SpartanNash Co (SPTN) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Spartan Stores Incorporated second quarter fiscal 2007 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 Incorporated. Thank you, Mr. Sturken, you may begin.

Thank you. Good morning, everyone, and thank you for joining our fiscal 2007 second 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; EVP of Retail Operations, Ted Adornato; EVP of Supply Chain, Derek Jones; and EVP, General Counsel and Corporate Secretary, Alex DeYonker.

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 risk and uncertainty. 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.

Our first quarter financial momentum continued through the second quarter and again exceeded our performance expectations. We are pleased with our second quarter performance, and having now completed the first half of our fiscal 2007 are on track to report another solid financial performance for the full fiscal year. Our second quarter net earnings set a quarterly record for our Company, including more than 36% year-over-year. These results show that we are successfully executing our business plan and they validate our strategic direction. Our second quarter benefited from a strong performance at both operating divisions. The strong quarterly retail sales growth was the result of our acquisition, good operational execution at the store level, market conditions that led to the closing of competing supermarket retailers in northern Michigan, and our store rationalization decision implemented in the first quarter.

Our distribution division sales continued to benefit from new customers and improved sales penetration with existing customers. During the quarter, we continued our efforts to integrate and turn around the acquired D&W stores. We began to implement our category management practices, and have reintroduced our premier portfolio of private label products to these stores. As you may recall, 6 of the original stores were converted to the Family Fare retail banners. These stores have responded very well to the format change and continue to improve. We have just started to infuse capital into the remaining 10 stores. Merchandise resets and physical facility improvements have been completed at several of these stores, and we are scheduling merchandise resets and remodel work for several other stores during the next 3 to 4 quarters. We believe that the performance of these stores has now stabilized, and we expect their performance to continually improved during the next 12 to 18 months, as our operational enhancements and market strategies gain traction.

Our retail promotional activity was slightly more aggressive in the second quarter compared with the first quarter in order to capitalize on the retail market conditions to take advantage of market share opportunities. During the quarter, we cycled the remaining competitive supercenters that opened during fiscal year 2006. You may recall that during fiscal 2006, we had a record number of competitive supercenter openings. We do not expect any additional supercenter openings in the markets that affect our own supermarkets during the remainder of our fiscal year.

Our distribution and business segment gains have significantly improved our strategic market position, as we have continued to recapture incremental market share and are now an even more significant player in the perishable product business. Our meat and produce volumes are now on track to exceed $400 million annually. The recent capital investments made to improve our perishable distribution facilities has led to our current growth and has positioned us to make additional market share gains in these key strategic product categories.

Lastly, during the second quarter, we strengthened our executive leadership team by appointing 2 seasoned and highly regarded executives to lead our supply chain and corporate legal affairs. Derek Jones was appointed Executive Vice President, Supply Chain, and Alex DeYonker was appointed Executive Vice President, General Counsel, and Corporate Secretary. Both are skilled leaders with a wealth of experience in their respective professions, and we formally welcome them to our executive management team. I will provide additional details about our business outlook for the second half of fiscal 2007 following Dave Staples' review of the quarter's financial results. Dave.

Thank you, Craig, and good morning, everyone. Consolidated net sales for the second quarter increased 15.2% to $559.4 million from $485.5 million in the same period last year, due primarily to the addition of D&W stores, retail comparable store sales growth of 6.4%, higher distribution sales to existing customers, as well as new distribution customers. Gross margin for the second quarter increased 70 basis points to 20%, compared with 19.3% in last year's second quarter. The increase was due to the continuing change in our sales mix to a higher concentration of retail sales, synergies gained from operationally integrating the acquired stores, and an increase in sales of higher margin perishable products at our distribution division. For the second quarter, our retail segment comprised 49.7% of consolidated sales compared with 45.7% in the same period last year.

