SpartanNash Co (SPTN) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spartan Stores fiscal 2006 fourth quarter and full year financial results 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).

Also as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Craig Sturken - Chairman, President, and Chief Executive Officer of Spartan Stores. Thank you, Mr. Sturken. You may now begin, Sir.

Thank you. Good morning, everyone, and thank you for joining our fiscal 2006 fourth quarter earnings conference call. With me this morning are members of our team including EVP and CFO Dave Staples; EVP of Marketing and Merchandising, Dennis Eidson; and EVP 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 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.

Fiscal 2006 has been another good year for Spartan Stores, marked by continued improvements to our retail and distribution operations, and capital investments in our store base and our distribution centers and in new technology.

We improved our private-label offerings, introduced new private-label brands, and increased our sales penetration of these products. We also increased our distribution business in the state of Indiana, added 51 stores to our distribution base and expanded our distribution sales penetration with existing customers.

In addition, we strengthened our retail operations and market share position by acquiring D&W Food Centers while adding three new fuel centers and completing nine store models expansions and or merchandise resets.

During our 2005 fiscal year-end earnings conference call, we spoke about the many permanent and fundamental improvements made to our business strategy and operations. We are pleased to report that those changes and the improvements made this year had enabled us to sustain our solid financial performance for the third consecutive year. As reported, earnings from continuing operations were 5.7 million for the fourth quarter and 20.4 million for the year, which are the highest fourth quarter and fiscal year profits from continuing operations we have achieved in five years.

The fourth quarter earnings from continuing operations for both 2006 and 2005 benefited from a number of items that had a favorable effect on earnings and Dave will cover those items with you in just a minute.

Both our retail and distribution segments reported year-over-year improvements in fourth quarter operating earnings and continued to show strong cash flow generated from operating activities of 54.7 million during fiscal 2006.

We are very confident in the sustainability of our performance due to the fact that we achieved these solid fourth quarter and fiscal year financial results despite a record number of new supercenter openings in our markets in fiscal 2006. In addition to the four supercenters opening in fiscal 2005, during fiscal 2006 we had an additional six supercenters and one Costco opened in our markets served by our corporately owned stores.

We also had a negative sales effect of the shift in Easter holiday from and early Easter last year to a late Easter this year which completely eliminated sales for the Easter holiday in our fiscal 2006 year.

By the way, an important point about the market competition is that we are not expecting any additional supercenters to open in markets where we operate corporately owned stores during the next 12 months. Subsequent to the fourth quarter, we completed our D&W acquisition and the operational integration is proceeding as planned.

Many of these stores have already had minor remodel work performed or store layouts changed and have been restocked with new products and merchandise. We are continuing with training initiatives for our new employees and have changed six of the store banners to Family Fare Supermarkets with the remaining stores retaining the D&W fresh markets banner.

During the fourth quarter our private-label program continued to perform well. Our relatively new Top Care and ValuTime brands are selling very well on both the wholesale and retail side of our business. We also began distribution of our private-label brands to the 16 retail stores we acquired through the D&W acquisition.

I will provide additional detail about our business outlook for fiscal 2007 following Dave's review of our fourth quarter financial results. Dave.

Thank you, Craig, and good morning, everyone. Consolidated net sales for the fourth quarter declined 1.1% to 452.8 million, compared with 457.6 million in the fourth quarter last year, due primarily to the shift in the Easter holiday sales to the first quarter of fiscal 2007. Our two closed Pharm stores, market competition and the influence of higher energy costs on consumer spending. Partially offsetting the declines we reported higher fourth quarter fuel center sales and higher distribution segments sales, due to new customers and increased sales to existing customers.

Gross margin for the fourth quarter declined 10 basis points to 19.2% compared to 19.3% in last year's fourth quarter. The decline was due mainly to a higher percentage of consolidated sales coming from the lower margin distribution segment and the additional fuel center sales this year. The decline in gross margin was partially offset by a LIFO credit provision of 300,000 in this year's fourth quarter which compared to a 400,000 charge in the same period last year.

As a percent of sales, fourth quarter operating expenses declined 70 basis points to 16.9%, compared with 17.6% in the same period last year. This improvement was due to higher sales volumes and better fixed cost absorption in our distribution segment, the change in sales mix to a higher concentration of distribution and fuel center sales, and the continuing improvement in store labor productivity. Total fourth quarter operating expenses declined to 76.7 million from 80.4 million in the same period last year. This year's fourth quarter operating expenses included favorable insurance reserve adjustments and a contract termination payment received from a vendor that reduced operating expenses by a total of 2.2 million.

As mentioned in our press announcement, the insurance reserve adjustment related to a lower than anticipated actuarial valuation for our workers compensation benefits and our redesigned health care benefit plan.

