SpartanNash Co (SPTN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Spartan Stores Incorporated fiscal 2009 first-quarter earnings conference call. 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 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; the general economic and market conditions; additional information about risk factors and any uncertainties associated with our 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. At this time, I would like to turn the call over to your moderator, Mr. Craig Sturken.

Thank you. Good morning, everyone, and thank you for joining our conference call. With me this morning are members of our team, including President and Chief Operating Officer Dennis Eidson, Executive VP and CFO Dave Staples, Executive VP of Retail Operations Ted Adornato, and Executive VP and General Counsel Alex DeYonker.

I will provide you with a brief overview of our first-quarter progress, and then Dave Staples will give you more details on our first-quarter financial results and outlook. I will then read join the call to provide you with an overview of our plans for the remainder of fiscal 2009.

As our financial results show, fiscal 2009 is off to a good start. Our operating and net earnings had solid increases this quarter, and we reported our ninth consecutive quarter of sales growth in net sales. In addition, first-quarter net sales on both a consolidated basis and in our retail segment reached six-year highs.

During the quarter, we continued investing in our retail store base through our capital improvement program. By the end of the first quarter, three major remodels were completed at acquired Felpausch stores and reopened under the Family Fare banner. Two additional remodels were substantially complete including one Felpausch store and one Glen's Markets store.

Early in our second quarter, the Felpausch store was rebranded under the D&W Fresh Markets banner and the Glen's store was rebranded as a Glen's Fresh Marketplace store. Both stores have exceeded our sales expectations in the first four weeks since their grand reopenings. We will discuss more details about these products later in the call.

It's important to understand that the majority of the remodel activity during the past three quarters has been in our Felpausch stores, which will not be included in our comparable store sales numbers until the fourth week of the second quarter. We expect our capital improvement activity to positively affect our comparable store sales trends as we move through the remainder of the fiscal year.

Our distribution business performed very well. As we continue to benefit from buying growth due to higher sales to new and existing customers. First quarter consolidated net sales improved nearly 13% while operating earnings increased more than 26%, despite the additional Easter holiday sales included in last year's first quarter. We are pleased to achieve these growth levels, despite the current economic factors affecting the consumer.

I believe it's important to consider that economic cycles are not new to companies operating in Michigan. We have been operating in this environment for some time and have produced solid results despite the challenging environment. We believe our management team has the experience to successfully adapt our business strategies to the economic conditions that prevail.

During the quarter, we exited 13 of our 14 pharm retail stores, and sold the script files for all of these stores for a gain. Dave will cover more details about the transaction with you in a minute. We still have one pharm store closure pending and expect to complete the sale of that store's script files during the second quarter.

From a distribution perspective, we experienced volume growth from the new business added last year and are making measurable progress with the efficiency improvement programs. With that overview, I will turn the call over to Dave for a detailed review of our first-quarter financial results. Dave?

Thank you, Craig, and good morning, everyone. Consolidated net sales for the 12-week first-quarter reached a six-year high increasing 12.8% to $586.7 million from $520.2 million in the same period last year, which included approximately $6 million in sales related to the Easter holiday. The increase was due primarily to the acquired retail stores, higher distribution sales to new and existing customers, and incremental fuel sales.

Gross margin for the first quarter increased 60 basis points to 19.7% from 19.1% in the first quarter last year. The improvement was due mainly to the shift in sales mix between distribution and retail, and an increase in distribution gross profits due to the elimination of sales related to the Felpausch acquisition, partially offset by growth in the lower margin fuel sales and the Felpausch retail stores.

As a percentage of sales, first-quarter operating expenses increased to 17.1% from 16.8% in the same period last year, reflecting the change in mix of our sales and additional costs related to five major remodels at our retail stores, from which three held grand reopenings during the first quarter. This year's first quarter includes $800,000 in remodel-related costs compared with $500,000 of startup costs related to the Felpausch acquisition in the same period last year.

Last year also included $500,000 of Michigan single business tax, which has been replaced by an income tax that is included in our taxes on income this year.

First-quarter operating earnings increased 26.4% to $15 million from $11.9 million in the same period last year. The improvement was primarily the result of the acquired Felpausch stores and new distribution business, partially offset by the absence of Easter holiday sales this year and higher remodeling-related costs. First-quarter earnings from continuing operations increased 22.4% to $7.6 million, or $0.35 per diluted share, from $6.2 million, or $0.29 per diluted share, in the same period last year.

