SpartanNash Co (SPTN) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Spartan Stores, Inc., fiscal 2005 second quarter earnings release conference call. At this time all participants are have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host, President and CEO of Spartan Stores, Craig Sturken. Sir, the floor is yours.

Thank you. Good morning, everyone and thank you for calling to our fiscal 2005 second quarter earnings conference call. With me this morning are members of our team including Executive VP and CFO, Dave Staples, Executive VP of Marketing and Merchandising, Dennis Eidson, and Executive VP of Retail Operations, Ted Adornato.

Before we begin, 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 [loss of audio] K and other filings with the SEC. Spartan Stores disclaims any intention or obligation to update or revise any forward-looking statements.

I am pleased to announce another quarter of solid financial progress. In fact, as stated in our press announcement our second quarter net earnings exceeded last year's results by approximately 300% and are at the highest levels reported in the past three years.

Our performance improvement is the result of our continued focus on basic, operational execution and on our shift to a consumer-centric business strategy whereby we place the consumer at the center of all product placement, promotion and pricing decisions. This strategy is making us better retail operators and distributors as demonstrated by the continued improvement in our financial results and the strengthening of our retail market position.

Consolidated net sales for the second quarter were 487 million, compared with 491 million in last year's quarter. Although we had solid sales growth in our Retail segment, those gains were offset by a decline in Distribution sales.

Second quarter Retail sales improved making this the sixth consecutive quarter of sales improvement in the Retail division. Sales in this division improved despite the opening of two supercenters during the fourth quarter of fiscal '04, and two additional supercenter openings in the second quarter.

Our marketing and merchandising strategies, store level execution, store reset programs and competitive store closures, all contributed to the Retail sales improvement. Comparable store sales at our Pharm stores continued to be below expectations due to primarily to an increase in direct mail order prescription fulfillment from a United Auto Workers mandate that we mentioned during our last conference call.

This mandate, also resulted in lower prescription sales at our in-store supermarket pharmarcies.

Also contributing to the Pharm sales decline is a [inaudible] of significant sales increases last year. Some of the sales increase last year is related to the closure of adjacent Food Town stores.

It is important to note that on a two-year comparable store basis, Pharm sales growth is constant.

Retail and Distribution operating profit growth was very strong in the second quarter. Our Retail operations have been a top priority since March of 2003, and we are pleased to report a more than 60% increase in Retail operating profits during the second quarter, compared to the corresponding period last year.

This improvement continues to be driven by our focus on providing a better in-store experience for our customers, and the improving efficiency of our operations. We continue to expect additional year-over-year Retail profit improvements for the second half of fiscal 2005.

Late in the second quarter we introduced our private label brand in two key dairy categories, ice cream and yogurt. Preliminary results in these categories have been very favorable.

Although these items alone will not significantly change our sales growth expectations, they are examples of the continuing progress we are making in developing more robust corporate brands and offerings.

Lastly, during the second quarter we implemented phase one of our specialty goods distribution program, which will allow us to gain additional distribution center sales and efficiencies, better manage our inventory investment, and provide greater profitability to our Retail customers.

In phase two, which is already underway, we will be offering an even broader selection of specialty products. Until now, these products were only available to our store network through smaller, specialty distributors.

We expect this phase to slowly add incremental sales and profits, but more importantly, it demonstrates another valued added distribution service capability.

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

Thank you, Craig and good morning, everyone.

The consolidated net sales for the second quarter were 486.7 million, compared to 491.4 million in the second quarter of last year. Our Retail division reported comparable store sales increases of 1.4%, which was driven by our supermarket operations. Offsetting the Retail division sales increase was a decrease in Distribution sales.

Gross margin for the second quarter increased 60 basis points to 19.5%, compared to 18.9% in last year's second quarter. The gross margin improvement was due primarily to the timing of new product launches in our Distribution division that we mentioned in the first quarter press announcement.

Operating expenses for the quarter declined more than 4% compared to the corresponding period last year. As a percentage of sales, operating expenses declined 60 basis points to 16.8%, compared with 17.4% in the second quarter last year. The decline was due to an improvement in store labor productivity, lower depreciation expense, and our continuing cost containment policy.

We also received a $1 million contract termination and non-performance payment from one of our former distribution accounts that was recorded as an offset to selling, general and administrative expenses. These improvements were partially offset by higher employee benefit costs.

