10-K 1 f17form10-k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 25, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number: 1-5418
 
svugraphica04.jpg
SUPERVALU INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
41-0617000
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
11840 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA
 
55344
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (952) 828-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
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  ý    No  ¨
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  ¨    No  ý
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  ý    No  ¨
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  ý    No  ¨
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.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of September 9, 2016 was approximately $1,248,780,826 (based upon the closing price of registrant’s Common Stock on the New York Stock Exchange).
As of April 21, 2017, there were 267,676,000 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant’s definitive Proxy Statement filed for the registrant’s 2017 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
Item
 
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7A.
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9.
9A.
9B.
 
 
 
 
 
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CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT
Any statements contained in this Annual Report on Form 10-K regarding the outlook for Supervalu’s businesses and their respective markets, such as projections of future performance, guidance, statements of Supervalu’s plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on Supervalu’s assumptions and beliefs. Such statements may be identified by such words or phrases as “will likely result,” “are expected to,” “will continue,” “may continue,” “outlook,” “is anticipated,” “estimate,” “project,” “believes,” “intends” 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 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 Supervalu disclaims 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 Supervalu’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” 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.
PART I
ITEM 1.     BUSINESS
Unless otherwise indicated, all references to “Supervalu,” “we,” “us,” “our” and the “Company” in this Annual Report on Form 10-K relate to SUPERVALU INC. and its wholly and majority-owned subsidiaries. All dollar and share amounts in this Annual Report on Form 10-K are in millions, except per share data and where otherwise noted.
Business Overview
Supervalu is the largest public company grocery distributor to wholesale customers across the United States through its Wholesale segment, operates five retail grocery banners in six geographic regions through its Retail segment and provides professional service solutions to retail operators and other entities, the results of which are included within Wholesale or Corporate depending on the customer type. Supervalu leverages its distribution operations by providing wholesale distribution and logistics service solutions to wholesale customers as well as wholesale distribution to Supervalu’s Retail stores. SUPERVALU INC., a Delaware corporation, was organized in 1925 as the successor to two wholesale grocery firms established in the 1870s.
Supervalu’s business is classified by management into two reportable segments: Wholesale and Retail. These reportable segments are two distinct businesses. The Wholesale reportable segment derives revenues from wholesale distribution of groceries and other products, logistics services and professional service solutions to retail stores and other customers (collectively referred to as “wholesale customers”). The Retail reportable segment derives revenues from the sale of groceries and other products at retail locations operated by Supervalu. Substantially all of Supervalu’s operations are domestic.
Supervalu operates on a 52/53 week fiscal year basis, with its fiscal year ending on the last Saturday in February. All references to fiscal 2017, 2016 and 2015 relate to the 52-week fiscal year ended February 25, 2017, the 52-week fiscal year ended February 27, 2016 and the 53-week fiscal year ended February 28, 2015, respectively.
Wholesale
Supervalu organizes and operates its Wholesale segment through two geographic regions: East and West. As of February 25, 2017, the Wholesale network spans 40 states and Supervalu serves as primary grocery supplier to approximately 1,902 stores of wholesale customers, in addition to Supervalu’s own Retail stores, as well as serving as secondary grocery supplier to approximately 244 wholesale customer stores. Supervalu’s wholesale customers include single and multiple grocery store operators, regional chains and the military, many of whom are long tenured Supervalu customers. The following charts depict the composition of Supervalu’s wholesale customer mix and tenure of Supervalu’s top 25 customers by net sales:

3


f17wholesalechartsa01.jpg
Supervalu 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 home, health and beauty care products. As of February 25, 2017, the network is comprised of 18 distribution facilities, ten of which supply Supervalu’s own Retail stores in addition to stores of wholesale customers, and one distribution center dedicated to supplying the Shop ’n Save banner in the St. Louis, Missouri area. In March 2017, Supervalu acquired an additional distribution center in Harrisburg, Pennsylvania that has approximately 732 thousand square footage that will eventually replace the Lancaster, Pennsylvania facility that is owned by New Albertson’s, Inc. (“NAI”) and operated by Supervalu. Wholesale distribution sales to Supervalu’s own Retail stores are eliminated within the Wholesale segment in Supervalu’s financial statements. Deliveries to retail stores are made from Supervalu’s distribution centers by Company-owned trucks, third-party independent trucking companies or customer-owned trucks.
Supervalu offers wholesale customers a wide variety of food and non-food products, including national and regional brands, and Supervalu’s own extensive lines of private label products. Supervalu also offers a broad array of professional services that provide wholesale customers with cost-effective and scalable solutions. These services include pass-through programs in which vendors provide services directly to our wholesale customers, as well as services and solutions developed and provided directly by Supervalu. Supervalu’s services include retail store support, advertising, couponing, e-Commerce, network and data hosting solutions, training and certifications classes, as well as administrative back-office solutions. The sales and operating results for these services are included within Wholesale.
As a logistics provider, efficiency is an important customer service measure. Supervalu optimizes its facilities to implement leading warehouse technology, ranging from radio-frequency devices guiding selectors to mechanized facilities with completely automated order selection for dry groceries that help Supervalu deliver aisle-ready pallets to wholesale customers. The Wholesale segment also focuses on improving its supply chain to achieve labor and cost efficiencies.
Retail
Supervalu conducts its Retail operations through a total of 217 stores, as of February 25, 2017, primarily organized under five retail grocery banners of Cub Foods, Shoppers Food & Pharmacy, Shop ’n Save in the St. Louis market, Farm Fresh, Shop ’n Save in the east coast market and Hornbacher’s, plus two Rainbow stores. Retail stores provide an extensive grocery offering and, depending on size, a variety of additional products, including general merchandise, home, health and beauty care, and pharmacy, Supervalu’s Retail stores offer, national and regional brands as well as Supervalu’s own private label products. A typical Retail store carries approximately 14,000 to 21,000 core SKUs, depending on the retail banner, and ranges in size from approximately 40,000 to 60,000 square feet, varying by banner.
Supervalu believes its Retail banners have strong local and regional brand recognition in the markets in which they operate. Supervalu’s Retail operations are supplied by one dedicated distribution center and nine distribution centers that are part of the Wholesale segment providing wholesale distribution to both Supervalu’s Retail stores and stores of wholesale customers. Refer to Item 2—Properties for additional information regarding Retail stores by banner and the markets in which they operate.
Sale of Save-A-Lot
On December 5, 2016, Supervalu completed the sale of Supervalu’s Save-A-Lot business to SAL Acquisition Corp (f/k/a Smith Acquisition Corp), an affiliate of Onex Partners Managers LP, for a purchase price of $1,365 in cash, subject to customary closing adjustments that were estimated at the time of the sale to reduce the purchase price by approximately $61. The sale of Save-A-Lot was completed pursuant to the terms of the Agreement and Plan of Merger, dated as of October 16, 2016 (“SAL

4


Merger Agreement”), by and among SAL Acquisition Corp, SAL Merger Sub Corp (f/k/a Smith Merger Sub Corp), a newly formed wholly owned subsidiary of the SAL Acquisition Corp, Supervalu and Moran Foods, LLC, a wholly owned subsidiary of Supervalu prior to the sale. Concurrently with entering into the SAL Merger Agreement, Supervalu and Moran Foods also entered into a Separation Agreement (the “Separation Agreement”) pursuant to which, among other things, the assets and liabilities of the Save-A-Lot business were transferred to and assumed by Moran Foods, LLC prior to the completion of the sale. The assets, liabilities, operating results, and cash flows of Save-A-Lot have been presented separately as discontinued operations in the Consolidated Financial Statements for all periods presented.
Corporate
In connection with the completion of Supervalu’s sale of Save-A-Lot on December 5, 2016, Supervalu and Moran Foods entered into a Services Agreement whereby Supervalu is providing certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein. Moran Foods paid Supervalu $30 upon entry into the Services Agreement, which will be credited against fees due under the Services Agreement. The initial annual base charge under the Services Agreement is $30, subject to adjustments. Pursuant to this Services Agreement, Save-A-Lot may also request new services through the “change control” procedures described therein, and Supervalu may also agree to conduct non-recurring projects for Save-A-Lot pursuant to project orders.
Moran Foods may terminate the Services Agreement in the event of Supervalu’s material breach, if Supervalu breaches its non-compete obligations under the Merger Agreement, if Supervalu is acquired by a third party that engages in a Competing Business (as defined in the Merger Agreement) or in the event of Supervalu’s bankruptcy or insolvency, in each case, subject to certain limitations set forth in the Services Agreement. In addition, Moran Foods may terminate certain services or service categories if Supervalu commits a breach that is material to the service category or if Supervalu fails to meet certain minimum specified service levels, in each case, subject to certain limitations set forth in the Services Agreement. Supervalu may terminate the Services Agreement in the event of Moran Foods’ material breach, for Moran Foods’ failure to make timely payment, for certain legal or regulatory changes and in the event of Moran Foods’ bankruptcy or insolvency, in each case, subject to certain limitations set forth in the Services Agreement. The Services Agreement generally requires each party to indemnify the other party against third-party claims arising out of the performance of or the provision or receipt of services under the Services Agreement.
Supervalu provides back-office administrative support services under the transition services agreements (“TSA”) with NAI and Albertson’s LLC and is also providing services as needed to transition and wind down the TSA with NAI and Albertson’s LLC. Supervalu estimates that the complete transition and wind down of the TSA with NAI and Albertson’s LLC could take approximately two to three more years. In September 2016, NAI and Albertson’s LLC each notified Supervalu that it was again exercising its right to renew the term of their respective TSA for an additional year, which extended the expiration date of the NAI and Albertson’s LLC TSA to September 21, 2018, unless renewed again by notice given no later than September 21, 2017. The wind down of the TSA will result in the loss of significant revenue for Supervalu.
In connection with Haggen’s bankruptcy process, Haggen has now closed or sold all 164 of its stores. The transition and wind down of the Haggen transition services agreement occurred in the second quarter of fiscal 2017, with Supervalu now providing limited services in connection with the wind down of the Haggen estate.
Products
Supervalu offers a wide variety of nationally advertised brand name and private-label products, including grocery (both perishable and nonperishable), general merchandise, home, health and beauty care, and pharmacy, which are sold through Supervalu’s Wholesale segment to Wholesale customers and through Company-operated Retail stores to shoppers. Supervalu believes that it has adequate and alternative sources of supply for most of its purchased products.
The following table provides additional detail on the amounts and percentages of Net sales for each group of similar products sold in the Wholesale and Retail segments, and service agreement revenue discussed in “—Professional Services” in Corporate:

5


 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
Wholesale:
 
 
 
 
 
 
 
 
 
 
 
Nonperishable grocery products(1)
$
5,579

 
45
%
 
$
5,753

 
45
%
 
$
5,939

 
45
%
Perishable grocery products(2)
1,969

 
16

 
2,025

 
16

 
2,099

 
16

Services to wholesale customers and other
157

 
1

 
157

 
1

 
160

 
1

 
7,705

 
62
%
 
7,935

 
61
%
 
8,198

 
62
%
Retail:
 
 
 
 
 
 
 
 
 
 
 
Nonperishable grocery products(1)
$
2,511

 
20
%
 
$
2,607

 
20
%
 
$
2,677

 
20
%
Perishable grocery products(2)
1,494

 
12

 
1,549

 
12

 
1,574

 
12

Pharmacy products
500

 
4

 
511

 
4

 
510

 
4

Fuel
55

 
1

 
67

 
1

 
83

 
1

Other
36

 

 
35

 

 
40

 

 
4,596

 
37
%
 
4,769

 
37
%
 
4,884

 
37
%
Corporate:
 
 
 
 
 
 
 
 
 
 
 
Service agreement revenue
$
179

 
1
%
 
$
203

 
2
%
 
$
195

 
1
%
Net sales
$
12,480

 
100
%
 
$
12,907

 
100
%
 
$
13,277

 
100
%
(1)
Includes such items as dry goods, dairy, frozen foods, beverages, general merchandise, home, health and beauty care and candy
(2)
Includes such items as meat, produce, deli and bakery
Private-Label Products
Supervalu’s private-label products are produced to Supervalu’s specification by many suppliers and compete in most categories. Private-label products include: the premium brands Culinary Circle® and Stockman & Dakota®, which offer unique, premium quality products in highly competitive categories; Wild Harvest®, which is free from over 100 undesirable ingredients; core brands Essential Everyday®, EQUALINE®, and category-specific brands Arctic Shores Seafood Company®, Baby Basics®, Farm Stand®, Stone Ridge Creamery® and Super Chill®, which provide shoppers quality national brand equivalent products at a competitive price; and the value brand Shopper’s Value®, which offers budget conscious consumers a quality alternative to national brands at substantial savings.
Trademarks
Supervalu offers Wholesale customers the opportunity to franchise a concept or license a service mark. These programs help our Wholesale customers compete by providing, as part of the franchise or license program, a complete business concept, group advertising, private-label products and other benefits. Supervalu is the franchisor or licensor of certain banner store service marks such as CUB FOODS, FESTIVAL FOODS, SENTRY, COUNTY MARKET, SHOP ’N SAVE, NEWMARKET, FOODLAND, JUBILEE and SUPERVALU. In conjunction with its licensing and franchise arrangements, Supervalu maintains wholesale distribution agreements with its licensees and franchisees, primarily under the Cub Foods, Festival Foods, Sentry and Rainbow banners.
Supervalu files a substantial number of its trademarks/service marks with the United States Patent and Trademark Office, including for many of its private-label product brands. U.S. trademark and service mark registrations are for a term of ten years, and renewable every ten years as long as the trademark is used in the regular course of trade. Supervalu considers certain of its trademarks and service marks to be of material importance to its Wholesale and Retail segments 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. Supervalu’s working capital needs are generally greater during the months leading up to high sales periods, such as the time period from prior to Thanksgiving through December. Supervalu typically finances these working capital needs with funds provided by operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories. There are no unusual industry practices or requirements relating to working capital.

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Seasonality
Overall product sales are fairly balanced throughout the year, although demand for certain products of a seasonal nature may be influenced by holidays, changes in seasons or other annual events. Our first quarter consists of 16 weeks, while all of our other quarters consist of 12 weeks, and all of our quarters typically include a major holiday.
Competition
Wholesale and Retail each operate in a highly competitive environment.
Wholesale competes directly with a number of traditional and specialty grocery wholesalers and retailers that maintain or develop self-distribution systems. Supervalu believes it competes in this business on the basis of price, quality, assortment, schedule and reliability of deliveries and services, service fees and distribution facility locations.
Principal competition for Supervalu’s Retail segment comes from traditional grocery retailers, including regional and national chains and independent grocery store operators, and non-traditional retailers, such as supercenters, membership warehouse clubs, specialty supermarkets, hard discount stores, dollar stores, online retailers, convenience stores, drug stores and restaurants. Supervalu’s ability to differentiate itself from its competitors and create an attractive value proposition for its customers is dependent upon a combination of price, quality, customer service, convenience, e-commerce offerings, assortment, in-stock levels, brand perception, store location and conditions, in-store marketing and merchandising and promotional strategies.
Supervalu believes that the success of its Wholesale and Retail segments is dependent upon the ability of its own stores, as well as the stores of wholesale customers it supplies, to compete successfully. Supervalu also competes to attract and maintain licensed and franchised operators to operate stores to which it provides wholesale distribution and services. This competition generally takes the form of alternative investment formats, such as a potential or existing licensee’s investment in fast food restaurants, dollar stores, specialty supermarkets, drug stores and other potential investments.
Recent and ongoing consolidation within the grocery industry has resulted in, and is expected to continue to result in, increased competition, including from some competitors that have greater financial, marketing and other resources than Supervalu.
Employees
As of February 25, 2017, Supervalu had approximately 29,000 employees. Approximately 16,000 employees are covered by 48 collective bargaining agreements. During fiscal 2017, twenty collective bargaining agreements covering approximately 9,200 employees were renegotiated. Also, three collective bargaining agreements covering approximately 140 employees have already 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 2018, twenty-three collective bargaining agreements covering approximately 6,000 employees will expire. The majority of employees covered by these expiring collective bargaining agreements are located in Eastern markets. Supervalu 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. Supervalu believes that it has generally good relations with its employees and with the labor unions that represent employees covered by collective bargaining agreements.
Where You Can Find More Information
Supervalu’s principal executive offices are located at 11840 Valley View Road, Eden Prairie, Minnesota 55344 (Telephone: 952-828-4000). Supervalu 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 Supervalu’s website is not deemed to be incorporated by reference into this Annual Report on Form 10-K. Supervalu will also provide its SEC filings free of charge upon written request to Investor Relations, SUPERVALU INC., P.O. Box 990, Minneapolis, MN 55440.

