Supervalu Inc. (SVU) reported results for the second quarter of fiscal 2010. Earnings of 35 cents per share were in line with the Zacks Consensus Estimate, but were down 41.7% year-over-year.

Net sales for the quarter declined 6.9% year-over-year due to a 6.9% decline in retail food net sales and a 9.5% decline in supply chain services sales.

The retail food net sales were primarily impacted by a 4.8% decline in identical store sales and store closures announced previously. A challenging economic environment, aggressive competitive activity and deflationary pressures also impacted the top line growth. Customer traffic declined only marginally during the quarter.

Gross margin for the quarter declined 30 basis points (bps) to 22.1% versus 22.4% in the prior-year quarter. The decline is primarily attributable to a higher promotional sales mix, which were partially offset by lower LIFO expense.

The operating margin for the quarter contracted 75 bps to 2.6% compared to 3.3% in the prior-year quarter. The decline is primarily attributable to a challenging economic environment, competitive pressure and the impact of a higher promotional sales mix.

During the quarter, the company completed 27 major remodels, 4 minor remodels and 1 new traditional supermarket. Year-to-date capital expenditures were $396 million including approximately $12 million in capital leases.

Cash flows from operating activities year-to-date were $840 million reflecting a 12.8% increase compared to the prior year, primarily due to improved working capital management. The company had a debt-to-capitalization ratio of 75% at the end of the quarter.

Based on the performance of the company during the quarter, management lowered its guidance. Identical store sales are now expected to be about negative 4% for the year compared to previous guidance of negative 3%.

Fiscal 2010 earnings are now anticipated to be in the range of $1.95 to $2.05 per share on a GAAP basis and $2.01 to $2.11 on an adjusted basis after excluding costs related to store closures. Previous guidance was $1.95 to $2.15 per diluted share on a GAAP basis and $2.01 to $2.21 on an adjusted basis.

Moreover, the Board of Directors yesterday decided to revise the company’s dividend policy. The Board now expects to pay the regular quarterly dividend of $0.0875 per share compared to $0.175 per share, effective March 1, 2010. The Board believes that this reduction will provide annual cash of approximately $75 million.

The company intends to utilize this cash to accelerate the growth of its Save-A-Lot banner, as well as support other corporate expenses.
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