We reported an 82% increase in second quarter operating earnings to 13.2 million, compared with 7.3 million in the second quarter last year.

Net earnings increased by approximately 300% to 7 million, or 34 cents per diluted share, compared with net earnings of 1.8 million, or 9 cents per diluted share in last year's second quarter. The second quarter net earnings included a loss from discontinued operations of 100,000, or 1 cent per diluted share, which compared with a loss from discontinued operations of 1 million, or 5 cents per diluted share in last year's second quarter.

The improvement in net earnings is due to the operating expense improvements already discussed, the sales performance in our Retail division, and lower interest expense due to our debt refinancing and lower investments and working capital.

Turning to our business segments, second quarter Retail sales increased .7% from last year, and comparable store sales increased 1.4%. The accounting change for bottle deposits, explained during our first quarter conference call, contributed a positive .7% to the second quarter comparable store sales increase.

The remaining Retail sales increase was primarily due to the factors already discussed by Craig.

Retail operating earnings increased by 60% to 6.8 million, from 4.2 million in the second quarter last year. The operating improvement was due to higher store sales volumes, [inaudible] productivity improvements, lower depreciation, and our cost containment measures.

Second quarter grocery distribution sales decreased 2.4%. The decline was due primarily to a shift in our annual private label promotion from the second to third quarter, the loss of two small distribution accounts, and higher incremental sales to existing customers in the second quarter of last year, as a result of the major power outage that affected the Detroit region.

The power outage left Spartan as one of the primary grocery distributors in Michigan for several days.

Sales to the former distribution accounts represented approximately 6 million out of the total 515 million in distribution sales during the first and second quarters of fiscal 2005. The $6 million is approximately one half the level of sales to these accounts during the third and fourth quarters of last year.

Second quarter operating earnings in the Distribution division increased significantly from the second quarter last year, and were due primarily to improved margins and lower SG&A expenses as previously discussed.

Turning to the balance sheet.

Long-term debt and investment in working capital declined for the quarter, placing us in our strongest financial condition since becoming a public company in August of 2000. As of September 11, 2004, our long-term debt to total capital ratio was .48 to 1.

As our business fundamentals have improved, our cash flow has also shown significant improvement. Year-to-date, cash from operations improved by more than 350% to 32.8 million, compared with 7.2 million in the corresponding year-to-date period last year.

This improvement is a direct result of our improved profitability and continued focus on working capital management.

We are revising our fiscal 2005 forecast to reflect the [inaudible] sales growth as we compare results in strong growth from last year, as we cycle competitive store closings, as we work to replace the lost distribution accounts, and as we anticipate additional supercenter openings. We now expect consolidated net sales for fiscal 2005 to be from flat to an increase of 1%, with retail comparable store sales growth for the year ranging from flat to an increase of 1.5%.

Fiscal 2005 gross margin as a percentage of sales will be slightly higher than fiscal 2004, as we improve our retail gross margins. We expect operating expenses to be lower than last year on a dollar basis and as a percentage of sales, due to productivity initiatives and lower depreciation expense.

The run rate, however, will not be as favorable as reported in fiscal 2005's first and second quarters, due to the seasonal nature of our Retail operations in Northern Michigan and increased employee benefits costs. Capital expenditures are expected to range from 20 million to 25 million for fiscal 2005, and depreciation and amortization will be approximately 22 million.

I will now turn the call back to Craig. Craig?

Thank you, Dave.

Our goal of being a consumer-driven company that possesses the best knowledge of consumers and independent Retail partners in the markets we serve is steadily becoming a reality.

We are firmly committed to developing excellence in our Retail operations and to working with our independent operators in order to support their efforts by providing them with products and services that produce tangible economic benefits. We are continuing to execute our center store category management initiatives, but as that process becomes more a part of our daily operations, we are moving to the next phase of our business improvement plan.

A negative component of that plan focuses on our store perimeter departments. We view the merchandising of our perimeter departments as a key component of our market positioning strategy and as the next logical area for us to make significant performance improvements.

We recently appointed Brian Haaraoja as Vice President of Fresh Merchandising to lead this initiative. He brings significant experience in the perishables area from his previous positions at premier retailers including Shaws and Giant of Landover [inaudible]. Brian began his career at Jewel Osco and received a food marketing degree from Western Michigan University.