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EXECUTIVE OFFICERS OF SUPERVALU INC.
The following table provides certain information concerning the executive officers of Supervalu as of April 25, 2017.
Name
 
Age
 
Present Position
 
Calendar Year Elected to Present Position
 
Other Positions Recently Held with Supervalu
Mark Gross(1)
 
54
 
President and Chief Executive Officer
 
2016
 
 
Bruce H. Besanko(2)
 
58
 
Executive Vice President, Chief Operating Officer and Chief Financial Officer
 
2016
 
Executive Vice President, Chief Operating Officer, 2015-April 2016;
Executive Vice President, Chief Financial Officer, 2013-2015
Randy G. Burdick(3)
 
59
 
Executive Vice President, Chief Information Officer
 
2013
 
 
Anne M. Dament(4)
 
50
 
Senior Vice President, Retail, Merchandising and Marketing
 
2017
 
 
Susan S. Grafton(5)
 
60
 
Senior Vice President, Finance, and Chief Accounting Officer
 
2016
 
Executive Vice President, Chief Financial Officer, 2015-April 2016; Senior Vice President, Finance, and Chief Accounting Officer, 2014-2015
Karla C. Robertson
 
46
 
Executive Vice President, General Counsel and Corporate Secretary
 
2013
 
Executive Vice President, Legal 2013; Vice President, Employment, Compensation and Benefits Law, 2012-2013; Director, Employment Law, 2011-2012; Senior Labor and Employment Counsel, 2009-2011
Michael C. Stigers(6)
 
58
 
Executive Vice President, Wholesale
 
2015
 
President of Cub Foods, 2014-2015; President, Northern and Western Region of Wholesale, 2013-2014; President of Shaw’s, 2011-2013
James W. Weidenheimer(7)
 
58
 
Executive Vice President, Corporate Development and Chief Innovation Officer
 
2016
 
 
Rob N. Woseth(8)
 
46
 
Executive Vice President, Chief Strategy Officer
 
2013
 
 
(1)
Mark Gross was appointed President and Chief Executive Officer in February 2016. Prior to joining Supervalu, Mr. Gross served since 2006 as President of Surry Investment Advisors LLC, an advisory firm that Mr. Gross founded to provide consulting services to grocery distributors and retailers with respect to strategic and operational matters. From 1997-2006, Mr. Gross held various positions at C&S Wholesale Grocers, including serving as Co-President of C&S’s overall operations from 2005-2006. Additionally, during his tenure with C&S, Mr. Gross served as Chief Financial Officer, General Counsel, and President of its affiliated retail grocery operations.
(2)
Bruce H. Besanko was appointed Executive Vice President, Chief Operating Officer and Chief Financial Officer in April 2016. Prior to that, Mr. Besanko served as Executive Vice President, Chief Operating Officer from October 2015 to April 2016, and as Executive Vice President, Chief Financial Officer from August 2013 to October 2015. Prior to joining Supervalu, Mr. Besanko served as Executive Vice President and Chief Financial Officer since February 2009, and as Chief Administrative Officer since October 2009, for OfficeMax. Mr. Besanko previously served as Executive Vice President and Chief Financial Officer of Circuit City Stores, Inc. (“Circuit City”), a specialty retailer of consumer electronics and related services, from July 2007 to February 2009. Prior to that, Mr. Besanko served as Senior Vice President, Finance and Chief Financial Officer for The Yankee Candle Company, Inc., a designer, manufacturer, wholesaler and retailer of premium scented candles, since April 2005. On November 10, 2008, Circuit City and several of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. Circuit City’s Chapter 11 plan of liquidation was confirmed by the Bankruptcy Court on September 14, 2010.
(3)
Randy G. Burdick was appointed Executive Vice President, Chief Information Officer in March 2013. Prior to joining Supervalu, Mr. Burdick served as Executive Vice President and Chief Information Officer at OfficeMax from 2005-2013.
(4)
Anne M. Dament was appointed Senior Vice President, Retail, Merchandising and Marketing in January 2017. Prior to joining Supervalu, Ms. Dament served as Senior Vice President, Merchandising at Target Corporation, a general merchandise retailer, from April 2015 to November 2016. Ms. Dament previously served as Vice President, Merchandising Solutions from 2009 to September 2012 and as Vice President, Services from September 2012 to April 2015 at PetSmart, Inc., a specialty retailer of services and solutions for pets.
(5)
Susan S. Grafton was appointed Senior Vice President, Finance, and Chief Accounting Officer in April 2016. Prior to that, Ms. Grafton served as Executive Vice President, Chief Financial Officer from October 2015 to April 2016, and as Senior Vice President, Finance, and Chief Accounting Officer for Supervalu from February 2014 to October 2015. Prior to joining Supervalu, Ms. Grafton served as Senior Vice President, Controller and Chief Accounting Officer from 2011-2014 and as Vice President, Controller and Chief Accounting Officer from 2006-2011 at Best Buy Co., Inc., a retailer of consumer electronics and related products.
(6)
Prior to joining Supervalu in 2011, Michael C. Stigers served as President of PW Supermarkets, Inc., an operator of retail grocery supermarkets, from 2006-2010 and as Chief Executive Officer in 2010. In April 2011, creditors filed a petition for involuntary bankruptcy against PW Supermarkets in U.S. Bankruptcy Court, Northern District of California to force PW Supermarkets into a

8


Chapter 7 liquidation. The bankruptcy case was transferred to the Oakland Division in October 2014 and continues to be an active case in that court.
(7)
James W. Weidenheimer was appointed Executive Vice President, Corporate Development and Chief Innovation Officer in April 2016. Prior to joining Supervalu, Mr. Weidenheimer served as Senior Vice President of Corporate Development for C&S Wholesale Grocers from 2008 to January 2016, where Mr. Weidenheimer oversaw significant M&A activity and led the development of procurement and distribution outsourcing plans. From 1998 to 2008, Mr. Weidenheimer had operating responsibility for finance, treasury, procurement, facilities, internal audit, quality assurance and inventory control at C&S.
(8)
Rob N. Woseth was appointed Executive Vice President, Chief Strategy Officer effective March 2013. Prior to joining Supervalu, Mr. Woseth served as Vice President Business Development and Strategy at Albertson’s LLC from 2006-2013.
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 family relationships between or among any of the executive officers of Supervalu.
ITEM 1A.    RISK FACTORS

Various risks and uncertainties may affect Supervalu’s business. Any of the risks described below or elsewhere in this Annual Report on Form 10-K or Supervalu’s other SEC filings may have a material impact on Supervalu’s business, financial condition or results of operations.
Strategic and Operational Risks
Supervalu faces intense competition.
The grocery business is intensely competitive, and the recent and ongoing consolidation within the grocery industry is expected to result in increased competition, including from some competitors that have greater financial, marketing and other resources than Supervalu. The grocery industry is characterized by relatively small operating margins, and as competition in certain areas intensifies and as the industry continues to consolidate, Supervalu’s results of operations may be negatively impacted through a loss of sales and reductions in gross margins. See “Business—Competition” for a discussion of the competitive environment.
If Supervalu is unable to appropriately respond to competition and execute on its initiatives to improve the competitive position or profitability of Supervalu, and differentiate Supervalu’s offerings, Supervalu’s sales, financial condition and results of operations may be adversely affected.
Supervalu may engage in acquisitions and divestitures, and may encounter difficulties integrating acquired businesses or disposing divested businesses and may not realize the anticipated benefits of these acquisitions and divestitures.
Supervalu may engage in strategic transactions. Acquisitions and dispositions present significant challenges and risks relating to the integration of acquired businesses and the separation of disposed businesses. The risks include Supervalu’s due diligence reviews may not identify all of the material issues, Supervalu may incur unanticipated costs or expenses, and Supervalu may not be able to integrate acquisitions with its operations or separate divested businesses and related obligations from its operations as planned. Supervalu may also not realize the degree or timing of benefits or synergies it anticipates when it first enters into a transaction. There can be no assurances that Supervalu will manage acquisitions and dispositions successfully, that strategic opportunities will be available to Supervalu on acceptable terms or at all, or that Supervalu will be able to consummate desired transactions. Any of the foregoing could materially adversely affect Supervalu’s competitive position, financial condition, results of operations or cash flows.
On April 10, 2017, Supervalu entered into a definitive merger agreement to acquire Unified Grocers, Inc., a West Coast focused wholesale grocery and specialty distributor, in a transaction valued at approximately $375, comprised of approximately $114 in cash for 100% of the outstanding stock of Unified Grocers plus the assumption and pay-off of Unified Grocers’ net debt at closing, which was approximately $261 as of April 1, 2017. There are no purchase price adjustments for any changes in Unified Grocers’ net debt between signing and closing or otherwise. The process of consummating the proposed acquisition of Unified Grocers may be disruptive to Supervalu’s business operations and may distract Supervalu’s management team from their day-to-day responsibilities. The acquisition is subject to customary closing conditions, which may not be obtained or satisfied, and as a result and due to other factors outside Supervalu’s control, the acquisition may not be completed on the current terms or on the timing currently contemplated, or at all. There can also be no assurance the Supervalu will be able to successfully integrate Unified Grocers to achieve the operational efficiencies, including synergistic and other benefits of the proposed acquisition, or effectively retain key employees and maintain and grow customer relationships. Any of these risks or uncertainties, including the inability to complete the proposed acquisition in the time period and on the terms contemplated, could adversely affect Supervalu’s business, financial condition, results of operations or cash flows.

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Supervalu’s Wholesale distribution business could be adversely affected if Supervalu is not able to affiliate new customers or retain existing customers, or if Supervalu’s Wholesale customers fail to perform.
The profitability of Supervalu’s Wholesale segment is dependent upon sufficient volume to support Supervalu’s operating infrastructure, which is dependent on the ability of Supervalu to attract new customers and retain existing customers. The inability to attract new customers or the loss of existing customers to a competing wholesaler or due to closure, vertical integration by an existing customer converting to self-distribution, or industry consolidation may negatively impact Supervalu’s sales and operating margins.
Supervalu’s success also relies in part on the financial success and cooperation of its Wholesale customers. These Wholesale customers manage their businesses independently, and therefore are responsible for the day-to-day operation of their stores. They may not experience an acceptable level of sales or profitability, and Supervalu’s revenues and gross margins could be negatively affected as a result. Supervalu may also need to extend credit to its Wholesale customers, including through loans, market support or guarantees, and while Supervalu seeks to obtain security interests and other credit support in connection with the financial accommodations Supervalu extends, such collateral may not be sufficient to cover its exposure. If sales trends or profitability worsen for Wholesale customers, their financial results may deteriorate, which could result in, among other things, lost business for Supervalu, delayed or reduced payments to Supervalu or defaults on payments or other liabilities owed by Wholesale customers to Supervalu, any of which could adversely impact Supervalu’s financial condition and results of operations as well as its ability to grow its Wholesale business. In this regard, Supervalu’s Wholesale customers are affected by the same economic conditions, including food deflation, and competition that Supervalu’s Retail segment is facing. The magnitude of these risks increases as the size of Supervalu’s Wholesale customers increases.
Failure to affiliate new customers and retain existing customers for Supervalu’s professional services, or the failure to perform the services as required, could adversely impact Supervalu’s results of operations.
Supervalu provides numerous services to its Wholesale customers to support the operation of their businesses and stores. Supervalu has been working to leverage its experience, infrastructure and investments to engage new customers and expand the scope of services received by existing customers. If Supervalu is unable to successfully implement this strategy, including differentiating the quality and breadth of Supervalu’s services to customers, in a highly competitive and consolidating environment, or if Supervalu is unable to perform the services up to the customers’ expectations, Supervalu’s results of operations could be adversely impacted.
Supervalu has significant service relationships with Albertson’s LLC, NAI and Save-A-Lot, and the wind-down of Supervalu’s relationship with Albertson’s LLC and NAI (and any future wind down of Save-A-Lot) could adversely impact Supervalu’s results of operations.
Supervalu has provided significant support services to Albertson’s since 2006 and to Save-A-Lot since Supervalu divested it in December 2016. Despite Supervalu believing that it met service expectations, Albertson’s has determined to wind down its services relationship with Supervalu after it acquired Safeway and now has access to these services from Safeway’s platform. Supervalu expects its services to Albertson’s to be fully wound down over the next approximately two to three years. Supervalu will lose a significant amount of revenue and corresponding operating earnings as a result of this wind down. Supervalu has been executing on its plan to reduce costs, grow its sales and enhance its margins over the past several years. These efforts have contributed to Supervalu's profitability, including the TSA. As the revenue Supervalu receives from the TSA continues to decline, Supervalu does not believe that it will be able to grow sales quickly enough or further eliminate costs or enhance margin to fully mitigate the lost revenue as the TSA unwinds. Failure to execute on Supervalu’s services offering and growth strategy, including making the necessary capital investments for that growth while managing additional cost reductions, could further adversely impact Supervalu’s results of operations. Supervalu’s results of operations could also be adversely impacted if Supervalu is not able to transition and wind down the Albertson’s services in the manner or timeline anticipated. Supervalu is working closely with Albertson’s on the wind down but the execution of that wind down is dependent on Albertson’s.
Supervalu’s large professional services agreements, including Supervalu’s agreement with Save-A-Lot, provide certain rights for the customers. The services agreement will typically include a fixed term but provide the customer certain termination rights, including in the event of Supervalu’s material breach, and may give the customer certain termination and monetary rights with respect to specified services or service categories in the event Supervalu does not perform to agreed-upon minimum levels of service. The services agreement will also generally require Supervalu to indemnify the customer against third-party claims arising out of the performance of the services under the agreement. Termination of services agreements, in whole or in part, and in particular the services agreement with Save-A-Lot and the wind-down of the services agreement with Albertson’s, could adversely affect Supervalu’s business or results of operations.

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Supervalu’s inability to maintain or increase its operating margins could adversely affect its results of operations and the price of Supervalu’s stock.
As competition increases, the grocery industry consolidates and Supervalu attempts to affiliate larger Wholesale customers, Supervalu expects to continue to face pressure on its operating margins. If Supervalu is not able to continue to capture scale efficiencies and enhance its merchandise offerings, Supervalu may not be able to achieve its goals with respect to operating margins. In addition, if Supervalu does not continuously refine and improve its systems, Supervalu may not be able to increase sales, effectively manage inventory and procurement processes or effectively manage customer pricing plans. As a result, Supervalu’s operating margins may stagnate or decline, which could adversely affect the price of Supervalu’s stock.
Supervalu may not be able to grow or maintain its levels of identical store sales.
Supervalu has experienced negative identical store sales in its Retail operations in recent periods. A variety of factors affect identical store sales and profitability, including in-store performance, consumer tastes, competition, current economic conditions, pricing, deflation or inflation, and weather conditions, and many of these factors are beyond our control and can be difficult to predict in advance. If Supervalu’s identical store sales continue to decline or fail to meet market expectations, Supervalu’s results of operations could be adversely affected and the price of Supervalu’s stock could decline.
Supervalu’s indebtedness could decrease Supervalu’s financial and operational flexibility and Supervalu’s borrowing costs could increase.
Supervalu’s credit facilities contain covenants that limit Supervalu’s ability to acquire assets, dispose of assets and use the proceeds thereof, create liens on property, incur or prepay indebtedness and pay dividends, among other things and subject to certain exceptions. These covenants may affect Supervalu’s operating and financial flexibility and may require Supervalu to seek the consent of the lenders for certain transactions that Supervalu may wish to effect. There can be no assurances that Supervalu would be able to obtain such consent. There can also be no assurances that Supervalu will be able to refinance its existing indebtedness on similar terms. Tightening of credit, reduced liquidity or volatility in the capital markets could result in diminished availability of credit and higher costs of borrowing, making it more difficult for Supervalu to obtain or amend debt financing on favorable terms. Additionally, if Supervalu fails to comply with any of its covenants or other restrictions, the related indebtedness (and other unrelated indebtedness) could become due and payable prior to its stated maturity and Supervalu may not be able to repay the indebtedness that becomes due. A default under Supervalu’s debt instruments may also significantly affect Supervalu’s ability to obtain additional or alternative financing.
A significant portion of Supervalu’s debt portfolio has a variable interest rate component. Volatility in interest rates causes volatility in interest expense, potentially resulting in an adverse impact to earnings.
Increased healthcare, pension and other costs under Supervalu’s and multiemployer benefit plans, or failure to maintain satisfactory labor relations, could adversely affect Supervalu’s financial condition and results of operations.
Supervalu provides health, defined benefit pension, defined contribution and other postretirement benefits to many of its employees and the costs of such benefits continue to increase. The amount of any increase depends on a number of different factors, many of which are beyond Supervalu’s control. These factors include governmental regulations such as The Patient Protection and Affordable Care Act, which has resulted in changes to the U.S. healthcare system and imposes mandatory types of coverage, reporting and other requirements; return on assets held in plans; changes in actuarial valuations used to determine Supervalu’s benefit obligations for certain benefit plans, which require the use of significant estimates, including the discount rate, expected long-term rate of return on plan assets, mortality rates and the rates of increase in compensation and health care costs; and for multiemployer plans, the outcome of collective bargaining and actions taken by trustees who manage the plans. If Supervalu is unable to control these benefits and costs, Supervalu may experience increased operating costs, which may adversely affect Supervalu’s financial condition and results of operations.
Additionally, Company-sponsored plans and multiemployer pension plans are underfunded with the projected benefit obligations exceeding the fair value of those plans’ assets. Withdrawal liabilities from multiemployer plans could be material, and potential exposure to withdrawal liabilities could cause Supervalu to forgo business opportunities. Many of these plans have required rehabilitation plans or funding improvement plans, and Supervalu can give no assurances of the extent to which a rehabilitation plan or a funding improvement plan will improve the funded status of the plan. Supervalu expects that the unfunded liabilities of these plans will result in increased future payments by Supervalu and the other participating employers over the next few years. A significant increase to funding requirements could adversely affect Supervalu’s financial condition, results of operations or cash flows. The financial condition of these pension plans may also negatively impact Supervalu’s debt ratings, which may increase the cost of borrowing or adversely affect Supervalu’s ability to access one or more financial markets.

