SpartanNash Co (SPTN) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Spartan Stores Incorporated first quarter 2008 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.

Ladies and gentlemen, I must remind you that comments made by management during today's call will contain forward-looking statements. These forward-looking 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, the uncertainties inherent in implementing strategic plans, and general economic and market conditions. Additional information about risk factors and the uncertainties associated with our forward-looking statements can be found in the Company's earnings announcement, annual report on Form 10-K, and our 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 Incorporated. Thank you, Mr. Sturken, you may begin.

Thank you. Good morning, everyone, and thank you for joining our fiscal 2008 first quarter earnings conference call. With me this morning are members of our team, including Executive VP and CFO, Dave Staples; Executive VP and Chief Operating Officer Dennis Eidson; our Executive VP of Retail Operations, Ted Adornato; Executive VP of Supply Chain, Derek Jones; and Executive VP and General Counsel. Alex DeYonker.

As you can see from our first quarter financial results, fiscal 2008 is off to an excellent start. Our first quarter net earnings increased, and increased on consolidated sales of more than 5%, continue to demonstrate that our business strategy is working. These results represent our fifth consecutive quarter of year-over-year net earnings improvement, and our fifth consecutive quarter of year-over-year consolidated net sales growth. Retail stores in our core markets performed well during the quarter, with particular strength in our D&W Stores. Additionally, we continued to report solid sales growth in our distribution business, and operating earnings for the segment remained at levels representing six-year highs. Our principal accomplishments during the first quarter were the completion of the Felpausch retail store acquisition, the signing of Martin's Super Markets to an expanded supply agreement within our distribution division, completing the private placement of senior convertible notes, and amending our existing credit facility to reduce capital costs and improve financial flexibility.

During the quarter, we began assimilating the new distribution business with Martin's Super Markets, and the transition is progressing on plan. Their initial response to our portfolio of private label brands has been very positive. And thus far, we believe they are pleased with our commitment to the relationship. We are also very happy with the initial integration of this important customer, and will remain focused on meeting and exceeding their service expectations. Regarding our Felpausch acquisition, we were pleased to complete the transaction during the quarter, and are beginning to make necessary facility, merchandising and other changes that will drive a higher performance level at these stores. These changes will take place during the next four quarters, and will include changes in the store product mix, the redesign of store configurations and layouts, new or enhanced promotional campaigns, as well as the rebranding of stores.

We also remain focused on completing the capital plan for our D&W locations. During the quarter, we completed one major D&W store remodel, while beginning two additional major remodels. These additional remodels, plus one other, will be completed in our second quarter. This work will substantially complete our D&W remodeling efforts, bringing the facilities up to our high standards, and it lays the groundwork for our D&W prototype store. These completed remodels demonstrate our commitment to the fresh departments, as well as prepared foods, and provides us with high quality facilities that are demanded by customers of this particular demographic profile.

Additionally, we opened one new fuel center and began operating two additional fuel centers that were part of the Felpausch acquisition. We are showing good progress on the construction of our new 48,500 square foot Family Fare prototype store, and anticipate the store grand opening to take place in October. This store will encompass all of our best store layout, merchandising, retail concepts and customer service ideas for our conventional store banners. These activities continue to solidify our store base, and will allow our future retail capital expenditures to be focused principally on the Felpausch stores, replacement or remodels of our Glen's and Family Fare locations, as well as the addition of fuel centers. With that overview, I will turn the call over to Dave for a detailed review of our first quarter financial results. I will rejoin the call following Dave's comments to provide with you an update of our business outlook. Dave?

Thank you, Craig, and good morning, everyone. Consolidated net sales for the first quarter increased 5.4% to $556.7 million from $528 million in the first quarter last year. The increase was due to higher sales in both the retail and distribution segments. Gross margin for the first quarter declined 30 basis points to 19.3% compared to 19.6% in the last year's first quarter. The decline was due mainly to an increase in the mix of lower margin fuel and pharmacy sales, which offset the higher contribution to consolidated sales from the retail operations. As a percent of sales, first quarter operating expenses declined to 17% from 18.3% in the same period last year. The decline was primarily the result of asset impairment and exit costs of $4.5 million and $1.1 million in start-up costs related to the D&W acquisition that were recorded in last year's first quarter. Start-up costs attributable to the Felpausch acquisition amounted to approximately $0.5 million in this year's first quarter. In addition, improvements in store labor utilization, better expense leverage from higher sales volumes, and the increased mix of lower cost fuel and pharmacy also -- sales, also contributed to the improvement.

