SpartanNash Co (SPTN) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spartan Stores Inc. fiscal 2004 second-quarter earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Craig Sturken, President and CEO of Spartan Stores. Sir, the floor is yours.

Good morning, everyone, and thank you for calling into our fiscal 2004 second-quarter earnings conference call. If you don't already have a copy of the earnings release, you can call our offices at 616-878-8319, and ask for Jean Kirkbrid (ph), and she will be glad to fax to you a copy.

With me this morning are other members of our management team including Executive VP and CFO, David Staples, Executive VP of Marketing and Merchandising, Dennis Eidson, and our Executive VP of Supply Chain, John Summa Bella (ph).

Before we begin discussing our quarterly financial and operational performance, I must remind you that our comments today will contain forward-looking statements. These forward-looking statements may contain plans, expectations, estimates and projections that involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to, competitive pressures among food retail and distribution companies, general economic and market conditions, and other factors described in our earnings announcement and annual report on Form 10-K and other filings with the SEC. Spartan Stores disclaims any intention or obligation to update or revise any forward-looking statements.

During this call, I will provide you with highlights of our second-quarter financial results, and then review the continuing progress we are making on our top four priorities. Dave Staples will cover details of the financial results, and I will then conclude with a review of our plans for the second half of fiscal 2004.

Our fiscal 2004 second-quarter financial results showed marked improvement on both a year-over-year basis and on a sequential basis. Sales growth, one of our top priorities, has improved significantly for the past two consecutive quarters and this positive sales trend is continuing. Our second-quarter consolidated sales increased 3.8 percent. Second-quarter retail and distribution sales increased 3.9 and 3.7 percent, respectively. This achievement represents the second consecutive quarter of sales growth for both businesses segments.

Comparable store sales in our retail segment increased for the second quarter in a row, as comparable store sales grew 0.7 percent in the second quarter. We are pleased to have achieved these results despite difficult competitive and economic market conditions. Retail sales growth occurred across a broad segment of our store base, but we continue to realize significant growth in our Pharm deep discount drug store format. The sales improvement in these stores is particularly -- is principally -- the result of our improved promotional programs, including more frequent and advertising circulars and the transfer of previous Foodtown customers to Pharm stores. Collectively, we believe these results provide clear evidence that our renewed marketing, merchandising and category programs are producing the initial expected sales growth.

We are not sacrificing profits at the expense of sales growth, as we reported 7.3 million in operating profits and 1.8 million in consolidated net earnings for the second quarter. This represents the first quarter of consolidated net earnings from the past twelve months.

Both our retail and distribution segments reported operating earnings for the quarter. Second quarter operating earnings for the retail segment were 4.3 million, and our distribution segment reported 3.0 million of operating earnings. This sequential improvement in operating earnings over the past quarters was due largely to higher sales volume, improving retail gross margins, and better fixed cost leverage.

We also made progress on two other key priorities. Reducing our operating costs and lowering our long-term debt balance. Certain administrative costs were lower in the second quarter, but they were offset by higher advertising costs, higher insurance costs, and the costs associated with new stores. The incremental operating costs associated with these three new stores will diminish during the third quarter as these stores have been open for one year midway through the third quarter.

During the second quarter, we also made significant progress in the reduction of our long-term debt. Our balance declined more than 15 percent to 141.4 million as of September 13, '03, compared with 167 million at the end of the fiscal 2004's first quarter.

I will close my opening remarks by stating that we are very pleased to have achieved two consecutive quarters of sales growth and to have reported our first operating profit and bottom-line net earnings in the past twelve months. Our desire to become a consumer-centric and cost-conscious organization is just beginning to unlock the significant growth potential that we believe exists in our company.

I will now let Dave give you a more detailed at the second quarter financial performance.

Thank you, Craig, and good morning, everyone. This morning, I would like to update you on some of our initiatives and then cover the operating results. At the end of our second quarter, we completed the divestiture of our Foodtown operation, realizing proceeds of 42.1 million from the sale of the asset. The proceeds were used to reduce long-term borrowings, operating liability, and pay-related transaction expenses. Additionally during the second quarter, we decided to pursue the divestiture of our remaining convenience distribution operations. Consequently, the results of these operations have been classified as discontinued in our financial statements for all periods presented.

Consolidated sales for the second quarter increased 3.8 percent, to 491.4 million from 473.3 million in last year's comparable quarter. The increase is the result of a continuing improvement in both our retail and distribution businesses.

