SpartanNash Co (SPTN) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Spartan Stores, Inc., fourth quarter fiscal and year-end 2005 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Craig Sturken, president and chief executive officer for Spartan Stores, Inc. Thank you, Mr. Sturken, you may begin.

Thank you. Good morning, everyone, and than you for calling in to our fiscal 2005 fourth 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, Denis Eidson, our executive VP of retail operations, Ted Adornato, and executive VP of support services, Mark Eriks.

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 pressure 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.

I will begin today's discussion by mentioning that fiscal 2005 was a year marked by significant fundamental progress at Spartan Stores, which is evident in our much-improved fiscal 2005 financial performance. We are pleased to state that we delivered on the many strategic initiatives that we spoke about at the end of fiscal 2004. These operational and financial improvements are not temporary, but are fundamental and sustainable. We have changed the very basics of how we conduct business as a grocery retailer and distributor. Our entire corporate culture has been transformed during the past several years into one today that is highly competent, has strong individual leadership, is able to interpret market intelligence and formulate effective business strategies and, most importantly, one that is focused on accountability. This renewed company-wide enthusiasm reaches well beyond our walls to our independent retail operators, our retail store customers, supplier partners, and our shareholders. We are very proud of this achievement and are confident that our energized workforce will serve us well in this intensely competitive grocery environment.

I will now take just a few moments to highlight the key items from our fourth quarter earnings announcement. This quarter's performance was the most profitable fourth quarter we have reported in more than three years. The performance was aided by several notable items such as the adjustment to our tax provision and the additional sales related to the shift in the Easter holiday. But even excluding the bottom line influence of these items, we still had one of the most profitable fourth quarters in many years. Our fourth quarter improvement was driven primarily by the continuing solid performance in our supermarket operation, the improving performance in our Pharm stores, better retail gross margins, and a more favorable cost structure due to our relentless emphasis on cost containment and efficiency improvements. Lower interest expense as a result of our refinancing efforts and debt reduction also contributed to the profit improvement.

Net earnings for the quarter were $5.8 million compared with a net earnings of $1.7 million for the fourth quarter of fiscal 2004. Along with the earnings improvement, year-to-date cash from operations rose more than 115 percent, and our balance sheet is in the strongest position since we became a public company.

Consolidated net sales increased during the fourth quarter due primarily to the shift in the Easter holiday, which was partially offset by the lower sales at our Pharm stores and a loss of retail sales from the disposition of our single store joint venture. We covered the factors leading to the lower sales at our Pharm operation with you last quarter. Those same factors carried over into the fourth quarter.

Our core supermarket operations showed sales growth during the quarter despite the competitive environment in which four new supercenters opened during the past calendar year. Our product mix, pricing and promotional strategy, and category management practices continued to improve during the fourth quarter, and we are staying squarely focused on the customer convenience elements of our business strategy. During the quarter, we opened one new in-store pharmacy and built a drive-through pharmacy at one other retail supermarket. The two fuel centers and three in-store pharmacies opened in the third quarter are already providing incremental supermarket sales increases, which we anticipated. We are very pleased with the performance of these strategic initiatives.

As you saw in the press announcement, distribution sales were consistent with last year due to the factors we discussed during the third quarter. Acceptance of our self-distributed deli and bakery program is improving, but these incremental gains are not yet material. Now that we have a fully operational specialty goods warehouse, we are realizing additional distribution efficiencies and have the capability to efficiently expand our specialty foods and general merchandise product offerings.

In addition, we are continuing to make significant progress with our private label products. We have discussed previously, we have launched our Spartan brand in major dairy categories including milk, ice cream and yogurt. We have had an outstanding response to these products by both retail consumers and our independent distribution customers. In fact, during fiscal 2005, our private label penetration rate including retail and distribution sales increased by approximately 5 percent. During the fourth quarter, we began converting our Pharm, private label health and beauty care products to TopCare, which is a Topco brand label. This change will significantly increase the product breadth offered in these major product categories.