First quarter operating earnings increased 87.4% to $12.8 million from $6.9 million in last year's first quarter, as a result of the previously mentioned factors. Net earnings increased 142.3% to $6.5 million or $0.30 per diluted share from $2.7 million or $0.12 per diluted share in the same quarter last year. The first quarter earnings benefited from lower interest expense of $2.5 million compared with $2.9 million in last year's first quarter. The decline in interest expense relates to lower average outstanding borrowings, the amendment to our revolving credit facility, and a successful private placement of senior convertible notes.

Turning to our business segments, first quarter distribution sales increased 2.4% to $282.4 million from $275.9 million in the same period last year. The sales improvement was due to new distribution customers, and increased sales to existing customers. The full impact of our new Martin's relationship will not occur until the second and third quarters. Distribution operating earnings improved to $5.8 million from $5.7 million in the same period last year. First quarter retail sales increased 8.8% to $274.3 million from $252.2 million in the same period last year, with sales across all of our retail supermarket banners performing well. Comparable store sales excluding fuel rose 3.6% as a result of a favorable calendar in the acquired pharmacies. Additionally, the incremental fuel centers contributed to the sales growth. We are very pleased with our sales performance, especially considering that the economic climate in our trade area remains challenging and the performance at our Pharm stores was below our expectations. First quarter retail operating earnings increased $7 million from $1.2 million in the same period last year. Improvement was driven by higher acquisition-related conversion costs in last year's first quarter, higher store sales volumes and more efficient store operation.

Turning to the balance sheet, long-term debt at June 23rd, 2007, including current maturities, was $169.4 million compared with $108.8 million at the end of fiscal 2007. The increase in outstanding borrowings was primarily the result of the Felpausch acquisition. Net cash provided by operating activities for the year-to-date period increased 20% to $9.8 million from $8.1 million in the corresponding period last year due to improved operating earnings and working capital management.

I will now cover our outlook for the remainder of fiscal 2008. We expect comparable retail store sales to increase in the low single-digits for the remainder of the year, and the acquired Felpausch stores to add approximately $70 million to our consolidated sales. On the distribution side, we will generate incremental revenue from the new Martin's business and from the Farmer Jack store closures in the Detroit area. Current distribution customers have purchased approximately 14 of the Farmer Jack locations, while 20 locations were closed and not reopened. We are expecting to see the benefits of this business ramp up during the next two quarters. Collectively, we expect the Martin's business and the Farmer Jack transitions to provide in excess of $120 million in revenues this fiscal year. We expect the additional business from our Martin's relationship to be modestly accretive to earnings during the first year due to the additional start-up costs associated with this new business.

As previously disclosed, we expect the Felpausch acquisition to be accretive to earnings in its second year of operation, as we'll incur start-up costs of between $5 million and $6 million for store repositioning, remodeling, employee training during the first 15 months of operations. We expect capital expenditures for fiscal 2008, excluding the acquisition-related expenditures, to range from $35 million to $40 million, and depreciation and amortization expense to range from $23 million to $26 million. In addition, we expect interest expense to be approximately $12 million in fiscal 2008. I will now turn the call back to Craig. Craig?

Thanks, Dave. We are very pleased to continue our steady financial and business plan progress. In the near term, our primary focus in our Retail Division will be on integrating the Felpausch and D&W acquisitions in order to bring these stores up to their full operating potential and up to our high performance standards. Additionally, we will continue to be focused on fine tuning our perishable offerings and working to differentiate our stores from competitors. In our Distribution Division, we will place a priority on fully assimilating the distribution business with Martin's and bringing on the additional distribution business with customers in the Detroit area, such as those from Farmer Jack. Both of these transitions have substantially improved our market position, and have provided us with the opportunity to further distinguish Spartan Stores from our competitors. We are also currently reviewing our warehouse network with a long-term goal of significantly improving our distribution operating efficiency and capacity.

From a capital perspective, as previously mentioned, we expect to complete construction of our new prototype store in the third quarter, complete at least three major store remodels, begin the process of upgrading the Felpausch store base, and open an additional fuel center by year end. From a longer term growth perspective, we continue to look for expansion opportunities for both our Distribution and Retail Division in contiguous midwestern states, as well as the current markets we serve. Our fundamental goal is to keep focused on the consumer, to ensure that they remain at the center of our retail and distribution business decisions. We continue to be confident about our business prospects as we execute the growth phase of our business strategy, and we believe that significant growth opportunities remain ahead of us. We will now open the call for your questions.

