings for fiscal 2001. In fiscal 2003, the fiscal 2001 asset impairment charges for property, plant and equipment were decreased by $3.6 million primarily due to changes in estimates on exited real estate in certain markets and includes a decrease of $8.2 million in estimates related to certain food distribution properties offset by an increase of $4.6 million in estimates related to certain retail food properties. In fiscal 2004, the fiscal 2001 asset impairment charges for property, plant and equipment were increased by $2.7 million primarily due to changes in estimates on exited real estate in certain markets for food distribution properties. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values, which were based on the estimated market values for similar assets. 17
All activity for the fiscal 2001 restructure plan has been completed. Remaining reserves represent future payments on exited real estate and employee benefit related costs from previously exited food distribution facilities. Details of the fiscal 2001 restructure activity for fiscal 2004 are as follows: Balance Fiscal Fiscal Balance February 22, 2004 2004 February 28, 2003 Usage Adjustment 2004 (In thousands) Lease related costs: Consolidation of distribution centers $ 6,473 $ (2,384) $ (33) $ 4,056 Exit of non-core retail markets 8,844 (4,458) 3,266 7,652 Disposal of non-core assets and other administrative reductions 4,299 (1,375) 536 3,460 19,616 (8,217) 3,769 15,168 Employee related costs: Consolidation of distribution centers 9,604 (5,996) 7,421 11,029 Exit of non-core retail markets 2,980 (3,087) 540 433 12,584 (9,083) 7,961 11,462 Total restructure and other charges $32,200 $(17,300) $11,730 $26,630 Fiscal Balance Previously 2004 February 28, Recorded Adjustment 2004 Impairment charges $86,169 $ 2,737 $88,906 The number of actual employees terminated under the fiscal 2001 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. There was no activity in fiscal 2004. Details of the fiscal 2001 restructure activity as it relates to the number of terminated employees are as follows: Employees Balance Original Terminated Adjustments February 22, Estimate in Prior Years in Prior Years 2003 Employees 4,500 (3,767) (733) — Restructure 2000 In fiscal 2000, the company recorded pre-tax restructure and other charges of $103.6 million as a result of an extensive review to reduce costs and enhance efficiencies. Included in this total was $17.4 million for asset impairment costs. The restructure and other charges include costs for facility consolidation, non-core store disposal, and rationalization of redundant and certain decentralized administrative functions. The original reserve amount was reduced by $10.3 million in fiscal 2001, primarily as a result of a change in estimate for the closure of a remaining facility. The reserve amount was subsequently increased $12.2 million in fiscal 2002, due to a change in estimate on a remaining facility primarily due to the softening real estate market. In fiscal 2003, the fiscal 2000 restructure and other charges were decreased by $1.6 million, including a $2.9 million increase to the restructure reserves offset by a decrease in asset impairment charges of $4.5 million. The reserve increase of $2.9 million was a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sale, sublease or assignment in certain markets and higher than anticipated employee related costs. In fiscal 2004, the fiscal 2000 restructure and other charges were increased by $0.5 million as a result of changes in estimates on exited real estate due to the continued softening of real estate marketed for sale, sublease or assignment in certain markets. 18
Included in the asset impairment charges in fiscal 2000 of $17.4 million were writedowns on food distribution assets of $10.6 million for property, plant and equipment, $5.6 million of goodwill and other intangibles, and $1.2 million for other assets that were reflected in the “Restructure and other charges” line in the Consolidated Statements of Earnings for fiscal 2000. In fiscal 2003, the fiscal 2000 asset impairment charges for property, plant and equipment on food distribution properties were decreased by $4.5 million primarily due to changes in estimates on exited real estate in certain markets. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values, which were based on the estimated market values for similar assets. All activity for the fiscal 2000 restructure plan has been completed. Remaining reserves represent future payments on exited real estate. Details of the fiscal 2000 restructure activity for fiscal 2004 are as follows: Balance Fiscal Fiscal Balance February 22, 2004 2004 February 28, 2003 Usage Adjustment 2004 (In thousands) Lease related costs: Facility consolidation $ 8,083 $(7,667) $ 34 $ 450 Non-core store disposal 3,042 (1,454) 418 2,006 Total restructure and other charges $11,125 $(9,121) $452 $ 2,456 Fiscal Previously 2004 February 28, Recorded Adjustment 2004 Impairment charges $12,964 $ 18 $12,982 The number of actual employees terminated under the fiscal 2000 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. There was no activity in fiscal 2003 or fiscal 2004. Details of the fiscal 2000 restructure activity as it relates to the number of terminated employees are as follows: Employees Balance Original Terminated Adjustments February 23, Estimate in Prior Years in Prior Years 2002 Employees 2,517 (1,693) (824) — CRITICAL ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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 the Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements. Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of the company’s consolidated financial statements. 19
LIFO and Retail Inventory Method For a significant portion of the company’s inventory, cost is determined through use of the last-in, first-out (LIFO) method. The Company utilized LIFO to value approximately 68 percent and 71 percent of the company’s consolidated inventories for fiscal 2004 and 2003, respectively. The retail inventory method (RIM) is used to value retail inventory. The valuation of inventories are at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. Inherent in the RIM calculations are certain significant management judgments and estimates, including shrinkage, which significantly impact the ending inventory valuation at cost, as well as the resulting gross margins. These judgments and estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce results which differ from actual. Management believes that the company’s RIM provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market. Allowances for Losses on Receivables 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. Although risk management practices and methodologies are utilized to determine the adequacy of the allowance, it is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectibility based on the information considered and further deterioration of accounts. Reserves for Closed Properties and Asset Impairment Charges The company maintains reserves for estimated losses on retail stores, distribution warehouses 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, net of estimated subtenant income. 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 income 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 current economic conditions. Owned properties that are closed are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with our policy on impairment of long-lived assets. Impairment charges on long-lived assets are recognized when expected net future cash flows are less than the assets’ carrying value. The company estimates net future cash flows based on its experience and knowledge of the market in which the closed property is located and, when necessary, utilizes local real estate brokers. 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. Closed property reserves are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period. The expectations on timing of disposition or sublease and the estimated sales price or sublease income associated with closed properties are impacted by variable factors such as 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 on closed properties are adequate, it is possible that continued 20
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supervalu annual report 2004

  • 1.
  • 2. Dear Shareholder: This year, I am proud that SUPERVALU’s business operations delivered a standout year in fiscal 2004 marked by significant accomplishments and strong financial results. SUPERVALU continued to build momentum. We stayed the course on our business strategies and made substantial progress in our financial metrics. Unlike last year, which was clouded by macro-economic factors, fiscal 2004 was a year of changing industry dynamics. A long-time wholesale competitor declared bankruptcy; health care costs and pension expenses continued to increase at double-digit rates, which challenged union contract negotiations across the country; and moderate price inflation returned in some food categories. Today, we are witnessing transformation in the food retailing industry as companies embark on large-scale infrastructure initiatives to respond to more intense competition and drive sales improvements. It is truly an exciting time in our industry, and I believe SUPERVALU is well positioned to continue our success in this ever-changing environment. Our accomplishments in fiscal 2004 attest to our ability to adapt in a changing landscape while maintaining our long-term strategies. In fiscal 2004, we reported: ‰ Sales of $20.2 billion ‰ Net earnings of $280 million ‰ Diluted earnings per share of $2.07 ‰ Debt to capital ratio of 46.7 percent, the lowest in more than a decade ‰ Return on Invested Capital (ROIC), calculated on a 52-week basis, of 14.1 percent Even with the extra week in fiscal 2004 compared to fiscal 2003’s 52-week year, we showed good progress. The extra week contributed approximately $360 million in revenues and $0.07 in diluted earnings per share in the fourth quarter. Key Accomplishments Fiscal 2004 performance is the result of many initiatives undertaken during the year. Our key accomplishments in our two business engines will provide the fuel for continued success in fiscal 2005. Our retail team did an exceptional job again in fiscal 2004. Throughout the year, we generated industry leading retail comparable store sales growth that was broad based across our markets. Our strong merchandising and store level execution continued to drive improvement in important benchmarks such as higher customer counts and average ticket on a like-store basis. At Save-A-Lot, our fastest growing retail format, we completed much of the staging work necessary to accelerate the growth of this unique retail offering. In fiscal 2004: ‰ We tested the new combination store prototype, which features both grocery products and general merchandise at extreme value prices, and increased the pace of store conversions to this combination store format; ‰ We ended the fiscal year with nearly 200 combination stores within our 37-state Save-A-Lot store network, including licensees. This was driven by the conversion of existing stores to combination units and 75 new stores, including licensed stores, that we added to our network during the year; ‰ We continued to invest in our distribution infrastructure with the relocation of three food distribution centers and the opening of a general merchandise distribution center; ‰ We expanded the general merchandise sourcing programs to support future growth; and ‰ We began to install new technologies to enhance core systems in procurement and inventory management.
