SpartanNash Co (SPTN) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Spartan Stores, Inc., third quarter fiscal 2007 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

Ladies and gentlemen, I must remind you that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss 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, among others, competitive pressures among food retail and distribution companies, general economic and market conditions. Additional information about risk factors and the uncertainties associated with the company's forward-looking statements can be found in the company's earnings announcement, annual report on Form 10-K and the company's other filings with the SEC.Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements.

Spartan Stores disclaims any intention or obligation to update or revise any forward-looking statements.

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 now begin.

Thank you, Tina. Good morning, everyone, and thank you for joining our fiscal 2007 third quarter earnings conference call. With me this morning are members of our team, including Executive VP 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 and General Counsel Alex DeYonker.

We are pleased to report that our third quarter net earnings grew more than 75%, representing our second consecutive quarter of 30%-plus year-over-year net earnings growth. Third quarter consolidated net sales, gross profit margin ratios and operating earnings also reached five-year highs.

We are very pleased with these results because we achieved them despite the challenging retail economic climate and the lack of snow in our northern Michigan resort areas. We believe these results demonstrate the underlying and fundamental strength of our business strategy and execution abilities.

During the quarter, our primary focus has been on integrating the D&W operations and improving the stores' physical appearance, layout and merchandising. While we are pleased with the progress to date, these stores at not yet-- not yet performing to their fullest potential.

We will continue to fine-tune the marketing and merchandising strategies at these stores during the next several quarters in order to bring them up to our high performance standards. In addition to the marketing and merchandising efforts, we are currently working on one major store remodel and expect to begin another major remodel in the fourth quarter and first quarter of next year.

During the third quarter we also acquired 12 independent pharmacies that were located in D&W stores. We believe this acquisition will allow us to further leverage our pharmacy initiative and improve our overall customer service at these locations.

In our distribution segment, we know that our value-added distribution services are making a strong contribution to our customers' ongoing success. Recent discussions with our customers revealed a high level of optimism with respect to their retail market conditions and opportunities for continuing performance gains.

With the addition of Derek Jones, our new EVP of Supply Chain, we have also identified a significant number of areas in our supply chain to further improve operational efficiencies as we move forward.

With that business overview, I will now turn the call over to Dave for a review of the quarter's financial results and then rejoin the call to provide you with details of our business outlook. Dave?

Thank you, Craig and good morning, everyone.

Consolidated net sales for the third quarter increased 12.7% to $723.5 million from $642.3 million in the same period last year, due primarily to the addition of the D&W stores and the PrairieStone pharmacies, retail comparable store sales growth of 3.2% and higher distribution sales to existing customers and new distribution customers.

Gross margin and SGA expense rates were primarily affected by the continuing higher concentration of retail sales in our business mix and synergies gained from integrated the acquired stores. For the third quarter, the retail segment made up 46.5% of consolidated net sales compared with 41.6% in the same period last year.

Third quarter operating earnings increased 59.5% to $13.2 million from $8.2 million in the same period last year as a result of higher sales, acquisition synergies and stronger profit margins in both business segments.

Net earnings reached a 6-year third quarter high, increasing 75.6% to $5.9 million or $0.27 per diluted share from $3.4 million or $0.16 per diluted share in the same period last year.

Turning to our business segments, third quarter retail net sales increased 25.9% to $336.6 million from $267.3 million in the same period last year due to the additional 16 D&W stores and the comparable stores sales increase of 3.2%. The acquired stores contributed approximately $62 million to the third quarter retail sales increase. Fuel centers provided an additional $7 million and contributed 2.6 percentage points to the comparable store sales increase.

The retail sales increase, however, was partially offset by a decline in sales at our Farm Stores and $5 million less in sales as a result of the two retail supermarkets that were closed in our first quarter. These two closed stores contributed $8.6 million in retail net sales for the year-to-date period last year.

Third quarter retail operating earnings increased substantially to $5.2 million from $1 million in the same period last year, due primarily to the acquisition and related synergies. Last year's operating earnings included $600,000 in net pretax special charges mentioned in our press release.

Third quarter distribution segment sales increases 3.2% to $387 million from $375 million in the same period last year due to new distribution customers and higher sales penetration with existing customers, partially offset by $6.3 million less in sales resulting from the transition of relationships with two unprofitable distribution customers. Sales to these two customers totaled $7.7 million for the first and second quarters.

Third quarter operating earnings for the segment, including a net pretax charge of $600,000 related to a labor agreement signing bonus given in lieu of a raise for the first year of the contract increased 9.1%. The increase was due primarily to better fixed cost absorption from the additional D&W store sales volumes and incremental volumes from new and existing customers, partially offset by increased employee compensation expense.

Turning to the balance sheet, long-term debt at December 30, 2006, including current maturities and capital lease obligations from the acquired D&W stores, increased to $128 million from $65.7 million at March 25, 2006.