Gross margin for the second quarter declined 10 basis points to 19 percent from 19.1 percent in the second quarter of last year, while improving 50 basis points over the fiscal 2004 first quarter. The gross margin for our retail segment improved in the second quarter and was the primary influence over the sequential improvement in the overall gross margin rate.

Second quarter operating expenses increased 4.7 million to 86.1 million from last year's 81.4 million. The increase was due primarily to the increasing costs, as Craig mentioned, including advertising, incremental operating costs of three new stores opened in our fiscal 2003's third quarter. As a percentage of sales, operating expenses rose to 17.5 percent compared to 17.2 percent a year earlier. We expect our operating expenses to approximate the previous year's amounts by the end of the fourth quarter, due to the cycling of the new stores, the elimination of the joint retail and distribution marketing program that was in the previous year, and the effect of our prior cost-reduction initiatives. The second quarter is our peak sales volume quarter, so we would not expect our fixed cost leverage to be as robust during the remaining two quarters.

As anticipated, we have reported improved second quarter operating earnings of 7.3 million. These results compare with operating earnings of 9.3 million for the corresponding period last year. This is a substantial improvement over fiscal 2004's first quarter operating loss of 892,000. And it reverses the recent trend of quarterly operating losses. On a year-over-year basis, second quarter operating results declined 2 million, primarily due to stronger promotional spending and the higher operating costs of the stores open for less than a year.

We reported second quarter net earnings of 1.8 million, or 9 cents per diluted share, compared to a net loss of 600,000, or 3 cents per diluted share in the corresponding period last year. This year's second quarter results included a $900,000 loss from discontinued operations compared with a $4.6 million loss from discontinued operations in the same period last year. As I just mentioned, the second quarter is traditionally our strongest quarter due to seasonal sales increases at our retail stores in Northern Michigan.

Turning to our business segments, second quarter grocery distribution sales increased 3.7 percent to 260.9 million from 251.5 million last year. The increase was due principally to improved penetration with existing customers, but also included incremental sales from the addition of new customers. We are pleased to see that our strategies targeted for incremental sales gains are generating sustained sales growth as this is our second consecutive quarter of year-over-year distribution sales growth.

Second quarter operating income for the grocery distribution segment declined to $3 million from 3.8 million last year. The decline was primarily due to the higher SG&A costs referred to earlier. Sales in our retail segment increased 3.9 percent to 230.5 million from last year's 221.8 million. And comparable store sales increased 0.7 percent. This increase represents the second consecutive quarter of comparable store sales improvement, and brings our performance in line with current industry averages.

As Craig mentioned, our comparable store sales results are favorable across a broad segment of our store base, but we have particularly strong retail sales at our Pharm operations. This is the second consecutive quarter of improving sales at these stores, and the improvement is a result of our ability to convert Foodtown customers to Pharm customers, and our implementation of more effective merchandising and marketing programs. We expect to see favorable retail sales trends continue for the remainder of the year.

Our retail segment reported operating earnings of 4.3 million with operating earnings -- compared with operating earnings of 5.5 million in the corresponding period last year. The decline in operating earnings was principally due to the more aggressive promotional and merchandising program, and higher costs associated with new stores. While our overall gross margin rate from the segment were lower than last year, it is important to note that we have made significant improvements to our gross profit rates over the past three quarters. We expect to approximate these current run rates for the remainder of the year, which would be a significant improvement over the prior year's third and fourth quarters.

We continue to make significant progress reducing our outstanding long-term debt during the second quarter. Our long-term debt balance, including current maturities, declined 15.6 percent to 141.4 million at September 13th, 2003 compared with 167.6 million at June 21st, 2003. During the quarter, we received 120-day waiver of our debt covenants, which extends through January 12, 2004. We continue to evaluate and work to formalize a long-term financing structure that is best suited for the current companies current operations. Are working capital needs declined significantly over the second quarter due primarily to her reduction in our inventory balance which declined by nearly 44 percent. To 103.9 million as of September 13th, detained, 2003. Compared with 184.6 million on September 14, 2002. The inventory reduction was a result of the convenience store distribution and retail store divestitures, product line rationalization efforts, and more prudent and disciplined buying strategy. We expect inventory balances to increase slightly due to the holiday shopping season in the third quarter and the higher sales volume experiencing.