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Supervalu is party to collective bargaining agreements that impose certain work rules and other restrictions on Supervalu that limit its flexibility in managing the business and cost structure. See “Business—Employees” for information about the collective bargaining agreements. There can be no assurance that Supervalu will be able to negotiate the terms of expiring or expired agreements in a manner acceptable to Supervalu. Therefore, potential increases in operating costs, reduced operational flexibility or work disruptions from labor disputes, strikes or picketing could disrupt Supervalu’s businesses and adversely affect Supervalu’s financial condition and results of operations. Certain of Supervalu’s operations have employees who are non-union, and while Supervalu believes its employee relations are strong, there can be no assurance that these operations will not experience pressure from labor unions or become the target of campaigns to unionize.
Supervalu’s success depends in part on the retention of its executive officers and key management, and its ability to hire and retain key personnel.
Supervalu’s success depends on the experience, performance and skills of its executive officers, senior management and other key employees. Competition for skilled and experienced personnel is intense, and Supervalu’s future success will also depend on its ability to attract and retain qualified personnel. Failure to attract and retain qualified personnel could have an adverse effect on Supervalu’s operations. There can be no assurance that Supervalu’s executive succession planning, retention or hiring efforts will be successful.
Disruptions to Supervalu’s or third-party information technology systems, including cyber-attacks and security breaches, and the costs of maintaining secure and effective information technology systems could negatively affect Supervalu’s business and results of operations.
The efficient operation of Supervalu’s businesses is highly dependent on computer hardware and software systems, including customized information technology systems. Additionally, Supervalu’s businesses increasingly involve the receipt, storage and transmission of sensitive data, including personal information about Supervalu’s customers and employees and proprietary business information of Supervalu and its customers and vendors. Supervalu also shares information with vendors. Information systems are vulnerable to not functioning as designed and to disruptions and security breaches by computer hackers and cyber terrorists.
In fiscal 2015, Supervalu experienced separate criminal intrusions into the portion of its computer network that processes payment card transactions for some of its owned and franchised retail food stores, including some of the associated stand-alone liquor stores. Supervalu has incurred and expects to incur costs and expenses related to these intrusions, and may also be adversely affected by claims from customers, financial institutions, payment card brands, Albertson’s LLC and NAI for stores owned and operated by them that experienced related criminal intrusions, stockholders and others and by costly inquiries or enforcement actions on the part of regulatory authorities.
Despite Supervalu continuing to take actions to strengthen the security of its information technology systems, these measures and technology may not adequately anticipate or prevent security breaches in the future or Supervalu may not be able to timely implement these measures and technology. Cyber-attacks are rapidly evolving and becoming increasingly sophisticated and difficult to detect. The failure to promptly detect, determine the extent of and appropriately respond to and contain a significant data security attack or breach of the systems of Supervalu or any third party systems used by Supervalu could have a material adverse impact on Supervalu’s business, financial condition and results of operations. Supervalu could also lose credibility with its customers and suffer damage to its reputation and future sales, including through negative publicity and social media. In addition, the unavailability of the information systems or failure of these systems or software to perform as anticipated for any reason and any inability to respond to, or recover from, such an event, could disrupt Supervalu’s business, impact Supervalu’s customers and could result in decreased performance, increased overhead costs and increased risk for liability, causing Supervalu’s business and results of operations to suffer.
As a merchant that accepts debit and credit cards for payment, Supervalu is subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the PCI Council. Additionally, Supervalu is subject to PCI DSS as a service provider, which is a business entity that is not a payment brand directly involved in the processing, storage, or transmission of cardholder data. PCI DSS contains compliance guidelines and standards with regard to Supervalu’s security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, Supervalu is also subject to compliance with American National Standards Institute data encryption standards and payment network security operating guidelines. The cost of complying with stricter privacy and information security laws, standards and guidelines, including evolving PCI DSS standards, and developing, maintaining and upgrading technology systems to address future advances in technology, could be significant and Supervalu could experience problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems. Failure to comply with such laws, standards and guidelines, or payment card industry standards such as accepting Europay,

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MasterCard, and Visa (EMV) transactions, could have a material adverse impact on Supervalu’s business, financial condition and results of operations.
Changes in the military commissary system or decreases in governmental funding could negatively impact the sales and operating performance of Supervalu’s military business.
Supervalu’s Wholesale segment sells and distributes grocery products to military commissaries and exchanges in the United States. The commissary system is experiencing material changes as the Defense Commissary Agency (“DeCA”) looks to reduce the level of governmental funding required for the system, including to lower prices from suppliers and to offer its own private label products. The military food distribution industry already has narrow operating margins making economies of scale critical for distributors. These changes could have an adverse impact on the sales and operating performance of Supervalu’s military business. Additionally, Supervalu’s military business faces competition from large national and regional food distributors as well as smaller food distributors, and the military commissaries and exchanges face competition from low-cost retailers.
Supervalu’s insurance and self-insurance programs may not be adequate to cover future claims.
Supervalu uses a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, automobile and general liability, director and officer liability, property risk, cyber and privacy risks and employee healthcare benefits. Supervalu estimates the liabilities and required reserves associated with the risks retained by Supervalu. Any such estimates and actuarial projection of losses is subject to a degree of variability. Among the causes of this variability are changes in benefit levels, medical fee schedules, medical utilization guidelines, vocation rehabilitation and apportionment and unpredictable external factors affecting inflation rates, discount rates, rising health care costs, litigation trends, legal interpretations, benefit level changes and actual claim settlement patterns. If the number or severity of claims for which Supervalu is self-insured increases, or Supervalu is required to accrue or pay additional amounts because the claims prove to be more severe than Supervalu’s original assessments, Supervalu’s financial condition and results of operations may be adversely affected.
Impairment charges for long-lived assets or goodwill may adversely affect Supervalu’s financial condition and results of operations.
Supervalu monitors the recoverability of its long-lived assets such as buildings and equipment and evaluates their carrying value for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Supervalu annually reviews goodwill to determine if impairment has occurred. Additionally, interim reviews are performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, Supervalu is required to record a non-cash impairment charge for the difference between the carrying value of the long-lived assets or goodwill and the fair value of long-lived assets and the implied fair value of the goodwill, respectively, in the period the determination is made. The testing of long-lived assets and goodwill for impairment requires Supervalu to make estimates that are subject to significant variability about its future revenue, profitability, cash flows, fair value of assets and liabilities, weighted average cost of capital, as well as other assumptions. Changes in these estimates, or changes in actual performance compared with these estimates, may affect the fair value of long-lived assets or goodwill, which may result in an impairment charge.
Supervalu cannot accurately predict the amount or timing of any impairment of assets. Should the value of long-lived assets or goodwill become impaired, Supervalu’s financial condition and results of operations may be adversely affected.
Supervalu’s stock price is subject to market and other conditions and may be volatile.
The market price of Supervalu’s common stock may fluctuate significantly in response to a number of factors. These factors, some of which may be beyond Supervalu’s control, include the perceived prospects and actual operating results of Supervalu’s business; changes in estimates of Supervalu’s operating results by analysts, investors or Supervalu; trading activity by our large stockholders; trading activity by sophisticated algorithms (high-frequency trading); Supervalu’s actual operating results relative to such estimates or expectations; actions or announcements by Supervalu or its competitors; litigation and judicial decisions; legislative or regulatory actions; and changes in general economic or market conditions. In addition, the stock market in general has from time to time experienced extreme price and volume fluctuations. These market fluctuations could reduce the market price of Supervalu’s common stock for reasons unrelated to Supervalu’s operating performance.

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Economic Risks
Changes in commodity prices, including due to deflation or inflation, or worsening economic conditions could adversely impact Supervalu’s financial condition and operating results.
Prices for the commodities and supplies that Supervalu purchases can be volatile. Supervalu has more recently experienced continued deflation in commodities that it purchases for resale. Decreases in these input costs have caused Supervalu to lower its prices and thereby reduce its revenues and gross margins. Continued deflation could adversely affect Supervalu’s operating results. Additionally, Supervalu’s operations are dependent on the availability of energy and fuel to store and transport products. While Supervalu has entered into contracts to purchase fuel, electricity and natural gas at fixed prices to satisfy a portion of its expected needs, an increase in these costs could adversely affect Supervalu’s results of operations. Supervalu has also invested in semitrailer trucks powered by compressed natural gas, which operations are subject to risks of defects, malfunctions and other damages.
The vast majority of Supervalu’s operations and customers are located in the United States, making its results highly dependent on U.S. economic conditions including consumer confidence and spending habits. Further, a significant portion of Supervalu’s total sales for its Retail operations is derived from stores located in Minnesota, Missouri and the Washington D.C./Baltimore market, resulting in further dependence on local economic conditions in these states. There can be no assurance that Supervalu will be able to identify and respond effectively to changing economic conditions and trends. Additionally, these economic conditions can increase Supervalu’s cost of sales and selling, general and administrative expenses, and otherwise adversely affect Supervalu’s results of operations.
Severe weather and natural disasters may harm Supervalu’s business.
Severe weather conditions and natural disasters in areas in which Supervalu or its customers operate or from which Supervalu obtains products may adversely affect Supervalu’s financial condition and results of operations, including as a result of physical damage to Supervalu’s properties, closure of one or more of Supervalu’s or its customers’ stores, offices 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 distribution centers or stores, a reduction in customer volume and a reduction in the availability of products. 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.
Disruption to Supervalu’s supply chain and distribution network could have an adverse impact on Supervalu’s sales and results of operations.
Supervalu’s sales and operating results could be adversely impacted if Supervalu is not able to provide goods and services to Supervalu and its customers in a timely and cost-effective manner. Factors that may disrupt Supervalu’s ability to maintain an uninterrupted supply chain and distribution network include adverse climate conditions, product recalls, crop conditions, availability of key commodities, regulatory actions, disruptions in technology, political or financial instability of suppliers, performance by outsourced service providers, transportation interruptions, labor supply or stoppages or vendor defaults or disputes, as well as other risk factors mentioned herein, any of which could also have an adverse effect on Supervalu’s sales and operating results.
Legal and Regulatory Risks
Supervalu’s businesses are subject to laws and governmental regulations that could adversely impact Supervalu’s financial condition and results of operations.
Supervalu’s businesses are subject to various federal, state and local laws, regulations and administrative practices that require Supervalu to comply with numerous provisions regulating areas such as environmental, health and sanitation standards, food safety, marketing of natural or organically produced food, facilities, pharmacies, equal employment opportunity, public accessibility, employee benefits, wages and hours worked and licensing for the sale of food, drugs and alcoholic beverages, among others. For example:
Environmental, Health and Safety: Supervalu’s operations are subject to extensive and increasingly stringent laws and regulations pertaining to the protection of the environment, including those relating to the discharge of materials into the environment, the disposal of food by-products, the handling, treatment and disposal of wastes, maintenance of refrigeration systems and remediation of soil and groundwater contamination. Compliance with existing or changing environmental and safety requirements, including more stringent limitations imposed or expected to be imposed in recently renewed or soon-to-be renewed environmental permits, may require capital expenditures.

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Food Safety: There is increasing governmental scrutiny, regulations and public awareness regarding food quality and food and drug safety. Supervalu may be adversely affected if consumers lose confidence in the safety and quality of Supervalu’s food and drug products. Any events that give rise to actual or potential food contamination, drug contamination or food-borne illness or injury, or events that give rise to claims that Supervalu’s products are not of the quality or composition claimed to be, may result in product liability claims from individuals, consumers and governmental agencies, penalties and enforcement actions from government agencies, a loss of consumer confidence, harm to Supervalu’s reputation and could cause production and delivery disruptions, which may adversely affect Supervalu’s financial condition and results of operations. It may be necessary for Supervalu to recall unsafe, contaminated or defective products or Supervalu may recall products that it determines do not satisfy its quality standards. Recall costs and product liability claims can be material. While Supervalu generally seeks contractual indemnification and insurance coverage from its suppliers, it might not be able to recover these significant costs from its suppliers.
Pharmacy: Supervalu is required to meet various security and operating standards and comply with the Controlled Substances Act and its accompanying regulations governing the sale, marketing, packaging, holding, record keeping and distribution of controlled substances. During the past several years, the United States health care industry has been subject to an increase in governmental regulation and audits at both the federal and state levels. For example, see Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K under the caption “Legal Proceedings” for a discussion of the administrative subpoena issued to Supervalu by the DEA requesting, among other things, information on Supervalu’s pharmacy policies and procedures generally as well as the production of documents that are required to be kept and maintained by Supervalu pursuant to the Controlled Substances Act and its implementing regulations. Additionally, the Patient Protection and Affordable Care Act made several significant changes to Medicaid rebates and to reimbursement. One of these changes was to revise the definition of the Average Manufacturer Price, a pricing element common to most payment formulas, and the reimbursement formula for multi-source (i.e., generic) drugs. This change will affect Supervalu’s reimbursement. In addition, the Patient Protection and Affordable Care Act made other changes that affect the coverage and plan designs that are or will be provided by many of Supervalu’s health plan clients, including the requirement for health insurers to meet a minimum medical loss ratio to avoid having to pay rebates to enrollees. These Patient Protection and Affordable Care Act changes may not affect Supervalu’s business directly, but they could indirectly impact Supervalu’s services and/or business practices.
Wage Rates and Paid Leave: Changes in federal or state minimum wage and overtime laws or employee paid leave laws could cause Supervalu to incur additional wage costs, which could adversely affect Supervalu’s operating margins.
Foreign Operations: Supervalu’s supplier base includes domestic and foreign suppliers. Accordingly, political or financial instability in these foreign countries, changes in U.S. and foreign relationships, laws and regulations affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws and regulations could adversely impact Supervalu’s financial condition and results of operations. In addition, Supervalu is required to comply with laws and regulations governing ethical, anti-bribery and similar business practices such as the Foreign Correct Practices Act. Additionally, foreign currency exchange rates and fluctuations may have an effect on our future costs or on future cash flows from our foreign operations, and could adversely affect our financial condition and results of operations.
Failure to comply with government laws and regulations or make capital expenditures required to maintain compliance with governmental laws and regulations may adversely impact Supervalu’s business operations and prospects for future growth and its ability to participate in federal and state healthcare programs and may also result in monetary liabilities, claims, fines, penalties or other sanctions and may adversely affect Supervalu’s business, financial condition and operating results. Supervalu cannot predict the nature of future laws, regulations, interpretations or applications, nor can Supervalu 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 Supervalu’s future business.
Supervalu’s businesses may become subject to legal proceedings that may adversely affect Supervalu’s financial condition and results of operations.
Supervalu’s businesses are subject to the risk of legal proceedings by employees, unions, consumers, customers, suppliers, stockholders, debt holders, governmental agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation or proceeding. 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 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 Supervalu’s businesses, regardless of whether the allegations are valid or whether Supervalu is ultimately found liable. As a result, litigation may adversely affect Supervalu’s financial condition and results of operations. See also “Item 3 Legal Proceedings” below.

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Efforts to reduce pharmacy reimbursement levels and alter health care financing practices may adversely affect Supervalu’s results of operations.
The continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit managers, government entities and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates may impact Supervalu’s profitability. In particular, increased utilization of generic pharmaceuticals (which normally yield a higher gross profit rate than equivalent brand named drugs) has resulted in pressure to decrease reimbursement payments to Supervalu’s pharmacies for generic drugs, causing a reduction in Supervalu’s generic profit rate. Additionally, there has been significant consolidation within the generic manufacturing industry, and it is possible that this and other external factors may enhance the ability of manufacturers to sustain or increase pricing of generic pharmaceuticals and diminish Supervalu’s ability to negotiate reduced acquisition costs. The increase in preferred pharmacy networks has also had a negative impact on pharmacy reimbursement rates. Any inability to offset increased costs or to modify Supervalu’s activities to lessen the impact could have an adverse effect on Supervalu’s results of operations.
Supervalu may be unable to adequately protect its intellectual property rights, which could harm Supervalu’s business.
Supervalu relies on a combination of trademark, trade secret, copyright and domain name law and internal procedures and nondisclosure agreements to protect its intellectual property. Supervalu believes its trademarks, private label products and domain names are valuable assets. However, Supervalu’s intellectual property rights may not be sufficient to distinguish Supervalu’s products and services from those of its competitors and to provide Supervalu with a competitive advantage. From time to time, third parties may use names, logos and slogans similar to Supervalu’s, may apply to register trademarks or domain names similar to Supervalu’s, and may infringe or otherwise violate Supervalu’s intellectual property rights. Supervalu’s intellectual property rights may not be successfully asserted against such third parties or may be invalidated, circumvented or challenged. Asserting or defending Supervalu’s intellectual property rights could be time consuming and costly and could distract management’s attention and resources. If Supervalu is unable to prevent its competitors from using names, logos, slogans and domain names similar to Supervalu’s, consumer confusion could result, the perception of Supervalu’s brands and products could be negatively affected, and Supervalu’s sales and profitability could suffer as a result. In addition, if Supervalu’s Wholesale customers receive negative publicity or fail to maintain the quality of the goods and services used in connection with Supervalu’s trademarks, Supervalu’s rights to, and the value of, its trademarks could potentially be harmed. Failure to protect Supervalu’s proprietary information could also have an adverse effect on its business.
Supervalu may also be subject to claims that its activities or the products it sells infringe, misappropriate or otherwise violate the intellectual property rights of others. Any such claims can be time consuming and costly to defend and may distract management’s attention and resources, even if the claims are without merit, and may prevent Supervalu from using its trademarks in certain geographies or in connection with certain products and services, any of which could have an adverse effect on Supervalu’s business.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.    PROPERTIES
Supervalu’s properties are in good condition, well maintained and suitable to carry on its business. Substantially all of Supervalu’s owned and ground-leased real estate are subject to mortgages to secure Supervalu’s credit facilities. Additional information on Supervalu’s properties can be found in Part I, Item 1 of this Annual Report on Form 10-K.
Distribution Centers
Supervalu operates and manages its distribution centers by geographic region. The following table is a summary of Supervalu’s distribution centers as of February 25, 2017. In March 2017, Supervalu acquired an additional distribution center in Harrisburg, Pennsylvania that has approximately 732 thousand square feet that will eventually replace the Lancaster, Pennsylvania facility that is owned by NAI and operated by Supervalu.

