SpartanNash Co (SPTN) 2005 Q1 法說會逐字稿

Good morning and welcome to Spartan Stores Fiscal 2005 First Quarter Earnings Release Teleconference. At this time all parties have been placed on a listen-only mode and the call will be open for your questions following the presentation. It is now my pleasure to introduce 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 2005 first quarter earnings conference call. If you don't already have a copy of the earnings release you can call our offices at area code 616-878-8319 and ask for Jeanne Curtbright (ph.) and she will be glad to fax you a copy. With me this morning are members of our team including EVP and CFO, Dave Staples; EVP of marketing and merchandizing, Dennis Eidson; EVP of Retail Operations, Ted Adornato; and EVP of Support Services, Mark Eriks.

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 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 on annual report comes Form 10K and the other filings with the SEC.

Spartan Stores disclaims any intention or obligation to update or revise any forward-looking statements. With that said we are very pleased to report another quarter of solid financial and operational improvements. Although, we have made excellent progress over the past 15 months solid growth opportunities remain in front of us. Broadly speaking there had been three fundamental reasons for our success. These three include hiring right people with the necessary retail skills, adapting a fundamentally different and consumer centric business strategy, and lastly focusing all of our organizational resources are excellent on day-to-day execution.

Consolidated net sales increase 2.5% for the first quarter but discerning our fifth consecutive quarter of year-over-year sales growth. The first quarter sales improvement was driven primarily by increases in both our retail and distribution operations. Sales in our retail division increased despite several corporate stores being adversely affected by two super centers that opened in our market during the fourth quarter of fiscal 2004. Our retail sales improvement at our super markets is attributable to more effective marketing and merchandising strategies, improved store level execution, our stores reset programs, and competitive store closures. Day-today sales trend is also a consequence of market share gains made at the expense of other conventional supermarket operators.

Comparable store sales at finer stores were below our expectations than we began cycling the significant promotional activity that our company, the closure of select food [town] locations adjacent to certain Pharm stores and with an increase in direct mail order prescription fulfillment from a [inaudible] auto workers cost containment initiative that has affected prescription sales at our retail stores.

We have however seen an improving profit trend in the [Pharm] stores because of the reduced promotional expenses combined with the incremental sales coming from the previous year. We are pleased to report a first quarter operating profit in both our retail and distribution business segments, as well as consolidated net income. Turning our retail operation to profitability has been a top priority since March of 2003 and we reported a $138,000 operating profit in this division during the first quarter which is a vast improvement, compared to the loss reported last year. We expect to report continued profit improvements as the year progresses. Lastly, John Sommavilla, Executive Vice President of Supply Chain recently left our organization. We are very grateful for John's many years of service and wish him well in his new position as President at Grand Rapids based food manufacturer. We have now replaced this position and have reorganized the responsibilities and absorbed them into our existing organizational structure.

With that overview of the quarter, I will now ask Dave to give you a more detailed look at the first quarter financial performance. I will rejoin the call later to provide more insight about our operational and financial outlook for the remainder of fiscal 2005. Dave.

Thank you, Craig, and good morning. Our first quarter consolidated net sales increased 2.5% compared to the first quarter last year. Sale increase was due to stronger sales in both our retail and distribution businesses, as a result of the factors already covered by Craig. Gross margin for the first quarter decreased 20 basis points to 18.1% compared to the first quarter last year. Gross margin decline was due primarily for the timing of new product launches at our distribution division, and increase in distribution sales as a percentage of consolidated sales.

The gross margin decline, however, was partially offset by an improvement in our retail division gross margin. The improvement was due primarily to our refined promotional merchandising strategy particularly at our Pharm stores. We are very pleased with the progress made in improving our retail gross margin rate. Operating expenses for the quarter declined dramatically compared to the corresponding period last year. As a percentage of sales, operating expenses declined to 17.1% compared with 18.5% in the first quarter last year.

The decline was due to our productivity and cost containment initiatives, the cycling of charges related to the retirement of our former Chief Executive and severance cost associated with previous staff reduction. Also contributing to the decline was lower depreciation expense and improved fixed cost leverage. Again we are pleased to be making substantial progress in our cost structure into alignment with industry standards. We reported first quarter operating earnings of 4.9 million and net earnings of 1.6 million or $0.08 per diluted shares. This compares to an operating loss of 900,000 and net loss of 6.1 million or $0.31 per diluted share in last years first quarter.