During the quarter, we also began to transition our Home Harvest private label brand to ValuTime, another Topco brand. Again, this will significantly expand our product offering and lower the cost of the product for our retail stores and distribution customers. This allows both customers and retail stores to offer quality products at lower price points and to be even more competitive with the offerings of mass retailers. These initiatives will benefit and strengthen both our retail and distribution operations by generating incremental sales growth and profit improvements.

Fourth quarter operating profits in our retail segment improved substantially even after adjustment to last year for the stock ledger implementation charge. Retail operations continued to improve due to better store level execution, a better product mix, more effective promotional strategies, more efficient use of labor, and our continued remodel and re-merchandise reset efforts. During the quarter, we remodeled and/or conducted merchandise reset at an additional four retail stores, bringing our total for the fiscal year to 15 stores. We also made a decision to close one under-performing Pharm store due to its performance and lease expiration.

With that overview, I will ask Dave Staples to give a more detailed look at the fourth quarter financial performance. I will rejoin the call later and provide additional insight about our operations and outlook for fiscal 2006. Dave.

Thank you, Craig, and good morning, everyone. Consolidated net sales for the fourth quarter were 457.6 million, compared with 456.9 million in the fourth quarter last year. Sales increase was due primarily to the shift in the Easter holiday, offset by slightly lower sales at the Pharm stores and the loss of retail sales due to the sale of our single store joint venture, which contributed 4.3 million to sales in the fourth quarter last year. Gross margin for the fourth quarter increased 120 basis points to 19.3 percent, compared to 18.1 percent in last year's fourth quarter. This improvement was attributable to the absence of the 3.7 million charge in fiscal 2004's fourth quarter to implement a retail inventory and margin management system. Excluding this prior year charge, we still would have had a 40 basis point improvement in the fourth quarter gross margin. This improvement was driven by improvements in shrink control, lower product cost, more effective promotional strategies at the Pharm stores, and better merchandising execution at our distribution division.

Operating expenses for the quarter declined 2.8 percent, and as the percentage of sales decreased 50 basis points to 17.6 percent compared with 18.1 percent in the fourth quarter last year. The decline was due to store labor productivity improvements and lower depreciation expense.

Fourth quarter operating earnings increased substantially to 7.9 million from 83,000 in last year's fourth quarter. Net earnings also improved substantially to 5.8 million, or 28 cents per diluted share, compared with net earnings of 1.7 million, or 9 cents per diluted share in the fourth quarter last year. The items contributing most to the improvement were better retail gross margins due to the absence of the retail inventory charge booked in last year's fourth quarter, lower depreciation expense, lower interest expense, and the adjustment to our fourth quarter tax provision.

Fourth quarter net earnings also included earnings from discontinued operations of 500,000, or 3 cents per diluted share, compared with earnings from discontinued operations of 3.2 million, or 16 cents per diluted share in last year's fourth quarter.

Turning to our business segments, fourth quarter retail sales were 198.9 million, compared with 198 million in the same period last year. And comparable store sales increased 2.3 percent, which includes contributions from fuel sales, the shift in Easter holiday, and the change in accounting for bottle deposits. Comparable store sales increased 3.7 percent at supermarkets, but were offset by decline in Pharm comparable store sales.

Fourth quarter retail operating earnings improvement significantly to 1.4 million from a net loss of 5.7 million in last year's fourth quarter. The operating improvement was due mainly to the retail gross profit margin improvement already mentioned, better promotional and pricing strategies at the Pharm stores, labor productivity improvements, and lower depreciation expense. We are especially pleased with this performance, as it has historically been difficult for us to achieve profit in the fourth quarter, because it is our lowest sales quarter due to the heavy seasonal influence on our business in Northern Michigan.

Fourth quarter grocery distribution sales were consistent with last year due primarily to the reasons we discussed during the previous quarter. Fourth quarter operating earnings in the distribution division increased 12.1 percent to 6.5 million, from 5.8 million in the fourth quarter last year.

Turning to the balance sheet, long-term debt and investment in working capital declined for the quarter placing us in our strongest financial condition in more than four years. As of March 26, 2005, our long-term debt-to-total-capital ratio was 0.43 to 1. Our cash flow has continued to show significant improvement. Fiscal 2005 cash from operations improved more than 115 percent to 60.6 million, compared with the 28.1 million we generated in fiscal 2004. This improvement is a direct result of our improved profitability and continued focus on working capital management.