For fiscal 2004 we continue to expect capital expenditures to approximate 15 million, with depreciation and amortization of approximately 27 million. We are on track to continue the recent sales growth trend, trend, and expect gross margin rates to remain consistent for the remainder of the fiscal year for individual business segment. This will result in a higher overall rate when compared to last year in the upcoming quarters. This leaves us to re-enter rate are expect an our expectation for a return on a annual out operating profits in fiscal 2004. I will now turn the callback to Craig, period Craig.

Thanks day. It is stated earlier, we are extremely pleased to have achieved our second consecutive quarter a financial and operational improvements. But we still have a significant amount of work to do before realizing our full gross potential. We realize the substantial fight and operating improvement pretty improvement despite four supercenter openings in her Michigan market over the past 18 months. As we look out over the next twelve months, we expect additional supercenter opener center openings in our retail market, but will continue to build on our sales growth momentum by refining our marketing, detained, merchandising, and category management strategy or a new. In this momentum in a difficult competitive environment, will require great effort. But we continue to have this substantial opportunities for improvement.

We have quickly reversed our previous sales trends and have achieved sales growth in our last two quarters. This more favorable trend is the result of the result of the basic changes made to our marketing, merchandising, and category practice in the fiscal 2003's fourth quarter and early in fiscal 2004. Simply put, we are offering our retail and distribution customers better merchandise selections at better price points. And we are executing much better operationally. We've also made a concerted effort to improve and update the look of our Pharm stores in order to offer a more inviting shopping experience. Certain retail sales have also been remodeled and reprogrammed to increase the amount of selling space to make more efficient use of our existing retail space. While there is considerable work to do, we believe these changes are having a positive influence on our sales and profit results.

Our efforts to visit existing, former and prospective distribution customers are beginning to yield positive results, as we have increased our sales penetration with existing independent customers and have also gained new accounts. As I have stated before, we are listening to our customers and implementing service solutions that make them more competitive retailers. Our efforts to aggressively secure new accounts and expand sales of existing customers is a permanent change in our business strategy that we expect to produce sustainable sales growth.

On the retail side, we continue to make dramatic improvements in our sales performance during the second quarter. The initial changes made to our retail marketing and merchandising practices were intended to arrest the unfavorable sales that have developed during fiscal 2003, and those changes have been very effective. Additional changes to our programs will continue to build on this positive sales momentum. And as I stated in our last call, the opportunities for further improvements are significant. These opportunities will be realized as we leverage our retail knowledge and expand our use of effective category management practices, while making better use of market intelligence to become a consumer-centric organization. Fundamentally, consumer demand is now becoming the principal driver of our marketing and merchandising programs.

We also continue to focus our organization on reducing operating costs. We expect operating costs to move closer to industry standards as we realize the full benefits of staff reductions that took place earlier in this fiscal year. We are also working to transform our corporate culture to be more cost-conscious with stricter budgetary and spending controls and program performance accountability standards.

In summary, although a considerable amount of work remains ahead of us, we believe that our business is stabilizing and we have moved closer to sustainable sales and profitability growth. We have experienced a rapid operational turnaround, and we will continue to build on this positive momentum. We expect our sales trends to continue improving, and we are working diligently to reduce our operating costs without affecting customer service levels. We have and will continue to de-leverage our balance sheet by applying incremental operating cash flow improvements to reduce our outstanding debt.

Again during this call, I will restate our four primary organizational priorities central to our future success. Broadly speaking, the priorities are to improve sales growth; reduce operating costs; strengthen our financial position; and to make category management and customer focus a way of life throughout our organization.

We will now open the call for your questions.

(OPERATOR INSTRUCTIONS) Our first question is coming from Chuck Cerankosky of McDonald Investments.

Good morning, gentlemen. Looking at the increase in sales in the distribution segment, how much of that is related to Fleming and some of the changes in the distribution arrangements they had? And then, with what looks like Kroger using the continuity program against D&T Lagrude (ph) in the Detroit market, how is that impacting your retailer customers and distribution as well?

Chuck, first of all, the Fleming issue has very little impact on us whatsoever. As you know, they have limited penetration in Michigan. And we just can't quantify any benefit form the confusion related to Fleming. As far as -- our wholesale business is extremely robust at this point in time. And actually, the eastern part of the state is as good or maybe even slightly better than the balance of the state of Michigan for us. We have picked up new customers, particularly on the east side of the state. And I would guess we probably have, on an annualized basis, added as much as $40 million in wholesale business.

Is that strength due to anything in particular that you are doing? Or are the wholesale customers unhappy with their previous arrangements?

Chuck, this is Dennis. Are you talking about the new business that we picked up?