Our first quarter net earnings include a loss from discontinued operation of 146,000 which compared with the loss from discontinued operations of 3 million or $0.16 per diluted share in last years first quarter.

This improvement in net earnings is a direct result of the operational improvements already discussed as well as lower interest rates from our debt restructuring effort and a lower investment in working capital.

Turning to our business segments the first quarter grocery distribution sales increased 4.2% is due primarily to new business. The segment sales increase is the fifth consecutive quarter of year-over-year sales growth.

First quarter distribution operating earnings increased significantly from the first quarter last year and will do primarily to higher sales, lower operating cost of productivity [cost initiative] [inaudible] prior year non-recurring charges as previously mentioned.

First quarter retail sales increased 0.6% from last year and comparable store sales increase 1%. The sales increase is also the fifth consecutive quarter of comparable store sales growth in our retail division. The sales increase was due to primarily to more effective and merchandizing programs, story furbishing, product reset initiatives, and continued improvements in store level execution.

Also contributing to the sales increase was higher customer traffic in certain stores given the migration of customer from competing store that closed in Northern Michigan. We have also have found out we record bottle deposits and this contributed a positive 0.4% in the compare of store sales increase in the first quarter. We are now recording bottle deposits as a liability or asset depending on the net returns. Bottle deposits on our previous reporting method were treated as sales from [inaudible] sold and as a reduction to sales when the container was returned. The super market cyclically received more container returns than originally sold, sales were reduced. We believe this reporting method better reflects the true sales performance of our stores.

Retail operating earnings were 138,000 compared to an operating loss of 3 million in the same period last year. The operating improvement was due to higher store sales volumes, higher gross margin rates at our Pharm stores, productivity improvements, and our cost containment measures.

Turning to the balance sheet we continue to reduce our long-term debt and investment of working capital at better leveraging our current assets, improving our overall profitability, and due to the timing and payment and mix of our payables.

We are reiterating our fiscal 2005 forecast to achieve from 1-3% growth in consolidated net sales with comparable store sales ranging from flat to an increase of 1.5%. Overall gross margin as a percentage of sales will be slightly higher than fiscal 2004 by the end of our fiscal 2005 year. We expect operating expenses to be lower than last year on dollar basis and as a percentage of sales due to our productivity initiatives and lower depreciation expense.

Capital expenditures and depreciation and amortization facts make 23 million each and I will now turn the call back over to Craig. Craig

Thanks Dave. We are very pleased with our progress over the past 15 months and are taking decisive actions to continue our strong performance.

I will now discuss areas where we have the strongest growth opportunities. We believe that concentrating efforts in these areas will help strengthen our retail and distribution market position and lead to sustainable sales and profit growth.

Key areas of growth, like category management, of private label programs, increasing our sales penetration with existing distribution customers, and improving overall productivity. As we have been stating for some time, our category and management practices are becoming more methodical and scientific and the results have been very favorable. Category and management will continue to be one of our strongest sales and profit growth drivers as we continue to improve the promotional planning aspect and complete the assortment placement initiative that are currently underway.

To date we have deployed the assortment and in-store placement dimension of category management, to the majority of our non-perishable offerings. After implementing the new practices, more significant target categories have realized an average 12% lift in sales above the market in general. Our revised practices include a reduction in the number of SKU's and lower number of marginal items carried and sold. This also allows us to allocate more space to other products with stronger consumer demands, which in turn, will fuel additional sales growth.

Another area of growth is our private label products. As one of the most widely recognized private label brands in the state of Michigan this asset has great potential. We are aggressively pursuing growth in this area. As stated on our last call, we have joined forces with two of the country's premier private label marketing and procurement companies to assist in meeting our sales growth. We expect to begin realizing results from more aggressive practice by the end of fiscal 2005. Also having excellent opportunity to increase sales penetration with our existing distribution customers. We are working diligently to be a valued partner to our distribution customers by collectively developing strategies that meet the challenges of today's competitive retail environment. We have developed successful retail strategies based on a consumer centric business model and sound category enhancement principles and have demonstrated a willingness and a desire to share those practices with our independent customers. We consider this to be a winning strategy for both parties. In addition to this strategy, we are also working with customers to more closely synchronize our buying and marketing practices to help lower our collective product procurement costs.

While we continually strive to improve our sales growth we will also focus efforts on improving productivity. We expect to launch a new program for shipping products with slower turn rates and specialty item classifications. This program will help improve productivity while providing customers with a better selection of specialty products. In addition it will allow us to eliminate redundant inventory between existing facilities.