At this time, I want to discuss the outlook for our fiscal 2006 first quarter. We recently completed our first period of fiscal 2006, and are pleased that it shows continuing progress. Based on our expectations for the remainder of fiscal 2006 first quarter, we are optimistic that earnings for the quarter could exceed last year's by a range of 2 to 5 cents per share due to the improving margin trends that are carrying forward from fiscal 2005. As a result of the shift in the Easter holiday, the loss of retail sales from our sale of the single store joint venture, and the closing of one Pharm store, we expect first quarter sales to be slightly below the first quarter last year. In addition, we expect the majority of the competitive store openings for fiscal 2006 to occur during the first quarter, and we will not cycle the prior year's competitive openings until late in the second quarter and into the third quarter of fiscal 2006.

Based on our preliminary first quarter results, we are optimistic about our ability to continue to increase value for all of our constituents. We will provide additional guidance for fiscal 2006 with the release of our first quarter results.

I will now turn the call back to Craig.

Thanks, Dave. As we look forward, we will continue to execute strategies that focus on customer convenience. There is still room to improve our retail category management practices, and we will extend those practices to every corner of our retail and distribution operations. We are currently working to significantly improve the selection and variety aspects of our perimeter merchandise categories. During the fiscal year, we expect to open three in-store pharmacies and one additional fuel center, and to begin construction on two new retail supermarkets. Plans for these two stores include fuel centers and drive-through pharmacies. Our business plan also includes completing up to 15 store remodels or merchandise resets during fiscal 2006. On the distribution side, we expect the performance of our deli and bakery program to improve as we move through fiscal 2006, and expect to add new distribution customers for incremental buying. Our improved private label product offerings and specialty goods warehouse and commitment to share retail best practices provide unmatched value-added services that will help our distribution business grow.

In the coming quarter, we face the challenge of more supercenter openings. These openings will affect certain corporate-owned retail stores and independent customer stores, but we have shown our ability to absorb these competitive openings. We cycled two supercenters in the fourth quarter, and will cycle two more during the upcoming second and third quarters. We expect five supercenters to open in our retail markets during the first quarter of fiscal 2006. Although the absolute number of supercenters opening in our markets during fiscal 2006 is larger than the past year, they are not likely to have the same effect on sales as the four that opened during fiscal 2005. The reason is that two of them represent conversions of existing discount stores to supercenters, and all five of the trade areas currently have a supercenter alternative. The openings are also in markets that will affect at least one other conventional supermarket operator. The supercenter openings in our markets are expected to subside by the end of fiscal 2006. In the interim, we should benefit from market competition as retailers in weaker positions gradually exit these markets.

Our category management practices will continue to provide profit enhancement opportunity as we implement more effective pricing and promotional strategies, reduce product costs, and improve perimeter department product offerings. Our private label program continues to have promising growth areas including organic and natural food categories, and the introduction of new brands and phasing out of legacy brands. These strategic initiatives will significantly expand the breadth of our private label product offerings while providing more products at more competitive price points. This will help improve sales, lower product costs, increase private label sales penetration, and strengthen our competitive market position.

Our cash generated by operating activities has significantly and fundamentally improved. This cash flow improvement, along with our more flexible financing agreements, has allowed us to expand our capital budget. We will be using this enhanced financial flexibility to direct capital to projects and resources that we expect to produce favorable investment returns.

In summary, we have untapped organic growth potential available, and have clearly demonstrated our ability to successfully execute our business plan. We have reported significant profit improvement in an intensely competitive grocery environment, and we are confident in our ability to continue our positive momentum.

We will now open the call for your questions.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is coming from Chuck Cerankosky of Key McDonald. Please proceed with your question.

Good morning, guys. Great quarter. If we could take a look at the quarter, you detailed in the press release about the sales impact at Easter. Craig, can you give us any idea what Easter added to the EPS number and what it might have taken out of the first quarter?