  • 3. Also in retail during fiscal 2004, our “in-market” efforts with category management and banner branding enhanced our excellent foothold in key markets where we continue to invest with new stores and remodels. A few examples are: ‰ Cub Foods in Minnesota improved its market share position by adding four new stores to its network. Cub Foods plans to open four more stores in Minnesota in fiscal 2005. ‰ We converted the Metro stores in Baltimore, Maryland, to Shoppers Food and Pharmacy, our strong price impact format in Washington, D.C., which promises to extend our success to another major market. ‰ Farm Fresh in Virginia continued to grow market share through strong quality and service. In fiscal 2005, an exciting smaller store, uniquely located on the ground floor of a luxury high-rise condo development, will further broaden Farm Fresh’s appeal to consumers. ‰ Shop ’n Save in St. Louis, Missouri, continued its strong price impact merchandising programs, including a pilot program featuring Deal$-sourced dollar store merchandise within the larger Shop ’n Save stores. SUPERVALU’s distribution business made significant progress in fiscal 2004. We took bold steps to advance our strategy including focusing on aggressive asset management to carefully align productive assets to drive solid business returns, continuing the implementation of efficiency initiatives and delivering growth in our non-asset based business platform. Through a unique asset exchange with C&S Wholesale Grocers, Inc. to affiliate former Fleming retailers in the Midwest, we successfully brought on and integrated new business into our existing network. The overall square footage reduction and the complementary increase in capacity utilization rates was a component of our overall ROIC improvement for the year. Even though the wholesale distribution business is a mature industry, we have numerous efficiency initiatives in place across our logistics network generating improvements in our productivity. Supporting our nearly 3,200 customers are strong programs, founded on an activity-based pricing philosophy, which drive competitiveness at the grocery shelf level. Whether it is warehouse efficiencies or our business-to-business portal SVHarbor® with more than eight million customer transactions per month, we continuously leverage the application of technology for process improvement and efficiency. Our non-asset based logistics service business, Advantage Logistics, made progress in fiscal 2004. We began serving two new facilities in Denver, including Atkins Nutritionals, a new manufacturing customer specializing in controlled carbohydrate food products. Since the end of fiscal 2004, we have been awarded our second Atkins facility. Another hybrid to the traditional brick and mortar offering is our Target-dedicated facility in Fort Worth, Texas, which serves 49 of the 118 SuperTarget stores we currently supply. As these new business offerings and solutions gain scale and momentum, they provide a new iteration of growth for our logistics business over the long term. All these business strategies across SUPERVALU work hand-in-hand to drive progress on our financial goals. In fiscal 2004, we continued to strengthen our financial condition. We continued our prudent capital spending program, with spending for fiscal 2004 at $371.5 million, including $43.3 million in capitalized leases. As in previous years, our capital spending primarily supports retail store expansion and remodels, new Save-A-Lot distribution facilities and technology enhancements. During the year, SUPERVALU reduced debt levels by more than $220 million. As a result, our debt to capital ratio at year end was 46.7 percent, our lowest level in more than a decade. Subsequent to the end of the fiscal year, we sold our equity interest in a West Coast retailer named WinCo. Our decision to sell this equity interest was to monetize an asset over which we had limited control and that contributed no cash earnings, but had significant unrealized appreciation. We received approximately $150 million in after-tax proceeds for our interest in WinCo, which will be utilized to support further debt reduction. 2
  • 4. Business Outlook I believe SUPERVALU has a promising future with many exciting activities underway. ‰ We have a strong growth plan for Save-A-Lot with the addition of a general merchandise offering and an increase in store expansion with an estimated 110 to 140 new stores in fiscal 2005. ‰ We continue to sharpen our regional retail excellence across multiple banners. Through new stores and our remodeling program we have achieved a modern fleet with 80 percent of our regional stores either new or newly remodeled in the last seven years. ‰ Our diligent efforts in Distribution to rationalize our network to improve capacity utilization rates, implement “best in class” efficiency programs, and expand our non-asset based logistics platform remain an excellent formula to support a business model with strong cash flow characteristics. ‰ Our strong financial position provides the flexibility needed to support our future growth. ‰ Lastly, we expect ROIC in fiscal 2005 to benefit from the strategic activities undertaken during fiscal 2004. Our continued focus on ROIC supports a prudent and profitable approach to decision making that should contribute to meaningful improvements in ROIC in fiscal 2005 as well. We are confident that SUPERVALU is deploying the best short-term and long-term strategies aimed at the changing retail environment, the evolving needs of the grocery channel and the improvement in our financial metrics. These business strategies will be carried out by the 55,200 hard working employees who in fiscal 2004 renewed their pledge to our Mission Statement’s commitment to serve our customers better than anyone else can, each and every day. Our customers include retail partners, store consumers and communities. As we diligently work to create a growing, profitable company, we will continue to deliver value for all of our stakeholders. Jeff Noddle Chairman and Chief Executive Officer SUPERVALU Mission Statement Our mission at SUPERVALU always will be to serve our customers better than anyone else could serve them. We will provide our customers with value through our products and services, committing ourselves to providing the quality, variety and convenience they expect. Our success requires us to trust in our employees, respect their individual contributions and make a commitment to their continued development. This environment will allow us to attract the best people and provide opportunities through which they can achieve personal and professional satisfaction. Our commitment is to support the communities in which our employees and customers live and work. We will use our time and resources to preserve our role as a partner, neighbor and friend. Our responsibility to our investors is clear – continuous profit growth while ensuring our future success. SUPERVALU will prosper through a balance of innovation and good business decisions that enhances our operations and creates superior value for our customers. By pursuing these goals, SUPERVALU will continue to build on our foundation as a world-class retailer and distributor that values long-standing ties with its constituents, and conducts its business with integrity and ethics. We will continue to foster strong relationships with the diverse people and organizations with whom we work. Through open communication with our customers, employees, communities and shareholders, we will adapt to changing times while holding true to the fundamentals that support both our growth and stability. We shall pursue our mission with a passion for what we do and a focus on priorities that will truly make a difference in our future. 3
  • 5. SUPERVALU Corporate Officers Jeffrey Noddle Sherry M. Smith David M. Oliver Chairman, CEO & President Senior Vice President, Vice President, Controller Finance & Treasurer David L. Boehnen Yolanda M. Scharton Executive Vice President Ronald C. Tortelli Vice President, Investor Relations Senior Vice President, & Corporate Communications John H. Hooley Human Resources Executive Vice President; James L. Stoffel President & COO, Retail Foods Karen T. Borman Vice President, Vice President, Distribution Financial Planning Michael L. Jackson Financial Planning & Analysis Executive Vice President; Richard N. Finkbeiner President & COO, Distribution Leland J. Dake President, Advantage Logistics Vice President, Pamela K. Knous Edward J. McManus Merchandising, Distribution Executive Vice President & CFO President, Cub Foods Kristin A. Hayes Eastern Region Robert W. Borlik Vice President, Senior Vice President & CIO John P. Breedlove Strategic Planning Associate General Counsel J. Andrew Herring Stephen P. Kilgriff Corporate Secretary Senior Vice President; Vice President, Legal Executive Vice President, Warren E. Simpson Retail Pharmacies Edward B. Mitchell Senior Corporate Counsel Vice President, Assistant Secretary Gregory C. Heying Employee Relations Senior Vice President, Distribution Investor Information Transfer Agent and Registrar Investor Inquiries For general inquiries about SUPERVALU For a copy of the annual report or any documents common stock, such as: filed with the SEC, please request in writing to: ‰ Dividend reinvestment ‰ Automatic deposit of dividend checks John Breedlove ‰ Certificate replacements Corporate Secretary ‰ Account maintenance SUPERVALU INC ‰ Transfer of shares PO Box 990 ‰ Name or address changes Minneapolis, MN 55440 Please contact: Documents filed with the SEC may be Wells Fargo Shareowner Services accessed through the company’s web site at PO Box 64854 www.supervalu.com. St. Paul, MN 55164-0854 Phone: 877-536-3555 For investor relations inquiries, visit the www.wellsfargo.com/com/shareowner_services company’s web site at www.supervalu.com or contact: Yolanda Scharton, Common Stock Vice President, Investor Relations & Corporate SUPERVALU’s common stock is listed on the Communications New York Stock Exchange under symbol SVU. SUPERVALU INC As of April 1, 2004, there were approximately PO Box 990 6,811 shareholders of record and approximately Minneapolis, MN 55440 44,000 shareholders in street name. 4
  • 6. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2004 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-5418 SUPERVALU INC. (Exact name of registrant as specified in its charter) Delaware 41-0617000 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11840 Valley View Road Eden Prairie, Minnesota 55344 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (952) 828-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $1.00 per share New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes È No ‘ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 6, 2003 was approximately $3,257,057,854 (based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on September 5, 2003). Number of shares of $1.00 par value Common Stock outstanding as of April 24, 2004: 135,328,998. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant’s definitive Proxy Statement filed for the Registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Part III, as specifically set forth in Part III.