(OPERATOR INSTRUCTIONS) Mr. Cerankosky, FTN Midwest Securities.

Craig, you mentioned that you saw some strength among your store groups at D&W. Can you perhaps describe why that is?

Well, when we looked at D&W before we acquired them, we sort of felt that there were some upside potential in order to make our investment. And we really have gotten tremendous support from the organization, and the community has really responded to the upgrades that we've made with these stores. And in particular, we've really put a lot of pressure or emphasis on our perishable offering, and the response from the customer has been fantastic. So it's really been a very good deal for us.

So you're saying it's driven by the improvements you made, as opposed to say, the demographic that D&W targets being that much stronger or attracted to the stores? Perhaps you're expanding the demographic?

Yes, that's possible. Because we really made them more price competitive, too. Our programming and pricing probably significantly enhanced our position with the broader customer base.

Okay. Great. Could you get into a little more detail on The Pharm, how that did during the quarter?

The Pharm continues to chug along. It's a very competitive marketplace down there. Wal-Mart has invested in the market and opened a couple of new stores in the last couple of years. Kroger continues to invest in the market. They've got an excellent fleet of stores there. And we're -- we just have not made much of an investment down there. We are pleased with our current results. But we do not see that as a growth vehicle, like we do with D&W and Felpausch. Let's face it, our core competency and our core business is supermarkets, and we've invested in that.

Is it profitable, or at least EBITDA positive?

Yes. Oh, yes.

Yes to both, Craig?

Yes.

All right. And then talking about Felpausch, you mentioned you were going to rebrand the stores. Just get into that a little more detail, please.

Well, what we're doing is we determined that once we upgrade the stores from a physical standpoint, by whatever capital infusion we make, it could be from $500,000 to $2 million. Once we're completed with the capital infusion on a store by store basis, then we will convert it to a banner that we think is appropriate for the demographics in the community. So we feel that both the Family Fare banner and D&W banner will come into play as we go forward with Felpausch.

But the capital comes first?

Oh, absolutely. We just don't think that it makes good sense to put a new banner on a store that has not been fixed from a physical standpoint.

Got you. How about accelerating fuel center openings? Any thought about that? You seem to be always excited about the sales drive from those. Can you do that? Or is it a balance sheet limitation or a zoning limitation?

The most difficult thing with fuel centers is getting the approvals from the local authorities. It's a relatively efficient investment. Less than $1 million gets us open, and we can get the fuel center open 45 to 60 days from the day we dig in the ground. So it's quick, it's easy. It's just a matter of getting the approval. And we want to make sure that we put them in the right place.

How many would you like to have?

Oh, I don't know. I think in a perfect world, we'd be like Kroger, and have a fuel center for every supermarket. But that's not -- it's not in the cards, because we're working with some older facilities that just don't -- won't accommodate a fuel center.

Got you. And then Craig, have you seen any change in the competitive environment in greater Detroit now that Farmer Jack is off the air?

Not that I can say, no. No, I mean, Kroger and Meyer really have benefited tremendously from the demise of Farmer Jack. Kroger in the fact that they picked up 20 stores. Also, there are 20 stores over there that are dark, and Kroger being the market leader, they picked up a lot of business on that front. Meyer, I would think that they got their fraction of the action, too.

I was just suggesting that maybe it was a little more promotional in the last months of Farmer Jack, and now things have normalized for your distribution customers there.

Chuck, for a couple of weeks there around the closure of the stores, there was maybe some incremental activity, but it wasn't anything that would be very noticeable.

All right. Thanks a lot. Great quarter.

Ms. Short, Friedman, Billings, Ramsey.

Great quarter. Just a follow-up on Chuck's question on The Pharm. Is it -- is the banner profitable on a fully allocated basis?

Yes.

EBITDA and operating income?

Yes.

Okay. And then I just wanted to talk a little bit, I don't know if you could maybe talk a little bit about some of the metrics associated with D&W performance once you put capital into the stores. Kind of like what dollar amount of capital you're putting in, and what kind of sales lift you're seeing, or mix shift, or any kind of metrics around that?

Well, you're -- with the kind of capital we're putting into the stores that we just have -- just completed and just started is in a year between $1 million and $2 million (inaudible) store and seeing strong double-digit increases in sales.

