UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

 

 

Commission file number: 1-5418

 

SUPERVALU INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (952) 828-4000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes x  No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o  No x

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter ) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o  No x

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of September 10, 2010 was approximately $2,241,221,551 (based upon the closing price of registrant’s Common Stock on the New York Stock Exchange).

 

As of April 15, 2011, there were 212,154,277 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of registrant’s definitive Proxy Statement filed for the registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part III, as specifically set forth in Part III.

 

SUPERVALU INC.

 

Annual Report on Form 10-K

 

TABLE OF CONTENTS

 

 

Any statements contained in this Annual Report on Form 10-K regarding the outlook for the Company’s businesses and their respective markets, such as projections of future performance, guidance, statements of the Company’s plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on the Company’s assumptions and beliefs. Such statements may be identified by such words or phrases as “will likely result,” “are expected to,” “will continue,” “outlook,” “will benefit,” “is anticipated,” “estimate,” “project,” “management believes” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, SUPERVALU INC. claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

 

Certain factors could cause the Company’s future results to differ materially from those expressed or implied in any forward-looking statements contained in this Annual Report on Form 10-K. These factors include the factors discussed in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” the factors discussed below and any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statements. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive.

 

Economic and Industry Conditions

 

Execution of Initiatives

 

Competitive Practices

 

Food Safety

 

Liquidity

 

Labor Relations

 

Employee Benefit Costs

 

Regulatory Matters

 

Self-Insurance

 

Legal and Administrative Proceedings

 

Information Technology

 

Severe Weather, Natural Disasters and Adverse Climate Changes

 

Accounting Matters

 

Goodwill and Intangible Asset Impairment Charges

 

 

General

 

SUPERVALU INC. (“SUPERVALU” or the “Company”), a Delaware corporation, was organized in 1925 as the successor to two wholesale grocery firms established in the 1870’s. The Company’s principal executive offices are located at 7075 Flying Cloud Drive, Eden Prairie, Minnesota 55344 (Telephone: 952-828-4000). All references to the “Company” or “SUPERVALU” relate to SUPERVALU INC. and its majority-owned subsidiaries.

 

SUPERVALU is one of the largest companies in the United States grocery channel. SUPERVALU conducts its retail operations under several banner names that have strong local ties and brand recognition. Additionally, the Company provides supply chain services, primarily wholesale distribution, across the United States retail grocery channel.

 

On June 2, 2006, the Company acquired New Albertson’s, Inc. (“New Albertsons”) consisting of the core supermarket businesses (the “Acquired Operations”) formerly owned by Albertson’s, Inc. (“Albertsons”) operating approximately 1,125 stores under the banners of Acme, Albertsons, Jewel-Osco, Shaw’s, Star Market, the related in-store pharmacies under the Osco and Sav-on banners, 10 distribution centers and certain regional and corporate offices (the “Acquisition”). As part of the Acquisition, the Company acquired the Acme, Albertsons, Jewel, Osco, Sav-on and Shaw’s trademarks and tradenames (the “Acquired Trademarks”). The Acquisition greatly increased the size of the Company.

 

SUPERVALU is focused on long-term retail growth through targeted store remodels and new store development in the hard-discount format. During fiscal 2011, the Company added 132 new stores through new store development and closed or sold 87 stores, including planned disposals. The Company leverages its distribution operations by providing wholesale distribution and logistics and service solutions to its independent retail customers through its Supply chain services segment.

 

The Company makes available free of charge at its internet website (www.supervalu.com) its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). Information on the Company’s website is not deemed to be incorporated by reference into this Annual Report on Form 10-K. The Company will also provide its SEC filings free of charge upon written request to Investor Relations, SUPERVALU INC., P.O. Box 990, Minneapolis, MN 55440.

 

All dollar and share amounts in this Annual Report on Form 10-K are in millions, except per share data and where otherwise noted.

 

Financial Information About Reportable Segments

 

The Company’s business is classified by management into two reportable segments: Retail food and Supply chain services. These reportable segments are two distinct businesses, one retail and one wholesale, each with a different customer base, marketing strategy and management structure. The Retail food reportable segment is an aggregation of the Company’s retail operating segments, which are organized based on format (traditional retail food stores and hard-discount food stores). The Retail food reportable segment derives revenues from the sale of groceries at retail locations operated by the Company (both the Company’s own stores and stores licensed by the Company). The Supply chain services reportable segment derives revenues from wholesale distribution to independently-owned retail food stores, mass merchants and other customers (collectively referred to as “independent retail customers”) and logistics support services. Substantially all of the Company’s operations are domestic. Refer to the Consolidated Segment Financial Information set forth in Part II, Item 8

of this Annual Report on Form 10-K for financial information concerning the Company’s operations by reportable segment.

 

Retail Food

 

The Company conducts its Retail food operations through a total of 2,394 traditional and hard-discount retail food stores, including 899 licensed Save-A-Lot stores, located throughout the United States. The Company’s Retail food operations are supplied by 22 dedicated distribution centers and eight distribution centers that are part of the Supply chain services segment providing wholesale distribution to both the Company’s own stores and stores of independent retail customers.

 

The Company operates 1,114 traditional retail food stores under the Acme, Albertsons, Cub Foods, Farm Fresh, Hornbacher’s, Jewel-Osco, Lucky, Shaw’s, Shop ’n Save, Shoppers Food & Pharmacy and Star Market banners ranging in size from approximately 40,000 to 60,000 square feet. The Company’s traditional retail food stores provide an extensive grocery offering and, depending on size, a variety of additional products including, general merchandise, health and beauty care, pharmacy and fuel.

 

The Company owns 381 hard-discount food stores operating under the Save-A-Lot banner and licenses an additional 899 Save-A-Lot stores to independent operators. Save-A-Lot holds the number one market position, based on revenues, in the hard-discount grocery-retailing sector. Save-A-Lot food stores typically are approximately 15,000 square feet in size, and stock primarily custom-branded high-volume food items generally in a single size for each product sold.

 

Supply Chain Services

 

The Company’s Supply chain services business primarily provides wholesale distribution of products to independent retailers and is the largest public company food wholesaler in the nation. The Company’s Supply chain services network spans 47 states and serves as primary grocery supplier to approximately 1,900 stores of independent retail customers, in addition to the Company’s own stores, as well as serving as secondary grocery supplier to approximately 800 stores of independent retail customers. The Company’s wholesale distribution customers include single and multiple grocery store independent operators, regional and national chains, mass merchants and the military.

 

The Company has established a network of strategically located distribution centers utilizing a multi-tiered logistics system. The network includes facilities that carry slow turn or fast turn groceries, perishables, general merchandise and health and beauty care products. The network is comprised of 21 distribution facilities, eight of which supply the Company’s own stores in addition to stores of independent retail customers. Deliveries to retail stores are made from the Company’s distribution centers by Company-owned trucks, third-party independent trucking companies or customer-owned trucks. In addition, the Company provides certain facilitative services between its independent retailers and vendors related to products that are delivered directly by suppliers to retail stores under programs established by the Company. These services include sourcing, invoicing and payment services.

 

Products

 

The Company offers a wide variety of nationally advertised brand name and private-label products, primarily including grocery (both perishable and nonperishable), general merchandise and health and beauty care, pharmacy and fuel, which are sold through the Company’s own and licensed retail food stores to shoppers and through its Supply chain services business to independent retail customers. The Company believes that it has adequate and alternative sources of supply for most of its purchased products. The Company’s Net sales include the product sales of the Company’s own stores, product sales to stores licensed by the Company and product sales of the Company’s Supply chain services business to independent retail customers.

The following table provides additional detail on the percentage of Net sales for each group of similar products sold in the Retail food and Supply chain services segments:

 

 

 

 

Private-Label Products

 

The Company’s private-label products are produced to the Company’s specification by many suppliers and compete in many areas of the Company’s stores. Private-label products include: the premium brand Culinary Circle^tm, which offers unique, premium quality products in highly competitive categories; first tier brands, including Wild Harvest^tm, Flavorite^tm, Richfood^tm, equaline^tm, HomeLife^tm and several others, which provide shoppers quality national brand equivalent products at a competitive price; and the value brand, Shopper’s Value^tm, which offers budget conscious consumers a quality alternative to national brands at substantial savings.