  • 7. PART I ITEM 1. BUSINESS General Development SUPERVALU is one of the largest companies in the United States grocery channel. SUPERVALU conducts its retail operations under three retail food store formats: extreme value stores primarily under the retail banner Save-A-Lot; price superstores, under the regional retail banners of Cub Foods, Shop ’n Save, Shoppers Food Warehouse and bigg’s; and supermarkets, under the regional retail banners of Farm Fresh, Scott’s and Hornbacher’s. As of the close of the fiscal year, the company conducted its retail operations through 1,483 stores, including 821 licensed extreme value stores. SUPERVALU also provides food distribution and related logistics support services across the United States retail grocery channel. As of the close of the fiscal year, the company served as the primary grocery supplier to approximately 2,470 retail food stores in 48 states, in addition to its own regional banner store network, and as a secondary supplier to approximately 660 stores. SUPERVALU is focused on retail growth through targeted new store development, remodel activities, licensee growth and acquisitions. During fiscal 2004, the company added 66 net new stores through new store development. The company’s plans also include leveraging its distribution operations by providing logistics and service solutions through an efficient supply chain, which will allow it to affiliate new independent customers and expand its recently launched Advantage Logistics third party logistics business. Consolidation opportunities in the food distribution industry may provide another avenue for growth. In September 2003, the company acquired certain grocery distribution operations in the Midwest, formerly owned by Fleming, in exchange for its New England operations, pursuant to an Asset Exchange Agreement with C&S Wholesale Grocers (the “Asset Exchange”). Overall revenues declined as a result of the Asset Exchange, but the efficiency of the company’s operations were enhanced as the new business was absorbed by the company’s existing Midwestern facilities. The company has estimated that the Asset Exchange will benefit full year fiscal 2005 earnings by $0.07 to $0.10 per share. SUPERVALU INC., 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). Unless the discussion in this Annual Report on Form 10-K indicates otherwise, all references to the “company,” “SUPERVALU” or “Registrant” relate to SUPERVALU INC. and its majority-owned subsidiaries. The company makes available free of charge at its internet website (www.supervalu.com) various corporate governance materials, 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 soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. 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 the Corporate Secretary, SUPERVALU INC., P.O. Box 990, Minneapolis, MN 55440. Additional description of the company’s business is found in Part II, Item 7 of this report. Financial Information About Reportable Segments The company’s business is classified by management into two reportable segments: Retail food and food distribution. Retail food operations include three retail food store formats: extreme value stores, regional price superstores and regional supermarkets. The retail formats include results of food stores owned and results of 2
  • 8. sales to extreme value stores licensed by the company. Food distribution operations include results of sales to affiliated food stores, mass merchants and other customers, and other logistics arrangements. Management utilizes more than one measurement and multiple views of data to assess segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the consolidated financial statements. The financial information concerning the company’s operations by reportable segment for the years ended February 28, 2004, February 22, 2003 and February 23, 2002 is contained on page F-5. Retail Food Operations Overview. At February 28, 2004, the company conducted its retail food operations through a total of 1,483 retail stores, including 821 licensed extreme value stores. Its principal retail food formats include extreme value stores, regional price superstores and regional supermarkets. These diverse formats enable the company to operate in a variety of markets under widely differing competitive circumstances. Based on revenues, the company was the 11th largest grocery retailer in the United States as of February 28, 2004. In fiscal 2005, the company anticipates opening approximately 110 to 140 new extreme value stores and eight to 10 regional banner stores and continuing its store remodeling program. Extreme Value Stores. The company operates extreme value stores primarily under the Save-A-Lot banner. Save-A-Lot holds the number one market position, based on revenues, in the extreme value grocery- retailing sector. Save-A-Lot food stores typically are approximately 15,000 square feet in size, and stock approximately 1,250 high volume food items generally in a single size for each product sold. At a Save-A-Lot store, the majority of the products offered for sale are custom branded products. The specifications for the Save- A-Lot custom branded product emphasize quality and characteristics that the company believes are comparable to national brands. The company’s attention to the packaging of Save-A-Lot products has resulted in the company registering a number of its custom labels. After the company’s fiscal 2003 acquisition of a small dollar store general merchandise operator, Deal$ Nothing Over A Dollar (“Deals”), the company started testing several new prototypes of an extreme value combination store, offering both food and dollar-priced general merchandise. During fiscal 2004, the company converted or opened 166 combination stores. At fiscal year end, there were 1,225 extreme value stores located in 37 states, of which 821 were licensed. These stores are supplied from 16 dedicated distribution centers. Price Superstores. The company’s price superstores hold the number one, two or three market position in most of their markets. The price superstore focus is on providing every day low prices and product selection across all departments. Most of the company’s price superstores offer traditional dry grocery departments, along with strong perishable departments and pharmacies. Price superstores carry over 45,000 items and generally range in size from 45,000 to 100,000 square feet with an average size of approximately 64,000 square feet. At fiscal year end, the company owned and operated 199 price superstores under the Cub Foods, Shop ’n Save, Shoppers Food Warehouse and bigg’s banners in 12 states; an additional 29 stores were franchised to independent retailers under the Cub Foods banner. In-store pharmacies are operated in 176 of the price superstores. The owned Cub Food stores operate primarily in the Minneapolis/St. Paul and Chicago markets; Shop ’n Save operates primarily in the St. Louis and Pittsburgh markets; Shoppers Food Warehouse operates in the Washington D.C. and Baltimore markets; and bigg’s operates primarily in the Cincinnati market. Supermarkets. The company’s traditional supermarkets hold the number one or two market positions in their principal markets. This format combines a grocery store that offers traditional dry grocery and fresh food departments, and a variety of specialty departments that may include floral, seafood, expanded health and beauty care, video rental, cosmetics, photo finishing, delicatessen, bakery, as well as an in-store bank and a traditional 3
  • 9. drug store that includes a pharmacy. A typical supermarket carries approximately 32,000 items and generally ranges in size from 30,000 to 65,000 square feet with an average size of approximately 50,000 square feet. At fiscal year end, the company operated 59 supermarkets under the Farm Fresh, Scott’s and Hornbacher’s banners. The Farm Fresh stores operate primarily in the Virginia Beach, Virginia market; the Scott’s stores operate in the Fort Wayne, Indiana market; and the Hornbacher’s stores operate in the Fargo, North Dakota market. In-store pharmacies are operated in 29 of the supermarkets. Food Distribution Operations Overview. SUPERVALU provides logistics and service solutions to retailers for food and non-food products and is the largest public company food wholesaler in the nation. At February 28, 2004, the company was affiliated with approximately 2,470 stores as their primary supplier, excluding the company’s own regional banner store network, and approximately 660 additional stores as a secondary supplier. SUPERVALU’s customers include single and multiple grocery store independent operators, regional and national chains, mass merchants and the military. Such customers are located in 48 states, and range in size from small convenience stores to 200,000 square foot supercenters. Products Supplied. The company offers and supplies its distribution customers with a wide variety and selection of food and non-food products, including groceries, meats, dairy products, frozen foods, deli, bakery, fresh fruits and vegetables, health and beauty aids, general merchandise, seasonal items and tobacco products. Such products include national and regional brands, the company’s own lines of private label products and the private label products of its independent customers. The company has no significant long-term purchase obligations and considers that it has adequate and alternative sources of supply for most of its purchased products. SUPERVALU offers two tiers of private label products to its customers: first quality products under such private labels as CUB, FLAVORITE, HOMEBEST, IGA, RICHFOOD, SHOP ’N SAVE, SUPERCHILL, HEALTHY GENERATIONS, DAILY SOURCE, NUTRIPLAN and CHEF’S CIRCLE; and economy products under the private label of SHOPPERS VALUE. SUPERVALU supplies private label merchandise over a broad range of products in the majority of departments in the store. These products are produced to the company’s specifications by many suppliers. Logistics Network. 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 comprises 24 distribution facilities. The company believes that its multi-tiered distribution network increases buying scale, improves operating efficiencies and lowers costs of operations. The company is continuing to work on business initiatives that will deliver lower costs of operations. 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, many types of meats, dairy products, bakery and other products purchased from the company are delivered directly by suppliers to retail stores under programs established by the company. The company also offers third party logistics solutions, primarily to the grocery industry, through its Advantage Logistics operation which was formed in 2002. Trademarks The company offers some customers the opportunity to franchise a concept or license a service mark. This program helps the customer 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, DEAL$ NOTHING OVER A DOLLAR, 4