Okay. So that's great. Okay. And then I just want to talk a little bit -- I know you had commented a bit on the competitive environment. But what are you seeing from, I guess, Wal-Mart and Meyer these days in your market? I mean there's been some commentary -- there's been conflicting, I guess, comments across various chains on what exactly Wal-Mart is or isn't doing. So I wanted to see what your thoughts were on that, and I guess also on Meyer as it relates to you guys.

I can tell about you Wal-Mart. I mean really what's going on from a fact standpoint is that Wal-Mart this summer has engaged in a feature program that they never had before. If you look at the month of June where they ran a Proctor & Gamble program, they actually backed that up in July. On Fourth of July, they ran a very strong soft drink program. And by the way, that was nationally. We checked all of our other relationships that we have with retailers around the country. They ran those programs universally across the United States. The amount of feature activity that Proctor & Gamble has gotten with Wal-Mart is like overwhelming. You kind of almost wonder how they were able to supply it from a supply chain standpoint. And that's out-of-character for Wal-Mart. They are not a feature -- I mean, they like to match everybody's pricing, or they have a wonderful EDLP program. But having a circular on the street, glossy photographs with feature pricing that is very, very strong is out of character for Wal-Mart. So that's really a big change for them. And who knows what's going to happen? We've also seen that -- watched them maybe moderate some of their everyday pricing a little bit. We watch them very carefully, and we've seen some activity in that area.

As far as Meyer, Meyer is doing some things of their own, including maybe becoming more competitive with Wal-Mart in some particular areas. I think that it's -- there's sort of a transition going on. Nothing that we can't work with, deal with, or compete with, because we've been successful competing with both of those banners for some period of time now.

So I mean just to summarize, it would appear that Wal-Mart is looking like they're getting a little bit more high-low versus EDLP?

I'd say that's fair. That's fair. I think that Wal-Mart has a lot of pressure on their comp sales. They're buying the business.

Right.

They were selling product from Proctor & Gamble that was costing them a lot of money. A very costly program. Their soft drink program for Fourth of July was a very costly program. There was a huge investment on their part.

Got it. Okay. And I guess there's also been a lot of noise on inflation that probably helped your sector, and then hurt your sector, when expectations and inflation could be immediately passed on, and then couldn't be. And I just wanted to see if we could get a little bit more granular as it relates to retail and to distribution. So, and then also maybe talk about a little bit more the effect on private label, too. Because it would seem that to me you can't really draw any sweeping conclusions at all on, say, benefits or impact -- negative impact to private label, because it completely depends on the category. And then the same thing really could be said for different categories within the store at retail. Although, I would think that distribution is generally a positive for you.

But can you just tell me what your question -- ?

Well, maybe if we could go through inflation just by retail and by distribution, and your thoughts on where, what categories are benefiting from it, and which ones may be getting hurt by it at retail? And then the same thing at distribution?

Well, there is cost inflation. There's been a lot written recently about cost inflation and retail inflation and the delta between the two. And by the way, that's happened -- for a guy that's been around as long as me, that's happened more times than I can remember. You certainly have some activity going on in dairy and certainly corn-based products. With $4 a bushel corn, you're going to have cost increases on that side. Okay? But there's a lot of solutions that are in the hands of the retailer to deal with that. We manage our mix based on what's going on with various inflation and cost issues. Produce and meat inflation is up and down, and has been up and down constantly for the past -- my lifetime. We managed that. We managed our way through that. And can you manage the mix within your P&L by virtue of pricing programming, display program, et cetera.

Private label is a factor. We enjoy a very strong private label improvement, and we use private label to help us manage our way through an inflationary time. Another thing that a retailer really needs to do with this is really keep an eye on competition. I mean, don't leave anything on the table with a competitor. If a competitor happens to move on something, you make sure if that's the guy you're matching, you stay with them and you don't leave anything there. It's dealing with inflation is just a matter of dealing with day-to-day business. And you have to change what you're doing if, in fact, inflation becomes a big issue. We have not seen an inflationary impact on our business that has caused us to really change what we're doing very much. We feel we are managing our way through it. And I think our result shows that.

And are you seeing price increases on the distribution side that you can pass on? Or is it the same thing, it's kind of spotty and it depends on the category?

It's yes and no. We're a cost plus operator on the distribution side, so that makes life pretty easy.

Right.