 

Trademarks

 

The Company offers some independent retail customers the opportunity to franchise a concept or license a service mark. This program helps these customers compete by providing, as part of the franchise or license program, a complete business concept, group advertising, private-label products and other benefits. The Company is the franchisor or licensor of certain service marks such as CUB FOODS, SAVE-A-LOT, SENTRY, FESTIVAL FOODS, COUNTY MARKET, SHOP ’N SAVE, NEWMARKET, FOODLAND, JUBILEE, SUPERVALU and SUPERVALU PHARMACIES.

 

In connection with the Acquisition, the Company entered into a trademark license agreement with Albertson’s LLC, the purchaser of the non-core supermarket business of Albertsons, under which Albertson’s LLC may use legacy Albertsons trademarks, such as ALBERTSONS, SAV-ON and LUCKY. Under the trademark license agreement, Albertson’s LLC is also allowed to enter into sublicense agreements with transferees of Albertson’s LLC stores, which allows such transferees to use many of the same legacy Albertsons trademarks.

 

The Company registers a substantial number of its trademarks/service marks in the United States Patent and Trademark Office, including many of its private-label product trademarks and service marks. U.S. trademark and service mark registrations are generally for a term of 10 years, renewable every 10 years as long as the trademark is used in the regular course of trade. The Company considers certain of its trademarks and service

marks to be of material importance to its Retail food and Supply chain services businesses and actively defends and enforces such trademarks and service marks.

 

Working Capital

 

Normal operating fluctuations in working capital balances can result in changes to cash flow from operations presented in the Consolidated Statements of Cash Flows that are not necessarily indicative of long-term operating trends. There are no unusual industry practices or requirements relating to working capital items.

 

Competition

 

The Company’s Retail food and Supply chain services businesses are highly competitive. The Company believes that the success of its Retail food and Supply chain services businesses are dependent upon the ability of its own stores and stores licensed by the Company, as well as the stores of independent retail customers it supplies, to compete successfully with other retail food stores. Principal competition comes from traditional grocery retailers, including regional and national chains and independent food store operators, and non-traditional retailers, such as supercenters, membership warehouse clubs, specialty supermarkets, drug stores, discount stores, dollar stores, convenience stores and restaurants. The Company believes that the principal competitive factors faced by its own stores and stores licensed by the Company, as well as the stores of independent retail customers it supplies, include price, quality, assortment, brand recognition, store location, in-store marketing and merchandising, promotional strategies and other competitive activities.

 

The traditional wholesale distribution component of the Company’s Supply chain services business competes directly with a number of traditional grocery wholesalers. The Company believes it competes in this business on the basis of price, quality, assortment, schedule and reliability of deliveries, service fees and distribution facility locations.

 

Employees

 

As of February 26, 2011, the Company had approximately 142,000 employees. Approximately 88,000 employees are covered by collective bargaining agreements. During fiscal 2011, 61 collective bargaining agreements covering approximately 17,000 employees were renegotiated and 37 collective bargaining agreements covering approximately 2,000 employees expired without their terms being renegotiated. Negotiations are expected to continue with the bargaining units representing the employees subject to those expired agreements. During fiscal 2012, 59 collective bargaining agreements covering approximately 26,000 employees will expire. The majority of employees covered by these expiring collective bargaining agreements are located in the Southern California and Pennsylvania markets. The Company is focused on ensuring competitive cost structures in each market in which it operates while meeting its employees’ needs for attractive wages and affordable healthcare and retirement benefits. The Company believes that it has generally good relations with its employees and with the labor unions that represent employees covered by collective bargaining agreements. Upon the expiration of collective bargaining agreements with employees, work stoppages could occur if we are unable to negotiate new contracts. A prolonged work stoppage at a significant number of stores may have a material impact on the Company’s business, financial condition or results of operations.

EXECUTIVE OFFICERS OF THE COMPANY

 

The following table provides certain information concerning the executive officers of the Company as of April 21, 2011.

 

 

 

The term of office of each executive officer is from one annual meeting of the Board of Directors until the next annual meeting of Board of Directors or until a successor is elected. There are no arrangements or understandings between any executive officer of the Company and any other person pursuant to which any executive officer was selected as an officer of the Company. There are no family relationships between or among any of the executive officers of the Company.

 

Each of the executive officers of the Company has been in the employ of the Company or its subsidiaries for more than five consecutive years, except for Craig R. Herkert, Julie Dexter Berg and Wayne R. Shurts.

 

 

Various risks and uncertainties may affect the Company’s business. Any of the risks described below or elsewhere in this Annual Report on Form 10-K or the Company’s other SEC filings may have a material impact on the Company’s business, financial condition or results of operations.

 

Current economic conditions

 

The global economy and financial markets have experienced volatility in recent years due to uncertainties related to energy costs, availability of credit, difficulties in the banking and financial sectors, the decline in the housing market, falling consumer confidence and rising unemployment rates. These factors have all contributed to the decline in consumer spending and to consumers trading down to a less expensive mix of products or to consumers trading down to discounters for grocery items. In addition, in fiscal 2011, the Company experienced low levels of inflation. In this uncertain economy, it is difficult to forecast whether fiscal 2012 will be a period of inflation or deflation. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. If these consumer spending patterns continue or worsen, along with an ongoing soft economy, the Company’s financial condition and results of operations may be adversely affected.

 

Execution of initiatives

 

The Company is positioned in the retail food industry as the only traditional food retailer with multiple formats and ownership models that can be used to address differing customer needs across the United States. Management believes that this diversity of go-to-market options differentiates the Company and is part of its vision of becoming “America’s Neighborhood Grocer.” The Company has launched certain business transformation initiatives to achieve this vision of enhanced performance through greater focus on the customer, driving increased sales and reducing its overall cost structure. The Company plans to increase the number of hard-discount stores and to reinvest in its existing store base through remodels and merchandising initiatives tailored to the unique needs of each particular store’s neighborhood. If the Company is unable to execute on these initiatives, the Company’s financial condition and results of operations may be adversely affected.

 

Competition in the Retail food and Supply chain services businesses

 

The Company’s Retail food business faces competition for customers, employees, store sites, products and in other important areas from traditional grocery retailers, including regional and national chains and independent

food store operators, and non-traditional retailers, such as supercenters, membership warehouse clubs, specialty supermarkets, drug stores, discount stores, dollar stores, convenience stores and restaurants. The Company’s ability to attract customers in this business is dependent, in large part, upon a combination of price, quality, assortment, brand recognition, store location, in-store marketing and merchandising, promotional strategies and continued growth into new markets. In addition, the nature and extent to which our competitors implement various pricing and promotional activities in response to increasing competition and the Company’s response to these competitive actions, can adversely affect profitability. The Company’s Supply chain services business is primarily wholesale distribution, which competes with traditional grocery wholesalers on the basis of price, quality, assortment, schedule and reliability of deliveries, service fees and distribution facility locations.

 

Competitive pressures on the Company’s Retail food and Supply chain services businesses may cause the Company to experience: (i) reductions in the prices at which the Company is able to sell products at its retail locations or to its independent retail customers, (ii) decreases in sales volume due to increased difficulty in selling the Company’s products and (iii) difficulty in attracting and retaining customers. Any of these outcomes may adversely affect the Company’s financial condition and results of operations.

 

Food and drug safety concerns and related unfavorable publicity

 

There is increasing governmental scrutiny and public awareness regarding food and drug safety. The Company may be adversely affected if consumers lose confidence in the safety and quality of the Company’s food and drug products. Any events that give rise to actual or potential food contamination, drug contamination or food-borne illness may result in product liability claims and a loss of consumer confidence. In addition, adverse publicity about these types of concerns whether valid or not, may discourage consumers from buying the Company’s products or cause production and delivery disruptions, which may adversely affect the Company’s financial condition and results of operations.

 

Substantial indebtedness

 

The Company has, and expects to continue to have, a substantial amount of debt. The Company’s substantial indebtedness may increase the Company’s borrowing costs and decrease the Company’s business flexibility, making it more vulnerable to adverse economic conditions. For example, high levels of debt could:

 

 

There are various financial covenants and other restrictions in the Company’s debt instruments. If the Company fails to comply with any of these requirements, the related indebtedness (and other unrelated indebtedness) could become due and payable prior to its stated maturity and the Company may not be able to repay the indebtedness that becomes due. A default under the Company’s debt instruments may also significantly affect the Company’s ability to obtain additional or alternative financing.