Our retail operations is to continue to implement better and more efficient in-store operating practices some of which have already improved in productivity. [inaudible] our designed to provide retail customers with better service while having the right level of service at the right time and could reduce labor where it is not directly benefiting the customer.

From a competitive standpoint, we have had two super centers opened in our market during the fiscal 2004 fourth quarter and expect to have two additional ones opened during the period covering our second and third quarters. We are also keeping a close watch on the market conditions and retail operations in [inaudible] areas. We are well suited and strongly positioned to take advantage of opportunities that may develop in these markets. We will continue to exercise discipline in our spending by containing cost and channeling money where it has the best sales growth and investment potential. We are confident that our renewed business strategy and operational changes will continue to produce value to customers and shareholders. At this time I like to point out that our success is due to the wonderful team of highly confident and dedicated employees that have risen to the challenge of turning Spartan Stores. Our objective is now to achieve leadership in our industry as a premier distributor and retailer. We will now open the call for your questions.

Thank you the floor is now open for questions. If you have a question please press "*" "1" on your touchtone phone. If at any point your question has been answered you may remove yourself from the queue by pressing the "#' key. Questions will be taken in order they are received. We direct that while you pose your question you should pick up your handset to ensure proper sound quality. Please hold as we poll the questions. Thank you our first question is coming from Chuck Cerankosky of Key McDonald.

Good morning gentlemen, great quarter.

Good morning Chuck.

First question I have is about [inaudible] recently announced quarters in a couple of distribution centers not necessarily in space where you have centers but can you talk about that being any type of opportunity for Spartan's distribution business and then secondly can you give us a little more detail on your prescription business not only with regards to the UAW contract in Michigan but also what is going on at Pharm and how you sort of look at the full year prescription business trends.

Chuck, I will respond your question about [Roundy] and Dennis Eidson to respond to your prescription question but let me just give you my take on [Roundy] situation. First of all unfortunately for us again there is no benefit to our business from the fall of a competitor in a given trade area like -- for example like [Fleming] did last year. We didn’t benefit from the [Fleming] thing and it doesn’t look like we would benefit from [Roundy's] choice to exit a trade area because you are looking at very stubborn Indiana and very stubborn Illinois in the areas of service there.

But I do believe that it indicates a capacity for [Roundy] to be more focused on the retail segment of their business. If you look at their release they talked about buying seven stores from this operator in Wisconsin and they paid a lot of money for those stores. I think industries where their strategy is and where they are heading. I would hope that down the road that would board well for Spartan Stores.

Dennis on the prescription business.

Good morning Chuck. Prescription business in Michigan is really quite soft as a result of UAW action with maintenance charge being required to go through mail orders so what we are feeling here is an overall softness proportionately in our core supermarket business we been [inaudible] to stay relatively flat in our script sales so we are feeling pretty good about the overall trend. The Pharm as we mentioned there is a little bit of different scenario, the UAW impact there number 1 and technically a year ago we transferred scripts from Food Towns to The Pharm and it really kind of diluted the sales trend. So we are bolting up against that in our current year and we are slipping on our overall sales but not at a level that would be unnerving to us. We [inaudible] that cycle through that going forward, but it is a cause for some of the softness in our top line at the moment.

Thank you.

Thank you, our next question is coming from Robert Gouch (ph.) of Miller, Taebeck, Robert (ph.).

Hi, good morning. Just a few questions on retail and then one on wholesale please. You guys have stated that you picked up market share in retail and I was wondering if you can say if that share if you know, is from either the multi regional players there in Michigan or some local change or combination of both?

I would characterize our growth from -- I think I can be specific, I think that the retailers that are supplied by [Nash] in the North are affected. We actually compete head-to-head with [inaudible] and we know that they have experienced some softness and in fact, [inaudible] has closed handful of stores during the last 12 months.

Okay, you also mentioned-- okay, back to my second question, just that the weather in general, year-over-year, you got the boost in the vacation spots in Michigan due to the weather, I don’t know how it has been.

Well the weather in Michigan hasn't been very good at all. Summer was like being in San Francisco in July. We have had very moderate weather factor here, May was wet, June was cold, and July has been very mixed although we have a very stable business situation in the North where we entertain a lot of summer guests. We would like to see a little bit more warm weather.

So is it fair to say that, weather was working more in your favor last year.