Total second quarter operating expenses increased to $94.3 million from $81.3 million in the same period last year. As disclosed in our press announcement, operating expenses benefited from a $1.3 million pretax adjustment to our workers' compensation, healthcare, and general liability insurance reserves. Last year's second quarter included a pretax charge of $600,000 for a professional advisory fee associated with the Company's strategic review initiative. As a percentage of sales, second quarter operating expenses increased to 16.8% from 16.7% in the same period last year. This increase was due primarily to the higher fixed costs associated with the increased mix of retail sales and higher utility, fuel and bank card fees.

Reported second quarter operating earnings increased 44.8% to $17.7 million from $12.2 million in the same period last year, as a result of higher sales and stronger profit margins in both business segments. Reported net earnings for the quarter reached a new high, increasing 36.2% to $9.3 million, or $0.44 per diluted share, from $6.9 million, or $0.32 per diluted share, in the same period last year. This increase was partially offset by higher interest expense due to the additional outstanding borrowings to fund the acquisition and numerous federal reserve initiated rate increases.

Turning to our business segments, second quarter retail sales increased 25.3% to $277.9 million from $221.9 million in the same period last year, due to the addition of the 16 acquired stores and strong comparable store sales increases of 6.4%. The acquired stores contributed approximately $46 million to the second quarter retail sales, fuel center sales contributed 3.5 percentage points to the comparable store sales increase. Second quarter retail operating earnings increased 50.5% to $9.9 million from $6.5 million in the same period last year. The insurance reserve adjustment mentioned earlier benefited the quarter's retail operating earnings by approximately $800,000. The improvement in operating earnings was partially offset by higher utility expenses and bank card processing fees.

Second quarter distribution segment sales increased 6.8% to $281.5 million from $263.7 million in the same period last year, due to new distribution customers and higher sales penetration with existing customers. Second quarter operating earnings for the segment increased 38.1% due to better fixed cost absorption from the additional D&W stores sales volume, and incremental volumes from new and existing customers. Operating earnings for the segment also benefited from the insurance reserve adjustment by approximately $500,000.

Turning to the balance sheet, long-term debt at September 9, 2006, including current maturities and capital lease obligations from the acquired D&W stores increased to $124.1 million from $65.7 million at March 25, 2006. Improvements in earnings and working capital utilization, however, allowed us to pay down approximately $11.5 million in outstanding borrowings since completing the acquisition.

I will now cover our outlook for the remainder of our 53-week fiscal 2007. We expect distribution segment sales to continue to show growth compared with year ago -- with the year ago period, but at a moderating rate, as we [inaudible] some of the new customer gains from last year and the expanded supply agreement with one of our largest customers. In our retail division, we expect retail comparable store sales to be in the low to mid single-digits for the remainder of the fiscal year. Our expectations are based on incremental sales, contributions from the opening of 2 more fuel centers, and continued sales strength from our store rationalization effort, and the exit of a supermarket competitor in our northern Michigan market. We will, however, continue to monitor the slowing housing market and auto manufacturing industry, and their effect on the Michigan economy. We continue to expect fiscal 2007 gross margins to be above the levels achieved last year due to a greater mix of higher margin retail sales from our acquired stores, a higher margin mix of products sold, and the synergies resulting from the integration of these stores.

We expect SG&A expense as a percentage of sales to increase compared to last year, due to the higher mix of retail sales and higher employee compensation costs. The increase should be partially offset by better fixed cost absorption from the expected higher sales volumes. We anticipate fiscal 2007's capital expenditures will range from 30 to $33 million, and depreciation and amortization expense will range from 22 to $24 million. In addition, we expect interest expense to approximate $13 million in fiscal 2007. I will now turn the call back to Craig. Craig?