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Distribution Center
 
Wholesale Region
 
Owned Square Footage (Approximate in thousands)
 
Leased Square Footage (Approximate in thousands)
 
Total Square Footage (Approximate in thousands)
Hopkins, MN
 
West
 
1,847

 

 
1,847

Lancaster, PA
 
East
 

 

 
1,559

Mechanicsville, VA
 
East
 
1,192

 

 
1,192

Champaign, IL
 
West
 
893

 

 
893

Green Bay, WI
 
West
 
433

 
448

 
881

Fort Wayne, IN
 
West
 
856

 

 
856

Quincy, FL
 
East
 
787

 

 
787

Pittsburgh, PA
 
East
 
771

 

 
771

Tacoma, WA
 
West
 
683

 

 
683

Anniston, AL
 
East
 
456

 
105

 
561

St. Louis, MO(1)
 
n/a
 
547

 

 
547

Indianola, MS
 
East
 
540

 

 
540

Stevens Point, WI
 
West
 
431

 

 
431

Fargo, ND
 
West
 
324

 

 
324

Oglesby, IL
 
West
 
321

 

 
321

Billings, MT
 
West
 
239

 

 
239

Anniston, AL
 
East
 
231

 

 
231

Bismarck, ND
 
West
 
210

 

 
210

West Newell, IL
 
West
 
174

 

 
174

Total
 
 
 
10,935

 
553

 
13,047

(1)
St. Louis, MO distribution center is dedicated to providing products to the Shop ’n Save retail stores in the St. Louis, Missouri market.
Retail Stores
Retail operates and manages its properties by retail banner. The following table summarizes Retail stores under each banner as of February 25, 2017:
Retail Banner
 
Number of Stores
 
Primary Geographic Market Area
 
Owned Square Footage (Approximate in thousands)
 
Leased Square Footage (Approximate in thousands)
 
Total Square Footage (Approximate in thousands)
Cub Foods(1)
 
53

 
Minneapolis / St. Paul, Minnesota
 
1,132

 
2,452

 
3,584

Shoppers
 
52

 
Washington D.C. / Baltimore, Maryland
 

 
2,915

 
2,915

Shop ’n Save
 
40

 
St. Louis, Missouri
 
417

 
1,767

 
2,184

Farm Fresh
 
40

 
Virginia Beach, Virginia
 
58

 
1,834

 
1,892

Shop ’n Save
 
22

 
West Virginia, Maryland, Pennsylvania and Virginia
 
122

 
667

 
789

Hornbacher’s
 
8

 
Fargo, North Dakota
 
167

 
245

 
412

Rainbow(2)
 
2

 
Minneapolis / St. Paul, Minnesota
 

 
123

 
123

Total
 
217

 
 
 
1,896

 
10,003

 
11,899

(1)
Cub Foods stores includes stores in which Supervalu has a controlling ownership interest, and excludes Supervalu’s 28 franchised Cub Foods stores in which Supervalu has a minority interest or no interest.
(2)
Rainbow store count excludes one licensed Rainbow store.
Corporate
Supervalu had approximately 2 million building square feet of surplus retail stores and warehouses, 94 percent of which was leased, and approximately 2 million of owned vacant land as of February 25, 2017. In April 2017, Supervalu exited approximately 154 thousand leased surplus warehouse square footage.
In addition to its principal executive offices in Eden Prairie, Minnesota, Supervalu maintains a store support center in Boise, Idaho (which is owned by NAI and leased to Supervalu, but at which Supervalu has employees and provides services to NAI and Albertson’s LLC).

17


ITEM 3.    LEGAL PROCEEDINGS
Supervalu is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business. In the opinion of management, based upon currently available facts, the likelihood that the ultimate outcome of any lawsuits, claims and other proceedings will have a material adverse effect on the overall results of Supervalu’s operations, its cash flows or its financial position is remote. See Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K under the caption “Legal Proceedings” for a discussion of certain of Supervalu’s legal proceedings.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Supervalu’s common stock is listed on the New York Stock Exchange under the symbol SVU. As of April 21, 2017, there were 16,366 stockholders of record.
Common Stock Price
 
 
Common Stock Price Range
 
 
2017
 
2016
Fiscal
 
High
 
Low
 
High
 
Low
First Quarter
 
$
6.17

 
$
4.41

 
$
12.00

 
$
8.22

Second Quarter
 
5.74

 
4.14

 
9.37

 
7.26

Third Quarter
 
5.49

 
4.08

 
8.27

 
6.15

Fourth Quarter
 
5.13

 
3.64

 
7.17

 
3.94

Year
 
$
6.17

 
$
3.64

 
$
12.00

 
$
3.94

Common Stock Dividends
Supervalu did not declare any dividends in fiscal 2016 or fiscal 2017 and Supervalu has no current intent to pay dividends. Supervalu is limited in the aggregate amount of dividends that it may pay under the terms of Supervalu’s term loan facility (the “Secured Term Loan Facility”) and Supervalu’s $1,000 asset-based revolving credit facility (the “Revolving ABL Credit Facility”) and would need to meet certain conditions under these credit facilities before paying a dividend, as described in Note 8—Long-Term Debt in Part II, Item 8 of this Annual Report on Form 10-K. The payment of any future dividends is subject to the discretion of Supervalu’s Board of Directors and the requirements of Delaware law, and will depend on a variety of factors that Supervalu’s Board of Directors may deem relevant.
Purchases of Equity Securities
The following table sets forth Supervalu’s purchases of equity securities for the periods indicated:
(in millions, except shares and per share amounts)
Period (1)
 
Total Number of Shares Purchased (2)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
First four weeks
 
 
 
 
 
 
 
 
December 4, 2016 to December 31, 2016
 

 
$

 

 
$

Second four weeks
 
 
 
 
 
 
 
 
January 1, 2017 to January 28, 2017
 
123,537

 
$
4.78

 

 
$

Third four weeks
 
 
 
 
 
 
 
 
January 29, 2017 to February 25, 2017
 

 
$

 

 
$

Totals
 
123,537

 
$
4.78

 

 
$


18


(1)
The reported periods conform to Supervalu’s fiscal calendar composed of thirteen 28-day periods. The fourth quarter of fiscal 2017 contains three 28-day periods.
(2)
These amounts represent the deemed surrender by participants in Supervalu’s compensatory stock plans of 123,537 shares of previously issued common stock. These amounts are in payment of the purchase price for shares acquired pursuant to the exercise of stock options and satisfaction of tax obligations arising from such exercises, as well as from the vesting of restricted stock awards granted under such plans.
Stock Performance Graph
The following graph compares the yearly change in Supervalu’s cumulative stockholder return on its common stock for the period from the end of fiscal 2012 to the end of fiscal 2017 to that of the Standard & Poor’s (“S&P”) SmallCap 600, a group of peer companies in the grocery distribution and retail industries, and Supervalu’s fiscal 2016 peer group. The stock price performance shown below is not necessarily indicative of future performance.
COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN AMONG
Supervalu, S&P SmallCap 600 and Peer Group(1) 
February 25, 2012 through February 25, 2017(2) 
f17form10-k_chartx10776a01.jpg
Date
 
Supervalu
 
S&P SmallCap 600
 
2017 Peer Group(3)
 
2016 Peer Group(4)
 
 
(in dollars)
 
 
February 24, 2012
 
$
100.00

 
$
100.00

 
$
100.00

 
$
100.00

February 22, 2013
 
$
59.78

 
$
112.94

 
$
116.02

 
$
120.71

February 21, 2014
 
$
94.72

 
$
146.08

 
$
134.13

 
$
126.97

February 27, 2015
 
$
153.42

 
$
160.40

 
$
153.01

 
$
152.98

February 26, 2016
 
$
76.55

 
$
146.11

 
$
158.93

 
$
134.18

February 24, 2017
 
$
60.87

 
$
198.30

 
$
200.37

 
$
147.00

(1)
Total return assuming $100 invested on February 24, 2012 and reinvestment of dividends on the day they were paid.
(2)
Supervalu’s fiscal year ends on the last Saturday in February.
(3)
Supervalu revised its peer group in fiscal 2017 to better reflect companies related to Supervalu’s business and strategies, including the sale of Save-A-Lot. Supervalu’s fiscal 2017 peer group consists of SpartanNash Corporation, United Natural Foods, Incorporated, Sysco Corporation and Ingles Incorporated.

19


(4)
Supervalu’s fiscal 2016 peer group consists of SpartanNash Corporation, Wal-Mart Stores, Inc., Target Corporation, Sysco Corporation, The Fresh Market, Inc., Delhaize Group SA and Roundy’s, Inc. Roundy’s Inc. was included in Supervalu’s peer group until it was acquired in late calendar year 2015.
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 shall not be deemed soliciting material, and is not to be incorporated by reference into any filing of Supervalu, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

20


ITEM 6.    SELECTED FINANCIAL DATA
(Dollars and shares in millions,
except per share data and stores)
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
 
2014
(52 weeks)
 
2013
(52 weeks)
Results of Operations
 
 
 
 
 
 
 
 
 
Net sales
$
12,480

 
$
12,907

 
$
13,277

 
$
12,997

 
$
13,017

Cost of sales
10,693

 
11,033

 
11,379

 
11,111

 
11,345

Gross profit
1,787

 
1,874

 
1,898

 
1,886

 
1,672

Selling and administrative expenses
1,589

 
1,570

 
1,648

 
1,647

 
1,981

Goodwill and intangible asset impairment charges
15

 
6

 

 

 
6

Operating earnings (loss)(1)
183

 
298

 
250

 
239

 
(315
)
Interest expense, net(2)
181

 
195

 
242

 
404

 
269

Equity earnings in unconsolidated affiliates
(5
)
 
(5
)
 
(4
)
 
(2
)
 
(3
)
Earnings (loss) from continuing operations before income taxes(1)(2)
7

 
108

 
12

 
(163
)
 
(581
)
Income tax (benefit) provision(3)
(20
)
 
24

 
(13
)
 
(69
)
 
(163
)
Net earnings (loss) from continuing operations
27

 
84

 
25

 
(94
)
 
(418
)
Income (loss) from discontinued operations, net of tax
627

 
102

 
174

 
283

 
(1,038
)
Net earnings (loss) including noncontrolling interests
654

 
186

 
199

 
189

 
(1,456
)
Less net earnings attributable to noncontrolling interests
(4
)
 
(8
)
 
(7
)
 
(7
)
 
(10
)
Net earnings (loss) attributable to SUPERVALU INC.
$
650

 
$
178

 
$
192

 
$
182

 
$
(1,466
)
Net earnings (loss) from continuing operations per share—
diluted
$
0.09

 
$
0.28

 
$
0.07

 
$
(0.40
)
 
$
(2.02
)
Financial Position of Continuing Operations
 
 
 
 
 
 
 
 
 
Working capital(4)
$
528

 
$
248

 
$
319

 
$
288

 
$
50

Total assets(5)
$
3,580

 
$
3,381

 
$
3,466

 
$
3,423

 
$
3,621

Total debt and capital lease obligations
$
1,475

 
$
2,514

 
$
2,689

 
$
2,729

 
$
2,806

Stockholders’ equity (deficit)
$
376

 
$
(441
)
 
$
(646
)
 
$
(738
)
 
$
(1,415
)
Other Statistics of Continuing Operations
 
 
 
 
 
 
 
 
 
Dividends declared per share
$

 
$

 
$

 
$

 
$
0.0875

Weighted average shares outstanding—diluted(6)
268

 
268

 
264

 
258

 
212

Depreciation and amortization
$
207

 
$
210

 
$
223

 
$
242

 
$
301

Capital expenditures(7)
$
199

 
$
172

 
$
162

 
$
70

 
$
154

Adjusted EBITDA(8)
$
483

 
$
527

 
$
550

 
$
516

 
$
229

Stores Supplied and Operated:
 
 
 
 
 
 
 
 
 
Wholesale primary stores
1,902

 
1,796

 
1,825

 
1,819

 
1,901

Retail stores
217

 
200

 
194

 
190

 
191

Subtotal
2,119

 
1,996

 
2,019

 
2,009

 
2,092

Wholesale secondary stores(9)
244

 
232

 
208

 
424

 
441

Total number of stores
2,363

 
2,228

 
2,227

 
2,433

 
2,533

(1)
Pre-tax items recorded in fiscal 2017 included $42 of non-cash pension settlement charges, a $41 non-cash asset impairment charge, a $15 non-cash goodwill impairment charge and $5 of store closure charges and costs, offset in part by a $9 supply agreement termination fee, a $2 sales and use tax refund and a $1 severance benefit.
Pre-tax items recorded in fiscal 2016 included $7 of store closure charges and costs, $6 of severance costs and $6 of non-cash intangible asset impairment charges.
Pre-tax items recorded in fiscal 2015 included $64 of non-cash pension settlement charges, a $5 benefit plan charge, $2 of net information technology intrusion costs and $1 of severance costs.
Pre-tax items recorded in fiscal 2014 included $42 of severance costs and accelerated stock-based compensation charges, $13 of non-cash asset impairment and other charges, $6 of contract breakage and other costs and $3 of multi-employer pension withdrawal charges, offset in part by a $15 gain on sale of property.
Pre-tax items recorded in fiscal 2013 included $214 of non-cash asset impairment and other charges, $32 of severance costs, $6 of non-cash intangible asset impairment charges and $4 of multi-employer pension withdrawal charges, offset in part by $10 in a cash settlement received from credit card companies.
(2)
Pre-tax items recorded in fiscal 2017 included $17 of non-cash unamortized financing cost charges and $2 of debt refinancing costs, within Interest expense, net.
Pre-tax items recorded in fiscal 2016 included $6 of debt refinancing costs and $4 of non-cash unamortized financing cost charges, within Interest expense, net.
Pre-tax items recorded in fiscal 2015 included $37 of debt refinancing costs and $6 of non-cash unamortized financing cost charges, within Interest expense, net.

21


Pre-tax items recorded in fiscal 2014 included $99 of non-cash unamortized financing cost charges and original issue discount acceleration and $75 of debt refinancing costs, within Interest expense, net.
A pre-tax item recorded in fiscal 2013 included $22 of non-cash unamortized financing charges within Interest expense, net.
(3)
Tax items recorded in fiscal 2017 included discrete deferred tax benefits of $9. These tax items and amounts do not contemplate the tax effect of the pre-tax items noted in footnotes (1) and (2) above.
(4)
Working capital of continuing operations is calculated using the first-in, first-out method (“FIFO”), after adding back the last-in, first-out method (“LIFO”) reserve. The LIFO reserve for each year is as follows: $216 for fiscal 2017, $215 for fiscal 2016, $211 for fiscal 2015, $202 for fiscal 2014 and $211 for fiscal 2013. Current assets of discontinued operations at the end of each fiscal year were as follows: $0 for fiscal 2017, $376 for fiscal 2016, $410 for fiscal 2015, $329 for fiscal 2014 and $1,788 for fiscal 2013. Current liabilities of discontinued operations at the end of each fiscal year were as follows: $0 for fiscal 2017, $346 for fiscal 2016, $335 for fiscal 2015, $315 for fiscal 2014 and $2,997 for fiscal 2013.
(5)
Total assets of continuing operations are calculated as Total assets of Supervalu excluding current assets and long-term assets of discontinued operations.
(6)
Weighted average shares outstanding—diluted, as presented here, represents the diluted weighted average shares outstanding utilized in the computation of Net earnings (loss) from continuing operations per share—diluted.
(7)
Capital expenditures include cash payments for purchases of property, plant and equipment and non-cash capital lease additions, and exclude cash payments for business acquisitions.
(8)
Adjusted EBITDA is a non-GAAP financial measure that Supervalu provides as a supplement to results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to any financial measure of performance prepared and presented in accordance with GAAP (defined below). Refer to the “Non-GAAP Financial Measures” section of Part II, Item 7 of this Annual Report on Form 10-K for a reconciliation to the applicable GAAP financial measure and additional information regarding Supervalu’s use of non-GAAP financial measures.
(9)
Wholesale secondary stores is defined as a customer location that falls under a certain dollar threshold of Wholesale sales for each of the last three fiscal periods in a given quarter.
Historical data is not necessarily indicative of Supervalu’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.
ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars and shares in millions, except per share data)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited Consolidated Financial Statements and the information contained under the captions “Risk Factors” and “Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act” contained in this Annual Report on Form 10-K.
The results of operations, financial position and cash flows of Save-A-Lot are reported as discontinued operations for all periods presented.
EXECUTIVE OVERVIEW
Business Overview
Supervalu is the largest public company grocery distributor to wholesale customers across the United States through its Wholesale segment, operates five retail grocery banners in six geographic regions through its Retail segment and provides professional service solutions to Wholesale customers and other entities, the results of which are included within Wholesale or Corporate depending on the customer type. Supervalu leverages its distribution operations by providing wholesale distribution and logistics service solutions to Wholesale customers as well as wholesale distribution to Supervalu’s Retail stores. Supervalu’s business is classified by management into two reportable segments: Wholesale and Retail.
Business Strategies and Initiatives
Supervalu’s vision, which continues to guide its strategic and operational decisions, is to become the leading distributor of consumable products and provider of services to retailers in the United States. Initiatives in each of Supervalu’s segments include:
Wholesale:
Retaining existing customers by differentiating ourselves through our service levels, pricing, product offerings and growing professional services offerings
Growing our business with existing customers by marketing our fresh product offerings, such as produce, and Supervalu’s professional services offerings, including merchandise and promotional planning, design and administrative back-office solutions

22


Targeting sales growth by affiliating new customers, including larger chain businesses, and aggressively pursuing external growth and market opportunities
Improving the efficiency of Supervalu’s operations, including its information technology infrastructure and maximizing the use of trucking miles and warehouse capacity
Strengthening core merchandising and marketing programs, including leveraging Supervalu’s private-label programs, such as the Essential Everyday® and Equaline® labels, while marketing and adding depth to the Wild Harvest® and Culinary Circle® brands
Retail:
Driving profitable sales by investing in price and promotions, and enhancing product offerings and merchandising displays
Driving improved store performance, including reducing inventory shrink rates and levels of out-of-stocks, through standardizing certain store processes
Continued development and introduction of Supervalu’s private-label products, including organic products, by providing innovative products in multiple channels across Retail and Wholesale
Investing capital in new stores, relocations and targeted store remodels
Corporate:
Continued management of Supervalu’s overhead cost structure to enable investments in lower prices to customers
Providing high-quality administrative support services by enhancing Supervalu’s service offerings and information technology systems
Leverage our professional services capabilities to grow our services business
Fiscal 2017 Overview
Wholesale Business Developments
In fiscal 2017, Supervalu affiliated several large Wholesale customers through long-term supply agreements, which we expect to contribute meaningfully to Wholesale revenue growth in fiscal 2018. These affiliations included the following:
In November 2016, Supervalu entered into a long-term supply agreement to serve as a grocery wholesaler and distributor to America’s Food Basket, a regional cooperative that serves 47 neighborhood stores located primarily in New York and parts of New England. Supervalu completed the transition of these stores at the end of the fourth quarter of fiscal 2017.
Supervalu began transitioning over 170 stores operated by The Fresh Market in late February 2017 under the long-term supply agreement entered into with The Fresh Market in August 2016 and has now completed this onboarding process.
Supervalu completed the transition of and began supplying approximately 70 Marsh Supermarkets and O’Malia Food Markets under the long-term supply agreement Supervalu entered into with Marsh Supermarkets in August 2016.
Retail Business Developments
In September 2016, Supervalu paid $17 to acquire 22 Food Lion stores located in northern West Virginia, western Maryland, south central Pennsylvania and northwestern Virginia. The acquired stores, included in Supervalu’s Retail segment, were converted to Supervalu’s Shop ‘n Save format currently used by certain of Supervalu’s Wholesale customers in those regions.
Sale of Save-A-Lot
On December 5, 2016, Supervalu completed the sale of its Save-A-Lot business, for a purchase price of $1,365 in cash, subject to customary closing adjustments that reduced the purchase price by approximately $61. In connection with the completion of the sale, on December 5, 2016, Supervalu and Moran Foods entered into a Services Agreement, whereby Supervalu is providing certain professional services to Save-A-Lot for a period of five years, on and subject to the terms and conditions set forth therein. The results of operations, financial position and cash flows of Save-A-Lot are reported as discontinued operations for all periods presented.
Supervalu used a portion of the cash proceeds from the sale of Save-A-Lot, net of transaction-related fees, expenses and taxes, to make a mandatory prepayment of $832 against Supervalu’s outstanding balance under its Secured Term Loan Facility, that caused Supervalu’s Total Secured Leverage Ratio, on a pro forma basis giving effect to such prepayment, to be no higher than 1.50:1.00. Supervalu also used a portion of the net cash proceeds to repay the outstanding balance under its Revolving ABL Credit Facility and to make a $25 contribution to the SUPERVALU Retirement Plan as required under the agreement Supervalu entered into with the Pension Benefit Guaranty Corporation (“PBGC”) in connection with the sale. The agreement with the PBGC required Supervalu to contribute an additional $35 to the SUPERVALU Retirement Plan, which Supervalu fulfilled in the fourth quarter of fiscal 2017.

