SpartanNash Co (SPTN) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spartan Stores, Inc. first-quarter fiscal 2006 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. (OPERATOR INSTRUCTIONS). 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.

Good morning, everyone, and thank you for joining our fiscal 2006 first-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; 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 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.

As you have seen from our first-quarter earnings announcement, we completed our sixth consecutive quarter of year-over-year earnings improvement. Some of the key highlights of the first quarter include an operating earnings improvement of 23% and a nearly 66% increase in net earnings from continuing operations, despite the opening of an additional five supercenters and one Costco during the quarter and the shift in Easter holiday to the prior year's fourth quarter. In addition, since August of last year, we have been competing with as many as seven new supercenters and two new Costcos.

Our first-quarter profit growth was driven primarily by a significant reduction of retail shrink combined with improved store labor productivity. Lower interest expense as a result of our refinancing efforts and debt reduction and a decline in depreciation expense also contributed to the profit improvement.

Consolidated net sales decreased during the first quarter, due primarily to the sale of a retail store joint venture and closure of a Pharm location. Also, competitive openings, the shift in the Easter holiday and the transition of two small distribution accounts to another supplier during the last year's second quarter contributed to this reduction.

Excluding the effect of the Easter holiday shift, first-quarter distribution sales were consistent with the same period last year. The distribution of sales related to the two accounts transitioned to another supplier were offset by an increase in sales to new and existing customers, and will be fully cycled in the second quarter.

We were pleased to welcome several new distribution customers during the quarter and to have added 27 stores to our distribution base. We expect distribution to these stores to be fully operational by the end of our second quarter and to generate 30 to 35 million in annual distribution sales. This positive sales momentum will become apparent in the second quarter, as we cycle the transition of the two accounts from fiscal 2005.

Although overall sales at our core supermarkets declined during the quarter, stores not affected by the competitive openings showed solid sales growth. The three fuel centers and four in-store pharmacies opened since the third quarter of last year continued to provide incremental sales growth.

We also are pleased with the incremental sales effect that these offerings have had on the associated supermarket locations, and are anticipating opening up to four more fuel centers by the end of this fiscal year. Sales at our Pharm stores were lower than last year's, as they are heavily influenced by the Easter holiday due to their high content of seasonal merchandise. However, sales at The Pharm stores are showing steady improvement as we cycle the UAW prescription drug mandate that we spoke about on previous conference calls.

We are continuing to upgrade our perimeter store product offering. And during the quarter, we introduced new premium bread and deli products which are being rolled out to our owned retail stores and will be available to our distribution customers.

During the first quarter, we also continued making progress with our private-label program. As of today, we have completed the process of converting our Pharm brand private-label health and beauty care products to Top Care. In fact, these products are now being featured in our current advertising circulars. The conversions of our HomeHarvest brand to the ValuTime Topco brand label is well underway, and will be featured in our promotional program starting in September.

These changes will significantly increase the product offerings in these major product categories and lower cost of products to our retail stores and distribution customers. These initiatives enable our distribution customers and retail stores to offer quality products at lower price points, so that we can even more competitive with the offerings of mass retailers.

We continued to make improvements to our core base of stores during the quarter by remodeling and/or conducting merchandise resets at an additional three retail locations. We also made a decision to close a second underperforming Pharm store where there is an impending lease expiration.

In addition, we are very pleased to have signed a five-year labor contract for our bargaining unit employees at our Plymouth distribution center during the first quarter. The contract provides significant improved flexibility in scheduling and work rules that will better serve customer needs, while enhancing labor productivity. The contract included wage increases, but also requires bargaining unit employees to share in rising health-care costs. This contract demonstrates our continuing track record and long history of favorable labor relations.

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

Thank you, Craig, and good morning, everyone. Consolidated net sales for the first quarter were 459.3 million, compared with 474.3 million in the first quarter of last year. The sales decrease was due to the events previously discussed, which mostly took place last fiscal year or were timing-related. We continue to be pleased with the performance of our stores, especially those that were not affected by new competition.

Gross margin for the first quarter increased 60 basis points to 18.7% compared to 18.1% last year's first quarter. The improvement was primarily attributable to our strong focus on retail inventory shrink. Operating expenses for the quarter declined 1.5% to 79.8 million from 81 million in last year's first quarter. As a percentage of sales, operating expenses increased 30 basis points to 17.4% compared with 17.1% in the first quarter of last year. The non-cash asset impairment reserve of 400,000, the prior-year contract termination fee from a distribution customer of 300,000 and a one-time signing bonus for our Plymouth union associates of 200,000 as well as increased wage and benefit costs in our distribution segment contributed to the percentage increase.