 

The Company’s ability to comply with the covenants or to refinance the Company’s obligations with respect to the Company’s indebtedness will depend on the Company’s operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond the Company’s control. These conditions and factors may also negatively impact the Company’s debt ratings, which may increase the cost of borrowing, adversely affect the Company’s ability to access one or more financial markets or result in a default under the Company’s debt instruments.

 

Any of these outcomes may adversely affect the Company’s financial condition and results of operations.

Labor unions

 

As of February 26, 2011, the Company is a party to 238 collective bargaining agreements covering approximately 88,000 of its employees, of which 59 collective bargaining agreements covering approximately 26,000 employees are scheduled to expire in fiscal 2012. These expiring agreements cover approximately 30 percent of the Company’s union-affiliated employees. In addition, during fiscal 2011, 37 collective bargaining agreements covering approximately 2,000 employees expired without their terms being renegotiated. Negotiations are expected to continue with the bargaining units representing the employees subject to those agreements. In future negotiations with labor unions, the Company expects that, among other issues, rising healthcare, pension and employee benefit costs will be important topics for negotiation. There can be no assurance that the Company will be able to negotiate the terms of expiring or expired agreements in a manner acceptable to the Company. Therefore, potential work disruptions from labor disputes may disrupt the Company’s businesses and adversely affect the Company’s financial condition and results of operations.

 

Costs of employee benefits

 

The Company provides health benefits and sponsors defined pension and other post-retirement plans for substantially all employees not participating in multi-employer health and pension plans. The Company’s costs to provide such benefits continue to increase annually and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. The Company is not able at this time to determine the impact that healthcare reform could have on the Company-sponsored medical plans.

 

In addition, the Company participates in various multi-employer health and pension plans for a majority of its union-affiliated employees, and the Company is required to make contributions to these plans in amounts established under collective bargaining agreements. The costs of providing benefits through such plans have escalated rapidly in recent years. The amount of any increase or decrease in the Company’s required contributions to these multi-employer plans will depend upon many factors, including the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability if the Company chooses to exit a market. Increases in the costs of benefits under these plans coupled with adverse stock market developments that have reduced the return on plan assets have caused some multi-employer plans in which the Company participates to be underfunded. The unfunded liabilities of these plans may result in increased future payments by the Company and the other participating employers. The Company’s risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. The Great Atlantic & Pacific Tea Company (“A&P”) filed for bankruptcy on December 12, 2010, and is a participant in five multi-employer plans with the Company. Based on the information available to the Company the impact of the A&P bankruptcy on the Company’s future payments or unfunded liabilities is not currently probable or reasonably estimable.

 

If the Company is unable to control healthcare and pension costs, the Company may experience increased operating costs, which may adversely affect the Company’s financial condition and results of operations.

 

Governmental regulations

 

The Company’s businesses are subject to various federal, state and local laws, regulations and administrative practices. These laws require the Company to comply with numerous provisions regulating health and sanitation standards, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. The Company’s inability to timely obtain permits, comply with government regulations or make capital expenditures required to maintain compliance with governmental regulations may adversely impact the Company’s business operations and prospects for future growth and its ability to participate in federal and state healthcare programs. In addition, the Company cannot predict the nature of future laws, regulations, interpretations or applications, nor can the Company determine the effect that additional governmental regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on the Company’s future business. They may, however, impose additional requirements or restrictions on the products the

Company sells or manner in which the Company operates its businesses. Any or all of such requirements may adversely affect the Company’s financial condition and results of operations.

 

Insurance claims

 

The Company uses a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, automobile and general liability, property insurance and employee healthcare benefits. The Company estimates the liabilities associated with the risks retained by the Company, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a degree of variability. Any actuarial projection of losses concerning workers’ compensation and general and automobile liability is subject to a degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and actual claim settlement patterns.

 

Some of the many sources of uncertainty in the Company’s reserve estimates include changes in benefit levels, medical fee schedules, medical utilization guidelines, vocation rehabilitation and apportionment. If the number or severity of claims for which the Company is self-insured increases, or the Company is required to accrue or pay additional amounts because the claims prove to be more severe than the Company’s original assessments, the Company’s financial condition and results of operations may be adversely affected.

 

Litigation

 

The Company’s businesses are subject to the risk of litigation by employees, consumers, suppliers, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in the Company’s businesses, regardless of whether the allegations are valid or whether the Company is ultimately found liable. As a result, litigation may adversely affect the Company’s financial condition and results of operations.

 

Information technology systems

 

The Company has complex information technology systems that are important to the operation of its businesses. The Company may encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulties may lead to significant expenses or losses due to disruption in business operations and, as a result, may adversely affect the Company’s financial condition and results of operations.

 

Additionally, data theft, information espionage or other criminal activity directed at the grocery or drug store industry, the transportation industry, or computer or communications systems may adversely affect the Company’s businesses by causing the Company to implement costly security measures in recognition of actual or potential threats, by requiring the Company to expend significant time and expense developing, maintaining or upgrading its information technology systems and by causing the Company to incur significant costs to reimburse third parties for damages. Such activities may also adversely affect the Company’s financial condition and results of operations by reducing consumer confidence in the marketplace and by modifying consumer spending habits.

 

Weather and natural disasters

 

Severe weather conditions such as hurricanes, earthquakes or tornadoes, as well as other natural disasters, in areas in which the Company has stores or distribution facilities or from which the Company obtains products may cause physical damage to the Company’s properties, closure of one or more of the Company’s stores or distribution facilities, lack of an adequate work force in a market, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to the Company’s distribution centers or stores and a reduction in the availability of products in the Company’s stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and

the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt the Company’s businesses and adversely affect the Company’s financial condition and results of operations.

 

Changes in accounting standards

 

Accounting principles generally accepted in the Unites States of America (“accounting standards”) and interpretations by various governing bodies, including the SEC, for many aspects of the Company’s business, such as accounting for insurance and self-insurance, inventories, goodwill and intangible assets, store closures, leases, income taxes and stock-based compensation, are complex and involve subjective judgments. Changes in these rules or their interpretation may significantly change or add significant volatility to the Company’s reported earnings without a comparable underlying change in cash flow from operations. As a result, changes in accounting standards may materially impact the Company’s financial condition and results of operations.

 

Impairment charges for goodwill or other intangible assets

 

The Company is required to annually test goodwill and intangible assets with indefinite useful lives, including the goodwill associated with past acquisitions and any future acquisitions, to determine if impairment has occurred. Additionally, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, the Company is required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made.

 

The testing of goodwill and other intangible assets for impairment requires the Company to make significant estimates about its future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including potential changes in economic, industry or market conditions, changes in business operations, changes in competition or changes in the Company’s stock price and market capitalization. Changes in these factors, or changes in actual performance compared with estimates of the Company’s future performance, may affect the fair value of goodwill or other intangible assets, which may result in an impairment charge. The Company cannot accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other intangible assets become impaired, the Company’s financial condition and results of operations may be adversely affected.

 

 

None.

 

 

Total retail square footage as of February 26, 2011 was 64 million, of which approximately 62 percent was leased. Additional information on the Company’s properties can be found in Part I, Item 1 of this Annual Report on Form 10-K.