  • 10. ADVANTAGE LOGISTICS, SENTRY, FESTIVAL FOODS, COUNTY MARKET, SHOP ’N SAVE, NEWMARKET, IGA, FOODLAND, JUBILEE, SUPERVALU and SUPERVALU PHARMACIES. 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. See “Retail Food Operations—Extreme Value Stores” and “Food Distribution Operations—Products Supplied” for further information. The company considers certain of its trademarks and service marks to be of material importance to its business and actively defends and enforces such trademarks and service marks. Competition The company’s retail food and food distribution businesses are highly competitive. The company believes that the success of its retail food and food distribution businesses are dependent upon the ability of the company’s retail food operations, and the retail food stores with whom it is affiliated as a supplier, to compete successfully with other retail food stores in a consolidating market. Principal competition comes from local, regional and national chains operating under a variety of formats that devote square footage to selling food (i.e. supercenters, supermarkets, extreme value stores, membership warehouse clubs, dollar stores, drug stores, convenience stores, various formats selling prepared foods, and other specialty and discount retailers), as well as from independent food stores. The company believes that the principal competitive factors that face its owned stores, as well as the stores owned by retailers it supplies, include the location and image of the store, the price, quality and variety of products, and the quality and consistency of service. The food distribution business competes directly with a number of food wholesalers. The company believes it competes in this supply chain on the basis of product price, quality and assortment, schedule and reliability of deliveries, the range and quality of services provided, service fees, and the location of distribution facilities. Employees At February 28, 2004, the company had approximately 55,200 employees. Approximately 23,600 employees are covered by collective bargaining agreements. During fiscal 2004, 15 collective bargaining agreements covering 3,500 employees were re-negotiated. The only work stoppage in fiscal 2004 was a 28-day strike in the third quarter in the St. Louis market where the company operates 21 regional banner stores. In fiscal 2005, 22 collective bargaining agreements covering approximately 9,300 employees will expire. The company believes that it has generally good relations with its employees. 5
  • 11. ITEM 2. PROPERTIES Retail Food Operations The following table is a summary of the corporate retail stores operated by the company under its principal retail formats as of February 28, 2004: Square Square Footage Footage Location and Number Owned Leased Retail Format Banner of Corporate Stores (Approximate) (Approximate) Save-A-Lot1 ExtremeValue Alabama (1), Arizona (2), Arkansas (1), 665,000 3,586,000 Stores California (19), Connecticut (5), Delaware (6), Florida (73), Georgia (17), Illinois (18), Louisiana (10), Maryland (12), Massachusetts (9), Mississippi (5), Missouri (10), New Jersey (11), New York (5), Ohio (31), Pennsylvania (24), Rhode Island (3), South Carolina (3), Tennessee (5), Vermont (1), Virginia (7), Wisconsin (2) Deals/Super Alabama (2), Arkansas (4), Georgia (3), — 1,244,000 Deals Illinois (21), Indiana (9), Iowa (2), Kansas (6), Kentucky (9), Michigan (1), Missouri (28), Ohio (27), Oklahoma (3), Pennsylvania (1), Tennessee (6), West Virginia (1), Wisconsin (1) Save-A-Lot California (1), Florida (1), Georgia (1), 2,779,000 1,697,000 Distribution Illinois (1), Indiana (1), Kentucky (1), Centers Louisiana (1), Maryland (1), Michigan (1), Missouri (1), New York (1), Ohio (2), Tennessee (1), Texas (1), Wisconsin (1) Cub Foods2 Price Superstores Illinois (29), Iowa (3), Minnesota (35), 2,547,000 2,807,000 Wisconsin (9) Shop ’n Save Illinois (14), Missouri (21), Pennsylvania (19) 471,000 2,362,000 Shoppers Food Delaware (1) Maryland (37), Virginia (20) — 3,206,000 Warehouse bigg’s Indiana (1), Kentucky (1), Ohio (9) 158,000 1,129,000 Supermarkets Farm Fresh Virginia (36) — 1,736,000 Hornbacher’s Minnesota (1), North Dakota (4) 107,000 113,000 Scott’s Indiana (18) 293,000 680,000 1 Excludes 821 Save-A-Lot stores that are licensed by independent retailers. 2 Excludes 29 Cub Foods stores that are franchised by independent retailers. The extreme value stores that are leased by the company generally have terms of 5 to 10 years plus renewal options. The price superstores and supermarkets that are leased by the company generally have terms of 15 to 25 years plus renewal options. 6
  • 12. Food Distribution Operations The following table is a summary of the company’s principal distribution centers and office space utilized in the company’s food distribution operations as of February 28, 2004: Square Square Footage Footage Owned Leased Region Location and Number of Distribution Centers (Approximate) (Approximate) Central Region Indiana (1), Ohio (1), Pennsylvania (2), West Virginia (1) 2,159,000 372,000 Midwest Region Illinois (2), Missouri (1), Texas (1), Wisconsin (2) 2,394,000 823,000 Northern Region Minnesota (1), North Dakota (2) 2,132,000 90,000 Northwest Region Montana (1), Washington (2) 1,557,000 — Southeast Region Alabama (2), Florida (1), Mississippi (1) 1,528,000 627,000 Eastern Region Maryland (1), Pennsylvania (1), Virginia (1) 1,145,000 926,000 Additional Property The company’s principal executive offices are located in a 180,000 square foot corporate headquarters facility located in Eden Prairie, Minnesota, a western suburb of Minneapolis, Minnesota. This headquarters facility is located on a site of 140 acres owned by the company. Other facilities allocated for corporate use, include approximately 189,000 square feet of leased office space located in Chanhassen, Minnesota, 53,000 square feet of owned office space located in Stillwater, Minnesota and 35,000 square feet of leased office space in Denver, Colorado. Additional information on the company’s properties can be found on pages F-24 through F-26 in the Leases note in the accompanying Notes to Consolidated Financial Statements. Management of the company believes its physical facilities and equipment are adequate for the company’s present needs and businesses. ITEM 3. LEGAL PROCEEDINGS In July and August 2002, several class action lawsuits were filed against the company and certain of its officers and directors in the United States District Court for the District of Minnesota on behalf of purchasers of the company’s securities between July 11, 1999 and June 26, 2002. The lawsuits have been consolidated into a single action, in which it is alleged that the company and certain of its officers and directors violated Federal securities laws by issuing materially false and misleading statements relating to its financial performance. On April 29, 2004, the District Court for the District of Minnesota granted preliminary approval to a stipulation of settlement between the company and plaintiffs. A hearing for final approval of the settlement is scheduled for August 16, 2004. The settlement will have no material impact to the company’s consolidated statement of earnings or consolidated financial position. The company is a party to various other legal proceedings arising from the normal course of business activities, none of which, in management’s opinion, is expected to have a material adverse impact on the company’s consolidated statement of earnings or consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted during the fourth quarter of fiscal year 2004 to a vote of the security holders of the Registrant. 7
