NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Statement of Registrant

The accompanying condensed consolidated financial statements of SUPERVALU INC. (“SUPERVALU” or the “Company”) for the third quarter and year-to-date ended December 1, 2012 and December 3, 2011 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial condition and results of operations for such periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2012. The results of operations for the third quarter and year-to-date ended December 1, 2012 are not necessarily indicative of the results expected for the full year. The Condensed Consolidated Balance Sheet as of February 25, 2012 has been derived from the audited Consolidated Balance Sheet as of that date.

Accounting Policies

The summary of significant accounting policies is included in the Notes to Consolidated Financial Statements set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2012.

Fiscal Year

The Company’s fiscal year ends on the last Saturday in February. The Company’s first quarter consists of 16 weeks, while the second, third and fourth quarters each consist of 12 weeks. Because of differences in the accounting calendars of the Company and its wholly-owned subsidiary, New Albertson’s, Inc., the accompanying December 1, 2012 and February 25, 2012 Condensed Consolidated Balance Sheets include the assets and liabilities related to New Albertson’s, Inc. as of November 29, 2012 and February 23, 2012, respectively.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

During the first quarter of fiscal 2013, the Company revised the presentation of its reportable segments, which resulted in the reclassification of certain prior year amounts in the Company’s Condensed Consolidated Segment Financial Information to conform to the current period’s presentation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company’s banking arrangements allow the Company to fund outstanding checks when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts are recorded in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets and are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows. As of December 1, 2012 and February 25, 2012, the Company had net book overdrafts of $279 and $268, respectively.

Inventories

Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventory consists of finished goods.

The Company uses one of either replacement cost, weighted average cost, or the retail inventory method (“RIM”) to value discrete inventory items at lower of cost or market before application of any last-in, first-out (“LIFO”) reserve. As of December 1, 2012 and February 25, 2012, approximately 77 percent and 78 percent, respectively, of the Company’s inventories were valued under the LIFO method.

As of December 1, 2012 and February 25, 2012, approximately 39 percent and 42 percent, respectively, of the Company’s inventories were valued under the replacement cost method before application of any LIFO reserve. The weighted average cost and RIM methods of inventory valuation together comprised approximately 38 percent and 36 percent of inventory as of December 1, 2012 and February 25, 2012, respectively, before application of any LIFO reserve.

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 being 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.

The Company uses one of either cost, weighted average cost, RIM or replacement cost to value certain discrete inventory items under the first-in, first-out method (“FIFO”). The replacement cost approach under the FIFO method is predominantly utilized in determining the value of high turnover perishable items, including Produce, Deli, Bakery, Meat and Floral.

As of December 1, 2012 and February 25, 2012, approximately 19 percent and 18 percent, respectively, of the Company’s inventories were valued using the cost, weighted average cost and RIM methods under the FIFO method of inventory accounting. The remaining 4 percent of the Company’s inventories as of December 1, 2012 and February 25, 2012 were valued using the replacement cost approach under the FIFO method of inventory accounting. The replacement cost approach applied under the FIFO method results in inventories recorded at the lower of cost or market because of the very high inventory turnover and the resulting low inventory days supply for these items of inventory.

Impairment of Long-Lived Assets

The Company monitors the recoverability of its long-lived assets such as buildings and equipment, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, including current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or the Company’s plans for store closures. When such events or changes in circumstances occur, a recoverability test is performed by comparing projected undiscounted future cash flows to the carrying value of the group of assets being tested.

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 discounted future cash flows.

For long-lived assets that are classified as assets held for sale, the Company recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the estimated fair value. Fair value is based on current market values or discounted future cash flows using Level 3 inputs. The Company estimates fair value based on the Company’s experience and knowledge of the market in which the property is located and, when necessary, utilizes local real estate brokers.

During the second quarter of fiscal 2013, the Company announced the closure of approximately 60 non-strategic stores, resulting in an impairment of $35 on certain of these stores’ long-lived assets.

The Company groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets, which historically has been at the geographic market level.