 

 

The Company is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business, none of which, in management’s opinion, is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

In September 2008, a class action complaint was filed against the Company, as well as International Outsourcing Services, LLC (“IOS”), Inmar, Inc., Carolina Manufacturer’s Services, Inc., Carolina Coupon Clearing, Inc. and Carolina Services, in the United States District Court in the Eastern District of Wisconsin. The plaintiffs in the case are a consumer goods manufacturer, a grocery co-operative and a retailer marketing services company who allege on behalf of a purported class that the Company and the other defendants (i) conspired to restrict the markets for coupon processing services under the Sherman Act and (ii) were part

of an illegal enterprise to defraud the plaintiffs under the Federal Racketeer Influenced and Corrupt Organizations Act. The plaintiffs seek monetary damages, attorneys’ fees and injunctive relief. The Company intends to vigorously defend this lawsuit, however all proceedings have been stayed in the case pending the result of the criminal prosecution of certain former officers of IOS. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

In December 2008, a class action complaint was filed in the United States District Court for the Western District of Wisconsin against the Company alleging that a 2003 transaction between the Company and C&S Wholesale Grocers, Inc. (“C&S”) was a conspiracy to restrain trade and allocate markets. In the 2003 transaction, the Company purchased certain assets of the Fleming Corporation as part of Fleming Corporation’s bankruptcy proceedings and sold certain assets of the Company to C&S which were located in New England. Since December 2008, three other retailers have filed similar complaints in other jurisdictions. The cases have been consolidated and are proceeding in the United States District Court for the District of Minnesota. The complaints allege that the conspiracy was concealed and continued through the use of non-compete and non-solicitation agreements and the closing down of the distribution facilities that the Company and C&S purchased from the other. Plaintiffs are seeking monetary damages, injunctive relief and attorneys’ fees. The Company is vigorously defending these lawsuits. Separately from these civil lawsuits, on September 14, 2009, the United States Federal Trade Commission (“FTC”) issued a subpoena to the Company requesting documents related to the C&S transaction as part of the FTC’s investigation into whether the Company and C&S engaged in unfair methods of competition. The Company cooperated with the FTC. On March 18, 2011, the FTC notified the Company that it has determined that no additional action is warranted by the FTC and that it has closed its investigation.

 

On January 7, 2010, the Company received a subpoena from the Office of Inspector General for the Department of Health and Human Services’ Milwaukee Field Office in connection with an investigation of possible false or otherwise improper claims for payment under the Medicaid program. The subpoena requests retail pharmacy claims data for “dual eligible” customers (i.e., customers with both Medicaid and private insurance coverage), information concerning the Company’s retail pharmacy claims processing systems, copies of pharmacy payor contracts and other documents and records. On February 11, 2011, a complaint was filed by the United States Government and the States of California and Minnesota to intervene in a previously sealed qui tam lawsuit in the United States District Court for the Western District of Wisconsin. The complaint alleges that the Company improperly billed Medicaid claims with dual eligibility by charging Medicaid more than the co-pay allowed by the primary payer in seven states. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

The Company is also involved in routine legal proceedings incidental to its operations. Some of these routine proceedings involve class allegations, many of which are ultimately dismissed. Management does not expect that the ultimate resolution of these legal proceedings will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

The statements above reflect management’s current expectations based on the information presently available to the Company, however, predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. In addition, the Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures and believes recorded reserves are adequate. It is possible, although management believes it is remote, that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

 

 

The Company’s common stock is listed on the New York Stock Exchange under the symbol SVU. As of April 15, 2011, there were 14,962 stockholders of record.

 

Common Stock Price

 

 

Dividend payment dates are on or about the 15th day of March, June, September and December, subject to the Board of Directors approval.

 

Company Purchases of Equity Securities

 

The following table sets forth the Company’s purchases of equity securities for the periods indicated:

 

 

 

Stock Performance Graph

 

The following graph compares the yearly change in the Company’s cumulative shareholder return on its common stock for the period from the end of fiscal 2006 to the end of fiscal 2011 to that of the Standard & Poor’s (“S&P”) 500 and a group of peer companies in the retail grocery industry. The stock price performance shown below is not necessarily indicative of future performance.

 

COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN AMONG
SUPERVALU, S&P 500 AND PEER GROUP⁽¹⁾

 

February 24, 2006 through February 25, 2011⁽²⁾

 

 

 

 

 

The performance graph above is being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 

 

 

Historical data is not necessarily indicative of the Company’s future results of operations or financial condition. See discussion of “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

 

RESULTS OF OPERATIONS

 

The challenging economic environment in fiscal 2011 has negatively impacted consumer confidence. As a result, consumer spending is pressured and consumers are seeking greater value offerings. These trends are expected to continue in fiscal 2012.

 

The Company is focused on its business transformation initiatives to enhance business performance by placing greater focus on the customer, matching offerings to the neighborhoods served, delivering high quality fresh produce, making the in-store shopping experience hassle-free and providing competitive everyday value. The Company is combining these customer initiatives with reducing its overall cost structure through the use of improved business tools and further leveraging of its size. In addition, the Company continues to provide capital spending to fund retail store remodeling activity and new hard-discount stores.

 

The following discussion summarizes operating results in fiscal 2011 compared to fiscal 2010 and for fiscal 2010 compared to fiscal 2009. Comparability is affected by income and expense items that fluctuated significantly between and among periods:

 

 

Comparison of fifty-two weeks ended February 26, 2011 (fiscal 2011) with fifty-two weeks ended February 27, 2010 (fiscal 2010):

 

For fiscal 2011, Net sales were $37,534, compared with $40,597 last year. Net loss for fiscal 2011 was $1,510, or $7.13 per basic and diluted share, compared with net earnings of $393, or $1.86 per basic share and $1.85 per diluted share last year. Results for fiscal 2011 include net charges of $1,987 before tax ($1,806 after tax, or $8.52 per diluted share) comprised of non-cash goodwill and intangible asset impairment charges of $1,870 before tax ($1,743 after tax, or $8.23 per diluted share), store closure and exit costs of $99 before tax ($77 after tax, or $0.37 per diluted share) and employee-related expenses, primarily labor buyout costs, severance, and the impact of a labor dispute of $80 before tax ($51 after tax, or $0.23 per diluted share), partially offset by a gain on the sale of Total Logistic Control of $62 before tax ($65 after tax, or $0.31 per diluted share).

 

Net Sales

 

Net sales for fiscal 2011 were $37,534, compared with $40,597 last year, a decrease of 7.5%. Retail food sales were 77.0 percent of Net sales and Supply chain services sales were 23.0 percent of Net sales for fiscal 2011, compared with 77.9 percent and 22.1 percent, respectively, last year.

Retail food sales for fiscal 2011 were $28,911, compared with $31,637 last year, a decrease of 8.6%. The decrease primarily reflects negative identical store retail sales growth (defined as stores operating for four full quarters, including store expansions and excluding fuel and planned store dispositions) and the impact of store dispositions. For fiscal 2011, as compared to fiscal 2010, identical store retail sales growth was negative 6.0 percent. Identical store retail sales performance was primarily a result of heightened value-focused competitive activity and the impact of the challenging economic environment on consumers.

 

During fiscal 2011 the Company added 132 new stores through new store development, comprised of 3 traditional retail food stores and 129 hard-discount food stores, and sold or closed 87 stores, including planned dispositions, of which 50 were traditional retail food stores and 37 were hard-discount food stores.

 

Total retail square footage as of the end of fiscal 2011 was approximately 64 million, a decrease of 1.7 percent from the end of fiscal 2010. Total retail square footage, excluding actual and planned store dispositions, increased 1.7 percent from the end of fiscal 2010. Supply chain services sales for fiscal 2011 were $8,623, compared with $8,960 last year, a decrease of 3.8%. The decrease primarily reflects the completion of a national retail customer’s previously announced plans to transition certain volume to self-distribution and the loss of a customer due to acquisition by a competitor net of new business during fiscal 2011.

 

Gross Profit

 

Gross profit, as a percent of Net sales, was 22.4 percent for fiscal 2011 compared with 22.5 percent last year. The decrease is primarily attributable to the impact of business segment sales mix. Retail food gross profit as a percent of Net sales was 27.5 percent for fiscal 2011 compared with 27.4 percent last year. The increase is due to improved promotional effectiveness and a change in product mix. Supply chain gross profit as a percent of Net sales for fiscal 2011 was consistent with last year at 5.4 percent.

 

Selling and Administrative Expenses

 

Selling and administrative expenses, as a percent of Net sales, were 20.0 percent for fiscal 2011, compared with 19.6 percent last year. The increase primarily reflects reduced sales leverage, increased store closure and exit costs, and increased employee-related expenses, partially offset by savings achieved from ongoing cost reduction initiatives and a gain related to the sale of Total Logistic Control.

 

Goodwill and intangible asset impairment charges

 

During fiscal 2011 the Company recorded non-cash impairment charges of $1,870 in the Retail food segment due to the significant decline in its market capitalization and the impact of the challenging economic environment on the Company’s operations. No goodwill impairment charges were recorded in fiscal 2010.

