Superdevalued

It started as a tiny inventory issue four years ago, no big deal. So why has their stock taken a billion-dollar tumble? And why won’t anybody just say it like it is? It’s not exactly Enron, but there’s something funny going on at Minnesota’s venerable, publicly-owned grocery supplier.

The Hopkins Police Department is headquartered in an unimposing brick building just off Mainstreet. From here, you can almost see the towering concrete warehouses operated by Supervalu, the suburb’s largest employer. Inside the station, the atmosphere is subdued, like a doctor’s office staffed by an exceedingly polite support staff.

But the friendliness dissolves into a stoic hostility when I ask whether or not there have been any recent arrests at Supervalu. Suddenly, nobody wants to talk. I’m not one to pester law enforcement, but there’s something I really need to know. “Hypothetical.” I suggest. “If twenty million dollars disappears in Hopkins, do you people hear about it?”

“Was it yours or Supervalu’s?”

“Mine.”

As a stock market investor, I want cash flow instead of flash, steady performance instead of inexplicable growth. Even during the so-called Internet Boom of the late 1990s, I preferred staid “old economy” industries such as banking, insurance, and wholesaling to dot-com and telecom high flyers. I may not have charted the gains of high tech investors, but I definitely avoided their losses.

So it was with some surprise when, on June 26, 2002, I noticed a precipitous 22 percent single-day decline in Supervalu, one of my best-performing stocks over the last year. Only a month earlier, this stalwart of the grocery wholesale business hit a 52-week high of $31.18. Now it was at $21.95, having lost nearly $800 million in value in a single day. I was completely bewildered. That’s the sort of loss that I associate with soon-to-be insolvent dot-coms, not grocery stores. (As of Oct. 23, it was $16.93.)

I logged into my E*Trade account and searched through any company news pertaining to Supervalu. I expected to see some announcement of wrongdoing. But the only news item was a June 25 headline (released after the markets had closed) that read, “Supervalu Inc. Announces Charge and Preliminary First Quarter Fiscal 2003 Results; Reaffirms Full Year Earnings Per Share Guidance of $2.20 to $2.35.”

At first, I didn’t even notice the word “charge” amid all of the happy earnings news. But when I did, I got worried. “Charge” is a dangerous term in today’s corporate environment. Enron reported a $600 million earnings restatement charge that forced bankruptcy. On the same day as Supervalu’s charge, Worldcom announced a charge that would lead to criminal indictments and insolvency. “Charge” means money that was on the balance sheet is no longer on the balance sheet. “Charge” is a polite way to describe the process of money disappearing.

“Supervalu Inc. today announced a charge resulting from intentional inventory misstatements by a former employee.” There was no elaboration on what constituted an “intentional inventory misstatement,” except to note that its value was approximately $20 million (it would later be certified as $17.1 million, after-tax), and that it was committed by a single isolated individual in Supervalu’s pharmacy unit over a four-year period. Neither the name of the employee nor her motive were given (I would later learn that the employee was female). As to where the money went, that too was not explained. Neither was there any explanation as to why Supervalu required four years to notice the misstatements, or when they first knew about them. And nowhere was there an indication as to whether Supervalu would be pursuing criminal or civil action against the wrongdoer.

Disclosure and transparency typically apply only to numbers, and not to the circumstances surrounding those numbers. So, in a perverse sense, Supervalu had every incentive to keep it secret, if only to keep reporters from contacting the individual to determine just how she managed to elude detection for four years. Supervalu CEO Jeffrey Noddle would later reveal to CNBC that the employee in question voluntarily revealed the misstatements prior to an audit. So I had to wonder: what’s the problem with releasing her name? If Noddle was telling the truth, a potential libel suit could not be among the reasons for withholding information.

“The charge, when measured against the substantial cash flow, inventory and earnings of the company… does not materially affect the financial condition or results of Supervalu,” continues Noddle in the official press release. That is, according to the CEO, a $20 million charge is inconsequential compared to Supervalu’s $6 billion in annual revenue. So far so good.

But the charge did materially affect the value of the stock, tracking a sell-off that knocked 30 percent off Supervalu’s market capitalization (about $1 billion in shareholder equity) in the weeks following the announcement. In fact, on the day following the restatement, Supervalu experienced its greatest single-day trading volume in five years, while the market’s overall trading volume that day was the lowest it had been to date in 2002. The Dow index remained essentially even.

Stocks simply don’t decline 22 percent with massive volume without precipitating factors. Yet the only Supervalu-related news within weeks of the decline was the announcement of the earnings restatement. “It wasn’t the twenty million that killed the share price,” explained a former CFO who has never worked with Supervalu. “It was that people were left wondering, ‘What else is out there that we haven’t heard about? Is it gonna be another Enron?’”

When Enron collapsed, the company’s officers made every effort to assure shareholders that nothing illegal had been done. Supervalu did the same, going so far as to suggest that a missing $20 million was nothing more than a violation of company policy, perhaps akin to using an office copier for the weekly football pool. Noddle says, “We are severely displeased that this former employee deliberately violated well-defined policies… we will not tolerate this unacceptable behavior at Supervalu.”

Shareholders lose $1 billion, and the CEO chalks it up to a violation of company policy? A missing $20 million is immaterial because the company makes so much money? It’s the sort of corporate arrogance that’s been pushing small investors out of the markets altogether. Like my CFO friend predicted, I began to wonder: What else was hidden in Supervalu’s balance sheet? Was there some significance to the fact that it took four years for the company to notice the problem? Should I sell before this thing really tanks?