Yes.

I think it really is more related to a focus on attracting new customers. In the last six months, we put a more dedicated effort in place, (indiscernible) and his team to prospect new customers, and we are getting a very warm reception at the moment. I think the marketplace is looking for a customer-focused alternative as it relates to future source of supply.

Thank you.

(OPERATOR INSTRUCTIONS). Thank you. Our next question is coming from Jamie Wylan (ph) of Wylan Management.

Hi, fellows. Nice turnaround. A couple of questions on the real estate side, are there -- have there been any additional sales that have been completed in the quarter or contemplated in the future?

Jamie, as you know, we've had a program for some time, as we've been moving on our real estate. We had a few small sales, totaling probably $1.5 to $2 million in total proceeds. We continue to market our various parcels of real estate. And so, we do expect to continue to have sales.

How much do you still have available to be sold?

Oh, in the say $10 to $20 million range.

Okay. Of the previous sales of businesses, are there any residuals, either positive or negative, that will flow into the company over the next twelve months?

No, at this point, everything is fairly well wrapped up.

Okay. And when you talk about the subsequent quarters, you say sales levels will be higher, gross margins will be higher. Will you have your SG&A in line enough to be able to say that profitability should be increased over the current quarter?

Well, that's a tough question. Let me just try to answer that. First of all the, second quarter is one of the better quarters for us because of the -- the summer business that we have in what we call the north country. So it would be difficult for us to say that we would do better in the third and fourth quarter than we have done in the second quarter overall. However, we believe that the core profitability in the stores in the western and central part of the states will continue to improve because of the margin improvements and the cost improvements that we have put in place and will continue to put in place.

Are you comfortable yet enough to say that you could be in the black in those two quarters?

Jamie, from an operating perspective, we will be profitable in our opinion for both of those two quarters. From a bottom-line perspective, third quarter, no; third quarter, close; fourth quarter, we don't expect that.

I am a little bit more positive; I'm a little bullish about it.

Within your operating environments, have there been any new openings? Are there store closures? Or how are the dynamics changing?

There are three supercenters under construction in the state of Michigan at this point in time. Wal-Mart has a store up in West Blanche (ph); they have a store in Gaylord; and Meyer has a store in Rockford. We are preparing our game plan against these stores; and we are totally prepared. By the way, that's the only three locations where there is any kind of physical construction at this time.

Okay. On the wholesale distribution side, how would you characterize this -- you picked up 40 million or so of new business. How would you characterize the type of operators? Are they single or multi-unit operators? And as you look forward, do you have the potential to pick up any decent chunks of business on the wholesale side?

Yes, most of the business that we picked up is through multiple operator groups -- people that see the value-added position that Spartan offers. And I want to make that point. One of the things that we have determined as part of our strategic plan going forward is that Spartan would be a value-added supplier as opposed to just being able to ship product at a low cost. We think that our point of difference will be -- from a competitive standpoint -- our point of difference will be offering our retailers more than just product at a low cost, but that we would offer them concepts, marketing, category management, etc., that will create a point of difference for us.

I would still think that someone switching from wholesale to wholesale is more of a relationship being comfortable with people as opposed to being able to quantify those differences that you just talked about.

Exactly right. I agree with that.

Are there any -- are you in discussions with any reasonable size groupings of chains at this moment?

Well, we are constantly mining new business. And we are in discussion with several situations that would be a good opportunity for us.

Okay. Thanks and nice job.

(OPERATOR INSTRUCTIONS). We have a follow-up question coming from Chuck Cerankosky of McDonald Investments.

My follow-up is looking at your retail business. Are the customers showing any signs of trading up, or showing at least increased willingness to spend on discretionary items, or trade up within departments?

I think it's pretty difficult to conclude that we are seeing a trading up or a trading down. What we have seen with the more recent promotional programs that we have put on the street is a propensity for the consumer to reach out for a value. And as we've begun focusing on more consumer-centric items in our programming, we've begun to move the needle on the top line. I am extremely pleased to say that our customer count on a weekly basis continues to be very positive. So I think more than being able to quantify the trading up or down, we think they like the programs that we are putting on the street. And that is giving us the top line momentum.

Thank you.

Gentleman, there appears to be no further questions or comments at this time. Would you like to add any closing remarks?

On behalf of Spartan stores, I would just like to thank all of you for calling in and supporting us. And we look forward to talking to you in another three months. Thank you.

Thank you, ladies and gentlemen, for your participation. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.