 

Operating Earnings (Loss)

 

Operating loss for fiscal 2011 was $976 compared with operating earnings of $1,201 last year. Retail food operating loss for fiscal 2011 was $1,212, or negative 4.2 percent of Retail food net sales compared with operating earnings of $989 or 3.1 percent of Retail food net sales last year. The decrease reflects goodwill and intangible asset impairment charges of $1,870, or 6.5 percent of Retail food sales, store closure and exit costs of $99, or 0.3 percent of Retail food sales, and certain other costs primarily related to labor buy-out costs, severance and the impact of a labor dispute of $80, or 0.3 percent of Retail food sales. The remaining decrease of $152, or 20 basis points, is primarily attributable to increased promotional spending and reduced sales leverage.

 

Supply chain services operating earnings for fiscal 2011 were $337, or 3.9 percent of Supply chain services net sales, compared with $299, or 3.3 percent of Supply chain services net sales, last year. The increase primarily reflects the gain on the sale of Total Logistic Control of $62, or 0.7 percent of Supply chain services sales.

Net Interest Expense

 

Net interest expense was $547 in fiscal 2011, compared with $569 last year, primarily reflecting lower debt levels in fiscal 2011.

 

Provision for Income Taxes

 

The income tax benefit was $13, or 0.9 percent of loss before income taxes, for fiscal 2011 compared with a tax expense of $239, or 37.8 percent of earnings before income taxes, last year. The tax rate for fiscal 2011 reflects the impact of the goodwill and intangible asset impairment charges, the majority of which are non-deductible for income tax purposes.

 

Net Earnings (Loss)

 

Net loss was $1,510, or $7.13 per basic and diluted share, for fiscal 2011 compared with net earnings of $393, or $1.86 per basic share and $1.85 per diluted share last year. Net loss for fiscal 2011 includes goodwill and intangible asset impairment charges, store closure and exit costs and certain other costs consisting primarily of labor buyout costs, severance and the impact of a labor dispute of $1,806 after tax, or $8.52 per diluted share, partially offset by a gain on the sale of Total Logistic Control of $65 after tax, or $0.31 per diluted share. Net earnings for fiscal 2010 includes net charges of $39 after tax, or $0.18 per diluted share, related to planned retail market exits, closure of non-strategic stores and fees received from the early termination of a supply agreement.

 

Comparison of fifty-two weeks ended February 27, 2010 (fiscal 2010) with fifty-three weeks ended February 28, 2009 (fiscal 2009):

 

For fiscal 2010, Net sales were $40,597, compared with $44,564 in fiscal 2009. Net earnings for fiscal 2010 were $393 and diluted net earnings per share were $1.85, compared with net loss of $2,855 and diluted net loss per share of $13.51 in fiscal 2009. Results for fiscal 2010 include net charges of $62 before tax ($39 after tax, or $0.18 per diluted share) related to planned retail market exits, closure of non-strategic stores announced in fiscal 2009 and fees received from the early termination of a supply agreement. Results for fiscal 2009 include charges of $3,762 before tax ($3,470 after tax, or $16.40 per diluted share) comprised of goodwill and intangible asset impairment charges of $3,524 before tax ($3,326 after tax, or $15.71 per diluted share), charges primarily related to the closure of non-strategic stores announced in fiscal 2009 of $200 before tax ($121 after tax, or $0.58 per diluted share), settlement costs for a pre-Acquisition Albertsons litigation matter of $24 before tax ($15 after tax, or $0.07 per diluted share) and other Acquisition-related costs (defined as one-time transaction costs, which primarily include supply chain consolidation costs, employee-related benefit costs and consultant fees) of $14 before tax ($8 after tax, or $0.04 per diluted share).

 

Net Sales

 

Net sales for fiscal 2010 were $40,597, compared with $44,564 in fiscal 2009. Retail food sales were 77.9 percent of Net sales and Supply chain services sales were 22.1 percent of Net sales for fiscal 2010, compared with 77.8 percent and 22.2 percent, respectively, in fiscal 2009.

 

Retail food sales for fiscal 2010 were $31,637, compared with $34,664 in fiscal 2009. Approximately $578 of fiscal 2009 Retail food sales is attributable to the extra week. The remaining decrease primarily reflects negative identical store retail sales growth (defined as stores operating for four full quarters, including store expansions and excluding fuel and planned store dispositions) and the impact of store dispositions. For fiscal 2010, as compared to fiscal 2009, identical store retail sales growth was negative 5.1 percent based on the same 52-week period for both years. Identical store retail sales performance was primarily the result of a challenging economic environment, heightened competitive activity and investments in price and promotions.

 

During fiscal 2010, the Company added 40 new stores through new store development and sold or closed 112 stores, including planned dispositions.

Total retail square footage as of the end of fiscal 2010 was approximately 65 million, a decrease of 6.2 percent from the end of fiscal 2009. Total retail square footage, excluding actual and planned store dispositions, increased 0.8 percent from the end of fiscal 2009.

 

Supply chain services sales for fiscal 2010 were $8,960, compared with $9,900 in fiscal 2009. Approximately $165 of fiscal 2009 Supply chain services sales is attributable to the extra week. The remaining decrease primarily reflects the completion of a national retail customer’s previously announced plans to transition certain volume to self-distribution.

 

Gross Profit

 

Gross profit, as a percent of Net sales, was 22.5 percent for fiscal 2010 compared with 22.7 percent in fiscal 2009, primarily reflecting a higher promotional sales mix and increased investments in price, partially offset by a lower LIFO charge.

 

Selling and Administrative Expenses

 

Selling and administrative expenses, as a percent of Net sales, were 19.6 percent for fiscal 2010, compared with 19.6 percent in fiscal 2009. Savings from ongoing cost-reduction initiatives and lower store disposition-related costs compared to last year were offset by reduced sales leverage.

 

Goodwill and intangible asset impairment charges

 

No goodwill impairment charges were recorded in fiscal 2010. During fiscal 2009 the Company recorded impairment charges of $3,524 in the Retail food segment due to the significant decline in the market price of the Company’s common stock as of the end of the third quarter of fiscal 2009 as well as the impact of the unprecedented decline in the economy on the Company’s plan.

 

Operating Earnings (Loss)

 

Operating earnings for fiscal 2010 were $1,201 compared with an operating loss of $2,157 in fiscal 2009. Retail food operating earnings for fiscal 2010 were $989, or 3.1 percent of Retail food net sales, reflecting $55, or 0.2 percent of Retail food net sales, of charges related to planned retail market exits. Retail food operating loss for fiscal 2009 was $2,315, or negative 6.7 percent of Retail food net sales last year, reflecting $3,524, or 10.2 percent of Retail food sales, of goodwill and intangible asset impairment charges and $162, or 0.5 percent of Retail food sales, of charges primarily related to the closure of non-strategic stores. The remaining decrease of $327, or 70 basis points, primarily reflects the impact of a challenging economic environment, heightened competitive activity, a higher promotional sales mix, increased investments in price and reduced sales leverage, partially offset by a lower LIFO charge. Supply chain services operating earnings for fiscal 2010 were $299, or 3.3 percent of Supply chain services net sales, compared with $307, or 3.1 percent of Supply chain services net sales, in fiscal 2009. The 20 basis point increase in Supply chain services operating earnings as a percent of Supply chain services net sales primarily reflects a lower LIFO charge and fees received from the early termination of a supply agreement in fiscal 2010.

 

Net Interest Expense

 

Net interest expense was $569 in fiscal 2010, compared with $622 in fiscal 2009, primarily reflecting lower interest rates and debt levels as well as one less week in fiscal 2010.

 

Provision for Income Taxes

 

Income tax expense was $239, or 37.8 percent of earnings before income taxes, for fiscal 2010 compared with $76, or 2.7 percent of loss before income taxes, in fiscal 2009. The tax rate for fiscal 2009 reflects the impact of the goodwill and intangible asset impairment charges, the majority of which are non-deductible for income tax purposes, as well as a benefit attributable to favorable state tax items, non-taxable life insurance proceeds and a reduction in the statutory rate.