Thanks, Dave. As stated earlier, fiscal 2007 is progressing well, and so far has exceeded our performance expectations. We are successfully executing the key elements of our strategic business plan and are living up to the expectations that we set during the past several years. We have successfully grown retail and distribution sales both organically and through prudent acquisitions, while keeping a sharp focus on sustained profitability. We will continue to focus on improving our acquired retail stores in order to bring them up to our high performance and profitability standards. Our business strategies will remain consumer-centric, focusing on consumer convenience, quality products and services, healthy living, and we will be expanding these strategies to all of the supermarkets in our retail network. We believe that we are developing one of the best consumer offerings among conventional supermarket operators in our markets, and our increasing market presence demonstrates that this strategy is working. We are also actively evaluating potential retail store acquisition opportunities that would allow us to expand our presence in existing or adjacent markets.

From a new facility standpoint, we expect to open up to 2 fuel centers at existing stores, to begin construction on 1 replacement store, and to secure sites for up to 2 additional stores during the remainder of this fiscal year. From a distribution standpoint, we continue to seek opportunities to expand our customer base and to increase sales to our existing customers. With our expanded perishables distribution capabilities, retail operations expertise, comprehensive retail support services, on time delivery record, and portfolio of award-winning private label products, we have a compelling value-added proposition for distribution customers. We will continue to leverage these competitive advantages to gain new customers and increase sales penetration with existing customers.

Additionally, I will brief you on the union contract negotiations for associates at our Grand Rapids Distribution Center. This past Saturday, our distribution associates voted to ratify a new 5-year contract, and it was just approved by the union's national office on Monday. This is a fair agreement that represents a good blend of benefits for both sides. Our valued associates receive favorable compensation and benefit packages, while we receive the necessary flexibility to improve our operations. We will record a pretax charge of $800,000 in our third quarter related to a signing bonus, which was given in lieu of a raise for the first year of the contract.

In closing, I will say that our strategy is working, we are consistently meeting our performance expectations, and we remain on track to achieve sustained profitable growth. We will now open the call for your questions.

[OPERATOR INSTRUCTIONS] Chuck Cerankosky, FTN Midwest.

Good morning, everyone. Good quarter. Craig, could you -- first question I have is -- has to do with the Teamster contract.

Yes.

With that signing bonus, is that -- covers raises for the entire duration of the contract?

No, that just covers the first year, Chuck.

Okay.

And some members of the bargaining unit will receive increases in the ensuing years, but it's based on job classification.

All right. Any significant work rule changes or benefit adjustments in the contract?

Well, we were able to get an increased participation on the part of the employees on the benefit cost. We're very happy to be able to do that. We also were able to get a new hire or a second tier arrangement for people that would be added to the workforce going forward.

Okay. Thank you.

Yes, one other point is that we were able to elevate the productivity hurdle that we have for our employees.

Those were engineered work standards?

That's correct.

Okay. Switching to another subject, could you touch on, again, the store development plans for the remainder of this year? And what are you looking at for next year? And I'm talking about relo's, expansions, new construction.

First of all, we have 2 gas stations that are under construction that will open pretty quickly. We have -- we will begin construction on a replacement store in Allendale, which is a very good community. We have a very good store there now. And we're going to replace that store. That project has begun. And we have secured 2 sites on the east side of Grand Rapids, and that's a work-in progress to get those started.

Those will be not new stores, or those will replace other stores?

1 is new, 1 is incremental.

Okay. All right. And how about the acquisition climate for further in-market acquisitions?

Can you comment on that?

Yes, can you comment on that? Is there anybody you're talking to right now?

You know, that's a tough question. We've said that we are actively pursuing opportunities. And we are -- it's a work-in-progress that is, of course, highly confidential.

Okay. What's driving the distribution sales growth? That's pretty strong.

Well, new customers. Remember, we stated that in fiscal year '06, we added 51 new customers, and those -- that business is starting to mature. We've added additional business this year. We have probably on an annualized basis, we'll add an additional $25 million in sales with customers that came into the fold this year. And we are generating higher purchase concentration with our retailers, particularly in the area of perishables.