In response to leadership changes during the second quarter of fiscal 2013 and strategic decisions, the Company initiated the evaluation of its current long-lived asset policy of assessing cashflow and grouping long-lived assets at the geographic market level.

During the initial review of its current policy during the second quarter of fiscal 2013 the Company determined it would be more appropriate to evaluate long-lived assets for impairment at the store level for certain geographic markets which have continued to show higher indicators of economic decline. During the third quarter of fiscal 2013 the Company identified a further geographic market at which it would be more appropriate to evaluate long-lived assets for impairment at the store level, and recorded a pre-tax non-cash impairment charge of approximately $2.

The Company determined that impairment of its long-lived assets for certain asset groups had occurred based on reviewing estimated cash flows for the asset groups, which were less than their carrying values. The Company’s estimate of undiscounted cash flows attributable to the asset groups included 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.

During the second quarter and third quarter of fiscal 2013, based upon the results of impairment testing which indicated the carrying value exceeded the fair value of the asset groups, the Company recorded a pre-tax non-cash impairment charge of approximately $24 and $2, respectively, related to equipment, capitalized lease assets, leasehold improvements, and favorable operating lease intangible assets in the Retail Food segment. This charge is a component of Selling and administrative expenses in the Condensed Consolidated Statements of Earnings.

Due to the ongoing business transformation and highly competitive environment, the Company will continue to evaluate its long-lived asset policy and current asset groups, to determine if additional modifications to the policy are necessary. Future changes to the Company’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.

Net Earnings (Loss) Per Share

Basic net earnings (loss) per share is calculated using net earnings (loss) available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted net earnings per share is similar to basic net earnings per share except that the weighted average number of shares outstanding is after giving effect to the dilutive impacts of stock options, restricted stock awards and other dilutive securities. In addition, during fiscal 2012 for the calculation of diluted net earnings per share, net earnings are adjusted to eliminate the after-tax interest expense recognized during the period related to contingently convertible debentures, if dilutive.

The following table reflects the calculation of basic and diluted net earnings (loss) per share:


	Third Quarter Ended					Year-to-Date Ended
	December 1, 2012		December 3, 2011			December 1, 2012			December 3, 2011
Net earnings (loss) per share—basic
Net earnings (loss) available to common stockholders	$	16	$	(750	)	$	(54	)	$	(616	)
Weighted average shares outstanding—basic		212		212			212			212
Net earnings (loss) per share—basic	$	0.08	$	(3.54	)	$	(0.26	)	$	(2.91	)

Net earnings (loss) per share—diluted
Net earnings (loss) available to common stockholders	$	16	$	(750	)	$	(54	)	$	(616	)
Weighted average shares outstanding—basic		212		212			212			212
Dilutive impact of options and restricted stock outstanding		2		—			—			—

Weighted average shares outstanding—diluted		214		212			212			212
Net earnings (loss) per share—diluted	$	0.08	$	(3.54	)	$	(0.26	)	$	(2.91	)

Options of 25 shares were outstanding during the third quarter ended December 1, 2012, but were excluded from the calculation of diluted earnings per share because they were antidilutive. Options and restricted stock of 21 shares were outstanding during the year-to-date ended December 1, 2012, but were excluded from the calculation of diluted earnings per share because they were antidilutive when applied to a net loss. Options and restricted stock of 20 and 21 shares were outstanding during the third quarter and year-to-date ended December 3, 2011, respectively, but were excluded from the calculation of diluted net loss per share as the effect of their inclusion would be antidilutive when applied to a net loss.

Stockholders’ Equity

On July 17, 2012, the Company changed the par value of the Company’s common stock from $1.00 to $0.01 per share. This amendment resulted in a reduction to Common stock of approximately $228 and a corresponding increase of $228 to Capital in excess of par value in the Condensed Consolidated Balance Sheet as of September 8, 2012. In addition, on July 11, 2012, the Company announced that it had suspended the payment of the regular quarterly dividend. The Board of Directors will continue to review its dividend policy annually.