Net Earnings (Loss)

 

Net earnings were $393, or $1.86 per basic share and $1.85 per diluted share, for fiscal 2010 compared with net loss of $2,855, or $13.51 per basic and diluted share in fiscal 2009. Net earnings for fiscal 2010 include net charges of $39 after tax, or $0.18 per diluted share, related to planned retail market exits, closure of non-strategic stores announced in fiscal 2009 and fees received from the early termination of a supply agreement. Net loss for fiscal 2009 includes charges of $3,470 after tax, or $16.40 per diluted share, comprised of goodwill and intangible asset impairment charges, charges primarily related to the closure of non-strategic stores announced in fiscal 2009, settlement costs for a pre-Acquisition Albertsons litigation matter and other Acquisition-related costs.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of consolidated financial statements in conformity with accounting standards requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant accounting policies are discussed in Note 1 — Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of the Company’s consolidated financial statements.

 

Vendor Funds

 

The Company receives funds from many of the vendors whose products the Company buys for resale in its stores. These vendor funds are provided to increase the sell-through of the related products. The Company receives vendor funds for a variety of merchandising activities: placement of the vendors’ products in the Company’s advertising; display of the vendors’ products in prominent locations in the Company’s stores; supporting the introduction of new products into the Company’s retail stores and distribution system; exclusivity rights in certain categories; and to compensate for temporary price reductions offered to customers on products held for sale at retail stores. The Company also receives vendor funds for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor fund contracts have terms of less than a year, with a small proportion of the contracts longer than one year.

 

The Company recognizes vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount and timing of recognition of vendor funds as well as the amount of vendor funds to be recognized as a reduction to ending inventory requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecast and historical data and review of average inventory turnover data. These judgments and estimates impact the Company’s reported gross profit, operating earnings (loss) and inventory amounts. The historical estimates of the Company have been reliable in the past, and the Company believes the methodology will continue to be reliable in the future. Based on previous experience, the Company does not expect significant changes in the level of vendor support. However, if such changes were to occur, cost of sales and advertising expense could change, depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or eliminated, the Company would consider changing the volume, type and frequency of the advertising, which could increase or decrease its advertising expense. Similarly, the Company is not able to assess the impact of vendor advertising allowances on increasing revenues as such allowances do not directly generate revenue for the Company’s stores. For fiscal 2011, a 1 percent change in

total vendor funds earned, including advertising allowances, with no offsetting changes to the base price on the products purchased, would impact gross profit by less than 10 basis points.

 

Inventories

 

Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventory consists of finished goods. Approximately 79 percent of the Company’s inventories were valued using the last-in, first-out (“LIFO”) method for fiscal 2011 and fiscal 2010. The Company uses a combination of the retail inventory method (“RIM”) and replacement cost method to determine the current cost of its inventory before any LIFO reserve is applied. Under RIM, the current cost of inventories and the gross margins are calculated by applying a cost-to-retail ratio to the current retail value of inventories. Under the replacement cost method, the most current unit purchase cost is used to calculate the current cost of inventories. The first-in, first-out method (“FIFO”) is used to determine cost for some of the remaining highly perishable inventories. If the FIFO method had been used to determine cost of inventories for which the LIFO method is used, the Company’s inventories would have been higher by approximately $282 and $264 as of February 26, 2011 and February 27, 2010, respectively.

 

During fiscal 2011, 2010 and 2009, inventory quantities in certain LIFO layers were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2011, 2010 and 2009 purchases. As a result, Cost of sales decreased by $11, $22 and $10 in fiscal 2011, 2010 and 2009, respectively.

 

In addition, the Company evaluates physical inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date. Although the Company has sufficient current and historical information available to record reasonable estimates for inventory shortages, it is possible that actual results could differ. As of February 26, 2011, each 25 basis point change in the estimated inventory shortages would impact the allowances for inventory shortages by approximately $14.

 

Reserves for Closed Properties and Property, Plant and Equipment-Related Impairment Charges

 

The Company maintains reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. The Company provides for closed property operating lease liabilities using a discount rate to calculate the present value of the remaining noncancellable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. The closed property lease liabilities usually are paid over the remaining lease terms, which generally range from one to 20 years. The Company estimates subtenant rentals and future cash flows based on the Company’s experience and knowledge of the market in which the closed property is located, the Company’s previous efforts to dispose of similar assets and existing economic conditions. Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.

 

Owned properties, capital lease properties and the related equipment and leasehold improvements at operating leased properties that are closed are reduced to their estimated fair value. The Company estimates fair value based on its experience and knowledge of the market in which the closed property is located and, when necessary, utilizes local real estate brokers to assist in the valuation.

 

The expectations on timing of disposition and the estimated sales price or subtenant rentals associated with closed properties, owned or leased, are impacted by variable factors including inflation, the general health of the economy, resultant demand for commercial property, the ability to secure subleases, the creditworthiness of sublessees and the Company’s success at negotiating early termination agreements with lessors. While management believes the current estimates of reserves for closed properties and related impairment charges are adequate, it is possible that market and economic conditions in the real estate market could cause changes in the Company’s assumptions and may require additional reserves and asset impairment charges to be recorded.

The Company’s reserve for closed properties was $178, net of estimated sublease recoveries of $142, as of February 26, 2011 and $128, net of estimated sublease recoveries of $125, as of February 27, 2010. The Company recognized asset impairment charges of $39, $52 and $75 in fiscal 2011, 2010 and 2009, respectively.

 

Goodwill and Intangible Assets with Indefinite Useful Lives

 

The Company reviews goodwill for impairment during the fourth quarter of each year, and also if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The reviews consist of comparing estimated fair value to the carrying value at the reporting unit level. The Company’s reporting units are the operating segments of the business which consist of traditional retail stores, hard-discount stores, and supply chain services. Fair values are determined by using both the market approach, applying a multiple of earnings based on guideline for publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on the Company’s industry, capital structure and risk premiums including those reflected in the current market capitalization. If management identifies the potential for impairment of goodwill, the fair value of the implied goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value. Fair value calculations contain significant judgments and estimates related to each reporting unit’s projected future revenues, profitability and cash flows. When preparing these estimates, management considers each reporting unit’s historical results, current operating trends and specific plans in place. These estimates are impacted by variable factors including inflation, the general health of the economy and market competition. The Company has sufficient current and historical information available to support its judgments and estimates. However, if actual results are not consistent with the Company’s estimates, future operating results may be materially impacted.

 

The Company also reviews intangible assets with indefinite useful lives, which primarily consist of trademarks and tradenames, for impairment during the fourth quarter of each year, and also if events or changes in circumstances indicate that the asset might be impaired. The reviews consist of comparing estimated fair value to the carrying value. Fair values of the Company’s trademarks and tradenames are determined primarily by discounting an assumed royalty value applied to projected future revenues associated with the tradename based on management’s expectations of the current and future operating environment. The royalty cash flows are then discounted using rates based on the weighted average cost of capital discussed above and the specific risk profile of the tradenames relative to the Company’s other assets. These estimates are impacted by variable factors including inflation, the general health of the economy and market competition.

 

The Company undertook reviews for impairment of goodwill and intangible assets with indefinite useful lives twice during the year. During the second quarter of fiscal 2011 the Company’s stock price had a significant and sustained decline and book value per share substantially exceeded the stock price. As a result, the Company completed an impairment review and recorded non-cash impairment charges of $1,840, comprised of a $1,619 reduction to the carrying value of goodwill and a $221 reduction to the carrying value of indefinite-lived trademarks and tradenames within the traditional retail operating segment.

 

The result of the annual review of goodwill undertaken in the fourth quarter indicated no goodwill impairment charges were required. The initial review of goodwill for impairment indicated that the $1,137 carrying value of traditional retail stores’ goodwill exceeded its estimated fair value. Further assessment of the fair value of implied goodwill based on the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities did not indicate impairment. Future appreciation of the fair value of the reporting unit assets and liabilities may impact the results of the assessment if similar analysis is required in a future period. The fair value of supply chain services’ goodwill exceeded its $710 carrying value by greater than 5 percent and the fair value of the hard-discount stores’ goodwill substantially exceeded its $137 carrying value. If the Company’s stock price experiences a significant and sustained decline, or other events or changes in circumstances, such as operating results not meeting plan indicate that impairment may have occurred, the Company would reassess the fair value of the implied goodwill compared to the carrying value.