Reported fourth quarter operating earnings were 10.4 million compared with 7.9 million in last year's fourth quarter. Earnings from continuing operations for the fourth quarter were 5.7 million, compared with 5.3 million in the same quarter last year. As previously disclosed, last year's fourth quarter included a 1.3 million favorable income tax provision adjustment. Lower interest expense, store labor efficiency improvements, and better fixed cost absorption from higher distribution volumes also contributed to the fourth quarter earnings improvement.

Reported net earnings for the quarter were 5.3 million or $0.25 per diluted share compared with 5.8 million or $0.28 per diluted share in the prior year. Fourth quarter net earnings included a loss from discontinued operations of .4 million or $0.02 per diluted share compared to earnings from discontinued operations of .5 million or $0.03 per diluted share in the same quarter last year. Last year's fourth quarter earnings from discontinued operations also included a $.7 million favorable income tax provision adjustment.

Turning to our business segments, fourth quarter gross redistribution sales increased .7% to 260.5 million from 258.8 million in the same period last year due to the addition of new distribution customers and increased sales to existing customers. Fourth quarter operating earnings for the segment increased 28.5% due to the favorable insurance reserve adjustment, the change in the LIFO provision to a credit this year from a charge last year, and the contract settlement payment we received from a vendor as disclosed in our press announcement.

Fourth quarter retail sales were 192.3 million, compared with 198.9 million in the same period last year. Total comparable store sales declined 1.7%. Fuel sales contributed a positive 2.5% to comparable store sales during the quarter while the shift in Easter holiday sales to the fiscal 2007 fourth quarter lead to a 1.5% decline in comparable store sales.

Fourth quarter retail operating earnings increased 44.5% to 2.1 million from 1.4 million in the same period last year. The increase was due to the favorable insurance reserve adjustment for workers compensation, our redesigned health care plan and an improvement in store labor efficiency. These items were partially offset by higher utility expense and increased bank card processing fees.

Turning to the balance sheet long-term debt at March 31, 2006, including current maturities, declined 30.7% to 65.7 million from 94.8 million as of March 26th, 2005. Long-term debt as of April 22nd, 2006 was 132.1 million as a result of additional borrowings to fund our acquisition of the D&W stores. This balance includes 22 million in capital lease obligations assumed in the acquisition.

I will now cover our outlook for our 53-week fiscal 2007. We expect distribution segment sales to continue to show growth compared with the year ago period because of the new stores added to our distribution base during fiscal 2006, our improved private label and perishable product offerings, and because many of our customers are in good positions to take advantage of the changing grocery industry landscape. In addition we will have the benefit of the Easter holiday sales in the upcoming first quarter.

Turning to our retail divisions we do not anticipate any additional supercenter openings against our corporately owned supermarkets for fiscal 2007 and we will cycle the remaining openings during the upcoming first and second quarters. Retail comparable store sales should gradually improve as these supercenters are cycled and as we gained sales from the opening of additional fuel centers. We expect these factors to result in positive comparable store sales growth in the low single digits for the fiscal year. Our acquisition integration efforts are well underway and as a result, in the first quarter, we will incur costs for training and start-up related to cleaning the stores and restocking shelves.

Also as mentioned in our press announcement, we are closely monitoring and evaluating the effect of our acquisition on market conditions and may consider additional restructuring of our retail operations. Should we move forward with any restructuring, we could incur up to 3.6 million on an after-tax basis of restructuring and start-up charges in the first quarter of fiscal 2007. Excluding these two charges we expect our full year earnings in fiscal 2007 to exceed earnings in fiscal 2006.

Fiscal 2007 gross margin should be above the levels achieved in the previous year due to a greater mix of higher margin retail sales from our acquired D&W stores and synergies resulting from the operational integration of these stores. However we expect the gross margin improvement to be partially offset by higher SG&A rates as a percentage of sales, due to the greater mix of retail sales.

We expect capital expenditures for fiscal 2007 to range from 30 to 35 million, and depreciation and amortization expense to range from 22 to 25 million. In addition, we expect interest expense to be approximately 15 million in fiscal 2007.

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

Thanks, Dave. We are looking forward to another successful year in fiscal 2007 and continue to have great confidence in our business strategy and growth opportunities. Our confidence stems from the expectation that our corporate store markets will have fully absorbed the additional retail grocery space that was added during the past year. In addition we have significant opportunities to realize additional retail and distribution sales growth, combined with operational synergies from our recent D&W acquisition.

During the coming year our priorities will be to integrate our D&W acquisition, to share best practice opportunities between our store formats, to gain the retail and distribution operational synergies that we are expecting from the acquisition and to look for new growth vehicles.

We believe it is important to realize that the acquisition of D&W is just one step toward the fulfillment of our strategy to grow the Company on both an opportunistic and organic basis. We will also continue to develop retail strategies designed to meet the needs of our consumers by expanding our offerings related to healthy living and convenience.