Net earnings for the first-quarter reached $9.9 million, or $0.46 per diluted share, compared with $6.5 million, or $0.30 per diluted share, in the year-ago period. Net earnings included $2.3 million, or $0.11 per diluted share, in earnings from discontinued operations. The earnings from discontinued operations related primarily to an after-tax gain related to the sale of script lists at 13 out of the 14 pharm stories. As Craig mentioned, the script list sale for the remaining pharm stores is expected to be completed during the second quarter.

We expect to incur an after-tax loss in the second quarter between $300,000 and $700,000 related to the closure of this remaining store due to lease and other exit costs.

Turning to our business segments, first quarter distribution sales increased 5.6% to $298.1 million from $282.4 million in the same period last year. The sales improvement was due primarily to increased sales to new and existing customers. The sales increase was partially offset by the reclassification of $20.6 million in sales to our now owned Felpausch retail stores and the absence of approximately $3 million Easter holiday sales in last year's first quarter.

Distribution operating earnings improved 43.7% to $7.5 million from $5.2 million in the same period last year, which is a first-quarter record. The improvement was due to higher sales volumes, improved sales mix, and increase cost leverage, partly offset by a higher LIFO inventory charge.

First quarter retail sales increased 21.4% to $288.6 million from $237.8 million in the same period last year. Sales improvement was due to the contribution from acquired stores, higher fuel sales, and sales gains from stores remodeled last year. Comparable store sales increased 1.6%, excluding both fuel sales and the Easter holiday sales from last year. Our comparable store sales increase was somewhat below our recent run rate average due to unseasonably cool and wet weather in our northern Michigan market during the late spring and early summer and the consumer's response to economic conditions.

We expect our comparable store sales number to improve above the first-quarter rate during the upcoming quarter. The rate improvement will be due to our capital investment program, the Felpausch stores being included in our comparable store sales numbers during the fourth week of the second quarter, as well as a return to more seasonal weather in northern Michigan. Additionally, we expect the comparable store sales trends to improve as our marketing and merchandising programs effectively address the existing consumer purchase trend. Through the early part of the second quarter, we have experienced a noticeable increase in our comparable store sales.

First-quarter retail operating earnings increased 12.8% to $7.5 million from $6.7 million in the same period last year. Improvement was primarily the result of the acquired Felpausch store reduced shrink rates, partially offset by the startup costs associated with the remodel activity during the first quarter, and the absence of Easter holiday sales this year. Total long-term debt, including current maturities, declined $3.9 million to $150.6 million as of June 21, 2008, from $154.4 million at March 29, 2008.

The debt reduction was due to improved profitability and the near doubling of year-to-date net cash generated from operations to $13.7 million from $7.4 million in the same period last year. In addition, our cash position increased $10.7 million primarily as a result of the sales of the pharm stores, script lists, and inventory liquidation, as well as the continued improvement in our operations.

I will now cover our outlook for fiscal 2009. We expect comparable retail store sales to increase in the low to mid single digits during fiscal 2009, excluding the effect of fuel and the Easter holiday sales, which was included in both the first and fourth quarters of fiscal 2008 but will not occur in either quarter during fiscal 2009.

We completed major remodels on two additional stores in the second quarter and expect to complete remodels on two or three more stores during the third and fourth quarters. In addition, we expect to complete a major relocation project for one store, substantially complete construction of a new D&W store during the fourth quarter, and open up the four additional fuel centers during fiscal 2009. We expect to incur additional startup cost for employee training, marketing, promotion and store repositioning of between $2 million and $2.5 million during the remainder of fiscal 2009.

On the distribution side, we expect to generate additional revenue and sales volumes from our new business during the remainder of fiscal 2009, but not at the same rate as in fiscal 2008 because we will cycle the Martin's business early in the second quarter and the sales gains from customer purchases of Farmer Jack stores during the second and third quarters. We anticipate capital expenditures for fiscal 2009 to range between $55 million and $60 million. These expenditures will allow us to continue our successful capital investment program, including rolling out our Family Fare and D&W offerings in certain Felpausch locations and further optimizing the performance of our entire retail store network.

Depreciation and amortization expense should range from $26 million to $29 million, and interest expense should be approximately $11 million. I will now turn the call back to Craig. Craig?

Thanks, Dave. I want to reiterate that fiscal 2009 is off to a good start. We are very pleased with our capital investment program as it is producing the sales gains we protected and is allowing us to solidify our retail market share. However, we still see many opportunities that will improve the profitability of our operations.