23


The following table provides the composition of the gain on the sale:
 
2017
(52 weeks)
Purchase price
$
1,304

Disposed of balance sheet assets and liabilities, net
(635
)
Transaction costs and other
(32
)
Pre-tax gain on sale
637

Income tax provision
(60
)
After-tax gain on sale
$
577

Income taxes on the gain were recorded at a significantly reduced effective rate due to the anticipated utilization of capital loss carryforwards and the release of valuation allowances of approximately $244. Income tax on the gain on sale of Save-A-Lot are expected to be paid in Supervalu’s first quarter of fiscal 2018. The closing adjustments under the SAL merger agreement are subject to finalization, which may impact the final calculation of the purchase price and gain on sale. Supervalu believes that any potential adjustment to the purchase price from the closing adjustments will be insignificant.
Prior to the sale of Save-A-Lot, Supervalu assessed the carrying value of its assets held-for-sale for impairment and determined the carrying value of the Save-A-Lot corporate stores reporting unit was in excess of its fair value. As a result, Supervalu recorded a non-cash goodwill impairment charge of $37 in the third quarter of fiscal 2017.
Continuing Operations Financial Highlights for Fiscal 2017 Compared to Fiscal 2016:
Net sales were $12,480, a decrease of $427 or 3.3 percent, primarily due to lower sales from Wholesale customers primarily lost last year, lower identical store sales in our Retail business, lower sales to existing Wholesale customers and lower sales from closed Retail stores, offset in part by higher sales from new Wholesale customers and stores, and newly acquired Retail stores.
Gross profit was $1,787, a decrease of $87 or 4.6 percent, which primarily reflects declines in Retail and Wholesale sales, lower fees earned under services agreements and lower base margins, offset in part by higher vendor allowances.
Operating earnings were $183, a decrease of $115, which reflects $72 of higher net charges and costs compared to last year, primarily due to a pension settlement charge, an asset impairment charge, a goodwill impairment charge and store closure charges and costs in fiscal 2017, offset in part by a supply agreement termination fee and other items in fiscal 2017, offset by an intangible asset impairment charge, store closure charges and costs and severance costs last year. When adjusted for these items (refer to the Operating Earnings section below for descriptions of these charges and costs), Operating earnings decreased $43, primarily due to lower gross profit from decreased sales, higher employee costs, lower fees earned under services agreements and lower base margins, partially offset by lower pension expense and higher vendor allowances.
Interest expense, net was $181, a decrease of $14, primarily due to lower average outstanding debt balances.
Net earnings from continuing operations was $27, a decrease of $57, and diluted net earnings per share from continuing operations decreased $0.19, in each case, primarily due to the items described above.
Net cash provided by operating activities of continuing operations was $308, an increase of $63, primarily due to lower levels of cash utilized in operating assets and liabilities, offset in part by lower cash generated from earnings and higher contributions to benefit plans.
Net cash used in investing activities of continuing operations was $198, an increase of $11, primarily due to an increase in cash paid for capital expenditures and business acquisitions, offset in part by a decrease in cash paid for other intangible assets.
Net cash used in financing activities of continuing operations was $1,106, an increase of $914, primarily due to a net increase in cash paid towards debt and capital lease obligations, including required prepayments of outstanding loans under the Secured Term Loan Facility of $832 following the sale of Save-A-Lot and $99 from fiscal 2016 Excess Cash Flow (as defined in the facility), and a decrease in proceeds from the sale of common stock, offset in part by proceeds from the increased borrowings under the Revolving ABL Credit Facility, lower distributions to noncontrolling interests and lower debt financing cost payments.
Agreement to Acquire Unified Grocers
On April 10, 2017, Supervalu, a newly formed wholly owned subsidiary of Supervalu (“UG Merger Sub”), and Unified Grocers, Inc. (“Unified Grocers”), entered into an Agreement and Plan of Merger (the “UG Merger Agreement”) pursuant to which Supervalu agreed to acquire Unified Grocers in a transaction valued at approximately $375, comprised of approximately $114 in cash for 100% of the outstanding stock of Unified Grocers plus the assumption and payoff of Unified Grocers’ net debt at closing (approximately $261 as of April 1, 2017). Founded in 1922, Unified Grocers is a retailer-owned wholesale grocery

24


distribution cooperative that supplies independent retailers throughout the western United States and has annual sales of approximately $3.8 billion. Supervalu expects to use cash on hand and available liquidity under its credit facilities to fund the acquisition and payoff Unified Grocers’ net debt.
On the terms and subject to the conditions set forth in the UG Merger Agreement, at the closing of the transactions contemplated thereby (the “UG Closing”), UG Merger Sub will merge with and into Unified Grocers (the “UG Merger”) with Unified Grocers surviving the UG Merger as a wholly owned subsidiary of Supervalu, and the shares of Unified Grocers will be converted into the right to receive from Supervalu at the UG Closing approximately $114 in cash in the aggregate.
As further provided in the UG Merger Agreement, the consummation of the transactions contemplated by the UG Merger Agreement is subject to certain closing conditions, including (i) approval of the UG Merger by the shareholders of Unified Grocers, (ii) any applicable waiting periods (or extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 having expired or been terminated, (iii) the absence of any order by any governmental entity that restrains, enjoins or otherwise prohibits the UG Merger, (iv) the accuracy of the representations and warranties of the parties (generally subject to a material adverse effect standard), (v) material compliance by the parties with their respective obligations under the UG Merger Agreement, (vi) no material adverse effect having occurred with respect to the Unified Grocers business after entry into the UG Merger Agreement, and (vii) other customary closing conditions. The transaction is currently expected to be completed in mid- to late summer 2017.
Under the terms of the UG Merger Agreement, Supervalu will be entitled to receive a termination fee of $8, plus reimbursement of up to $1 in costs and expenses, in the event that the UG Merger Agreement is terminated by Unified Grocers under certain circumstances, including as a result of a change in the recommendation of the board of directors of Unified Grocers. In addition, a reverse termination fee of $9.5 may be payable by Supervalu to Unified Grocers upon termination of the UG Merger Agreement under certain circumstances, including if Supervalu is unable to obtain antitrust approval before January 5, 2018.
In connection with entry into the UG Merger Agreement, Supervalu entered into voting agreements with each shareholder of Unified Grocers that has a representative on the board of directors of Unified Grocers. The voting agreements require such shareholders to vote shares over which they have voting control in favor of the approval of the UG Merger and the UG Merger Agreement.
Impact of Inflation and Deflation
Supervalu monitors product cost inflation and deflation and evaluates whether to absorb cost increases or decreases, or pass on pricing changes. Supervalu has experienced a mix of inflation and deflation across product categories within its business segments during fiscal 2017.
In aggregate across all of Supervalu’s businesses and taking into account the mix of products, management estimates Supervalu’s businesses experienced low single digit cost deflation in fiscal 2017. The Wholesale and Retail business segments sustained higher levels of cost deflation within the meat, egg and produce product categories. Cost deflation estimates are based on individual like items sold by Supervalu during the periods being compared.
Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation and deflation on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, deflation has the effect of decreasing sales.
Competitive Environment
The United States grocery business is highly competitive and management expects operating results will continue to be impacted by the effects of operating in a highly competitive and price-sensitive marketplace. In fiscal 2017, Supervalu’s Retail segment was impacted to a greater degree than anticipated by price competition, competitive store openings and a challenging sales and operating environment. This environment contributed to lower sales from identical retail stores, which impacted gross profit and operating earnings. These factors affecting the Retail segment are expected to impact fiscal 2018 as well.

25


RESULTS OF OPERATIONS

Consolidated results of operations for fiscal 2017, 2016 and 2015 are as follows:
 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
Net sales
$
12,480

 
100.0
 %
 
$
12,907

 
100.0
 %
 
$
13,277

 
100.0
 %
Cost of sales
10,693

 
85.7

 
11,033

 
85.5

 
11,379

 
85.7

Gross profit
1,787

 
14.3

 
1,874

 
14.5

 
1,898

 
14.3

Selling and administrative expenses
1,589

 
12.7

 
1,570

 
12.2

 
1,648

 
12.4

Goodwill and intangible asset impairment charges
15

 
0.1

 
6

 

 

 

Operating earnings
183

 
1.5

 
298

 
2.3

 
250

 
1.9

Interest expense, net
181

 
1.4

 
195

 
1.5

 
242

 
1.8

Equity in earnings of unconsolidated affiliates
(5
)
 

 
(5
)
 

 
(4
)
 

Earnings from continuing operations before income taxes
7

 
0.1

 
108

 
0.8

 
12

 
0.1

Income tax (benefit) provision
(20
)
 
(0.2
)
 
24

 
0.2

 
(13
)
 
(0.1
)
Net earnings from continuing operations
27

 
0.2

 
84

 
0.6

 
25

 
0.2

Income from discontinued operations, net of tax
627

 
5.0

 
102

 
0.8

 
174

 
1.3

Net earnings including noncontrolling interests
654

 
5.2

 
186

 
1.4

 
199

 
1.5

Less net earnings attributable to noncontrolling interests
(4
)
 

 
(8
)
 
(0.1
)
 
(7
)
 
(0.1
)
Net earnings attributable to SUPERVALU INC.
$
650

 
5.2
 %
 
$
178

 
1.4
 %
 
$
192

 
1.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Basic net earnings per share attributable to SUPERVALU INC.:
Continuing operations
$
0.09

 
 
 
$
0.29

 
 
 
$
0.07

 
 
Discontinued operations
$
2.37

 
 
 
$
0.39

 
 
 
$
0.67

 
 
Basic net earnings per share
$
2.45

 
 
 
$
0.68

 
 
 
$
0.74

 
 
Diluted net earnings per share attributable to SUPERVALU INC.:
Continuing operations
$
0.09

 
 
 
$
0.28

 
 
 
$
0.07

 
 
Discontinued operations
$
2.34

 
 
 
$
0.38

 
 
 
$
0.66

 
 
Diluted net earnings per share
$
2.43

 
 
 
$
0.66

 
 
 
$
0.73

 
 
The following discussion summarizes operating results for fiscal 2017 compared to fiscal 2016, and fiscal 2016 compared to fiscal 2015. References to last year refer to fiscal 2016.
Net Sales
The following table outlines the composition of and variances in Net sales, which are discussed in the paragraphs below:
 
Fiscal Year
 
Variance
 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
 
2017 Change
 
2016 Change
Wholesale
$
7,705

 
$
7,935

 
$
8,198

 
$
(230
)
 
$
(263
)
Retail
4,596

 
4,769

 
4,884

 
(173
)
 
(115
)
Corporate
179

 
203

 
195

 
(24
)
 
8

Total Net sales
$
12,480

 
$
12,907

 
$
13,277

 
$
(427
)
 
$
(370
)
Fiscal 2017 Compared to Fiscal 2016
Wholesale’s net sales decreased primarily due to $514 of lower sales from Wholesale customers primarily lost last year that Supervalu no longer supplies, including lost primary stores for which Supervalu continues to supply certain product categories, $84 of lower sales to existing customers, and $54 of lower military sales, offset in part by $277 from increased sales to new customers, $141 from increased sales to new stores of existing customers and $4 of higher other revenue. Lost sales to stores no longer supplied by Supervalu include certain Albertson’s LLC stores in the Southeast region that have transitioned to self-distribution and reflect that Supervalu is no longer supplying Haggen and Gordy’s stores. Supervalu anticipates new customer sales to more than offset the existing lost business in fiscal 2018, as was seen in the third and fourth quarters of fiscal 2017.

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Retail’s net sales decreased primarily due to $245 of lower sales from negative identical store sales primarily driven by lower customer counts and lower average basket size, $54 of lower sales from closed stores and $15 of lower other revenue, including fuel sales, offset in part by a sales increase of $71 from new stores and $70 from acquired stores. In fiscal 2018, Supervalu expects identical store sales to be negative.
Corporate’s net sales decreased primarily due to $31 of lower fees under transition services agreements from a lower number of stores serviced, offset in part by $7 of higher sales from the professional services agreement with Save-A-Lot that began in December 2016.
Revenues generated from existing transition services agreements with Albertson’s LLC and NAI, which are expected to wind-down over the next approximately two to three years, are anticipated to contribute to lower Corporate net sales and operating earnings in fiscal 2018. In fiscal 2018, Supervalu expects transition services agreement revenue to decrease approximately $40, which will be partially offset by increases in revenue from the professional services agreement with Save-A-Lot.
Fiscal 2016 Compared to Fiscal 2015
Wholesale’s net sales decrease included a contribution of $143 from the additional week in fiscal 2015. Excluding the additional week of sales in fiscal 2015, Wholesale net sales decreased $120 primarily due to $286 of lower sales from lost customers and $210 of lower sales to existing customers, offset in part by $375 of higher sales from new stores operated by new and existing customers.
Retail’s net sales decrease included a contribution of $87 from the additional week in fiscal 2015. Excluding the additional week of sales in fiscal 2015, Retail net sales decreased $28 primarily due to $109 of negative identical store sales, $26 of lower sales from closed stores and $14 from lower fuel sales, offset in part by $122 of higher sales from acquired and new stores. Management believes the lower Retail identical store sales and customer count in fiscal 2016 compared to fiscal 2015 were driven by adjustments to pricing and promotional activity to partially mitigate compressed pharmacy margins.
Corporate’s net sales increase was net of a decrease from the additional week in fiscal 2015 which previously contributed $4 to net sales. Excluding the additional week of sales in fiscal 2015, Corporate net sales increased $12 due to additional transition service fees from the transition services agreement with Haggen and wind-down transition service revenues from Albertson’s LLC and NAI, offset in part by lower TSA fees from a lower number of NAI and Albertson’s LLC stores under their TSA.
Retail Identical Store Sales Variances
The following table summarizes identical store sales variances in percentages for Supervalu’s Retail segment compared to the prior fiscal year:
 
Fiscal Year Variance
 
2017
(52 weeks)
 
2016
(52 weeks)
Identical store sales percent variance(1)
(5.5
)%
 
(2.5
)%
Average basket percent variance(2)
(1.0
)%
 
0.7
 %
Customer count percent variance(3)
(4.5
)%
 
(3.2
)%
(1)
Retail identical store sales are defined as net sales from stores operating for four full quarters, including store expansions and excluding fuel and announced planned store dispositions. The variance calculation for fiscal 2016 excludes the additional week of sales from fiscal 2015.
(2)
Average basket is defined as the average purchases by Supervalu’s customers per transaction within its Retail stores operating for four full quarters, including store expansions and excluding fuel and planned store dispositions.
(3)
Customer count is defined as the number of transactions by Supervalu’s customers within its Retail stores operating for four full quarters, including store expansions and excluding fuel and planned store dispositions.