  • 13. EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information concerning the executive officers of the company as of April 15, 2004. Year Elected to Present Other Positions Recently Held Name Age Present Position Position With the company Jeffrey Noddle 57 Chairman of the Board of 2002 Director, Chief Executive Officer Directors, Chief Executive Officer and President, 2001-2002; Director, and President President and Chief Operating Officer, 2000-2001; Executive Vice President, President and Chief Operating Officer, Wholesale Food Companies, 1995-2000 David L. Boehnen 57 Executive Vice President 1997 John H. Hooley 52 Executive Vice President; President 2002 Senior Vice President; President and Chief Operating Officer, Retail and Chief Executive Officer, Cub Foods Foods, 2000-2002; Vice President; President and Chief Executive Officer, Cub Foods, 1992-1999 Michael L. Jackson 50 Executive Vice President; President 2001 Senior Vice President, Retail Food and Chief Operating Officer, Companies, 1999-2001; President, Distribution Northwest Region, 1995-1999 Pamela K. Knous 50 Executive Vice President and Chief 1997 Financial Officer Robert W. Borlik 55 Senior Vice President, Chief 1999 Information Officer J. Andrew Herring 45 Senior Vice President; Executive 2002 Senior Vice President, Corporate Vice President, Retail Pharmacies Development 1999-2002; Vice President, Corporate Development and External Relations, 1998-1999 Gregory C. Heying 55 Senior Vice President, Distribution 1994 Sherry M. Smith 42 Senior Vice President, Finance and 2002 Vice President, Corporate Treasurer Controller, 1998-2002 Ronald C. Tortelli 57 Senior Vice President, Human 1988 Resources Leland J. Dake 47 Vice President, Merchandising, 1998 Distribution Food Companies Stephen P. Kilgriff 62 Vice President, Legal 2000 Associate General Counsel, 1996- 2000 David M. Oliver 46 Vice President, Controller 2004 The term of office of each executive officer is from one annual meeting of the directors until the next annual meeting of directors or until a successor for each is elected. There are no arrangements or understandings between any of the executive officers of the company and any other person pursuant to which any of the executive officers were 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 John H. Hooley and David M. Oliver. Mr. Hooley was elected to his current position in April 2002. From November 2000 to April 2002, he was Senior Vice President and President and Chief Executive Officer, Cub Foods. From February 2000 to September 8
  • 14. 2000, he was Executive Vice President of Partner Alliances, 24K.com, a loyalty marketing company and affiliate of the Carlson Companies, Inc. From November 1992 to September 1999, he was presient and Chief Executive Officer of Cub Foods. Mr. Oliver was elected to his current position in April 2004. From November 1999 to April 2004, he was Chief Financial Officer, Arden Group, Inc. From August 1998 until joining Arden Group, Inc. in November 1999, he was an independent consultant. DIRECTORS OF THE REGISTRANT The following table provides certain information concerning the directors of the company as of April 15, 2004. Present Position With the Company Name Age and Committees of the Board Professional Background Irwin Cohen 63 Director since 2003 Retired; Partner with Deloitte & Touche Audit Committee LLP (a professional services firm, Finance Committee providing accounting, tax and consulting services), 1972-2003, Global Managing Partner of the Consumer Products, Retail and Services Practice of Deloitte & Touche LLP, 1997-2003, Managing Partner of Deloitte & Touche LLP’s U.S. Retail Practice, 1980-2002; Director of Phoenix House Foundation and Beall’s Inc. Ronald E. Daly 57 Director since 2003 Chief Executive Officer and President Executive Personnel and of Oce USA Holding, Inc., a subsidiary ´ Compensation Committee of Oce N.V. (a supplier of digital ´ Finance Committee document management technology services), 2002-present; President of RR Donnelley Print Solutions (a print solutions company), 1997-2002; President of RR Donnelley Telecommunications (a telecommunications industry printing company), 1995-2001; Board of Executive Directors of Oce N.V. ´ Lawrence A. Del Santo 70 Director since 1997 Retired; Chief Executive Officer of The Director Affairs Committee Vons Companies (a retail grocery Chairman company), 1994-1997; Executive Personnel and Director of PETsMART, Inc. Compensation Committee Susan E. Engel 57 Director since 1999 Chairwoman of the Board and Chief Audit Committee Executive Officer of Department 56, Executive Personnel and Inc. (a designer, importer and distributor Compensation Committee of fine quality collectibles and other giftware products), 1997-present; Director of Wells Fargo & Company Edwin C. Gage 63 Director since 1986 Chairman and Chief Executive Officer Director Affairs Committee of GAGE Marketing Group, L.L.C. (an Executive Personnel and integrated marketing services company), Compensation Committee, Chairman 1991–present Garnett L. Keith, Jr. 68 Director since 1984 Chairman and Chief Executive Officer Audit Committee, Chairman of SeaBridge Investment Advisors, LLC Finance Committee (a registered investment advisor), 1996- present; Director of AEA Investors LLC, Whitecap Capital LLC, Pan- Holding Societe Anonyme and Phillippe Investment Management 9
  • 15. Present Position With the Company Name Age and Committees of the Board Professional Background Richard L. Knowlton 71 Director since 1994 Chairman of the Hormel Foundation (a Director Affairs Committee charitable foundation controlling 46.2% Executive Personnel and Compensation of Hormel Foods Corporation), 1995- Committee present; Director of ING America Insurance Holdings, Inc. Charles M. Lillis 62 Director since 1995 General Partner, LoneTree Capital Audit Committee Management (a private equity company), Finance Committee, Chairman 2000-present; Chairman, President and Chief Executive Officer of MediaOne Group, Inc. (a broadband communications company), 1998-2000; Director of Charter Communications Inc. and Williams Companies, Inc. Jeffrey Noddle 57 Director since 2000 See table “Executive Officers of the Chairman of the Board, Registrant” above; Chief Executive Officer and President Director of Donaldson Company, Inc. of the Company, 2002-present and General Cable Corporation Finance Committee Harriet Perlmutter* 72 Director since 1978 Trustee of the Papermill Playhouse (the Executive Personnel and Compensation State Theatre of New Jersey) Committee Finance Committee Marissa Peterson 42 Director since 2003 Executive Vice President, Worldwide Director Affairs Committee Operations and Services and Chief Finance Committee Customer Advocate for Sun Microsystems, Inc. (a provider of hardware, software and services) 2002- present. Executive Vice President, Worldwide Operations 1998-2002; Director of Couisint, Lucille Packard Children’s Hospital and a member of the Board of Trustees of Kettering Univeristy Steven S. Rogers 46 Director since 1998 Clinical Professor of Finance and Director Affairs Committee Management at J.L. Kellogg Graduate Audit Committee School of Management at Northwestern University, 1995-present; Director of Duquesne Light, Inc. and S.C. Johnson & Son, Inc. * In accordance with Board policies, Ms. Perlmutter is retiring from the Board of Directors on May 26, 2004. PART II ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company’s common stock is listed on the New York Stock Exchange under the symbol SVU. As of April 24, 2004, there were 135,328,998 shares of common stock outstanding. At that date, there were 6,782 stockholders of record, excluding individual participants in security position listings. The information called for by Item 5 as to the sales price for the company’s common stock on a quarterly basis during the last two fiscal years and dividend information is found under the heading “Common Stock Price” in Part II, Item 7 below. During the fiscal year ended February 28, 2004, the company issued 17,000 shares of unregistered restricted common stock as stock bonuses to certain employees. The issuance of such shares did not constitute a “sale” within the meaning of Section 2(3) of the Securities Act of 1933, as amended. 10
  • 16. ITEM 6. SELECTED FINANCIAL DATA The information called for by Item 6 is found within the Five Year Financial and Operating Summary on page F-2. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW SUPERVALU is one of the largest grocery companies in the United States. We operate within two complementary businesses in the grocery food industry, grocery retail and food distribution. At February 28, 2004, we conducted our retail operations through a total of 1,483 stores, including 821 licensed locations. Principal formats include extreme value stores, regional price superstores and regional supermarkets. Our food distribution operations network spans 48 states and we serve as primary grocery supplier to approximately 2,470 stores, in addition to our own regional banner store network, as well as serving as secondary grocery supplier to approximately 660 stores. For the past several years, the approximate $500 billion revenue grocery food industry has been consolidating. As a result, market share has been concentrated in the larger grocery food companies. We participated in that consolidation through selective acquisition activities and the exit of certain markets. Based on revenues today, we would be ranked as the largest extreme value food retailer, 11th largest grocery retailer, and largest public company food wholesaler in the United States. In addition to consolidation activities, the grocery industry has experienced store saturation driven primarily by the continued increase in square footage devoted to food in supercenters, club stores, mass merchandisers, dollar stores, drug stores and other alternate formats as well as organic growth by traditional supermarket operators. As a result, same-store sales growth for the industry has been soft, pressuring profitability levels in the industry as operating costs continue to rise at a rate faster than sales growth. We expect this industry environment to continue for the foreseeable future. In fiscal 2004, our businesses benefited from the bankruptcy of Fleming Companies, Inc., formerly one of our largest food wholesale competitors. By