If a retailer -- if a distributor like Proctor & Gamble [crashed], that would be a good example because of [dairy]. They put an across the board increase in. That goes into the cost of goods. That gets passed right on to our retailers that we distribute to.

Right. Okay. And I guess the last question, just wondering what you're seeing, I guess, on the consumer side? Obviously, the last two weeks have made people nervous that suddenly the consumer is going to capitulate. But it seems that you have had a challenging environment for a while. I'm just wondering in the last month or so, have you seen any material change in behavior on the part of the consumer?

Not at all. I mean, we don't see -- we would not report -- we can't report that. Our numbers indicate that things are pretty steady. We're having a wonderful summer in our summer areas. Where there's a real tourist impact, we're doing extremely well this summer. We feel very good about that. We are doing very well in Grand Rapids, which is not a summer area. We feel very good about Grand Rapids. We feel very good about the banners, whether you're talking D&W, which is for the high end, or Family Fare, which is for the middle. I don't think that there's a consumer activity going on that's affected us. Remember, we've already cycled $3 a gallon price on gasoline.

Right. Okay. And then just the last question on the comp, Dave, you mentioned that the comps benefited from the acquired pharmacies. Can you just explain that? Was the entire dollar amount from the acquired pharmacies rolled into the comp base this quarter, but was not at all in the base last quarter? Or how did that work?

We purchased the Prairie Stone pharmacies, if you recall, in that October, November timeframe last year.

Right.

Once D&W then became a comp store after the 14th period, they're part of that comp. So yes, they're in the comp base.

But whatever the stores were doing a year ago, including Prairie Stone, versus what they were doing this year including Prairie Stone?

Correct. But there [was] Prairie Stone in last year, right, because we didn't buy them until November.

Right, yes. That's not actually when I'm -- that's okay. Maybe I'll follow-up offline.

Okay.

Okay. That's all I have. Thanks.

(OPERATOR INSTRUCTIONS) Mr. [Kay], [Camden].

I just heard your answer to the previous question regarding how your customer is faring this summer. And it's good to hear that -- it's good to hear that. It sounds like your customer is doing fine as evidenced by their purchases in your stores. But can you comment on -- can you take those comments a step or two wider and comment on general economic trends in your core region, industry trends, et cetera?

Sure. When you look at the state of Michigan, people have said that Michigan's economy is really, really soft. Well, there's really two economies in Michigan. There's the automobile-based economy in southeast Michigan, and then there's the rest of Michigan, in particular western Michigan and northern Michigan where we operate. We're very fortunate that we have some population growth. We do not have anywhere near the unemployment rate that the eastern side of the state has. The automobile economy in the Detroit area is really a factor. It's a much less of a factor for us, because we have a distribution center in Plymouth that supplies -- I'm going to say there's -- there's over 100 retail -- about 100 stores that we supply out of Plymouth that is in the Detroit marketplace. And again, we have the benefit of the Farmer Jack demise helping us over there. But, when you look at the economy in Michigan, there's Detroit and then there's the rest of Michigan.

Thank you very much.

Mr. Cerankosky, FTN Midwest Securities.

Craig, you mentioned you're reviewing the distribution network to increase efficiency and address capacity. Could you get in a little detail on that? And any customer prospects in northwest or western Ohio?

First of all, on the distribution, we have a nice cushion as far as capacity in most of the categories that we are involved in. We probably are getting a little bit tight in frozen food, and maybe even produce a little bit, because our business in those categories is just booming. But there's no real concern on our part. We have options available to us with the facilities that we already own in the way of upgrades, or productivity improvements, or investments and various things like that. As far as growing our business in Ohio and Indiana, we continue to mine the opportunities that are out there. And there has been some interest on the part of retailers, particularly related to the fact that Martin's moved over to us. Martin's is a very highly respected organization, and retailers watch Martin's to see what they do. And the fact that Martin's came to us is a real vote of confidence in our value-added program. So there are probably opportunities out there for us because of the good work that we did in order to bring Martin's onboard.

Sort of like free advertising?

It's free, yes. Yes.

All right. Thanks a lot.

Mr. [Park], Friedman, Billings Ramsey.

I was just wondering if you are now a cash taxpayer presently?

This is Dave. No, we're not. We're still hoping we have another quarter or so where we will not be in that position.

Great. Thank you.

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

Again, I want to thank everybody for calling in. I look forward to talking to you in the fall after our second quarter results. Thank you very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.