I will now review our outlook for the remainder of our 53-week fiscal 2007. Excluding the extra week in this fiscal year, we expect distribution segment sales for the upcoming quarter to continue to show growth compared with the year-ago period, but at a moderating rate, similar to what occurred during this quarter.

In our retail division, excluding the 53rd week, we continue to expect comparable store sales to be in the low-single-digit range for the remainder of the fiscal year. Our expectations are based on incremental sales contributions from the opening of two more fuel centers, the return of more seasonal winter weather in northern Michigan, the continued sales strength from our store rationalization effort and continuing benefit of the supermarket that exited our northern Michigan market.

We also expect fiscal 2007 gross margins to be above the levels achieved last year due to a greater mix of higher margin retail sales and realization of additional operating synergies. As a percentage of sales, SG&A expense for the fourth quarter should increase relative 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.

Fiscal 2007 capital expenditures should range from $31 million to $33 million and depreciation and amortization expense will range from $21 million to $23 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. With the majority of fiscal year 2007 now reported, we remain on track to exceed last year's financial performance and our acquisition of the D&W stores is making the positive contribution to our growth that we had contributed-- sorry, that we had anticipated.

We will continue to execute the key elements of our strategic business plan, which include growing retail and distribution sales organically and through prudent acquisitions within our Midwest market area while staying acutely focused on sustaining profitability.

In our retail segment, we will begin construction on our first prototype Family Fare Supermarket during the fourth quarter, which will replace an existing store. This will be a flagship store and will include approximately 48,000 square feet of retail space with our full complement of consumer offerings, including the latest merchandise, a wide variety of private label products, convenient service offerings such as a drive-in pharmacy and fuel center, and a new store layout designed to improve the consumer shopping experience. This will be our first newly constructed store in more than four years.

As I mentioned earlier, we will also continue to integrate and improve our D&W retail stores by making physical facility improvements, strengthening our merchandising efforts and by further filling out consumer offerings. During the next two quarters we will begin significant remodels at two additional stores and will perform exterior facility improvements at an additional four stores.

Early in the fourth quarter we opened our first D&W Quick Stop fuel center, which was part of a larger store remodel project that included the addition of a drive-through pharmacy. Additionally, we expect to open another D&W Quick Stop Fuel Center today. We believe that these physical store improvements, better merchandising practices and more complete consumer offerings will continue to drive additional sales and profit growth from the D&W retail stores.

We continue to execute retail business strategies that are consumer centric, with a focus on convenience, quality products and services and healthy living. We will be gradually implementing these consumer-centric strategies, particularly the healthy living emphasis, at each of our 68 retail supermarkets.

Turning to our distribution segment, we are very pleased with our recent success in attracting new distribution customers and expanding sales with existing customers. We remain optimistic about the long-term sales and profit growth prospects of this business.

In addition, we realize that there are also attractive opportunities to improve efficiencies in this business. As I mentioned during the opening, we hired Derek Jones in the second quarter. He leads our supply chain and, along with his team, they will have identified a number of areas where we believe we can make significant efficiency improvements.

Those areas include making better use of labor productivity by introducing standards to new operating areas, completing the implementation of voice recognition technologies in our perishable operations and making more efficient use of warehouse space. Now that we have identified these areas of operational improvement, we will begin taking the steps to realize these improvements during the next several quarters.

In addition to these initiatives, we continually evaluate potential retail store and distribution acquisitions that make good economic sense and that can further increase our market presence in our outside of our existing trade area. To that point, we will be aggressive in the pursuit of this strategic objective, but we will not make a mistake.

In closing, I will say that we are pleased with the solid financial and market share results being produced by our business strategy. We continue to identify areas of our operations that can improve and believe that we are-- ample opportunities within our market to continue our track record of sustained, profitable growth. We will now open the call for your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Chuck Cerankosky with FTN Midwest Research. Please proceed with your question.

Good morning, gentlemen. A quick question right out of the box. Did you disclose what the terms were of those pharmacy acquisitions? And, Dave, how are you accounting for those? Is it-- I guess you were just getting, probably, a lease, now its sales and earnings flowing through?

Yes. I mean, what we basically did, these stores were inside of the D&Ws that were acquired, but they were owned by an independent entity. So we acquired the script files. We acquired the asset. And so now they'll be part of our regular sales in those stores. So there'll be a lift in sales and they'll flow all the way through the P&L

Okay.

Excuse me, Chuck, these are businesses, by the way, that were owned by D&W and sold by them prior to our acquisition of them. And, of course, we always felt that we'd like to get them back and we were able to negotiate that.

What kind of time lag was involved between D&W selling them and you buying them back?

About a year.

Okay. What'd it cost you? Have you disclosed that?