27


Gross Profit
The following table outlines the composition of and variances in Gross profit, which are discussed in the paragraphs below:
 
Fiscal Year
 
Variance
 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
 
2017 Change
 
2016 Change
Wholesale
$
367

 
$
383

 
$
388

 
$
(16
)
 
$
(5
)
% of Wholesale sales
4.8
%
 
4.8
%
 
4.7
%
 
 %
 
0.1
%
Retail
1,241

 
1,288

 
1,317

 
(47
)
 
(29
)
% of Retail sales
27.0
%
 
27.0
%
 
27.0
%
 
 %
 
%
Corporate
179

 
203

 
193

 
(24
)
 
10

Total Gross profit
$
1,787

 
$
1,874

 
$
1,898

 
$
(87
)
 
$
(24
)
% of total Net sales
14.3
%
 
14.5
%
 
14.3
%
 
(0.2
)%
 
0.2
%
Fiscal 2017 Compared to Fiscal 2016
Wholesale gross profit decreased $16, and was flat to last year as a percentage of net sales, primarily due to $30 of lower gross margin from net decreased sales driven by lost customers, $18 of higher employee-related costs driven by higher distribution center labor rates and hours incurred and $3 of higher logistics costs, offset in part by $21 of higher vendor allowances, $6 of favorable inventory reclamation, $4 of reduced costs from incremental vendor back-haul allowances and $3 of lower pension expense.
Retail gross profit decreased $47, and was flat to last year as a percentage of net sales. Retail gross profit included $1 of store closure charges and costs related to inventory write-downs. When adjusted for this item, Retail gross profit decreased $46 primarily due to $52 of lower gross margin from net decreased sales, including the impact of incremental gross margin from acquired stores, and $21 of lower gross margins driven by strategic investments to lower prices to customers, offset in part by $10 of higher vendor allowances, $9 of lower inventory shrink costs, $4 of lower employee-related costs and $3 of lower logistics costs.
Corporate gross profit decreased $24 primarily due to a lower number of stores serviced under transition services agreements, net of fees earned under the professional services agreement with Save-A-Lot, discussed in the net sales variances above. The shared service center costs incurred to support back office functions related to the services agreements represent administrative overhead and are recorded in Selling and administrative expenses.
Fiscal 2016 Compared to Fiscal 2015
Wholesale gross profit decreased $5 or increased 10 basis points as a percentage of net sales. The additional week in fiscal 2015 contributed approximately $8 to Wholesale gross profit. Excluding the additional week, Wholesale gross profit increased $3 primarily due to $14 of higher base margins primarily from vendor rebates and allowances, $11 of lower logistics costs, $4 of higher trucking back-haul income and $3 of lower pension expense, offset in part by $19 of higher employee-related costs and $10 of higher occupancy costs primarily associated with new distribution center capacity and repair and maintenance expenses on existing facilities.
Retail gross profit decreased $29 and was flat as a percentage of net sales. The additional week in fiscal 2015 contributed approximately $25 to Retail gross profit. Excluding the additional week, Retail gross profit decreased $4 primarily due to $14 of higher inventory shrink costs and $7 of lower gross profit from lower sales, offset in part by $7 of higher base margins, $6 of lower logistics costs and $5 of lower employee-related costs.
Corporate gross profit increased by $10. The additional week in fiscal 2015 contributed $4 to Corporate gross profit. Excluding the additional week, Corporate gross profit increased by $14, primarily due to the variances discussed in Corporate net sales above.
Selling and Administrative Expenses
Fiscal 2017 Compared to Fiscal 2016
Selling and administrative expenses for fiscal 2017 were $1,589 compared with $1,570 last year, an increase of $19 or 1.2 percent. Selling and administrative expenses for fiscal 2017 included net charges and costs of $75, comprised of non-cash pension settlement charges of $42, a non-cash asset impairment charge of $41 and store closure charges and costs of $4, offset in part by a supply agreement termination fee of $9, a sales and use tax refund of $2 and a severance benefit of $1. Last year’s Selling and

28


administrative expenses included net charges and costs of $13, comprised of store closure charges and costs of $7 and severance costs of $6. When adjusted for these items, the remaining decrease of $43 in Selling and administrative expenses is primarily due to $53 of lower pension expense, $8 of lower other operating costs, $7 of lower bad debt expense and $5 of lower depreciation expense, offset in part by $25 of higher total employee costs driven by higher Retail employee costs from new stores and $5 of higher contracted services.
Fiscal 2016 Compared to Fiscal 2015
Selling and administrative expenses for fiscal 2016 were $1,570 compared with $1,648 for fiscal 2015, a decrease of $78 or 4.7 percent. Selling and administrative expenses for fiscal 2016 included net charges and costs of $13, comprised of store closure charges and costs of $7 and severance costs of $6. Selling and administrative expenses for fiscal 2015 included net charges and costs of $72, comprised of non-cash pension settlement charges of $64, a benefit plan charge of $5, information technology intrusion costs, net of insurance recoverable, of $2 and severance costs of $1. The additional week in fiscal 2015 contributed approximately $23 to Selling and administrative expenses. When adjusted for these items, Selling and administrative expenses increased $4 primarily due to $16 of lower depreciation expense and $4 of lower occupancy costs, offset in part by $8 of higher pension expense, $7 from lower other administrative costs primarily due to death benefits and fees received from a supply agreement termination in fiscal 2015, and higher expenses from independent retailer marketing costs in fiscal 2016, $4 of higher payment processing and bad debt expense and $4 of higher contracted services costs.
Goodwill and Intangible Asset Impairment Charges
During fiscal 2017, Supervalu conducted an interim impairment review of the carrying value of its reporting units in conjunction with its impairment review of Save-A-Lot’s goodwill and due to declines in sales and cash flows within Retail. The review indicated that the estimated fair value of the Wholesale reporting unit was substantially in excess of 100 percent of its carrying value. The review also indicated that the carrying value of the Retail reporting unit exceeded its estimated fair value, as determined utilizing the income approach and market approach. As a result, Supervalu performed the step 2 assessment and recorded a non-cash goodwill impairment charge of $15 in the Retail segment during the third quarter of fiscal 2017. The calculation of the impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.
During fiscal 2016, Supervalu received a notice pursuant to which it could exercise certain purchase options. As a result, Supervalu performed a review of the associated indefinite-lived intangible assets for impairment, which indicated the carrying value of the intangible assets exceeded its estimated value, and a non-cash intangible asset impairment charge of $6 was recorded within Wholesale.
Operating Earnings
The following table outlines the composition of and variances in Operating earnings, which are discussed in the paragraphs below:
 
Fiscal Year
 
Variance
 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
 
2017 Change
 
2016 Change
Wholesale
$
238

 
$
230

 
$
243

 
$
8

 
$
(13
)
% of Wholesale sales
3.1
 %
 
2.9
%
 
3.0
%
 
0.2
 %
 
(0.1
)%
Retail
(45
)
 
94

 
122

 
(139
)
 
(28
)
% of Retail sales
(1.0
)%
 
2.0
%
 
2.5
%
 
(3.0
)%
 
(0.5
)%
Corporate
(10
)
 
(26
)
 
(115
)
 
16

 
89

Total Operating earnings
$
183

 
$
298

 
$
250

 
$
(115
)
 
$
48

% of total Net sales
1.5
 %
 
2.3
%
 
1.9
%
 
(0.8
)%
 
0.4
 %
Fiscal 2017 Compared to Fiscal 2016
Wholesale operating earnings for fiscal 2017 increased $8, or 20 basis points as a percentage of net sales. Wholesale operating earnings for fiscal 2017 include a fee received from a supply agreement termination of $9. Last year’s Wholesale operating earnings included an intangible asset impairment charge of $6. When adjusted for these items, the remaining decrease of $7 in Wholesale operating earnings is primarily due to $30 of lower gross margin from net decreased sales driven by lost customers and $19 of higher employee-related costs driven by higher distribution center labor rates and hours incurred, offset in part by $21 of higher vendor allowances, $7 of lower bad debt expense and customer recoveries, $6 of favorable inventory reclamation, $4 of reduced costs from incremental vendor back-haul allowances and $3 of lower pension expense.

29


Retail operating earnings for fiscal 2017 decreased $139, or 300 basis points as a percentage of net sales. Retail operating loss for fiscal 2017 included a non-cash asset impairment charge of $41, a non-cash goodwill impairment charge of $15 and store closure charges and costs of $5. Last year’s Retail operating earnings included store closure charges and costs of $1. When adjusted for these items, the remaining decrease in Retail operating earnings of $79 is primarily due to $53 of lower gross margin from net decreased sales, including the impact of incremental gross margin from acquired and new stores, $21 of lower base margins driven by strategic investment to lower prices to customers, $21 of higher employee-related costs driven by existing, acquired and new stores, net of lower costs from closed stores, $5 of higher occupancy costs driven by acquired stores, $5 of higher other operating expenses and $3 of higher contracted services costs, offset in part by $10 of higher vendor allowances, $9 of lower inventory shrink costs, $7 of lower depreciation expense and $3 of lower logistics costs. In fiscal 2018, Supervalu expects identical store sales to be negative, which will negatively impact Retail operating earnings.
Corporate operating loss for fiscal 2017 decreased $16. Corporate operating loss for fiscal 2017 included non-cash pension settlement charges of $42, offset in part by a sales and use tax refund of $2 and a severance benefit of $1. Last year’s Corporate operating loss included severance costs of $6, and store closure charges and costs of $6. When adjusted for these items, the remaining increase in Corporate operating earnings of $43 is primarily due to $51 of lower pension expense, $9 of lower salary, wages and incentive compensation, $8 of lower infrastructure costs driven by information technology, $3 of lower bad debt expense and $3 of lower other operating expenses, offset in part by $24 of lower fees earned under services agreements discussed in Corporate net sales above and $7 of higher employee benefit costs. In fiscal 2018, the expected $40 decrease in transition services agreement revenue from Albertson’s LLC and NAI is expected to negatively impact Corporate operating loss in an amount equal to approximately three-quarters of the lost revenue.
Fiscal 2016 Compared to Fiscal 2015
Wholesale operating earnings for fiscal 2016 decreased $13, or 10 basis points as a percentage of net sales. Wholesale operating earnings for fiscal 2016 included $6 of an intangible asset impairment charge. Wholesale operating earnings for fiscal 2015 included $1 of severance costs. The additional week in fiscal 2015 contributed approximately $7 to Wholesale operating earnings. When adjusted for these items, the remaining $1 decrease in Wholesale operating earnings is primarily due to $20 of higher employee-related costs, $9 of higher occupancy costs primarily associated with new distribution center capacity and repair and maintenance expenses on existing facilities, $7 of higher administrative costs as a result of fees received from a supply agreement termination for fiscal 2015 and higher expenses from independent retailer marketing costs in fiscal 2016, offset in part by $14 of higher base margins primarily from vendor rebates and allowances, $11 of lower logistics costs primarily from lower diesel costs, $4 of higher trucking back-haul income and $3 of lower pension expense.
Retail operating earnings for fiscal 2016 decreased $28, or 50 basis points as a percentage of net sales. Retail operating earnings for fiscal 2016 include $1 of store closure charges and costs. The additional week in fiscal 2015 contributed approximately $7 to Retail operating earnings. When adjusted for these items, the remaining $20 decrease in Retail operating earnings is primarily due to $21 of higher employee-related costs primarily driven by new retail stores, $14 of higher inventory shrink costs, $7 of lower gross profit from lower sales and $4 of higher occupancy costs, offset in part by $14 of lower depreciation expense, $7 of higher base margins and $6 of lower logistics costs.
Corporate operating loss for fiscal 2016 decreased $89. Corporate operating loss for fiscal 2016 included $6 of severance costs and $6 of store closure charges and costs. Corporate operating loss for fiscal 2015 included $64 of non-cash pension settlement charges, a $5 benefit plan charge and $2 of information technology intrusion costs, net of insurance recoverable. The additional week in fiscal 2015 contributed approximately $1 of expense to Corporate operating loss. When adjusted for these items, the remaining $29 net decrease in Corporate operating loss was primarily due to $28 of lower employee-related costs, primarily due to lower benefits and entity-wide incentive compensation, $12 of higher transition service agreement fees and $8 of lower occupancy costs, offset in part by $12 of higher pension expense and $5 of higher contracted services.
Interest Expense, Net
Interest expense, net for fiscal 2017 was $181, compared with $195 for last year. Interest expense, net for fiscal 2017 included charges of $19 related to prepayments and the amendment of the Secured Term Loan Facility, comprised of unamortized financing cost charges of $17 and refinancing costs of $2. Interest expense, net for fiscal 2016 includes $6 of debt refinancing costs related to the redemption of the remaining $278 of Supervalu’s outstanding 8.00 percent Senior Notes due May 2016 (the “2016 Notes”) and $4 of non-cash unamortized financing cost charges related to the 2016 Notes redemption and an amendment to the Revolving ABL Credit Facility. When adjusted for these items, Interest expense, net decreased $23 primarily due to lower average outstanding debt balances.
Interest expense, net for fiscal 2016 was $195, compared with $242 for fiscal 2015. Interest expense, net for fiscal 2016 includes $10 of debt refinancing costs and non-cash unamortized financing cost charges as described above. Interest expense for fiscal 2015 included $37 of debt refinancing costs related to the redemption of $350 of the 2016 Notes and costs related to the

30


incremental carry costs of the 7.75 percent Senior Notes due November 2022 (the “2022 Notes”) outstanding during the 2016 Notes 30-day redemption period, and $6 of non-cash unamortized financing cost charges related to the 2016 Notes redemption and the amendments to the Revolving ABL Credit Facility. The additional week in fiscal 2015 contributed additional interest expense of approximately $3. When adjusted for these items, the remaining $11 decrease in Interest expense, net is primarily due to lower average outstanding debt balances.
Income Tax (Benefit) Provision
Income tax benefit on earnings from continuing operations for fiscal 2017 was $20 or 279.9 percent of earnings from continuing operations before income taxes, compared with income tax expense of $24 or 21.8 percent of earnings from continuing operations before income taxes last year. The change in the effective tax rate is primarily due to lower pre-tax income in fiscal 2017, as permanent and discrete tax items have a greater rate impact with lower pre-tax income, as well as certain fiscal 2017 discrete deferred tax items and the tax effects related to the fiscal 2017 pension settlement charges and goodwill impairment charges.
Income tax expense for fiscal 2016 was $24, or 21.8 percent of earnings from continuing operations before income taxes, compared with income tax benefit of $13 or 107.4 percent of earnings from continuing operations for fiscal 2015. The change in the effective tax rate is primarily due to the tax effects related to the pension settlement charge included in fiscal 2015, partially offset by a favorable mix of income in state tax jurisdictions in fiscal 2016.
Net Earnings from Continuing Operations
Net earnings from continuing operations for fiscal 2017 were $27, compared with $84 last year. Net earnings from continuing operations for fiscal 2017 included after-tax costs and charges of $56, comprised of asset impairment charges of $25, a pension settlement charge of $24, unamortized financing cost charges of $10, a goodwill impairment charge of $9, store closure charges and costs of $4 and debt refinancing costs of $1, offset in part by a deferred income tax benefit of $9, a fee received from a supply agreement termination of $6, a sales and use tax refund of $1 and a severance benefit of $1. Net earnings from continuing operations for fiscal 2016 included after-tax costs and charges of $17, comprised of an intangible asset impairment charge of $4, store closure charges and costs of $4, debt refinancing costs of $4, severance costs of $3 and unamortized financing cost charges of $2. When adjusted for these items, the remaining $18 after-tax decrease is due to the variances discussed in the Operating Earnings, Interest Expense, Net and Income Tax (Benefit) Provision sections above.
Net earnings from continuing operations for fiscal 2016 were $84, compared with $25 for fiscal 2015. Net earnings from continuing operations for fiscal 2016 included after-tax costs and charges of $17, comprised of an intangible asset impairment charge of $4, store closure charges and costs of $4, debt refinancing costs of $4, severance costs of $3 and unamortized financing cost charges of $2. Net earnings from continuing operations for fiscal 2015 included $68 of after-tax charges and costs comprised of non-cash pension settlement charges of $36, debt refinancing costs of $23, unamortized financing cost charges of $4, a benefit plan charge of $3, net information technology intrusion costs of $1 and severance costs of $1. The additional week in fiscal 2015 contributed approximately $4 to Net earnings from continuing operations. When adjusted for these items, the remaining $12 after-tax increase in Net earnings from continuing operations is primarily due to the variances as discussed in the Operating Earnings, Interest Expense, Net, and Income Tax Provision sections above.
Income from Discontinued Operations, Net of Tax
Discontinued operations primarily include the Save-A-Lot business that was previously disclosed as a separate reporting segment of Supervalu, adjusted for assets, liabilities, operating results, and cash flows of the Save-A-Lot business as provided under the SAL Merger Agreement and the Separation Agreement. In addition, discontinued operations include the results of operations and cash flows attributed to the assets and liabilities of the NAI business. Refer to Note 17—Discontinued Operations in the Notes to Consolidated Financial Statements for further information regarding these discontinued operations.
Fiscal 2017 Compared to Fiscal 2016
Net sales from discontinued operations for fiscal 2017 were $3,529, compared with $4,621 last year. The sale of the Save-A-Lot business occurred on the first business day of our fourth quarter of fiscal 2017 (December 5, 2016), resulting in a partial fiscal year of operations in fiscal 2017. Net sales from discontinued operations decreased $1,054 due to the reduction in fourth quarter sales relative to the prior year due to the sale of the Save-A-Lot business. The remaining $38 decrease is primarily due to lower identical licensee store sales, lower identical corporate store sales, lower sales due to closed licensee stores and lower sales due to closed corporate stores, offset in part by higher sales from new corporate stores, higher sales from new licensee stores and higher sales from corporate store conversions.
Operating earnings from discontinued operations for fiscal 2017 were $708, compared with $147 last year. Fiscal 2017 operating earnings from discontinued operations included a pre-tax gain on sale of $637 and a goodwill impairment charge of $37. The

31


remaining decrease of $39 is primarily due to lower earnings from a partial fiscal year of operations in fiscal 2017, higher employee-related costs driven by new corporate stores and higher inventory shrink, offset in part by higher base margins driven by higher product margin rates.
Income from discontinued operations, net of tax for fiscal 2017 was $627, compared with $102 last year. Fiscal 2017 income from discontinued operations includes an after-tax gain on sale of $577, which includes a tax benefit from the anticipated utilization of capital loss carryforwards and the release of valuation allowances of approximately $244. The remaining decrease of $52 was due to the after-tax impact of the operating earnings variances discussed above and the applicable tax provision, which included certain tax matters.
Fiscal 2016 Compared to Fiscal 2015
Net sales from discontinued operations for fiscal 2016 were $4,621, compared with $4,639 for fiscal 2015, a decrease of $18 or 0.4 percent. The additional week in fiscal 2015 contributed $79 to net sales. Excluding the additional week of sales in fiscal 2015, net sales from discontinued operations increased $61 primarily due to $124 of higher sales from new corporate stores, $60 of higher sales from new licensee stores, $56 of higher sales from corporate stores that were acquired and converted to licensee stores and $11 of higher sales at existing corporate stores, offset in part by lower sales of $70 from lower sales to existing licensees, $55 from stores that were disposed of by licensees, $41 from licensee stores that were converted to corporate stores and $31 from corporate stores that were closed.