Yes.

Okay, and finally, just can you comment, I know this could be difficult on your distribution market share and in that if you can in that context -- what have you seen in attrition and whether or not, how-- you know, absent the new business structure is till positively cycling from [Fleming] -- how has been the net on the wholesale business side?

Our wholesale business is very robust. We are very happy with our kind of position. Our market share is growing, we are now looking at [easy] information on wholesale -- information, that we did not have a year or two years ago. We are looking at nice increases in our market share and nice increases in our total sales overall with our distribution business.

And just last question now, just -- great quarter, the 2% is coming in the second or third quarter, could you please give me the cities?

It will be [inaudible] in Lockeford, Michigan and a Wal-Mart in [inaudible] Michigan.

Thank you very, very much. Bye-bye.

Thank you.

Thank you. Our next question is coming from David Untberg (ph.) of Fidelity Investments.

Good morning, guys. Congratulations.

Thank you.

I was just going to ask -- actually the other side of [inaudible] question were the two super centers placed last year? Two, Wal-Marts?

The stores that we are up against are in [West Branch] which is in the central part of the State, [Gaylord] which is more in North towards the [McCall] bridge.

Okay, I am going to run right now, but hope that I can talk to you all later.

Okay.

Alright, thank you.

Thank you.

Thank you. Our next question is a follow-up from Chuck Cerankosky of Key McDonald.

Looking at the cash flow you got a nice reduction of working capital, what does that reflect, is that part of the category management or we see it something else good going on there?

I'll let Dave handle that.

Chuck it is, you know, I think it's a combination of many things, clearly more profitability is driving our improved cash flow if you look at the year-over-year improvements. I think category management as the guys really reflect on the proper mix, proper assortment, and the like and the categories I think they are reducing as we mentioned in the script a little earlier and all those products that really are not the ones we should have in our assortment and I think we end up even though we may have more volume going through I think, you know, and the flight assortment I think we get rid of some of those [mid-tier] products and so I think our category management is helping us manage our working capital and as always at any quarter at a time, you know, that there is timing of the payment of payables and so that has certainly benefited us as something well. Like you know as we continue to improve our returns at distribution which we did again slightly, you know, we keep having inventory closer and closer to the payment day, which I think helps up our cash flow. So, I think it's our working capital management, I think its category management, and I think its time as well.

Great, perhaps the question for you in, looking at retail specially the super market side in Michigan could you talk about the sales mix, especially between higher quality merchandise especially higher and perishables versus which you are seeing over the last couple of quarter and what it has done about consumer behaviors and reactions to your stores?

Well Chuck we are seeing a nice increase in our perishable business in particular meat business is very strong, we have improved our entire go to market approach in the meat type and we've see some very nice increases there. We are very solid in our [inaudible] operations and honestly I think that we continue to have opportunities in our deli and bakery business but overall the perishable category as a collection are doing very well. In addition I think that there has been probably some inflation in the dairy side of the business because of the milk market issue which has changed our mix somewhat but not dramatically but overall we are seeing a change in mix to the more profitable categories which has really helped us

Thank you.

Thank you once again if you would like to ask a question please press "*" "1" on your touch tone phone at this time. Please hold as we poll for questions. Thank you our next questions is coming from Vance Spellman (ph.) of Siegel Capital (ph.).

Hi, good morning and great quarter you guys. As you look at the amount of the debt reduction that we had this past quarter that was kind of a pleasant surprise given what you had suggested earlier as you do kind of a trade off between repaying debt and refurbishing your retail stores what do you see as kind of your most opportunistic and attractive use of your capital amount

Well I -- as we look at that Vance -- this is Dave Staples by the way -- we believe that investing in our stores is always the most prudent use of our capital and we paid down a lot of debt we don't believe at the expense of investing at our stores but through a lot of our restructuring efforts and just more prudent asset management in the working capital areas is really how we believe we present [inaudible] to that debt paid down not by avoiding our stores. But, you know, we believe we have a real strong store base, we are happy with our store base but in any store base you want to continue to keep it fresh and keep it renovated so -- we do look to put more money obviously this year then last year by the guidance we have given into our store base and our overall operation and we think we can continue to see improvements. I don’t know if you have been on prior calls but last year we did minor remodel and reset at our Pharm stores all of 21 and we also completed 16 in our grocery base. This year we anticipate at least another 13 or so in our grocery base and so, out of our 54 store base we are really making some nice improvements in keeping that base strong

Thank you and this is a follow up in terms of the remaining store base. Any thoughts about any additional closures or you are pretty much likely where you are in terms of the remaining stores?