entering into an asset exchange with C&S, we were able to affiliate certain former Fleming distribution operations in the Midwest in exchange for our New England operations. Even though overall revenues declined, approximately $200 million on an annual basis, as a result of the Asset Exchange, the efficiencies of our remaining operations were greatly enhanced as volume was concentrated in our existing facilities. It is expected that this transaction will provide incremental net earnings per share in fiscal 2005 of $.07 to $.10 per share. The grocery industry is also affected by the general economic environment and its impact on consumer spending behavior. In fiscal 2003, we experienced moderate deflation in our product costs in a weak economic environment. We would characterize fiscal 2004 as a year with a modestly improving economy and more normal levels of consumer spending and product cost inflation. For fiscal 2005, we expect a modest inflationary environment and further economic recovery. In fiscal 2004, most US businesses, including the labor intensive grocery industry were impacted by another year of rapidly rising health care and pension costs. These rising costs impacted the overall profitability levels of the food industry and have become a pivotal issue in labor negotiations for unionized employees who bargain for health and retirement benefits in addition to wages. Approximately 42% of SUPERVALU’s employees are unionized. In the St. Louis market, where we operate 21 regional supermarkets, we experienced a 28-day strike in the third quarter of fiscal 2004 (the “St. Louis Strike”). Approximately 40% of our unionized workforce are represented by contracts that are up for renewal in fiscal 2005. All of these industry factors impact our food distribution customer base. As a result, we continue to experience revenue attrition in our food distribution operations in a historical range of approximately 2% to 4%. 11
  • 17. All the above factors will continue to impact our industry and our company in fiscal 2005. We believe we can be successful against this industry backdrop with our regional retail formats that focus on local execution, merchandising, and consumer knowledge. In addition, our operations benefit from our efficient and low-cost supply chain and economies of scale as we leverage our retail and distribution operations. Save-A-Lot, our extreme value format, has nationwide potential, and currently operates in 37 states. After our fiscal 2003 acquisition of Deals, we tested in fiscal 2004 several new prototypes of an extreme value combination store, offering both food and dollar general merchandise. We are pleased with the performance of the new prototypes and the majority of our new extreme value food stores will be a type of combination store in the future. We plan to expand regional retail banner square footage through selective new store growth in key markets where we have significant market share. In addition, we will supplement regional retail store growth with continued focus on remodel activities. Given the life cycle maturity of our distribution business with its inherent attrition rate, future growth in food distribution will be modest and primarily achieved through serving new independent customers, net growth from existing customers and further consolidation opportunities. We will remain committed to streamlining our operations and improving our return on invested capital through a variety of initiatives. RESULTS OF OPERATIONS Highlights of results of operations as reported were as follows: February 28, February 22, February 23, 2004 2003 2002 (53 weeks) (52 weeks) (52 weeks) (In millions) Net sales $20,209.7 100.0% $19,160.4 100.0% $20,293.0 100.0% Cost of sales 17,372.4 85.9 16,567.4 86.5 17,704.2 87.2 Selling and administrative expenses 2,220.4 11.0 2,020.2 10.5 2,037.7 10.1 Restructure and other charges 15.5 0.1 2.9 — 46.3 0.2 Operating earnings $ 601.4 3.0 $ 569.9 3.0 $ 504.8 2.5 Interest expense 165.6 0.8 182.5 1.0 194.3 1.0 Interest income (19.1) (0.1) (20.6) (0.1) (21.5) (0.1) Earnings before income taxes $ 454.9 2.3 $ 408.0 2.1 $ 332.0 1.6 Income tax expense 174.8 0.9 151.0 0.8 133.7 0.6 Net earnings $ 280.1 1.4% $ 257.0 1.3% $ 198.3 1.0% In fiscal 2003, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, which required it to cease amortizing goodwill and test annually for impairment. Goodwill amortization of $48.4 million was included in fiscal 2002. Comparison of fifty-three weeks ended February 28, 2004 (2004) with fifty-two weeks ended February 22, 2003 (2003): In fiscal 2004, the company achieved net sales of $20.2 billion compared with $19.2 billion last year. Net earnings for fiscal 2004 were $280.1 million and diluted earnings per share were $2.07 compared with net earnings of $257.0 million and diluted earnings per share of $1.91 last year. Fiscal 2004 was a 53 week fiscal year, resulting in an extra week in the fourth quarter, which generated approximately $360.0 million in net sales and contributed approximately $.07 to diluted earnings per share. Fiscal 2004 operating results include the impact of the Asset Exchange, the sale or closure of its Denver based operations that included nine retail stores and a food distribution facility (the “Denver Disposition”) and the St. Louis Strike. 12
  • 18. Net Sales Net sales for fiscal 2004 were $20.2 billion, an increase of 5.5 percent from last year. Retail food sales were 52.2 percent of net sales for fiscal 2004 compared with 51.4 percent last year. Food distribution sales were 47.8 percent of net sales for fiscal 2004 compared with 48.6 percent last year. Retail food sales for fiscal 2004 increased 7.1 percent compared with last year, primarily reflecting new store openings, increases in same-store sales and the benefit of the extra week. Same-store retail sales for fiscal 2004 were positive 2.1 percent. Fiscal 2004 store activity, including licensed units, resulted in 107 new stores opened and 41 stores closed, including the sale or closure of our Denver based stores, for a total of 1,483 stores at year end. Total square footage increased approximately 3.8 percent over the prior year. Food distribution sales for fiscal 2004 increased 3.7 percent compared with last year, primarily reflecting the impact of new customer affiliations and the benefit of the extra week, which more than offset customer attrition, and the net revenue loss as a result of the Asset Exchange. Gross Profit Gross profit (calculated as net sales less cost of sales), as a percent of net sales, was 14.1 percent for fiscal 2004 compared with 13.5 percent last year. The increase in gross profit, as a percent of net sales, primarily reflects improved merchandising execution for retail, including the expansion of general merchandise in the extreme value format, and the growing proportion of our retail food business, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business. Selling and Administrative Expenses Selling and administrative expenses, as a percentage of net sales, were 11.0 percent for fiscal 2004 compared with 10.5 percent last year. The increase in selling and administrative expenses, as a percent of net sales, primarily reflects increases in employee benefit and incentive related costs, costs associated with the Denver Disposition, including related reserves for closed stores, $10.8 million in additional reserves for non- operating properties and approximately $5 million in net litigation settlements. Restructure and Other Charges In fiscal 2004, the company incurred $15.5 million, or 0.1 percent of net sales, in pre-tax restructure and other charges, consisting of $8.5 million for changes in estimates on exited real estate in certain markets for food distribution and $7.0 million for increased liabilities associated with employee benefit related costs from previously exited food distribution facilities. Operating Earnings Operating earnings for fiscal 2004 increased 5.5 percent to $601.4 million compared with $569.9 million last year. Fiscal 2004 operating earnings include $15.5 million in pre-tax restructure and other charges. Fiscal 2003 operating earnings include $2.9 million in pre-tax restructure and other charges. Retail food operating earnings for fiscal 2004 increased 1.7 percent to $444.0 million, or 4.2 percent of net sales, from last year’s operating earnings of $436.5 million, or 4.4 percent of net sales. The increase in retail food operating earnings was primarily due to growth of new stores, improved merchandising execution and the benefit of the extra week which were substantially offset by increases in employee benefit and incentive related costs, costs associated with the Denver Disposition, including related reserves for closed stores and the impact of the St. Louis Strike. Food distribution operating earnings for fiscal 2004 increased 29.6 percent to $222.5 million, or 2.3 percent of net sales, from last year’s operating earnings of $171.6 million, or 1.8 percent of net sales. The increase in food distribution operating earnings primarily reflects the increase in sales volume, benefits of efficiency initiatives implemented during the course of the prior year and the benefit of the extra week. 13