The results of the annual fourth quarter impairment review of intangible assets with indefinite useful lives indicated that the carrying value of certain Acquired Trademarks exceeded their estimated fair value and an impairment charge of $30 was recorded. If the variable factors discussed above change significantly, the Company would be required to reassess the fair value of the intangible assets with indefinite useful lives compared to the carrying value.

 

During fiscal 2010, the Company recorded impairment charges of $20 to its Acquired Trademarks as a result of certain market exits.

 

Self-Insurance Liabilities

 

The Company is primarily self-insured for workers’ compensation, healthcare for certain employees and general and automobile liability costs. It is the Company’s policy to record its self-insurance liabilities based on management’s estimate of the ultimate cost of reported claims and claims incurred but not yet reported and related expenses, discounted at a risk-free interest rate.

 

In determining its self-insurance liabilities, the Company performs a continuing review of its overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities. Any projection of losses concerning workers’ compensation, healthcare and general and automobile liability is subject to a degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, regulatory changes, benefit level changes and actual claim settlement patterns. The majority of the self-insurance liability for workers’ compensation is related to claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers and providers. In recent years, there has been an increase in the number of legislative reforms and judicial rulings affecting the handling of claim activity. The impact of many of these variables on ultimate costs is difficult to estimate. The effects of changes in such estimated items are included in results of operations in the period in which the estimates are changed. Such changes may be material to the results of operations and could occur in a future period. If, in the future, the Company was to experience significant volatility in the amount and timing of cash payments compared to its earlier estimates, the Company would assess whether to continue to discount these liabilities. The Company had self-insurance liabilities of approximately $1,050, net of the discount of $178, and $1,101, net of the discount of $191, as of February 26, 2011 and February 27, 2010, respectively. As of February 26, 2011, each 25 basis point change in the discount rate would impact the self-insurance liabilities by approximately $1.

 

Benefit Plans

 

The Company sponsors pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. The determination of the Company’s obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions used in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and healthcare costs. The discount rate is based on current investment yields on high-quality fixed-income investments. The expected long-term rate of return on plan assets is based on the historical experience of the Company’s investment portfolio and the projected returns by asset category. Over the 10-year period ended February 26, 2011 and February 27, 2010, the average rate of return on plan assets was approximately 5 percent and 4 percent, respectively. The 10-year average rate of return on pension assets for fiscal 2011 and fiscal 2010 are lower than the assumed long-term rate of return of 7.75 percent due to the unprecedented decline in the economy and the credit market turmoil during fiscal 2009. The Company expects that the markets will recover to the assumed long-term rate of return. In accordance with accounting standards, actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.

During fiscal 2011, the Company contributed $163 to its pension plans and $6 to its postretirement benefit plans, and expects to contribute $70 to its pension plans and $8 to its postretirement benefit plans in fiscal 2012.

 

For fiscal 2012, each 25 basis point reduction in the discount rate would increase pension expense by approximately $10 and each 25 basis point reduction in expected return on plan assets would increase pension expense by approximately $4. Similarly, for postretirement benefits, a 100 basis point change in the healthcare cost trend rate would impact the accumulated postretirement benefit obligation as of the end of fiscal 2011 by approximately $12 and the service and interest cost by $1 in fiscal 2012. Although the Company believes that its assumptions are appropriate, the actuarial assumptions may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates and longer or shorter life spans of participants.

 

In addition, the Company contributes to various multi-employer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These plans generally provide retirement benefits to participants based on their service to contributing employers. Based on available information, the Company believes that some of the multi-employer plans to which it contributes are underfunded. Company contributions to these plans are likely to continue to increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of the Company’s collective bargaining efforts, investment return on the assets held in the plans, actions taken by the trustees who manage the plans, and requirements under the Pension Protection Act of 2006 and Section 412(e) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Furthermore, if the Company were to exit certain markets or otherwise cease making contributions to these plans at this time, it could trigger a withdrawal liability that would require the Company to fund its proportionate share of a plan’s unfunded vested benefits. The Company contributed $135, $143 and $147 to these plans for fiscal 2011, 2010 and 2009, respectively.

 

Income Taxes

 

The Company’s current and deferred tax provision is based on estimates and assumptions that could materially differ from the actual results reflected in its income tax returns filed during the subsequent year and could significantly affect the effective tax rate and cash flows in future years.

 

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which it expects the differences to reverse.

 

The Company’s effective tax rate is influenced by tax planning opportunities available in the various jurisdictions in which the Company operates. Management’s judgment is involved in determining the effective tax rate and in evaluating the ultimate resolution of any uncertain tax positions. In addition, the Company is currently in various stages of audits, appeals or other methods of review with taxing authorities from various taxing jurisdictions. The Company establishes liabilities for unrecognized tax benefits in a variety of taxing jurisdictions when, despite management’s belief that the Company’s tax return positions are supportable, certain positions may be challenged and may need to be revised. The Company adjusts these liabilities in light of changing facts and circumstances, such as the progress of a tax audit. The effective income tax rate includes the impact of reserve provisions and changes to those reserves. The Company also provides interest on these liabilities at the appropriate statutory interest rate. The actual benefits ultimately realized for tax positions may differ from the Company’s estimates due to changes in facts, circumstances and new information. As of February 26, 2011 and February 27, 2010, the Company had $182 and $133 of unrecognized tax benefits, respectively.

 

The Company records a valuation allowance to reduce the deferred tax assets to the amount that it is more-likely-than-not to realize. Forecasted earnings, future taxable income and future prudent and feasible tax planning strategies are considered in determining the need for a valuation allowance. In the event the Company was not able to realize all or part of its net deferred tax assets in the future, the valuation allowance would be increased. Likewise, if it was determined that the Company was more-likely-than-not to realize the net deferred tax assets, the applicable portion of the valuation allowance would reverse. The Company had a valuation allowance of $24 and $161 as of February 26, 2011 and February 27, 2010, respectively.

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities was $1,163, $1,474 and $1,534 in fiscal 2011, 2010 and 2009, respectively. The decrease in cash provided by operating activities in fiscal 2011 compared to fiscal 2010 is primarily attributable to changes in deferred income taxes, operating assets and liabilities, and Net loss, adjusted for the impact of non-cash impairment charges. The decrease in cash provided by operating activities in fiscal 2010 compared to fiscal 2009 is primarily attributable to decreased Net earnings, adjusted for the impact of non-cash impairment charges, depreciation and amortization and LIFO expense, substantially offset by the changes in deferred income taxes and operating assets and liabilities.

 

Net cash used in investing activities was $227, $459 and $1,014 in fiscal 2011, 2010 and 2009, respectively. The decrease in cash used in investing activities in fiscal 2011 compared to fiscal 2010 and in fiscal 2010 compared to fiscal 2009 is primarily attributable to higher proceeds from the sale of assets and lower capital spending.

 

Net cash used in financing activities was $975, $1,044 and $523 in fiscal 2011, 2010 and 2009, respectively. The decrease in cash used in financing activities in fiscal 2011 compared to fiscal 2010 is primarily attributable to lower dividends paid compared to last year. The increase in cash used in financing activities in fiscal 2010 compared to fiscal 2009 is primarily attributable to higher levels of debt reduction.

 

Management expects that the Company will continue to replenish operating assets with internally generated funds. There can be no assurance, however, that the Company’s business will continue to generate cash flow at current levels. The Company will continue to obtain short-term or long-term financing from its credit facilities. Long-term financing will be maintained through existing and new debt issuances and its credit facilities. The Company’s short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund capital expenditures and acquisitions as opportunities arise. Maturities of debt issued will depend on management’s views with respect to the relative attractiveness of interest rates at the time of issuance and other debt maturities.

 

Certain of the Company’s credit facilities and long-term debt agreements have restrictive covenants and cross-default provisions which generally provide, subject to the Company’s right to cure, for the acceleration of payments due in the event of a breach of the covenant or a default in the payment of a specified amount of indebtedness due under certain other debt agreements. The Company was in compliance with all such covenants and provisions for all periods presented.