Operating earnings from discontinued operations for fiscal 2016 were $147, compared to $176 for fiscal 2015. Operating earnings from discontinued operations for fiscal 2016 included $5 of store closure charges and costs and $2 of severance costs. Operating earnings from discontinued operations for fiscal 2015 included store closure charges and costs of $3. The additional week in fiscal 2015 contributed approximately $4 to Operating earnings from discontinued operations. When adjusted for these items, the remaining $21 decrease is primarily due to Save-A-Lot related variances of higher occupancy and employee costs, and higher depreciation expense, offset in part by higher base margins driven by a higher mix of corporate stores relative to licensee stores and product costs declining faster than retail prices, higher gross profit from higher sales, lower logistics costs and higher trucking back-haul income.

Income from discontinued operations, net of tax for fiscal 2016 was $102, compared to $174 for fiscal 2015, primarily reflecting the after tax impact of the operating earnings variances discussed above and the net tax benefits of $66 for fiscal 2015 primarily related to tangible property repair regulations and other deduction related changes, property tax refunds and interest income resulting from the settlement of income tax audits.
NON-GAAP FINANCIAL MEASURES
Use of Non-GAAP Financial Measures
Supervalu’s Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles (“GAAP”). In addition to the above analysis of results of operations, Supervalu also considers certain non-GAAP financial measures to assess the performance of its business and understand underlying operating performance and core business trends, which it uses to facilitate operating performance comparisons of its business on a consistent basis over time. The measures and items identified below, such as Adjusted EBITDA, are provided as a supplement to Supervalu’s results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to any financial measure of performance prepared and presented in accordance with GAAP. In each of these measures, certain items are being omitted either because they are non-cash items or are items that are not considered in Supervalu’s supplemental assessment of on-going business performance. Certain of these adjustments are considered in similar supplemental analyses by other companies, such as Depreciation and amortization, impairment charges and certain other adjustments.
Supervalu believes these non-GAAP measures are useful to investors and financial institutions because Adjusted EBITDA provides additional understanding of other factors and trends affecting its business, which are used in the business planning process to understand expected performance, to evaluate results against those expectations, and as one of the compensation performance measures under certain compensation programs and plans. Supervalu believes Adjusted EBITDA is more reflective of factors that affect its underlying operating performance and facilitate operating performance comparisons of our business segments on a consistent basis over time.
Limitations of Use
Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered

32


recurring in nature and may be reflected in Supervalu’s financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. All measurements are provided with a reconciliation from a GAAP measurement. The non-GAAP financial measures below should only be considered as an additional supplement to Supervalu’s financial results reported in accordance with GAAP and should be reviewed in conjunction with Supervalu’s results reported in accordance with GAAP in this Annual Report on Form 10-K for the fiscal year ended February 25, 2017.
There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting cash expenditures for capital assets or contractual commitments, changes in working capital, income taxes, capital lease obligations and debt service expenses that are recurring in Supervalu’s results of operations.
Definitions
Supervalu defines Adjusted EBITDA as Net (loss) earnings from continuing operations, plus Interest expense, net and Income tax (benefit) provision, less Net earnings attributable to noncontrolling interests calculated in accordance with GAAP, plus non-GAAP adjustments for Depreciation and amortization, LIFO charge (credit), certain employee-related costs and pension-related charges (including severance costs, pension settlement charges, multiemployer pension withdrawal charges, accelerated stock-based compensation charges and other items), certain non-cash asset impairment and other charges (including asset write-offs, store closures and market exits), certain gains and losses on the sale of property, goodwill and intangible asset impairment charges, costs related to the separation of businesses, legal settlement charges and gains, contract breakage costs and certain other non-cash charges or items, as determined by management.
The following table reconciles Adjusted EBITDA to Net (loss) earnings from continuing operations:
 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
 
2014
(52 weeks)
 
2013
(52 weeks)
Net earnings (loss) from continuing operations
$
27

 
$
84

 
$
25

 
$
(94
)
 
$
(418
)
Less net earnings attributable to noncontrolling interests
(4
)
 
(8
)
 
(7
)
 
(7
)
 
(10
)
Income tax (benefit) provision
(20
)
 
24

 
(13
)
 
(69
)
 
(163
)
Interest expense, net
181

 
195

 
242

 
404

 
269

Depreciation and amortization
207

 
210

 
223

 
242

 
301

LIFO charge (credit)
1

 
3

 
8

 
(9
)
 
4

Pension, multi-employer and benefit plan settlement charges(1)
42

 

 
69

 
3

 
4

Asset impairment and other charges, net of gains(2)
41

 

 

 
(2
)
 
214

Goodwill and intangible asset impairment charges(3)
15

 
6

 

 

 
6

Store closure charges and costs(4)
5

 
7

 

 

 

Contract breakage costs and certain other charges(5)

 

 

 
6

 

Information technology intrusion costs, net of insurance recoverable(6)

 

 
2

 

 

Legal settlement gain(7)

 

 

 

 
(10
)
Severance (benefits) costs(8)
(1
)
 
6

 
1

 
42

 
32

Sales and use tax refunds(9)
(2
)
 

 

 

 

Supply agreement termination fees(10)
(9
)
 

 

 

 

Adjusted EBITDA
$
483

 
$
527

 
$
550

 
$
516

 
$
229

(1)
Pension settlement charges in fiscal 2017 and 2015 reflect accelerated amortization of accumulated actuarial loss associated with lump sum settlement payments made to certain deferred vested pension plan participants made by the SUPERVALU Retirement Plan under a lump sum payment option window.
(2)
Asset impairment charges include non-cash charges related to Supervalu’s Retail business in fiscal 2017 and amounts related to Supervalu’s Retail and Wholesale business in fiscal 2014 and 2013, with an offsetting gain on the sale of property in fiscal 2014 related to the Wholesale business.
(3)
Goodwill and intangible asset impairment charges include a non-cash goodwill impairment charge related to Supervalu’s Retail business in fiscal 2017, a non-cash intangible asset impairment charge related to Supervalu’s non-exercise of certain options to purchase operating assets in fiscal 2016 and a non-cash intangible asset impairment charge related to a tradename within the Wholesale business in fiscal 2013.
(4)
Store closure charges and costs include impairment, severance and related costs due to store closures.
(5)
Contract breakage costs relate to continuing operations break-up costs from the sale of NAI.
(6)
Information technology intrusion costs include costs related to the intrusions discussed in Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K.
(7)
Legal settlement gain relates to cash gains from favorable settlements.
(8)
Severance (benefits) costs include separation-related costs for former employees, including accelerated non-cash stock-based compensation charges. The fiscal 2017 severance benefit includes a reversal of a portion of severance costs in fiscal 2016.

33


(9)
Sales and use tax refunds reflect refunds received related to prior years.
(10)
Supply agreement termination fees reflect cash gains related to the termination of supply agreements.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Unused available credit under the Revolving ABL Credit Facility increased $4 to $748 as of February 25, 2017 from $744 as of February 27, 2016. The increase reflects $138 of lower borrowings under the facility and $16 of lower letters of credit outstanding, partially offset by a lower borrowing base of approximately $150 primarily due to the disposition of Save-A-Lot.
Cash and cash equivalents increased $290 to $332 as of February 25, 2017 from $42 as of February 27, 2016.
Total debt was $1,263 and $2,297 as of February 25, 2017 and February 27, 2016, respectively, net of unamortized debt financing costs and original issue discount, under senior secured credit agreements and debentures.
In connection with the sale of Save-A-Lot, Supervalu received proceeds of $1,301 in cash, including estimated customary closing adjustments, and used the proceeds to:
make mandatory prepayments of $832 against outstanding loans under the Secured Term Loan Facility comprised of (1) 100% of the first $750 of Net Cash Proceeds (as defined in the Secured Term Loan Facility) received and (2) up to 50% of the Net Cash Proceeds in excess of $750 up to an aggregate amount that reduced Supervalu’s Total Secured Leverage Ratio (as defined in the Secured Term Loan Facility) on a pro forma basis after giving effect to such prepayment to be no higher than 1.50:1.00;
contribute $60 to the SUPERVALU Retirement Plan, fulfilling its remaining obligations for pension contributions under its agreement with the PBGC; and
pay off the outstanding balance of the Revolving ABL Credit Facility.
Subsequent to the sale of Save-A-Lot and the related Secured Term Loan Facility prepayments described above, no scheduled debt maturities are due in fiscal 2018 and 2019, exclusive of any potential excess cash flow prepayment requirements under the Secured Term Loan Facility from Supervalu’s subsequent years’ results of operations and cash flows.
Payments to reduce capital lease obligations are expected to be approximately $26 for fiscal 2018.
Working capital of continuing operations increased $280 to $528 as of February 25, 2017 from $248 as of February 27, 2016, excluding the impacts of the LIFO reserve. The working capital increase is primarily due to an increase in Cash and cash equivalents, which includes the residual proceeds from the sale of Save-A-Lot, lower current maturities of long-term debt from the required excess cash flow prepayment in fiscal 2017 and higher inventories within Wholesale and Retail. These increases in working capital were partially offset by higher accounts payable from the higher inventory levels and higher income taxes payable driven by the income tax provision on the sale of Save-A-Lot, expected to be paid in the first quarter of fiscal 2018.
Management expects that Supervalu will be able to fund debt maturities through internally generated funds, borrowings under the Revolving ABL Credit Facility, additional term loans under the Secured Term Loan Facility (subject to identifying term loan lenders or other institutional lenders and satisfying certain terms and conditions) or through new debt issuances.
No minimum pension contributions are required under Employee Retirement Income Security Act of 1974, as amended (“ERISA”) for fiscal 2018.
Sources and Uses of Cash
Management expects that Supervalu will continue to replenish operating assets with internally generated funds and pay down debt obligations with internally generated funds and new debt issuances or existing credit facilities. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on Supervalu’s operating cash flow, which may limit Supervalu’s ability to pay down its outstanding indebtedness as planned. Supervalu’s credit facilities are secured by a substantial portion of Supervalu’s total assets.
Supervalu’s primary sources of liquidity are from internally generated funds and from borrowing capacity under its credit facilities. Supervalu 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. Supervalu’s short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund debt obligations and to fund capital expenditures as opportunities arise. There can be no assurance, however, that Supervalu’s business will continue to generate cash flow at current levels or that it will continually have access to credit on acceptable terms. 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.

34


Primary uses of cash include debt servicing and maturities, capital expenditures, working capital maintenance, contributions to various benefit plans and income tax payments. Supervalu’s working capital needs are generally greater during the months leading up to high sales periods, such as the time period from prior to Thanksgiving through December. Supervalu typically finances these working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories. Strategic and operational investments in Supervalu’s businesses are funded by cash provided from operating activities and on a short-term basis through available liquidity.
Supervalu’s continued access to short-term and long-term financing through credit markets depends on numerous factors including the condition of the credit markets and Supervalu’s results of operations, cash flows, financial position and credit ratings.
Supervalu does not pay dividends, and there is no current intent to pay dividends. Supervalu is limited in the aggregate amount of dividends that it may pay under the terms of its Secured Term Loan Facility and its Revolving ABL Credit Facility and is required to meet certain conditions under these credit facilities before paying a dividend, as described in Note 8—Long-Term Debt in Part II, Item 8 of this Annual Report on Form 10-K. The payment of future dividends is subject to the discretion of Supervalu’s Board of Directors and the requirements of Delaware law, and will depend on a variety of factors that Supervalu’s Board of Directors may deem relevant.
Cash Flow Information
The following summarizes Supervalu’s Consolidated Statements of Cash Flows:
 
Fiscal Year
 
Variance
 
2017
(52 weeks)
 
2016
(52 weeks)
 
2015
(53 weeks)
 
2017 Change
 
2016 Change
Cash flow activities
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities – continuing operations
$
308

 
$
245

 
$
211

 
$
63

 
$
34

Net cash used in investing activities—continuing operations
(198
)
 
(187
)
 
(194
)
 
(11
)
 
7

Net cash used in financing activities—continuing operations
(1,106
)
 
(192
)
 
(92
)
 
(914
)
 
(100
)
Net cash provided by discontinued operations
1,271

 
77

 
106

 
1,194

 
(29
)
Net increase (decrease) in cash and cash equivalents
275

 
(57
)
 
31

 
332

 
(88
)
Cash and cash equivalents at beginning of year
57

 
114

 
83

 
(57
)
 
31

Cash and cash equivalents at the end of year
$
332

 
$
57

 
$
114

 
$
275

 
$
(57
)
Operating Activities
The increase in net cash provided by operating activities from continuing operations in fiscal 2017 compared to fiscal 2016 is primarily due to lower levels of cash utilized in operating assets and liabilities, offset in part by lower cash generated from earnings and $22 of higher contributions to benefit plans.
The increase in net cash provided by operating activities from continuing operations in fiscal 2016 compared to fiscal 2015 is primarily due to $129 of lower pension and other postretirement benefit plan contributions from lower required and discretionary pension contributions and higher cash generated from operating earnings, offset in part by higher levels of cash utilized in operating assets and liabilities.
Investing Activities
The increase in net cash used in investing activities in fiscal 2017 compared to fiscal 2016 includes a $36 increase in cash paid for capital expenditures and business combinations, offset in part by a $23 decrease in cash paid for other intangible assets.
The decrease in cash used in investing activities in fiscal 2016 compared to fiscal 2015 is primarily due to a $34 decrease in cash paid for business combinations and capital expenditures, offset in part by an increase of $25 in cash paid for intangible assets.
Financing Activities
The increase in net cash used in financing activities in fiscal 2017 compared to fiscal 2016 is primarily due to a $995 net increase in cash paid towards debt and capital lease obligations, of which $832 related to required prepayments of outstanding loans under the Secured Term Loan Facility following the sale of Save-A-Lot, and a $7 decrease in proceeds from the sale of

35


common stock, offset in part by $80 of proceeds from increased borrowings under the Revolving ABL Credit Facility, $3 of lower distributions to noncontrolling interests and $3 of lower debt financing cost payments.
The increase in net cash used in financing activities in fiscal 2016 compared to fiscal 2015 is primarily due to lower proceeds from the issuance of long-term debt, offset in part by lower payments on long-term debt and debt financing costs. Proceeds from the issuance of long-term debt decreased primarily due to the issuance of $350 of the 2022 Notes in fiscal 2015, compared with a $138 net increase in borrowings under the Revolving ABL Credit Facility in fiscal 2016 to partially fund the redemption of $278 of the 2016 Notes. Long-term debt payments decreased primarily due to a smaller amount of redemptions of the 2016 Notes in fiscal 2016 compared to fiscal 2015. Payments used on debt financing costs were lower due to lower redemption premiums, credit facility amendment costs and new debt issuance costs.
Discontinued Operation Activities
The increase in net cash provided by discontinued operations in fiscal 2017 compared to last year is primarily due to $1,301 of proceeds received from the sale of Save-A-Lot, offset in part by lower cash generated from earnings from discontinued operations due to the partial fiscal year in 2017.
The decrease in net cash provided by discontinued operations in fiscal 2016 compared to fiscal 2015 is primarily due to higher levels of cash utilized in operating assets and liabilities, and lower cash generated from earnings from discontinued operations.
Credit Facilities and Debt Agreements
Supervalu’s credit facilities and certain long-term debt agreements have restrictive covenants and cross-default provisions which generally provide, subject to Supervalu’s right to cure, for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain other debt agreements. Supervalu was in compliance with all such covenants and provisions for all periods presented.
Total debt and capital lease obligations, net of unamortized debt financing costs and original issue discount, decreased $1,039 to $1,475 as of February 25, 2017 from $2,514 as of February 27, 2016. This decrease is primarily due to a $935 lower balance outstanding on the Secured Term Loan Facility as a result of payments required to be made in connection with the sale of Save-A-Lot, the required excess cash flow prepayment from fiscal 2016 made in fiscal 2017, and the payoff of the remaining balance of the Revolving ABL Credit Facility, which contributed $138 to the decrease in debt, a $33 decrease in debt financing costs, $14 of which related to the Revolving ABL Credit Facility and was presented as a long-term asset because the facility did not have an outstanding balance, and a net decrease in total capital lease obligations of $6.
Refer to Note 8—Long-Term Debt in Part II, Item 8 of this Annual Report on Form 10-K for a detailed discussion of the provisions of Supervalu’s credit facilities and certain long-term debt agreements and additional information.
Capital Expenditures
The following summarizes capital expenditures and payments for business combinations of continuing operations:
Capital expenditures in fiscal 2017 were $199 and primarily consisted of Retail store remodels, new Retail stores and information technology investments. In addition, during fiscal 2017, Supervalu paid $19 for 24 acquired stores.
Capital expenditures in fiscal 2016 were $172 and primarily consisted of Retail stores, store remodels and information technology investments.
Capital expenditures for fiscal 2018 are estimated to be approximately $240 to $265 and primarily relate to an acquisition of a distribution center and related improvements, investments in existing distribution centers, Retail store remodels and information technology investments. The anticipated increase in capital expenditures for fiscal 2018 in comparison to fiscal 2017 primarily relates to the acquisition of the distribution center and distribution center improvements.
Supervalu defines capital expenditures as cash payments for purchases of property, plant and equipment and non-cash capital lease additions, and excludes payments for business acquisitions and capitalized property, plant and equipment obligation for which cash payment has not been made and obligations exist within Accounts payable.