We recently expended considerable effort to develop a model store program that physically demonstrates our strategy for product mix, store layout and overall product flow. In April, we invited both our store managers and our independent customers to view the first model store in order to discuss various strategies and exchange ideas and best practices. The participation rate and idea exchange was outstanding.

We recently completed our second model store and will be hosting another open house for store managers and independent owners in October. This is a very effective and efficient method for us to transfer our category management and operations expertise to our store base and to our independent customers.

We are also undertaking strategic steps to improve the shopping convenience for our Retail consumers by testing fuel centers at select locations and increasing the number of in-store pharmacies. We have developed a list of stores that we believe will benefit the most from these initiatives in terms of sales and profit growth, and we expect to open two fuel centers and three in-store pharmacies during the third quarter.

On the competitive front, as stated in my opening remarks, we had two supercenters opened that affected certain corporate supermarkets and Pharm stores during the second quarter, and we are anticipating another opening in the third quarter. By the end of the fourth quarter, however, we will have cycled the two opened [inaudible] come 2004 which will positively affect our comparable store sales in those locations.

Our key near-term profit enhancement opportunities remain an [improved] category management practices and reducing our product costs, increasing our private label penetration, increasing sales penetration with existing distribution customers, and improving overall operational productivity.

From a sales perspective, we expect to grow our retail operations by opening new stores, expanding or remodeling existing locations, raising the level of convenience services to the consumer, and improving the overall offering at our existing stores. We believe there continues to be opportunities to increase sales with our existing distribution customers.

As we move forward sharing our category management, product assortment and store layout success with our independent operators, we are gaining wider participation in our product promotion. In turn, this is helping to drive down product costs and is providing stronger vendor program support.

In addition, the fine tuning of our recently launched deli and bakery program, the introduction and subsequent expansion of our specialty product program, and the continual evaluation of other additional services and product lines, should allow us to expand our current relationships and develop new relationships beyond our existing customer base.

The first half of fiscal 2005 has been a great success and we look forward to extending that success in our future.

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 star, then one on your touchtone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. Once again, to ask a question, please press star, then one on your touchtone telephone at this time. Our first question is coming from Chuck Cerankosky of Key McDonald. Please go ahead.

Good morning, gentlemen. Great quarter. Craig, can you talk a little bit about what you're seeing in terms of economic improvement or lack thereof in your markets as evidenced by consumer behavior and purchasing mix and how some of your competitors are responding to it?

Chuck, the product mix is very dynamic today and there are a lot of alternative channels for our customers to shop in and we are seeing the change in product mix, and in our conversations with our peers we are finding that they are also experiencing changes. In particular, general merchandise, as a category, is showing some weakness because of the strong alternative opportunities that our customers have. At meetings with other retailers, they're expressing the same frustrations as we are.

The pharmacy story, of course, continues to be a great story in that our customers expect pharmacies in our stores but, you know, operating against that is a United Auto Workers mail-in program.

How about if you would look say in the meat case, how is that selling? Are you seeing trading up to better cuts or trading down or staying the same? Trying to get some indication of where the consumer's head is at.

I don't see any change in product mix, Chuck. Dennis, I don't no where---

We haven't really seen that Chuck in terms of product mix, but we are in fact seeing our meat distribution rate moving more aggressively forward than it did a year ago. We're pleased with our meat performance. Being offset a little bit by the GM distribution rate and a little bit by pharmacy, but meat and produce are performing very well for us.

Okay. Dave, if I could ask you a question about the [tempering] and the sales outlook for the second half. Would you expect earnings per share in the third and fourth quarters of fiscal 2005 to each be up versus the year-ago numbers?

Chuck, at this point as you know, we haven't really given any quarterly guidance. When you look back to our prior year's results from a net perspective, you will see in the third quarter we had a loss, we had the refinancing where we took an $800,000 charge. We had staff reductions, so we've kind of given our overall guidance where we expect margins up and we've given a general sales guidance in the G&A, but certainly there were some unusual events in the prior year that we wouldn't expect to occur.

Thank you. Once again, to ask a question, please press star, then one on your touchtone telephone at this time. At this time there are no further questions. I'd like to turn the floor back to Mr. Sturken for any closing remarks.

I want to thank everyone for calling in for the Spartan Stores first half report. On behalf of Dave Staples, Dennis Eidson and Ted Adornato and everyone else that works for Spartan, I thank you for listening to our comments today. We look forward to discussing our business with you at the end of our third quarter. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.