Do the new customers, Craig, tend to be located in the eastern part of the state, more than western Michigan?

No, not really. I would say they're equality distributed. One new customer that came on board, and it's over a $10 million business for us, is actually in the western Michigan area.

Okay. During the first quarter you indicated you wanted to invest more gross margin to drive sales in the retail segment of the business. Just looking at the numbers, it looks like some of that occurred. Are you happy with that balance right now? And what should we expect? Because we still saw a pretty healthy increase in the operating margin.

Yes, we are happy with the investments that we've made. It certainly paid off for us, and I don't see any significant change in our go-forward strategy.

Would we -- is this sort of a normalized margin that we're looking at now in the retail segment? Or should we expect some further reinvestments? Or is there incremental gains now that sales are comping roughly 3%, ex-gas.

Well, that's a very dynamic number that is affected by what happens within any given market at any given time. But we -- one of the things that affects our margin performance is competitive activity, new supercenters that open in our trade area, and as I stated earlier in the conference call, we have no more new supercenters to open in the fiscal year against the stores that we own and operate. So I would -- that would suggest that our gross margin at retail would be very stable.

Chuck, I think it's a more targeted approach that we're using today. We have the capability of being able to carve out those marketplaces where we think we have an opportunity to gain share, and we target them accordingly.

Thank you.

[OPERATOR INSTRUCTIONS] Karen Short, Friedman, Billings, Ramsey.

Just first, housekeeping. Can you just give me the same store sales for the Farm stores?

I think it's like a negative 2% for the second quarter.

Okay.

By the way, what's driving that, Karen, is a Wal-Mart supercenter opened right in the heart of Toledo during that period. So that's really what that's all about.

Oh. Okay. So that's actually a pretty decent improvement, then, sequentially?

I would say that our comp sales there would be sort of stable.

Okay. They were what, minus 2.7, I guess, in the first -- no, they were plus 0.8, right, in the first quarter? Isn't that right?

Correct.

The supercenter opened during the second quarter?

I think it opened right at the end of the first quarter, didn't it? June?

Little bit into the second quarter.

Okay. Do you -- just since you brought up the Wal-Mart subject, can you just comment on what you're thinking is going forward, given Wal-Mart's announcement on the $4 generics? And I know that they've announced select markets, but it sounds like they're going to roll it out nationwide. What is -- have you kind of evaluated the impact on the Farm for that?

Well, first of all, I don't think it affects the Farm trade area yet. I think where they rolled it out is way far away from us. We -- I think it has a lot to do with what other competitors do, not just what Wal-Mart does. I mean, the Farm really competes head-on with Walgreen and other [inaudible] drug operators. And I think that's the driving force, is what happens in the marketplace in general, not just at Wal-Mart. Because remember, Wal-Mart on a pharmacy basis, does not have anywhere near the penetration that they have, say, in the balance of their business.

Right. Okay, but so far, you haven't seen that in your market, regardless?

No.

Okay. Can you just comment a little bit about your strategy, what you did with the Carter stores, and kind of update us on which sites you won in the bid, and what your plans for them?

Yes. Well, first of all, we were able to purchase the equipment, and gain control of the equipment. We were able to also purchase some inventory. And it appears that those stores will not be reopening, which sort of solidifies our position as the conventional operator in those markets.

So, of all of the sites, you don't plan on reopening any of the stores?

Not at this time. Well, actually, there's 1 store which is something that we want to do something with, but it's a negotiation with the landlord, et cetera.

Okay. Okay. And so -- but, how many stores did you actually purchase the equipment and inventory?

4.

4?

4, yes.

And so, is there a fifth store that you're in negotiation with?

Pardon?

Is there a fifth store that you're currently in the process of discussing?

Yes, that's correct.

Okay. Maybe can you just talk a little bit about what you're seeing now in the third quarter, now that we've seen gas prices at the pump coming down pretty steadily? Are you seeing a shift in consumer behavior? A positive shift in consumer behavior at all?