36


Pension and Other Postretirement Benefit Obligations
Cash contributions to defined benefit pension and other postretirement benefit plans were $62, $40 and $169 in fiscal 2017, 2016 and 2015, respectively. The increase in cash contributions in fiscal 2017 compared to fiscal 2016 is primarily due to $60 of contributions to the SUPERVALU Retirement Plan in excess of required minimum contributions as required under the agreement with the PBGC entered into in connection with the sale of Save-A-Lot. Cash contributions decreased in fiscal 2016 compared to fiscal 2015 due to lower required and discretionary defined benefit pension plan contributions. Cash contributions in fiscal 2015 included a $50 discretionary contribution on top of required minimum contributions.
Supervalu currently expects that no minimum pension contributions will be required to its pension plans in fiscal 2018 consistent with its obligations under ERISA. Supervalu anticipates fiscal 2018 discretionary pension contributions and required minimum other postretirement benefit plan contributions will be approximately $5 to $10.
Supervalu funds its defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws, as determined by Supervalu’s external actuarial consultant, and additional contributions made at Supervalu’s discretion. Supervalu may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. Supervalu assesses the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required PBGC variable rate premiums or in order to achieve exemption from participant notices of underfunding.
CRITICAL ACCOUNTING POLICIES
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“Accounting Standards”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 Supervalu’s Consolidated Financial Statements.
Inventories, Net
Inventories are valued at the lower of cost or market. Substantially all of Supervalu’s inventory consists of finished goods. Inventories are recorded net of vendor allowances and cash discounts. Supervalu evaluates inventory shortages (shrink) throughout each fiscal year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the end of each fiscal year.
To value discrete inventory items at lower of cost or market before application of any LIFO reserve, Supervalu uses the weighted average cost method, the retail inventory method (“RIM”) or replacement cost method. Inventories were valued at the lower of cost or market under the following methods as of February 25, 2017: weighted average cost method, 72 percent; RIM, 19 percent; and replacement cost method, 9 percent.
The replacement cost approach under the first-in, first-out (“FIFO”) method is predominantly utilized in determining the value of high turnover perishable items, including produce, deli, bakery, meat and floral, and pharmacy inventory. Under the replacement cost method applied on a LIFO basis, the most recent purchase cost is used to calculate the current cost of inventory before application of any LIFO reserve. The replacement cost approach results in inventories valued at the lower of cost or market because of the high inventory turnover and the resulting low inventory days supply on hand combined with infrequent vendor price changes for these items of inventory.
RIM is used in valuing retail inventories. Under this method, the valuation of inventories is at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that has been widely used in the retail industry. Inherent in the RIM calculations are certain significant management judgments and estimates, including inventory shortages and cost-to-retail ratios, which impact the ending inventory valuation at cost, as well as the resulting gross margins. Management consistently applies its application of RIM valuations by product category and believes that Supervalu’s RIM provides an inventory valuation that reasonably approximates cost. For fiscal 2017, a one percent change in the cost-to-retail ratios used to value inventories would impact Gross profit by less than 30 basis points.

37


As of February 25, 2017 and February 27, 2016, approximately 73 percent and 75 percent, respectively, of Supervalu’s inventories were valued under the LIFO method. During fiscal 2017 and 2016, 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 2017 and 2016 purchases. As a result, Cost of sales decreased by $2 and $1 in fiscal 2017 and 2016, respectively. If the FIFO method had been used to determine cost of inventories for which the LIFO method is used, Supervalu’s inventories would have been higher by approximately $216 and $215 as of February 25, 2017 and February 27, 2016, respectively.
Vendor Funds
Supervalu receives funds from many of the vendors whose products Supervalu buys for resale. These vendor funds are provided to increase the sell-through of the related products. Supervalu receives vendor funds for a variety of merchandising activities: placement of the vendors’ products in Supervalu’s advertising; display of the vendors’ products in prominent locations in Supervalu’s stores; supporting the introduction of new products into Supervalu’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. Supervalu 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.
Supervalu 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 Supervalu’s reported gross profit, operating earnings (loss) and inventory amounts. The historical estimates of Supervalu have been reliable in the past, and Supervalu believes the methodology will continue to be reliable in the future. Based on previous experience, Supervalu 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, Supervalu would consider changing the volume, type and frequency of the advertising, which could increase or decrease its advertising expense. Similarly, Supervalu is not able to assess the impact of vendor advertising allowances on increasing revenues as such allowances do not directly generate revenue for Supervalu’s stores. For fiscal 2017, a one 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.
Allowances for Doubtful Accounts and Credit Risk
Supervalu uses a combination of measurements, analyses and techniques to evaluate the collectability of its accounts and notes receivable, and up-front customer advances, and also assesses the probability of default on guarantees and subleased property provided to customers. Supervalu obtains collateral from certain of its customers in the form of letters of credit, personal and other entity guarantees, priority claims on customer property and customer deposits. A customer’s credit-worthiness is evaluated on an ongoing basis to determine the appropriate level of reserves. Management performs customer-specific analyses and utilizes a variety of specific techniques including, an aged receivables analysis, historical collections and write-off trends, analysis of customers’ financial statements, economic or industry factors, customer bankruptcy, store closures or liquidity deterioration. These measurements, analyses and techniques are continually evaluated to estimate the recoverability of accounts and notes receivable, and the possibility for Supervalu to perform on its customer guarantees. This evaluation process contains significant management judgments and estimates that are used in accounting for allowance for doubtful accounts and credit risk. Refer to Note 3—Allowance for Doubtful Accounts in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Long-Lived Assets
Supervalu monitors the recoverability of its long-lived assets and tests them for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. If impairment is identified for long-lived assets to be held and used, the fair value is compared to the carrying value of the group of assets and an impairment charge is recorded for the excess of the carrying value over the fair value. Refer to 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

38


Form 10-K for further information regarding Supervalu’s monitoring, testing and impairment calculations for its long-lived assets.
Significant management judgments and estimates are used in accounting for long-lived assets, including, but not limited to, the determination of useful lives estimates, dependency of identifiable cash flows, projected undiscounted cash flows and fair values based on current market values or discounted cash flows using Level 3 inputs.
Determinations of geographic markets utilized in grouping assets and the interdependency of cash flows rely on significant judgments by management. Supervalu believes that revenue and cash flow dependencies exist among stores within its markets and operates its stores on that basis. Supervalu reviews its long-lived asset groupings at least annually or as facts and circumstances arise during interim periods that indicate a review should occur. Supervalu conducted reviews during the fourth quarter of fiscal 2017 and 2016, and no changes to geographic market asset groupings were made as a result of these reviews. Due to the highly competitive environment and ongoing business transformation, Supervalu continues to evaluate its long-lived asset policy and current asset groups to determine if additional modifications to the estimation approach of Supervalu’s long-lived asset groups are necessary. Future changes to Supervalu’s assessment of its long-lived asset policy and changes in circumstances, operating results or other events may result in additional asset impairment testing and charges.
Supervalu estimates fair value based on Supervalu’s experience and knowledge of the market in which the property is located, including local real estate brokers and advisers. Supervalu’s estimate of undiscounted cash flows attributable to the asset groups includes only future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group.
To calculate projected future cash flows, Supervalu utilizes business plans that take into account operational changes, competitive factors and inflation, among other factors. Using different assumptions or estimates could result in a change in estimated cash flows and fair values that could produce different results. The composition of cash flows for identifiable cash flows that are grouped include additional projected cash outflows of operating that asset group as a whole, whereas the composition of cash flows evaluated at the retail store-level and at the distribution center level include only the cash flows required to operate those individual long-lived assets.
During fiscal 2017, asset impairment charges of $41 were recorded as a result of Supervalu’s annual impairment review. Refer to Note 4—Reserves for Closed Properties and Property, Plant and Equipment-related Impairment Charges in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on reserves for closed properties and Property, plant and equipment-related impairment charges.
Reserves for Closed Properties
Supervalu maintains reserves for costs associated with closures of Retail stores, distribution centers and other properties that are no longer being utilized in current operations. Supervalu 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 15 years. Supervalu estimates subtenant rentals and future cash flows based on Supervalu’s experience and knowledge of the market in which the closed property is located, Supervalu’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. Supervalu 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 Supervalu’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 Supervalu’s assumptions and may require additional reserves and asset impairment charges to be recorded.
Supervalu’s net reserve for closed properties was $22, net of estimated sublease recoveries of $16, as of February 25, 2017, and $24, net of estimated sublease recoveries of $19, as of February 27, 2016.

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Goodwill
Goodwill is reviewed at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. A qualitative review may be conducted to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative review is bypassed or it is determined that it is more likely than not that the carrying value is greater than the fair value of the reporting unit, a quantitative impairment test must be performed. The quantitative impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit, there is an indication that goodwill impairment exists and a second step is completed in order to determine the amount of the goodwill impairment, if any, that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.
For the purposes of goodwill impairment testing, Supervalu has two goodwill reporting units: Wholesale and Retail; which are the same as Supervalu’s reportable segments. The determination of reporting units considers the quantitative and qualitative characteristics of aggregation of each of the components within the Wholesale and Retail operating segments. The significant qualitative and economic characteristics used in determining our components to support their aggregation include types of businesses and the manner in which the components operate, consideration of key impacts to net sales, cost of sales, competitive risks and the extent to which components share assets and other resources. Goodwill was assigned to the Wholesale reporting unit as of the acquisition date, with no amounts being allocated between reporting units.
The Wholesale reporting unit is primarily comprised of the aggregation of two geographic distribution areas, which are organized based on region components: East and West. Supervalu’s Retail reporting unit is comprised of the aggregation of six retail components under five banners: Cub Foods, Shoppers Food & Pharmacy, Shop ’n Save, Farm Fresh and Hornbacher’s.
The fair values of Supervalu’s reporting units are determined by using both the market approach, applying a multiple of earnings and revenue based on guidelines 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 Supervalu’s industry, capital structure and risk premiums including those reflected in the current market capitalization.
Fair value calculations contain significant judgments and estimates related to each reporting unit’s projected weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. 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. Supervalu has sufficient current and historical information available to support its judgments and estimates. However, if actual results are not consistent with Supervalu’s estimates, future operating results may be materially impacted.
Supervalu performed a quantitative goodwill impairment test during the third quarter of fiscal 2017 that resulted in the write-off of the remaining Retail goodwill. Discount rates in this analysis ranged between 10 percent and 13 percent to discount projected future cash flows for each reporting unit and perpetual growth rates that ranged between 2 percent and 3 percent. For Supervalu’s annual impairment review during the fourth quarter of fiscal 2017, a qualitative assessment was performed on the Wholesale goodwill but did not result in Supervalu proceeding to the first step of the goodwill impairment test.
Management performed sensitivity analyses on the fair values resulting from the discounted cash flow analysis utilizing alternate assumptions that reflect reasonably possible changes to future assumptions. Based upon Supervalu’s analysis of the Wholesale reporting unit, a 100 basis point increase in the discount rate utilized in the discounted cash flow analysis would not have resulted in the Wholesale reporting unit failing step one of the impairment test. Additionally, a 100 basis point decrease in the estimated perpetual sales growth rates utilized in the discounted cash flow analysis would not have resulted in the Wholesale reporting unit failing step one of the impairment test. The fair value of Supervalu’s Wholesale reporting unit was substantially in excess of its carrying value. If Supervalu’s stock price experiences a significant and sustained decline, or other events or changes in circumstances, such as a material shortfall of operating results to plan, Supervalu would reassess the fair value of Supervalu’s reporting units to their carrying value.
Benefit Plans
Supervalu sponsors pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. Supervalu’s defined benefit pension plan, the SUPERVALU Retirement Plan, and certain supplemental executive retirement plans were closed to new participants and service crediting ended for all participants as of December 31, 2007.

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While Supervalu believes the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The determination of Supervalu’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. Refer to Note 10—Benefit Plans in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information related to the actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.
Supervalu reviews and selects the discount rate to be used in connection with its pension and other postretirement obligations annually. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. Supervalu sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
Supervalu’s expected long-term rate of return on plan assets assumption is determined based on the portfolio’s actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance. The assumed long-term rate of return on pension assets was 6.5 percent for fiscal 2017 and 2016. The 10-year rolling average annualized return for a portfolio of investments applied in a manner consistent with our target allocations have generated average returns of approximately 8.1 percent based on returns from 1990 to 2016. In accordance with Accounting Standards, actual results that differ from Supervalu’s assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.
For fiscal 2018, each 25 basis point reduction in the discount rate would decrease pension expense by approximately $1 and each 25 basis point reduction in expected return on plan assets would increase pension expense by approximately $5. Similarly, for postretirement benefits, a 100 basis point increase in the healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $2 as of the end of fiscal 2017 and would increase service and interest cost by less than $1. Conversely, a 100 basis point decrease in the healthcare cost trend rate would decrease the accumulated postretirement benefit obligation as of the end of fiscal 2017 by approximately $2, and would decrease service and interest cost by less than $1. Although Supervalu 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.
Amortization of net actuarial loss expense recognition
Effective for fiscal 2018, Supervalu expects to begin recognizing the amortization of net actuarial loss on the SUPERVALU Retirement Plan over the remaining life expectancy of inactive participants based on its determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, Supervalu utilized an over approximately 90 percent threshold established under Supervalu policy. This change did not affect the measurement of total benefit obligations in fiscal 2017, and instead impacts the recognition of certain components of net periodic pension expense prospectively beginning in fiscal 2018. The impact of the change in estimate is an anticipated reduction of the interest and service cost components within net periodic benefit cost in fiscal 2018 by approximately $31 for the defined benefit pension plans.
Full yield curve expense recognition
Effective fiscal 2017, Supervalu adopted the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of Supervalu’s pension and other postretirement benefit plans. Prior to fiscal 2017, the interest and service cost components of pension expense were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period.
Supervalu believes the “full yield curve” approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest and service costs. This change did not affect the measurement of total benefit obligation. Supervalu concluded that the application of the full yield curve approach was a change in estimate and, accordingly, recognized the effect beginning in fiscal 2017. The impact of the change in estimate reduced interest and service cost components within net periodic benefit cost in fiscal 2017 by approximately $22 for the defined benefit pension plans and less than $1 for postretirement benefit plans compared to the fiscal 2016 approach.

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Income Taxes
Supervalu’s current and deferred income 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.
Supervalu 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.
Supervalu’s effective tax rate is influenced by tax planning opportunities available in the various jurisdictions in which Supervalu 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, Supervalu is currently in various stages of audits, appeals or other methods of review with taxing authorities from various taxing jurisdictions. Supervalu establishes liabilities for unrecognized tax benefits in a variety of taxing jurisdictions when, despite management’s belief that Supervalu’s tax return positions are supportable, certain positions may be challenged and may need to be revised. Supervalu 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. Supervalu also provides interest on these liabilities at the appropriate statutory interest rate. The actual benefits ultimately realized for tax positions may differ from Supervalu’s estimates due to changes in facts, circumstances and new information. As of February 25, 2017 and February 27, 2016, Supervalu had $59 and $70 of unrecognized tax benefits, respectively.
Supervalu 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 Supervalu 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 Supervalu was more-likely-than-not to realize the net deferred tax assets, the applicable portion of the valuation allowance would reverse. Supervalu had a valuation allowance of $1,196 and $1,408 as of February 25, 2017 and February 27, 2016, respectively.
Included in discontinued operations is the recognition of the additional tax basis in the shares of NAI offset by a valuation allowance on the estimated capital loss. In fiscal 2017, Supervalu utilized a portion of the capital loss offset by a matching release of the valuation allowance on the capital loss.  Supervalu has recorded a valuation allowance against the remaining capital loss as there is no evidence that the capital loss will be used prior to its expiration in fiscal 2019.
Self-Insurance Liabilities
Supervalu uses a combination of insurance and self-insurance for workers’ compensation, automobile and general liability costs. It is Supervalu’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, Supervalu 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.
If, in the future, Supervalu were to experience significant volatility in the amount and timing of cash payments compared to its earlier estimates, Supervalu would assess whether to continue to discount these liabilities. Supervalu had net self-insurance liabilities of approximately $67, net of the discount of $5, and $69, net of the discount of $5, as of February 25, 2017 and February 27, 2016, respectively. For the claims that occurred during the fiscal year ending February 25, 2017, each 25 basis point change in the discount rate would impact the net self-insurance liabilities by less than $1.

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OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
Supervalu has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of February 25, 2017. Supervalu is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. Supervalu is also a party to a variety of contractual agreements under which it may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. Refer to Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding Supervalu’s outstanding guarantees and contingent liabilities.
Multiemployer Benefit Plans
Supervalu contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement.
Expense is recognized in connection with these plans as contributions are funded, in accordance with Accounting Standards. Supervalu made contributions to these plans, and recognized expense, of $43, $43 and $39 in fiscal 2017, 2016 and 2015, respectively. 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 Supervalu’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 of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if Supervalu were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, it could trigger a partial or complete withdrawal that could require Supervalu to make withdrawal liability payments to the fund.
Based on the assessment of the most recent information available from the multiemployer plans, Supervalu believes that most of the plans to which it contributes are underfunded. Supervalu is only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability of Supervalu. However, Supervalu has attempted, as of February 25, 2017, to estimate its “proportionate share” of the underfunding of multiemployer plans to which Supervalu contributes, based on the ratio of its contributions to the total of all contributions to these plans in a year. As of February 25, 2017, using methods Supervalu believes are consistent with those used by the plans to establish the underfunded position, the estimate of Supervalu’s share of the underfunding of multiemployer plans to which it contributes was $598, pre-tax, or $368, after-tax. This represents an increase in Supervalu’s estimated proportionate share of the underfunding of approximately $11, pre-tax, or $9, after-tax, as of February 25, 2017, compared to February 27, 2016. The estimate is based on the most current information available to Supervalu including actuarial evaluations and other data, and may be outdated or otherwise unreliable. Supervalu’s proportionate share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who manage the plans’ benefit payments and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. This share of underfunding does not represent a multiemployer pension withdrawal obligation.
Company contributions can fluctuate from year to year due to store closures and reductions in headcount. In fiscal 2018, Supervalu expects to contribute approximately $40 to $50 to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market conditions. Furthermore, if Supervalu were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, it could trigger a partial or complete withdrawal that would require Supervalu to record a withdrawal liability. Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with Accounting Standards.
Supervalu also makes contributions to multiemployer 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 Supervalu intends, Supervalu’s Selling and administrative expenses could increase in the future.

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Refer to Note 10—Benefit Plans in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding the plans in which Supervalu participates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 1—Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K under the caption “Recently Issued Accounting Standards” for a discussion of other recently issued accounting standards not yet adopted by Supervalu, and for which Supervalu is currently evaluating their impact on its consolidated financial statements.
CONTRACTUAL OBLIGATIONS
The following table represents Supervalus significant contractual obligations as of February 25, 2017:
 
Payments Due Per Period
 
Total
 
Fiscal 2018
 
Fiscal 2019-2020
 
Fiscal 2021-2022
 
Thereafter
Contractual obligations(1)(2):
 
 
 
 
 
 
 
 
 
Long-term debt(3)
$
1,274

 
$

 
$
524