Chuck, at this point we haven't. It'll be in our-- it'll be in our Q when we put that out, but it was in the $3 million to $5 million mark, including inventory, fixed assets and scrip files.

Okay. All right. What's the acquisition environment like for you? Carter's was kind of a one-off deal in that it had gone bankrupt. Any smaller versions of D&W out there?

Well, yes there are.

Okay.

As stated, this is a strategic objective of ours and it's a process, Chuck. It's something that we work on all the time. There are many opportunities in our trade area and in trade areas that are adjacent to where we operate and to be specific that would also include Indiana and Ohio. But it's a process of evaluation and, as I stated earlier, making a mistake would be something that we are not going to do. So it's a-- we're being very careful, very prudent to make the right decision.

Looking up north where you finally have winter arriving, could you quantify what you lost in the quarter in terms of pennies per share, perhaps, from the lack of snow and can any of it catch up in the last quarter of the year?

Chuck, it may have had an impact of 1% to 2% on our comp sales, which, I mean, converting that into pennies per share it might be, I don't know, a penny or so, or two, but the-- Sometimes we are criticized for using the weather card when we talk about what's going on, but in northern Michigan, skiing and snowmobiling are a major industry. And they employ a significant number of people that are our customers on a regular basis.

And we know that many of these ski areas have just not functioned for the entire month of December which is their sweet spot, particularly around Christmas to New Year's and there-- not only was there no snow, it was warm and it wasn't-- they couldn't produce snow.

Also, in the snowmobile industry in Gaylord, anybody that's been to Gaylord in the winter time, if there's snow on the ground, there's not a hotel room. But there have been, like, zero occupancy in the hotels in Gaylord or in that whole area all winter long because of the lack of snow.

Okay. How about making it up? Can you make any up in the quarter or is it just-- once the time's gone, it's gone.

Well, I think most of it is gone, but there certainly is a pent-up demand on the part of the consumer to recreate in the northern area and I would guess that based on the fact that we're having ski-- snow this week that this weekend it'll be very strong. So we will get something back in that respect.

And can you-- can you talk about gift cards as an element to your third quarter results? How did they compare to last year? Did they move the EPS needle?

Gift cards -- yes, this-- it's become a hot topic. For a retailer like us that doesn't traffic in the ownership and distribution of gift cards, we are just merely a purveyor of gift cards. Gift cards for us are just a form of media for our customer. It's not like we sell a lot of gift cards and record a lot of profit.

The fact is that, yes, our gift card business is up, but the margin of profit on gift cards is de minimus and, matter of fact, I can say that we made less than $100,000 this year so far on gift cards. That's what the impact has been to our bottom line.

And I realize that there are some retailers out there where gift cards are a significant part of their profit picture, but that's just not the case for the average retailer.

All right. Thank you.

Thank you. Our next question is from Karen Short with Friedman Billings Ramsey. Please proceed with your question.

Hey, everyone.

Good morning.

Just a couple questions. So on the distribution side, can you just quantify or remind me how many customers you've added so far this year and maybe just give me some sense of-- well, some sense of the dollar volume and the timing of how it flows through the income statement throughout the year?

The primary addition of new customers really occurred at the end of our '06 and it's now-- it's-- we're sort of getting to the tail end of that significant addition. For example, two of our retailers chose to purchase produce from us and that was not in their original purchase concentration. So we enjoyed, for most of this year, a significant improvement in our produce business because of purchase concentration. Okay?

Also, we added -- I don't know, I don't have the number in front of me -- but I'm going to say probably added at least 30 individual stores to our distribution profile on a year-over-year basis and on a dollars basis, I don't know. Let me just see here. It looks like it might be, for the quarter, between $10 million and $12 million in new business.

For the quarter?

Right.

Okay. Okay, great. And then just on the perishable front, what is-- what would you say your capacity utilization is now in perishables? How much do you think you-- where are you at in terms of what you could expand without being a bit constrained on the--

It varies by product mix, if you look at produce, we're probably at 75% to 80% capacity. In frozen food, we might be in the same number. In dairy and meat we would be between 50% and 75% capacity. So we're in pretty good shape.

Okay. And then talking about expanding on the-- or growing the distribution business organically, in market and also in contiguous markets, what do you think the maximum travel distance is that you could-- well, maximum distance that you could travel and still be able to distribute with the same kind of competitive advantage that you have now in Michigan? I mean, I know the competitive advantage is that you're in Michigan, but you're, obviously, also a better supplier.

Well, I think that 250 miles would be the outer perimeter of any range of distribution from a wholesale standpoint. I think the industry would say if you go beyond 250 miles, you're probably not as-- not anywhere near as profitable.

Okay. Okay, now just switching to retail for a second, obviously, the Farm, we know the same-store sales or the comp was down. Was customer count down or traffic down or was it just a basket function or, sorry, was it just a function of ticket?