Chuck, it's probably a flip of $3 million from quarter-to-quarter. One of the unusual things about Easter this year is that it ended in our 52nd week, so we have the sale benefit of Easter, but we didn't have the hurt of post-Easter. So it's about a $3 million benefit, and we will pay about a $3 million charge, or a deficit in sales in our first quarter. But we've already been able to get through period one, and we're very encouraged with our position right now.

Okay. So yes, you're talking $3 million sales swing here.

That's correct.

On the retail side, maybe another 3 million on the distribution side.

That's a good point. On the distribution side it's probably an additional 3 million.

Three million on each segment. Now, the first release also talked about how Easter impacted COPs (ph) and gasoline impacted COPs, and those numbers should, I would guess, largely apply to just the supermarket COP number, because Pharm I would guess is a little less seasonal and certainly doesn't have to deal with the bottle bill in Michigan?

That's correct.

Okay. Craig, you made a statement about the fiscal '05 improvements. I think the words you used were sustainable and fundamental. What kind of margin progress should we expect in fiscal '06 now? You've had tremendous improvement last year. It's not the easiest thing to forecast, but can you talk about what you're comfortable with in terms of improvement?

Chuck, probably at the retail side we would continue to enjoy a 20 basis point improvement. On the distribution side, that would be flat . That is not a very flexible number. That's really the function of our agreements with our retailers.

Okay. So you've got most of the efficiency gains you're going to get there.

Well, you asked about margin.

I'm talking operating margin, yes. If I implied gross profit margin, I apologize. I'm thinking the overall profit margin for each segment that you report.

Well, we're very encouraged by our ability to sustain our growth and to continue to make progress both on reduced cost of goods and on expense control.

But it sounds like you're more comfortable with margin improvement in retail, to operate profit margin improvement in retail versus wholesale.

Exactly, that's correct.

All right, thank you.

Our next question is coming from Blaine Marder (ph) of Lowe Partners. Please proceed with your question.

Good morning. Give us a sense of maybe, Dave, where the capex came in in '05, and where you see it for '06 in the depreciation as well.

Where the capex came in for '05 is approximately $25 million. And where we see it going forward would be small increase over that, but in that 25 to 30. You asked also for deprecation for the year. That came in at 21.

Okay. Where do you see that for '06?

Probably in the mid-20s.

Okay. And then the 25 to 30, most of that is retail. How much of that is retail versus distribution?

You're asking on the capex?

Yes.

Well, the majority of it would certainly be in the retail group. We run more in the -- we certainly run more in that area. Probably, I'd say about two-thirds of it or so would be in the retail group.

Okay. And then you guys have taken a lot of working capital out of the business. Do you see that continuing in 2006 both on the receivable and the inventory side?

No, I would see that flattening out.

In '06. Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Our next question is a followup coming from Chuck Cerankosky of Key McDonald. Please proceed with your question.

Craig, looking at your distribution reach, what sort of catches your eye in terms of industry consolidation? We've got A&P in the news putting in some stores, depending on what you read, various numbers up for sale. Are you guys interested in any capacity that may come up for sale, and these things seem to be available at very attractive prices per box. If you could take sort of a five-year outlook, what would you say about store development within your retail group?

First of all, let's just talk about the distribution business. We see probably in the near term an opportunity for us to garnish additional distribution sales through our retailers primarily on the east side of the state, where there seems to be some activity apparently in the near future, and so we are working with our retailers and we are ready, willing and able to support them in their growth. From a capital standpoint and from an internal growth of investments on our own part, we see that we can sustain from two to four new stores a year in -- for our own retail business, where could fill in certain trade areas that are really sort of a void in our operation right now. So we think that we can add business organically that way. And you'll never know what the opportunity might be down the road for us to be in a position to maybe acquire a smaller business that might be within the trade area that we operate.

Do you see those being valued more as a percentage of replacement cost kind of transactions as opposed to any multiple of EBITDA?

Well, yes.

All right. Thanks.

(OPERATOR INSTRUCTIONS) Mr. Sturken, we show no further questions at this time. I'd like to turn the floor back over to management for any further comments you may have.

Well, I want to thank everyone for calling in to our conference call, and we look forward to this same meeting taking place at the end of our first quarter for fiscal year '06. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.