First-quarter operating earnings increased again this quarter, to 6 million from 4.9 million in last year's first quarter. Net earnings also improved substantially to 2.7 million or $0.12 per diluted share, compared with net earnings of 1.6 million or $0.08 per diluted share in the first quarter last year. Interpreting most of the earnings improvements were stronger retail gross margins due to our shrink control initiatives, lower store labor costs, lower depreciation expense and lower interest expense. First-quarter net earnings also included a loss from discontinued operations of $200,000 or $0.01 per diluted share.

Turning to our business segments, first-quarter retail sales were 202.6 million, compared with 213.5 million in the same period last year. Total comparable store sales declined 2.8%. Excluding the effect of the Easter holiday shift, comparable store sales at our supermarkets declined just 0.5% for the quarter in the face of significant competitive openings, which was in line with our expectations. Excluding the effect of the holiday shift, comparable store sales at our supermarkets not affected by competitive supercenter openings increased 3.3% for the quarter, which demonstrates the effectiveness of our retail offerings.

Fuel sales contributed 0.6% of the sales increase for the unaffected stores and 1% for all stores. Although our Pharm store sales have been improving each quarter, comparable store sales at these locations declined 6.4% during the first quarter. A large percentage of the sales at The Pharm stores is seasonal merchandise, and the shift in the Easter holiday had a significant effect on our first-quarter sales.

We continue to see significant improvements in the store sales trend as we cycle through the UAW prescription medication mandate. First-quarter retail operating earnings improved significantly to 2.5 million from 138,000 in last year's first quarter. The operating improvement was due mainly to the retail gross profit margin and other operational improvements already mentioned. We're especially pleased with this performance in light of the number of supercenters that have opened in our markets during the past nine months.

Excluding the sales effect of the Easter holiday shift, first-quarter grocery distribution sales were consistent with last year's first quarter. First-quarter operating earnings in the distribution division declined to 3.5 million from 4.7 million in the first quarter of last year, due primarily to the Easter shift's impact on sales, the one-time events related to the contract termination payment and higher compensation costs.

Turning to the balance sheet, long-term debt for the quarter declined 9.1% due to our improved profitability and the timing of certain capital projects. As of June 18, 2005, our long-term debt-to-total-capital ratio was 0.4 to 1.

At this time, I would like to discuss the outlook for the second quarter of fiscal 2006. On the competitive front for our retail division, we will cycle one supercenter opening late in the quarter, but also expect one additional supercenter to open late in the same quarter. For the remainder of the fiscal year, we will cycle an additional supercenter opening late in the third quarter and do not anticipate any more openings during the year.

Although our consolidated year-over-year sales trend for the second quarter will also be affected by the factors discussed earlier, it is important to understand that we cycled the transition of the two distribution accounts -- of the transitioned distribution accounts at the end of our most recent accounting period.

In summary, we expect to have slightly negative comparable store sales for the second quarter at our retail division, with distribution segment sales exceeding last year's second quarter. We expect consolidated earnings to approach the level reported in the second quarter of last year, excluding one-time events.

At this time, we believe that the majority of supercenter openings in markets where we own stores have already occurred. Although some additional supercenter openings may take place, they are likely to be in markets where a supercenter already exists, and will typically represent the expansion or revocation of an existing discount retail store rather than the introduction of a new store to the market. Historically, supercenter openings under these market conditions have had a much lower effect on traditional supermarket sales and profits. We will provide additional guidance for the second half of fiscal 2006 with the release of our second-quarter results.

I will now turn the call back to Craig.

As we look forward, we will continue to stay firmly focused on our strategies designed around customer convenience. During the remainder of fiscal 2006, we plan to open up to three in-store pharmacies and four fuel centers and begin construction on one or two new retail supermarkets and perform one major store expansion and remodel. We also remain on track to complete an additional 10 to 13 store remodels and/or merchandise resets during the balance of the fiscal year.

As I mentioned earlier, we are working to significantly improve the selection and variety aspects of our perimeter store merchandise and introduce several premium products in the bread and deli product categories. We are continually evaluating new products and new product categories to enhance our perimeter store product offerings.

During the second quarter, we will significantly expand our candy offering in our distribution segments, and continue to capitalize on opportunities to expand sales in the dairy and natural product categories, an effort to continually satisfy and respond to our customer needs and preferences.

In addition to our product and facility initiatives, we are also beginning the initial test phases of our retail store market positioning initiative, which we believe will continue to differentiate Spartan Stores from supercenters and other conventional supermarket operators. We will be testing new store signage, new service offerings, customer service enhancements and advertising campaigns designed around healthy living habits and wellness.

On the distribution side, we will continue to aggressively seek new customers and to increase our sales penetration with our existing customers. I have already discussed some of the new business we have secured, and we expect to make additional progress with new customers as the Michigan market continues to evolve.