Customer count is down slightly and SPT is down slightly in the Farm. Remember what happened in the Farm is right in the geographic epicenter of our major trade area, in Toledo, Wal-Mart opened a 220,000 square foot super center and-- a super center probably has a trade area radius of 5 to 10 miles, which covers up 10 to 12 of the Farm stores.

Consequently, we really did feel it. And keep in mind, the product mix that we sell would be right in the sweet spot of Wal-Mart. But we're-- the effects of that are starting to diminish.

Okay. And then the conventional store base, I mean, obviously, when you exclude what happened at the Farm, conventionals were-- the same-store number at conventionals was solidly up. Was that also-- was it basket and traffic?

Yes. Yes. We have both increased sale per transaction and increased customer count.

Okay. And just on the pharmacy, how many stores have pharmacy now?

Ooh, 46, I think. 49?

49 total.

49.

And that includes Prairie?

Yes.

The recent PrairieStone acquisition?

Yes.

Okay. And can you maybe just elaborate on some of the opportunities that you think this PrairieStone acquisition will present you with? I mean, the stores-- they were already in the stores, but just maybe talk about some initiatives or some things that you're looking at doing? And then I also wanted to just switch gears to D&W and maybe get some examples of ways that D&W's is not currently up to your standards, I guess?

Just to address PrairieStone, one of the strongest relationships of loyalty in a retail supermarket environment is really at the pharmacy. The relationship that a customer has with her pharmacist or his pharmacist is a much tighter bond than, say, with any other department in the store.

And we always see that in a-- and the proof of that is in a declining sales environment, the pharmacy is the last department to decline. It's just a very special relationship between a consumer-- they don't like to move their scrip file from store to store. And we-- we feel that bringing PrairieStone on board gives us that additional bond.

And there's-- there was, by the way, on the part of the customer, they were very happy to see that we reacquired the PrairieStone stores and their comments to our employees were very positive.

Okay.

Now, as far as what other-- what else is going on with D&W that will help-- help us-- where do we feel we can get better execution, well, really, they're-- they're a fantastic fresh perimeter operation and we think that we can continue to harvest the benefit of that, but also by improving center store. I think that the D&W management neglected center store in the last couple years of their operation and we want to get the customer back into the center store and so we have several initiatives that are helping us do that.

And the remodels are really one of the biggest ways of doing that, because we can reset the store and reflow the merchandise and assure that the full complement of product assortment is in place.

Okay. That makes sense. That's it. Thanks a lot.

Hey, Karen, one-- let me correct. The number we gave you for pharmacies was pre-PrairieStone.

Yes, I thought that--

It's 60, in total, with PrairieStone.

Okay.

Okay.

You get a number in your head and sometimes it takes a while to change that out.

Okay. And was the benefit of pharmacy comp also included in the total conventional comp this quarter?

Remember, PrairieStone's in our acquired entities, so those are not in comp.

Oh, okay, great. Okay, thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] The next followup question is from Karen Short with Friedman Billings Ramsey. Please proceed with your question.

I guess if there's no one else asking a question, I'll jump in again. But I just wanted to get some sense. I know, obviously, you're mandated to grow your business and look to make acquisitions. I mean, do you have a goal in terms of timing on doing something more meaningful?

I guess probably the right-- the timing would be the right time. You know what I mean? It's got to be the right thing at the right time. We are-- perfectly positioned to pull the trigger on anything. I mean, we've now digested D&W. It's a matter of tweaking and fine-tuning. So we've proven, also, that-- to the organization and to our board that we can digest an acquisition.

There are opportunities for us, but we want to be sure that-- that we pull the trigger on the right one. And so it's a due diligence process, Karen. It's really more about analyzing and being sure that it's-- it will work for us and that we don't preempt a better opportunity by getting into something a little bit quicker than we should.

But from a timing standpoint, I mean, it's-- it's wide open.

Okay and do you have any thoughts on in terms of something slightly larger scale were to present itself how you would think about financing?

That's already been very well analyzed, yes. Financing is not an issue.

In terms-- but would there be some thought as to equity versus debt?

Karen, I think the answer to that right now is kind of premature. It would depend on the size of the deal, the terms of the deal. I think we'd be premature to say, one way or the other.

Okay.

We're committed to acquisitions that are accretive and that benefit the shareholders, so we would expect our financing decisions to go in that direction, as well.

That's fair. Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] Mr. Sturken, there are no further questions.

Okay. Well, if there are no more questions, we'll conclude the call. On behalf of the team here at Spartan Stores, I think-- I want to thank you for listening and thank you for your comments and we look forward to discussing our fourth quarter year-end results with you during our conference call. Thank you.

Thank you, sir. This does conclude today's conference call. Thank you all for your participation. You may disconnect your lines at this time and have a wonderful day.