With the D&W fresh market locations we now offer customers a larger prepared food selection, Starbucks coffee bars, retail banking, sushi bars, and more extensive wine departments. We continually evaluate opportunities to expand these types of consumer offerings at our Family Fare and Glen stores where we believe it will better serve our customers.

We also expect to open additional fuel centers at existing store locations and in-store pharmacies where feasible. All of our efforts are designed to create a network of retail stores that offer consumers a distinct, convenient, and satisfying end to end shopping experience.

In addition, we will be focused on continuing to expand our distribution business by seeking additional customers and by growing sales to existing customers. Our award-winning portfolio of private-label products and brands developed during the past year, as well as the recently completed expansion of our perishable products warehouse capacity and upgrade of our produce ripening process to the latest technology, are just a few of the tools that we expect will allow us to generate distribution sales growth. In addition, as we become a more proficient retailer, our distribution customers continue to develop confidence in our ability to be a source of knowledge.

In summary, during fiscal 2007 we will be working to further enhance our value-added distribution capabilities while we create a network of retail stores that offer a distinct, convenient and more satisfying end to end shopping experience that is among the best conventional retail grocery offers in our marketplace. We will continue to execute a business strategy that places the retail consumer and distribution customer at the heart of our business decisions. We remain optimistic and confident about our future growth prospects and look forward to extending our successful track record in fiscal 2007.

We will now open the call for your questions.

(OPERATOR INSTRUCTIONS) Chuck Cerankosky of Key/McDonald Investments.

Good morning, everyone. Craig looking in the note here, you guys mentioned the influx of higher energy costs on consumer spending. Can you quantify that and how do you arrive at that conclusion?

If you look at just the raw cost of fuel and the raw cost of energy, the impact on us this year was significant - much more than anything that we had anticipated. And you know the trickle-down effect onto the consumer is realized and in particular, in our stores, we saw a significant increase in our own heating bills. Also, we saw in our stores a change in mix of sales per transaction versus customer count and we attribute that to customers reducing the number of chips because of the cost of gas.

How about their actual mix? Are they buying cheaper bottle of wine, or no wine at all? That sort of thing?

That's so hard to quantify. I will say that our private-label penetration continues to excel. We are showing significant improvements year-over-year - as much as 2% of total sales which would be around a 10% increase in private-label penetration.

So 10% increase in dollars sales and 2% of the mix is.

Yes.

All right. And on the fuel centers, how many did you have at the end of the year and how many are you planning for this year?

We ended the year with six. We have deals on two more and we continue to mine future prospects.

Dave, can you give us some sense of the profitability of gas?

We really a look at that in the whole picture, including the store lift. So when you put all those pieces together we are comfortable with our return on that.

You are speaking in terms of an ROS or an ROI?

An ROI. Actually we look in the world like internal rate of return. We believe it meets our requirement for that.

What was the total LIFO credit for the Company in the quarter and the year?

Actually it was a net expense for the year, I believe, about 700,000. For the quarter the net credit was 300,000.

All right. I will let somebody else have the floor -- .

Let me just make sure it was actually 850,000 for the year and the quarter was 300 credit.

And the year was an expense?

Right, an expense of 860.

(OPERATOR INSTRUCTIONS) [Karen Short] of Friedman Billings Ramsey.

Couple of questions. Can you just quantify the impact of generics on the Farm comps in the fourth quarter? (inaudible) questions. I have a bunch but -- .

You're talking about generic prescriptions?

Yes. The impact on the same-store sales number or the same-store sales (inaudible).

We think it runs somewhere between 7 and 8%, that it is negatively impacting the top line as a result of the movement from branded to generic drugs.

So the impact on the comp, like if your comp was -2.7 in the second quarter?

Yes about 30% of our business is the Farm and about 40% of that business is pharmaceuticals.

40% of Farm brands. Okay. I think I can back into it. Can you also maybe just talk a little bit about the opportunities you see for the President's Choice private-label? I know you recently got an agreement to distribute that and I think you have the right to distribute it in additional states other than Michigan? And also how many SKUs does that include?

I would like to ask Dennis to address the question for you.

Currently, Karen, we are stocking 114 President Choice items to start although (indiscernible) in the licensing agreement looking forward to us expanding that going forward as we mutually agreed upon, items that are right for the marketplace. It is brand-new for us as you know but we had a gap in our private-label portfolio where we did not have a brand for that premium tier private label. So we believe this is going to be extremely accretive to our private label top line in that it has applications not only in the corporate-owned stores but in our distribution customer stores - particularly those that have an upscale clientele. So we are excited about the opportunity to the able to build that going forward.

And what are the states you have the rights to?