  • 19. Net Interest Expense Interest expense was $165.6 million in fiscal 2004 compared with $182.5 million last year. The decrease primarily reflects lower borrowing levels that more than offset $5.8 million in pre-tax costs related to the early redemption of $100 million of debt at a price of 103.956 percent in the third quarter of fiscal 2004. Interest income was $19.1 million in fiscal 2004 compared with $20.6 million last year. Income Taxes The effective tax rate was 38.4 percent and 37.0 percent in fiscal 2004 and fiscal 2003, respectively. The increase in the effective tax rate in the current year was due to $7.6 million of taxes due on the Asset Exchange. Net Earnings Net earnings were $280.1 million, or $2.07 per diluted share, in fiscal 2004 compared with net earnings of $257.0 million, or $1.91 per diluted share last year. Weighted average diluted shares increased to 135.4 million fiscal 2004 compared with 134.9 million shares last year, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program. Comparison of fifty-two weeks ended February 22, 2003 (2003) with fifty-two weeks ended February 23, 2002 (2002): Net Sales Net sales for 2003 were $19.2 billion, a decrease of 5.6 percent from 2002. Retail food sales were 51.4 percent of net sales for 2003 compared with 47.1 percent for 2002. Food distribution sales were 48.6 percent of net sales for 2003 compared with 52.9 percent for 2002. Retail food sales for 2003 increased 3.1 percent compared to 2002, primarily as a result of new store growth. Same-store retail sales for 2003 were negative 1.1 percent, impacted by approximately 1.2 percent of planned in- market expansion. Other factors contributing to the decline in same store sales performance include a weakened economy and a more intense promotional environment. Fiscal 2003 store activity, including licensed units, resulted in 198 new stores opened and acquired, including the acquisition of 50 Deals stores and 41 stores closed or sold for a total of 1,417 stores at year end. Total square footage increased approximately 6.6 percent over the prior year. Food distribution sales for 2003 decreased 13.3 percent compared to 2002, primarily reflecting customers lost in 2002 including the exit of the Kmart supply contract and the loss of Genuardi’s as a customer and sales losses from restructure activities, which accounted for approximately eight percent, three percent and one percent, respectively, of the decrease in food distribution sales. Gross Profit Gross profit (calculated as net sales less cost of sales), as a percentage of net sales, was 13.5 percent for 2003 compared to 12.8 percent for 2002. The increase in gross profit, as a percentage of net sales, reflects the growing proportion of the company’s retail food business, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business, including the higher gross profit margin of the recently acquired and opened Deals stores. Gross profit in retail benefited from improved merchandising execution. Gross profit in distribution was negatively impacted by a change in our distribution customer mix. 14
  • 20. Selling and Administrative Expenses Selling and administrative expenses, as a percentage of net sales, were 10.5 percent for 2003 compared to 10.1 percent for 2002. Selling and administrative expenses include $12.5 million in store closing reserves recorded in fiscal 2002. Fiscal 2002 also includes goodwill amortization of $48.4 million. The increase in selling and administrative expenses, as a percentage of net sales, reflects the growing proportion of the company’s retail food business, which operates at a higher selling and administrative expense as a percentage of net sales than does the food distribution business, including the higher selling and administrative expense ratio of the recently acquired and opened Deals stores. Operating Earnings The company’s operating earnings were $569.9 million for 2003 compared to $504.8 million for 2002, a 12.9 percent increase. Fiscal 2003 operating earnings include $2.9 million for restructure and other charges. Fiscal 2002 operating earnings include $46.3 million for restructure and other charges and $12.5 million in store closing reserves. Retail food 2003 operating earnings increased 20.2 percent to $436.5 million, or 4.4 percent of net sales, from 2002 operating earnings of $363.3 million, or 3.8 percent of net sales. Fiscal 2002 retail food operating earnings include goodwill amortization of $25.3 million. The remaining increase in retail food operating earnings was primarily due to growth of new stores and improved merchandising execution in retail. Food distribution 2003 operating earnings decreased 24.4 percent to $171.6 million, or 1.8 percent of net sales, from 2002 operating earnings of $227.0 million, or 2.1 percent of net sales. Fiscal 2002 food distribution operating earnings included goodwill amortization of $23.1 million. The decrease in food distribution operating earnings primarily reflects the decrease in sales volume and a change in our distribution customer mix. Net Interest Expense Interest expense decreased to $182.5 million in 2003 compared with $194.3 million in 2002, reflecting lower borrowing levels and lower average interest rates, largely due to the interest rate swap agreements entered into in 2003. Interest income decreased to $20.6 million in 2003 compared with $21.5 million in 2002. Income Taxes The effective tax rate was 37.0 percent in 2003 compared with 40.3 percent in 2002. The decrease in the effective tax rate was due to the discontinuation of goodwill amortization as of February 24, 2002, which is not deductible for income tax purposes. Net Earnings Net earnings were $257.0 million, or $1.91 per diluted share, in 2003 compared with net earnings of $198.3 million, or $1.48 per diluted share in 2002. Weighted average diluted shares increased to 134.9 million in 2003 compared with 2002 weighted average diluted shares of 134.0 million, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program. RESTRUCTURE AND OTHER CHARGES For fiscal 2004, the company recognized pre-tax restructure and other charges of $15.5 million. The charges reflect the net adjustments to the restructure reserves and asset impairment charges of $0.6 million, $14.4 million and $0.5 million for restructure 2002, 2001 and 2000, respectively. The increases are due to continued softening of real estate in certain markets and higher than anticipated employee benefit related costs. The following information includes only those restructure and other charges that are the result of previously initiated restructure activities. In addition, the company maintains reserves and has recorded certain impairments for properties that have been closed as part of management’s ongoing operating decisions. Those reserves and impairment charges are disclosed within the Reserves for Closed Properties and Asset Impairment section. 15
  • 21. Fiscal 2004 net cash outflows relating to all restructure plans were approximately $20 million. Remaining future net cash outflows primarily relate to expected net future payments on exited real estate and employee related costs, net of after-tax proceeds from the sale of owned properties. Cash outflows will be funded by cash from operations. Restructure 2002 In fiscal 2002, the company identified additional efforts that would allow it to extend its food distribution efficiency program that began early in fiscal 2001. The additional food distribution efficiency initiatives identified resulted in pre-tax restructure charges of $16.3 million, primarily related to personnel reductions in administrative and transportation functions. Management began the initiatives in fiscal 2003 and the majority of these actions were completed by the end of fiscal 2003. In fiscal 2003, the fiscal 2002 restructure charges were decreased by $3.6 million, including a decrease of $1.4 million due to lower than anticipated lease related costs in transportation efficiency initiatives and a decrease of $2.2 million in employee related costs due to lower than anticipated severance costs. In fiscal 2004, the fiscal 2002 restructure charges were increased by $0.6 million due to higher than anticipated severance costs for certain employees. Remaining reserves for the fiscal 2002 restructure plan represent future lease payments. Details of the fiscal 2002 restructure activity for fiscal 2004 are as follows: Balance Fiscal Balance February 22, 2004 Fiscal 2004 February 28, 2003 Usage Adjustment 2004 (In thousands) Lease related costs: Transportation efficiency initiatives $1,054 $ (816) $ (43) $195 1,054 (816) (43) 195 Employee related costs: Administrative realignment 2,390 (3,019) 629 — 2,390 (3,019) 629 — Total restructure charges $3,444 $(3,835) $586 $195 Details of the fiscal 2002 restructure activity as it relates to the number of terminated employees are as follows: Employees Balance Employees Balance Original Terminated February 22, Terminated February 28, Estimate in Fiscal 2003 2003 in Fiscal 2004 2004 Employees 800 (650) 150 (150) — Restructure 2001 In fiscal 2001, the company completed a strategic review that identified certain assets that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments. This review process culminated in the company recording pre-tax restructure and other charges of $181.6 million, including $89.7 million for asset impairment charges, $52.1 million for lease subsidies, lease cancellation fees, future payments on exited real estate and guarantee obligations and $39.8 million for severance and employee related costs. In fiscal 2002, the fiscal 2001 restructure and other charges were increased by $17.8 million as a result of changes in estimates primarily due to the softening real estate market, including $19.1 million for increased lease liabilities in exiting the non-core retail markets and the disposal of non-core assets, offset by a net decrease of $1.3 million in restructure reserves for the consolidation of distribution centers. 16