Well we have no plans for any additional closure. We feel that we are in a very solid position with our existing inventory and the fact is we see some opportunities for us to grow our store count with some additional new retail investment.

Thank you very much.

Thank you Our next question is a follow up coming from Chuck Cerankosky of Key McDonald.

Once more guys the question about retail -- you got a profit in the retail segment where you expect profitability I guess to sequentially improve over the course of the year is that sequence going to be driven by certain expenses easing off as you implement category management and other programs in [comp] with sales building or -- are you counting on comps accelerating during the year or perhaps a richer product mix, I am just trying to think about how this things stages as you get up to a more acceptable level of profitability in retail and perhaps you even have a target for it?

Chuck, I'll tell you this there's really three elements to our -- to the bottom line where we are seeing as retail. One is we have nice comp growth of both sales product top line it is not [protected] but its very solid and that something that we can sustain. We are seeing nice margin improvements primarily because category management don’t allow us to attack the area of the cost of goods. Our margin improvements are not coming because the retailers are reducing our investment in promotion. We are really getting now better on the cost of good side which is the best way to improve your margins. We are continuing to see nice benefits on the expense side as we continue to develop on more profit focused organization and frankly we've been pleasantly surprised with our ability to contain expenses during the first part of the -- actually in the end of last year and the first quarter

So you can talk about better cost of goods this is -- by timing better buying opportunities

Absolutely. Altering the product mix, moving the customers buying habits to more profitable categories, re-negotiating some existing deals, we actually installed a program called -- that we called [inaudible] which I think maybe you may have seen it when you were up here Chuck, where we have -- as you enter our stores we offer a handful of select, of very, very solid high level, highly recognized demand items at a very, very good price point, and we are negotiating a much better cost situation for the manufacturers to be able play in that, it's really helpless.

Thanks Craig.

Thank you, our next question came is coming from Robert Gouch (ph.) of Miller, Taebeck, Roberts (ph.).

Hi, just a follow on mentioned diary prices could you talk about the impact inflation had on the quarter as well as where do you see year-over-year comparison of particularly in diary and meat as well going forward.

As a total inflation rate, [inaudible] 1-2%, inflation factor right now. Primarily it is driven by the diary classification and I just put that this morning where FMI has come out and suggested that we may be looking at a upwards flow, 4% inflation factor in calendar year '05, based on the commodity markets as it seems today. But currently we are probably looking at a 1-2%.

And how does that just fill between your cost of good and the pricing at the retail level.

Well, you know, as the cost goes up all retailers have to look at, the retail price structure and it does get passed on, that's a real fact of life, just like gasoline.

Okay, thank you.

One point is that we were not able to pass on all of the cost entries and the fact is that the retailers particularly in the State of Michigan did eat some of that cost entries, except of the margin side of the deal.

And how has been the promotional spend bend off and the manufacturers to offset any of this and goods in general not just any.

I don’t think we have seen any significant shift in the manufacturers promotional [dollars], I know some others have suggested that it's been a pretty robust, we think we are doing a better job, selectively utilizing the manufacturer promotions money to buy key-targeted categories that has really helped give us sales. Craig talked about the wall of values and we had another [inaudible] values, I just think we were doing a better job utilizing the parts.

And I assume that these assets are filtering down to your customers as well, your practices.

Yeah, as a matter of fact that is one of the problems. I mean best thing that we have been able to see happen is that our retailers have embraced many of the concepts that we put into our own stores. We introduced a model score program this year for our retailers and we have been decided on to stores that we operate, that's where we host time on a day long seminar where we walk them through our stores, show them the things that they we're doing, make presentations for them to discuss the benefits that it could be got them if in fact they were to get on our programs. It has been very, very well received, that really a very interesting how successful this has been with just a beginning of a program; it is probably the biggest upside that we have in Spartan.

Thanks you very much.

Thank you. There appears to be no further questions at this time. I will now turn the call back over to Mr. Craig Sturken for any further closing comments.

Well on behalf of the entire Spartan Stores team, I want to thank all of you for listening to our presentation today; and we look forward to discussing our '05 second quarter results with you during our next conference call. Thank you.

Thank you. This does conclude this mornings teleconference. You may disconnect your lines and enjoy your day.