Despite the five additional supercenter openings in the first quarter, we achieved strong profit growth. Although these openings will continue to affect sales at certain corporate-owned stores, this competitive intensity will diminish during the second half of fiscal 2006 as we move forward. We will cycle two supercenters in the upcoming second and third quarters, and believe the majority of these openings are now behind us.

In the interim, we should benefit from market competition as retailers in weaker positions gradually lose market share. We continue to expect benefiting from our shrink control and labor productivity initiatives in the upcoming quarters, but to a lesser extent, as the programs implemented in fiscal 2005 are fully cycled. Our private-label program continues to have promising growth areas, including the new value-oriented brand labels already mentioned.

In summary, we remain optimistic about our growth opportunities, as we have untapped organic growth potential and a demonstrated track record of successfully executing our business plan.

We will now open the call for your questions.

(OPERATOR INSTRUCTIONS). Blaine Marder (ph), Loeb Partners (ph).

First, on the distribution side, would you expect that the new supply relationships would be fully incremental? In other words, will there be any attrition offsetting that the business, do you think?

No. No, this is fully incremental.

And you said they are fully operational by the end of the second quarter. Will there be any revenue in the second quarter from those new relationships?

Yes.

On the retail side, what would you expect the square footage change to be this year, given the closures and then any other changes in square footage with openings or delay?

The square footage change for us would probably be a net reduction of 50,000 square feet, which is really de minimus as compared to our total. And that is a combination of the two Pharm stores that we had closed and an enlargement that we're going to do at a store here in Grand Rapids.

And then you had the joint venture taking away from the top line and same-store sales. Am I missing anything else?

No. You have the two Pharms, right, that you need to take out? And then, the sale of the joint venture. Those are the two, from our square footage perspective.

And then, finally, Dave, on the balance sheet, the accounts receivables for two quarters now have grown in excess of sales. Am I missing something? Is that going to right itself the rest of the year?

Well, I think a lot of that is the difference in business, the incremental pharmacies that we have added. Pharmacies typically carry a heavier receivable percentage because of the terms with the third party. So, as we continue to add pharmacies, we will see that kind of rate. But it's not anything unusual, so it's sort of the trend you'd expect to see with our sales. There's nothing unusual driving it.

Working capital as a whole was a huge source of cash of fiscal '05. Would you expect it to be a slight source of cash in fiscal 2006?

You can kind of see how it is mitigating, right? In the first quarter of last year, we had a significant help as we continued to work on inventory and turns. And you saw we got a lot more leverage on our inventory. That certainly is going to mitigate.

Chuck Cerankosky, Key/McDonald.

My question is -- the first one is can you go over the outlook again? We were disconnected from the call. If you could give us the short version of that? We missed all those comments while we were redialing, but particularly interested in how you are looking at the rest of the year, in light of competitive openings and economic developments in your markets.

Well, Chuck, what we had basically said is that, from a retail perspective we would anticipate slightly negative comps. We have gone through the number of supercenters, and that is really the driver. And our stores not affected will be positive.

On the distribution front, we expect our sales to exceed last year for the quarter, the second quarter, as we have brought on this new business and we cycled the two transitioned accounts from the prior year. And then, from a bottom-line perspective, we're looking for our earnings to approach last year's second-quarter earnings, exclusive of any one-time events from last year.

How do you look at your distribution business in light of Farmer Jack being up for sale? It looks like it's sort of disintegrating to some degree before the sale, if any actually takes place. How do you see that affecting your distribution business and even your retail business?

As we stated, there are 27 additional accounts that we are distributing to today, some of which are in the Detroit marketplace that are former Farmer Jack locations. So yes, that is playing a role. In addition, we were able to develop a relationship with a very solid retailer in Indiana that we are now distributing health and beauty aids and general merchandise to 20 stores. So, between the seven stores that we picked up on the east side and the 20 stores that we are distributing health and beauty aids and general merchandise, that accounts for the 27 stores.

So seven of those are from A&P-related events?

That's correct.

Well, looking forward, how do you see feel about the prospect of adding to that seven, Craig, as A&P does what it's going to do with Farmer Jack?

We feel good. We see a significant opportunity going forward, but we're very cautious to make any projections around that, because a deal isn't done until it's done. And what we're talking about here is supplying additional Farmer Jack locations that have transitioned over to independent operators in the marketplace. But until those guys have done their deal with A&P, we cannot count on anything.

Would Spartan buy any of the A&P stores to operate them as corporate retail?

We would not comment. That is something that we can't comment on.

(OPERATOR INSTRUCTIONS). Mr. Sturken, I am showing no further questions in queue.

Well, thank you very much. If there are no more questions, we will conclude the call. On behalf of Dave Staples, Dennis Eidson, Ted Adornato, Mark Eriks and everyone else on the Spartan team, I thank you for listening to our comments. Have a good day.

This concludes today's teleconference. Thank you for your participation.