I don't think that we could say that. It's amazing what's happened within this whole period of time that prices went up, because we did not see gasoline consumption suffer very much. Which would indicate that people's travel experience was about the same. Now that we've seen the price of fuel go down, we haven't seen a significant increase in consumption there. It's -- I mean, to us, from our point of view, the gasoline pricing has had a de minimis impact on our business.

That's interesting. Okay. And then just I guess, switching gears to distribution. Obviously, 2 of your larger competitors lost some pretty significant customers in the state of Michigan. What are you seeing just from -- in the competitive dynamics in the industry from a distribution perspective? Are you seeing higher -- are they passing on higher prices to offset the loss of the customer? Are you seeing any of that, or -- ?

It's possible that some customers -- existing customers of those suppliers would be impacted by a loss of other customers, because that's the way they sort of structure their cost-plus fees. But really, our situation is, we have a valuated relationship with our existing retailers, which seems to be something that other retailers have a strong interest in. And we've been able to garnish additional distribution business and customers primarily because of the total package that Spartan offers.

Okay. And then, I guess, just the last question is, last quarter you had finished the transition, I guess, to move bakery back to the stores. Can you maybe just talk about that a little bit, and what you're seeing?

We're very happy with it. It's been a very good experience for the stores. It puts, we think, probably a little bit fresher, more wholesome product in the hands of our consumer. And it has reduced our costs.

And that was done at all of the stores by the end of the first quarter? Right?

Yes, that whole transition was completed.

Okay. That's all I have for questions. Thanks.

Chuck Cerankosky, FTN Midwest.

This is a follow-up on Karen's gasoline question. Craig, are you -- so is there another way to look at this gasoline price volatility, and what you're seeing in terms of gallons purchased, does gasoline continue to be an attractive promotional tool for you guys, no matter what price it is at the pump? Whether it's $2 a gallon or $3 a gallon?

Oh, absolutely. Absolutely. Our gasoline initiative has been a very successful investment for us. And we are able to promote our core business, our supermarket business, via the gasoline. And as you know, we had the technology in place to be able to promote both directions. We can promote gas with our supermarkets. We can promote our supermarkets with gas. We have the probably state of the art technology, and we are taking advantage of it. We really think that our fuel initiative is one of the best things we've done.

How many pumps do you have installed right now? Or, stations do you have right now?

We have 7 open today, with 2 coming on stream fairly quickly.

And what do you think you'll add in fiscal '08?

I would hope 4 or 5 additional.

All right. Thank you.

Karen Short, Friedman, Billings, Ramsey.

Just 1 last question. On last quarter's call, you talked a little bit about rolling out Curaquick, I guess, to some of the Farm stores. Can you just update us on -- ?

Yes, we're happy with the experiment that we conducted at the Farm store in Toledo, and we are going rollout 2 additional Curaquicks within the next 4 to 6 weeks.

Can you give us some metrics on how that's performing? Because I think you had said the cost to roll it out was -- remind me again what the cost was for Curaquick at one store?

Oh, $100,000, probably. That would be the high-end. Because what we're able to do is transition our video rental space to Curaquick. And really, you're talking about just very minor kind of carpentry, paint, and lighting in order to prepare that area for the Curaquick center.

And what kind of sales lift are you seeing in stores overall? Or are you seeing any?

It's early to say that this is what the impact is. But it's a positive impact, and it's probably a little bit too soon.

But right now, 2 stores kind of more for the end of the year,and then -- ?

Oh, yes. We think it's right in the sweet spot of what our offering should be in a Farm environment.

Okay. Okay, great. Thanks.

We show no further questions in the queue at this time. I would like to turn the floor back over to management for any further comments.

Well, again, we are very happy with our performance. And we're happy to have you call in to our conference. And we look forward to our third quarter conference call down the road. Thank you.

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