We have the exclusive rights in the state of Michigan and then the rights become a little bit customer-defined as we move forward outside of the state of Michigan, with some regions and some customers specifically spelled out.

And just following on Chuck's question, so, are you saying in the first quarter, would you say that consumer behavior -- I mean, as impacted by energy costs -- is kind of unchanged from fourth quarter? Better? More cautious? Less cautious? How would you -- ?

I would say it probably hasn't changed much. The only thing that I can speculate is that the consumer has become more accustomed to the higher price of fuel. We look at the gallons sold in our fuel centers and it is an extremely steady, very reliable, very predictable number. And by the way it's a number that we are happy with.

Okay. Can you just talk a little bit about what is going on with the bakery operations like, obviously, you have been served some opportunities based on (indiscernible).

It's a pretty simple opportunity for us. We feel that - and this really doesn't have much to do with D&W by the way - we just feel that in our Family Fare stores we can improve the entire quality of the product and the efficiencies on a net basis by producing more product in our stores. And, by the way, on the impact on our organization is de minimus in that many of those employees will be transported and transferred into the supermarkets where we will produce the product.

The only issue that we would be faced with is a charge on the lease obligation for the facility.

Okay. Then just to clarify, also, in your guidance are you saying that you expect fiscal 2007 earnings to improve off of '06. When you say that are you referring to operating earnings should improve off of the 37 million that you reported in fiscal '06?

Yes we are referring when we talk about earnings we are talking from our earnings from continuing operations which I mean is just two lines further down so year -- .

The answer to the question is yes.

(OPERATOR INSTRUCTIONS) Chuck Cerankosky.

Thank you. Craig, in looking at the D&W integration, you've only had it less than a month if I remember correctly or.

March 25th.

Okay. Just over a month. Where are you at? What can you share with us with regard to the integration schedule? What is being done? What is sort of the timeframe and how that will affect the earnings contribution D&W this year? What I'm thinking to hear is that D&W's contribution will improve as the year progresses after you get past certain assimilation programs.

I guess the first thing that we have completed is the training of 1400 employees. As a matter of fact, we did something that the organization should be proud of and that is we actually brought 1400 D&W people into our facility here in Byron Center for a full day of orientation, so that Day 1 when we took over, these people understood what Spartan Stores was all about.

And most every store we are completed with the re merchandising of the store from a planogram standpoint. We have integrated all of our private labels. We've integrated a display program. Our baskets of valuables, our wall of values. We have converted some perishable departments in particular the stores that were converted from D&W to Family Fare where we had to right size the perishable offering. We've completed that.

We are currently completing a major remodel in a store in Grand Haven and we are in the midst of a major remodel of the store in Holland. We have minor remodel work to do in the store in Caledonia. This is a store that was enlarged by D&W in the midst of the transaction; and we have some work to do in Caledonia, primarily in the decor area, because we are working on a decor package that would be appropriate for that location. It's going very smoothly. The employees have been very very good. One of the smoothest transactions that I've ever been associated with.

Of course they were delighted to participate in this deal. It's been a very good thing.

But we are making investments. The first half of this year is going to be fraught with investment on our part to get these stores to where we think they should be and which is back to the good old days when D&W was king of the high-end offering. That's what we are trying to do is restore D&W to the glory that it once had as the cachet supermarket to shop in western Michigan.

Would be fair to say that if D&W is going to contribute X to fiscal 2007 earnings, we see more in the second half than in the first half because of these costs upfront?

Well sure that's the way it is. Remember one thing. We get an immediate benefit from D&W in distribution shipments. So that right away we are able to be able to deal with. It's just a matter of whether the stores come up to speed as soon as we want them to and what is the investment on our part to get them to where they need to be.

Do you see any customer feedback yet that you can rely upon?

We haven't taken the time yet because we really are not in a position to request customer feedback at this time. We will be doing research, though, on a location-by-location basis.

Looking at the bakery and some of the other things you're doing in the stores, it sounds like you are trying to just have a better freshness emphasis throughout the chain. Is that a fair conclusion?

Clearly. Clearly. That will be a continuing point of differentiation for a neighborhood supermarket like ours so, yes, you're absolutely right.

Thank you. Good year.

Karen Short of Friedman, Billings, Ramsey.

Just curious, also I know that Farmer Jack recently completed their distribution transition to C&S and they're kind of in the early stages of repositioning themselves in the Detroit market. I'm wondering if any of your customers have seen any impact from their maybe slightly more aggressive stance or if you are getting any -- if you're seeing any reaction in the market from Kroger?

We have not seen any reaction by anybody.

Mr. Sturken, there are no further questions at this time.

Okay. Thank you. Thank you everyone. I would like to again acknowledge everyone's participation in this call and we will conclude it at this time. Thank you very much.

Thank you, ladies and gentlemen, for your participation in this morning's teleconference. You may disconnect your lines at this time.