  • 22. In fiscal 2003, the fiscal 2001 restructure and other charges were increased by $8.1 million, including an $11.7 million increase to the restructure reserves offset by a decrease in asset impairment charges of $3.6 million. The reserve increase of $11.7 million was a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sale, sublease or assignment in certain markets, including approximately $5 million relating to the consolidation of distribution centers, $6 million relating to the exit of non-core retail markets and $1.2 million in higher than anticipated employee related costs primarily in the exit of non-core retail markets. For fiscal 2004, the fiscal 2001 restructure and other charges were increased by $14.4 million, including an $11.7 million increase to the restructure reserves and a $2.7 million increase in asset impairment charges. The reserve increase of $11.7 million was a result of changes in estimates on employee benefit related costs from previously exited food distribution facilities and changes in estimates on exited real estate in certain markets for food distribution properties. Included in the asset impairment charges in fiscal 2001 of $89.7 million were $57.4 million of charges related to retail food properties and $32.3 million of charges related to food distribution properties. Writedowns for property, plant and equipment, goodwill and other intangibles, and other assets were $58.4 million, $21.8 million and $9.5 million, respectively, and were reflected in the “Restructure and other charges” line in the Consolidated Statements of Earnings for fiscal 2001. In fiscal 2003, the fiscal 2001 asset impairment charges for property, plant and equipment were decreased by $3.6 million primarily due to changes in estimates on exited real estate in certain markets and includes a decrease of $8.2 million in estimates related to certain food distribution properties offset by an increase of $4.6 million in estimates related to certain retail food properties. In fiscal 2004, the fiscal 2001 asset impairment charges for property, plant and equipment were increased by $2.7 million primarily due to changes in estimates on exited real estate in certain markets for food distribution properties. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values, which were based on the estimated market values for similar assets. 17
  • 23. All activity for the fiscal 2001 restructure plan has been completed. Remaining reserves represent future payments on exited real estate and employee benefit related costs from previously exited food distribution facilities. Details of the fiscal 2001 restructure activity for fiscal 2004 are as follows: Balance Fiscal Fiscal Balance February 22, 2004 2004 February 28, 2003 Usage Adjustment 2004 (In thousands) Lease related costs: Consolidation of distribution centers $ 6,473 $ (2,384) $ (33) $ 4,056 Exit of non-core retail markets 8,844 (4,458) 3,266 7,652 Disposal of non-core assets and other administrative reductions 4,299 (1,375) 536 3,460 19,616 (8,217) 3,769 15,168 Employee related costs: Consolidation of distribution centers 9,604 (5,996) 7,421 11,029 Exit of non-core retail markets 2,980 (3,087) 540 433 12,584 (9,083) 7,961 11,462 Total restructure and other charges $32,200 $(17,300) $11,730 $26,630 Fiscal Balance Previously 2004 February 28, Recorded Adjustment 2004 Impairment charges $86,169 $ 2,737 $88,906 The number of actual employees terminated under the fiscal 2001 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. There was no activity in fiscal 2004. Details of the fiscal 2001 restructure activity as it relates to the number of terminated employees are as follows: Employees Balance Original Terminated Adjustments February 22, Estimate in Prior Years in Prior Years 2003 Employees 4,500 (3,767) (733) — Restructure 2000 In fiscal 2000, the company recorded pre-tax restructure and other charges of $103.6 million as a result of an extensive review to reduce costs and enhance efficiencies. Included in this total was $17.4 million for asset impairment costs. The restructure and other charges include costs for facility consolidation, non-core store disposal, and rationalization of redundant and certain decentralized administrative functions. The original reserve amount was reduced by $10.3 million in fiscal 2001, primarily as a result of a change in estimate for the closure of a remaining facility. The reserve amount was subsequently increased $12.2 million in fiscal 2002, due to a change in estimate on a remaining facility primarily due to the softening real estate market. In fiscal 2003, the fiscal 2000 restructure and other charges were decreased by $1.6 million, including a $2.9 million increase to the restructure reserves offset by a decrease in asset impairment charges of $4.5 million. The reserve increase of $2.9 million was a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sale, sublease or assignment in certain markets and higher than anticipated employee related costs. In fiscal 2004, the fiscal 2000 restructure and other charges were increased by $0.5 million as a result of changes in estimates on exited real estate due to the continued softening of real estate marketed for sale, sublease or assignment in certain markets. 18
  • 24. Included in the asset impairment charges in fiscal 2000 of $17.4 million were writedowns on food distribution assets of $10.6 million for property, plant and equipment, $5.6 million of goodwill and other intangibles, and $1.2 million for other assets that were reflected in the “Restructure and other charges” line in the Consolidated Statements of Earnings for fiscal 2000. In fiscal 2003, the fiscal 2000 asset impairment charges for property, plant and equipment on food distribution properties were decreased by $4.5 million primarily due to changes in estimates on exited real estate in certain markets. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values, which were based on the estimated market values for similar assets. All activity for the fiscal 2000 restructure plan has been completed. Remaining reserves represent future payments on exited real estate. Details of the fiscal 2000 restructure activity for fiscal 2004 are as follows: Balance Fiscal Fiscal Balance February 22, 2004 2004 February 28, 2003 Usage Adjustment 2004 (In thousands) Lease related costs: Facility consolidation $ 8,083 $(7,667) $ 34 $ 450 Non-core store disposal 3,042 (1,454) 418 2,006 Total restructure and other charges $11,125 $(9,121) $452 $ 2,456 Fiscal Previously 2004 February 28, Recorded Adjustment 2004 Impairment charges $12,964 $ 18 $12,982 The number of actual employees terminated under the fiscal 2000 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. There was no activity in fiscal 2003 or fiscal 2004. Details of the fiscal 2000 restructure activity as it relates to the number of terminated employees are as follows: Employees Balance Original Terminated Adjustments February 23, Estimate in Prior Years in Prior Years 2002 Employees 2,517 (1,693) (824) — CRITICAL ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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 the Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements. Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of the company’s consolidated financial statements. 19
  • 25. LIFO and Retail Inventory Method For a significant portion of the company’s inventory, cost is determined through use of the last-in, first-out (LIFO) method. The Company utilized LIFO to value approximately 68 percent and 71 percent of the company’s consolidated inventories for fiscal 2004 and 2003, respectively. The retail inventory method (RIM) is used to value retail inventory. The valuation of inventories are at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. Inherent in the RIM calculations are certain significant management judgments and estimates, including shrinkage, which significantly impact the ending inventory valuation at cost, as well as the resulting gross margins. These judgments and estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce results which differ from actual. Management believes that the company’s RIM provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market. Allowances for Losses on Receivables 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. Although risk management practices and methodologies are utilized to determine the adequacy of the allowance, it is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectibility based on the information considered and further deterioration of accounts. Reserves for Closed Properties and Asset Impairment Charges The company maintains reserves for estimated losses on retail stores, distribution warehouses 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, net of estimated subtenant income. 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 income 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 current economic conditions. Owned properties that are closed are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with our policy on impairment of long-lived assets. Impairment charges on long-lived assets are recognized when expected net future cash flows are less than the assets’ carrying value. The company estimates net future cash flows based on its experience and knowledge of the market in which the closed property is located and, when necessary, utilizes local real estate brokers. 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. Closed property reserves are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period. The expectations on timing of disposition or sublease and the estimated sales price or sublease income associated with closed properties are impacted by variable factors such as 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 on closed properties are adequate, it is possible that continued 20