 

On April 5, 2010, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for an extension of the maturity of portions of the senior secured credit facilities provided under the original credit agreement, which included a five-year revolving credit facility (the “Revolving Credit Facility”), a five-year term loan (“Term Loan A”) and a six-year term loan (“Term Loan B”). Under the Credit Agreement, $1,500 of the Revolving Credit Facility was extended until April 5, 2015 and $500 of Term Loan B (“Term Loan B-2”) was extended until October 5, 2015. The remaining $600 of the Revolving Credit Facility will expire on June 2, 2011 and the remaining $502 of Term Loan B (“Term Loan B-1”) will mature on June 2, 2012. The maturity date of Term Loan A was not extended and will mature on June 2, 2011.

 

The fees and rates in effect on outstanding borrowings under the Credit Agreement are based on the Company’s current credit ratings. Borrowings under the non-extended portion of the Revolving Credit Facility, if any, carry an interest rate of LIBOR plus 1.25 percent, borrowings under Term Loan A carry an interest rate of LIBOR plus 1.125 percent and borrowings under Term Loan B-1 carry an interest rate of LIBOR plus 1.375 percent. Borrowings under the extended portion of the Revolving Credit Facility, if any, carry an interest rate of LIBOR plus 2.50 percent and borrowings under Term Loan B-2 carry an interest rate of LIBOR plus 3.25 percent. Facility fees under the non-extended and extended portions of the Revolving Credit Facility are 0.30 percent and 0.625 percent, respectively. The Company pays fees of up to 2.75 percent on the outstanding balance of the letters of credit issued under the extended Revolving Credit Facility. Borrowings under the term loans may be repaid, in full or in part, at any time without penalty.

 

The Credit Agreement reset covenants which are generally less restrictive than the covenants that existed prior to April 5, 2010. Specifically, the Company must maintain a leverage ratio no greater than 4.25 to 1.0 through

December 30, 2011, 4.0 to 1.0 from December 31, 2011 through December 30, 2012 and 3.75 to 1.0 thereafter. The Company’s leverage ratio was 3.5 to 1.0 at February 26, 2011. Additionally, the Company must maintain an interest expense coverage ratio of not less than 2.20 to 1.0 through December 30, 2011, 2.25 to 1.0 from December 31, 2011 through December 30, 2012 and 2.30 to 1.0 thereafter. The Company’s interest expense ratio was 2.6 to 1.0 at February 26, 2011.

 

All obligations under the senior secured credit facilities are guaranteed by each material subsidiary of the Company. The obligations are also secured by a pledge of the equity interests in those same material subsidiaries, limited as required by the existing public indentures of the Company, such that the respective debt issued need not be equally and ratably secured.

 

In May 2010, the Company amended and extended its accounts receivable securitization program until May 2013. The Company can borrow up to $200 on a revolving basis, with borrowings secured by eligible accounts receivable, which remain under the Company’s control. The facility fee in effect on February 26, 2011, based on the Company’s current credit ratings, was 1.00 percent.

 

As of February 26, 2011, the Company had $30 of debt with current maturities that are classified in Long-term debt in the Consolidated Balance Sheets due to the Company’s intent to refinance such obligations with the Revolving Credit Facility or other long-term debt.

 

On April 6, 2011, the Company announced that it is seeking the consent of lenders to amend its existing senior secured credit facilities to allow for the extension of Term Loan B-1 due in June 2012 to April 2018. The Company expects to complete the amendment in late April 2011.

 

Annual cash dividends declared for fiscal 2011, 2010 and 2009, were $0.3500, $0.6100 and $0.6875 per share, respectively. The Company’s dividend policy will continue to emphasize a high level of earnings retention for growth.

 

Capital spending for fiscal 2011 was $604, including $7 of capital leases. Capital spending primarily included store remodeling activity, new retail stores and technology expenditures. The Company’s capital spending for fiscal 2012 is projected to be approximately $700 to $750, including capital leases.

 

Fiscal 2012 total debt reduction is estimated to be approximately $500 to $550.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Guarantees

 

The Company has guaranteed certain leases, fixture financing loans and other debt obligations of various retailers as of February 26, 2011. These guarantees were generally made to support the business growth of independent retail customers. The guarantees are generally for the entire terms of the leases or other debt obligations with remaining terms that range from less than one year to 19 years, with a weighted average remaining term of approximately eight years. For each guarantee issued, if the independent retail customer defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the independent retail customer. The Company reviews performance risk related to its guarantees of independent retail customers based on internal measures of credit performance. As of February 26, 2011, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was approximately $116 and represented approximately $86 on a discounted basis. Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Consolidated Balance Sheets for these contingent obligations under the Company’s guarantee arrangements.

 

The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

The Company is a party to a variety of contractual agreements under which the Company may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to the Company’s commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company and agreements to indemnify officers, directors and employees in the performance of their work. While the Company’s aggregate indemnification obligation could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability.

 

Multi-Employer Plans

 

The Company contributes to various multi-employer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These plans generally provide retirement benefits to participants based on their service to contributing employers. Based on available information, the Company believes that some of the multi-employer plans to which it contributes are underfunded. Company contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of the Company’s collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act and Section 412(e) of the Internal Revenue Code. Furthermore, if the Company was to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, it could trigger a partial or complete withdrawal that would require the Company to fund its proportionate share of a plan’s unfunded vested benefits. The Company contributed $135, $143 and $147 to these plans for fiscal 2011, 2010 and 2009, respectively.

 

The Company also makes contributions to multi-employer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as the Company intends, the Company’s Selling and administrative expenses could increase in the future.

 

CONTRACTUAL OBLIGATIONS

 

The following table represents the Company’s significant contractual obligations as of February 26, 2011.

 

 

 

 

 

Unrecognized tax benefits as of February 26, 2011 of $182 are not included in the contractual obligations table presented above because the timing of the settlement of unrecognized tax benefits cannot be fully determined. However, the Company expects to resolve $34, net, of unrecognized tax benefits within the next 12 months.

 

 

The Company is exposed to market pricing risk consisting of interest rate risk related to debt obligations outstanding, its investment in notes receivable and, from time to time, derivatives employed to hedge interest rate changes on variable and fixed rate debt. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.

 

The Company manages interest rate risk through the strategic use of fixed and variable rate debt and, to a limited extent, derivative financial instruments. Variable interest rate debt (bank loans, industrial revenue bonds and other variable interest rate debt) is utilized to help maintain liquidity and finance business operations. Long-term debt with fixed interest rates is used to assist in managing debt maturities and to diversify sources of debt capital.

 

The Company makes long-term loans to certain Supply chain customers and as such, holds notes receivable in the normal course of business. The notes generally bear fixed interest rates negotiated with each retail customer. The market value of the fixed rate notes is subject to change due to fluctuations in market interest rates.

 

The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates, including notes receivable and debt obligations. For debt obligations, the table presents principal payments and related weighted average interest rates by maturity dates, excluding the net discount on acquired debt and original issue discounts. For notes receivable, the table presents the expected collection of principal cash flows and weighted average interest rates by expected maturity dates.

 

 

Index of Financial Statements and Schedules

 

 

All other schedules are omitted because they are not applicable or not required.

 

The Board of Directors and Stockholders

SUPERVALU INC.:

 

We have audited the accompanying consolidated balance sheets of SUPERVALU INC. and subsidiaries as of February 26, 2011 and February 27, 2010, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 26, 2011. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule for each of the fiscal years in the three-year period ended February 26, 2011. We also have audited SUPERVALU INC.’s internal control over financial reporting as of February 26, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). SUPERVALU INC.’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on SUPERVALU INC.’s internal control over financial reporting, based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SUPERVALU INC. and subsidiaries as of February 26, 2011 and February 27, 2010, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 26, 2011, in conformity with U.S. generally accepted accounting principles. In our opinion, the accompanying financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, SUPERVALU INC. maintained, in all material respects, effective internal control over financial reporting as of February 26, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/S/  KPMG LLP

 

Minneapolis, Minnesota

April 21, 2011

 

SUPERVALU INC. and Subsidiaries

 

CONSOLIDATED SEGMENT FINANCIAL INFORMATION

(In millions)

 

 

 

Refer to Note 14 – Segment Information in the accompanying Notes to Consolidated Financial Statements for additional information concerning the Company’s reportable segments.

 

See Notes to Consolidated Financial Statements.

SUPERVALU INC. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share data)

 

 

See Notes to Consolidated Financial Statements.

SUPERVALU INC. and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)

 

 

See Notes to Consolidated Financial Statements.

SUPERVALU INC. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except per share data)