During the remainder of the year, we will continue integrating the Felpausch acquisition, continue with our capital investment program targeting stores and markets with the best growth potential, and refine our marketing, merchandising, and promotional activities in order to capture and more fully realize the profit improvement potential of select retail stores. We believe that significant opportunities exist to enhance our consumer offer in markets served by stores being remodeled and those scheduled to be remodeled.

We are just beginning to benefit from the performance potential of our Felpausch acquisition and expect to continue making progress improvement in their sales and profit performance during fiscal 2009.

As mentioned earlier, we finished major remodel work at three Felpausch stores during the first quarter. In addition, we finished remodeling one more Felpausch store and one Glen's store during the first week of the second quarter. The three first-quarter remodels include an improved product assortment, new marketing and merchandising programs, and store layout and equipment improvements.

These stores have been rebranded as Family Fare stores and customer response, as well as preliminary sales trends, are better than we originally expected. The Felpausch store remodeled in the second quarter was rebranded and converted to a D&W. The fresh perimeter merchandising and layout at the store was dramatically improved. We added a Starbucks cafe and significantly expanded the store's product assortment.

The Glen's store remodel is our first Glen's Fresh Marketplace format. It includes many of the upscale attributes of our D&W Fresh Markets stores such as Starbucks cafe, and significantly expanded and improved perishables and wine offerings. However, it still retains the local market center store product offerings of a traditional Glen's market. This store now represents a truly special shopping experience and product offering in the northern Michigan market. Customer response to both of these stores has been exceptional during the first few weeks since their grand reopenings.

In our distribution division, we expect the benefits of new business added during the past year to temper as we fully cycle this business beginning early in the second quarter. However, we are continually seeking expansion opportunities in contiguous states and with new customers. In addition, we still have productivity enhancement opportunities in this segment related to warehouse throughput and inventory management. We are currently engineering our dry grocery operations and expect this initiative to produce efficiency improvement benefits throughout the second half of the fiscal year.

We will now open the call for your questions.

(Operator Instructions) [Bakley Smith], Jefferies & Company.

Hey, guys, it's Bakley here. Nice quarter. I just wanted to ask a couple of questions related to -- I was interested in what you said about the response. Why do you think the comp trends have improved in the second quarter? I mean is it merchandising? Is it simply inflation? What are you seeing? Your tone sounded pretty positive about 2Q.

There is really two elements. First of all, in the spring, we had poor weather up north. The Glen's Markets banner really was affected by sort of a lack of traffic in the Lakes region. So that would have really affected us primarily in the month of June.

Also, the Felpausch stores could not be included as part of our comp sales because they had not completed their first annualization. Remember, we put capital money into the Felpausch stores, so we are enjoying the great comps in those stores in which we made the investment. But we have not been able to include them as part of our comp analysis.

Okay, and my next question is on fuel. It sounds like you guys continue to be positive on fuel. It's something that we have noticed that has been a driver for the industry. Yet at the same time, we are seeing independent fuel operators under a lot of stress with higher prices than credit cards and what have you. How are you making fuel work for you and do you remain committed to it as you go through your capital plan?

First of all, yes, we are committed to it. The magic of fuel for Spartan Stores really is the relationship of our fuel centers with our supermarkets. As a matter of fact, over 30% of the fuel transactions include some kind of a discount that is generated through a purchase in our supermarkets. So we have a very synergistic relationship that means more to us than say a convenience store.

Okay, and you say -- as you look out at your remodels, do you still plan to expand the number of fuel centers, generally speaking?

Absolutely.

Okay, and just one last question on the M&A front either from a distribution or a retail side, clearly markets are in turmoil to a degree. But do you see any opportunities over the next 12 months?

Well, you know, if I did I couldn't really tell you that.

You can tell just us.

No, but as stated in my script, we will continue to pursue acquisition opportunities or new business opportunities in contiguous trade areas.

Okay, thanks. Nice quarter guys.

Chuck Cerankosky, FTN Midwest.

Good morning, everyone. If we are looking at the quarter a year ago, as well as the fourth quarter of the fiscal '08 year, Craig, could you talk about what you are seeing changed in consumer sentiment, spending behavior, that sort of thing?

Well, you know, we are experiencing the same thing that everybody else in our industry is experiencing. We are, of course, able to deal with some of this stuff, primarily because we have the experience. Michigan has been a tough market for the past several years, so I think our organization is prepared to deal with some of the things. And they are not new to us.

But I think private label might be one of the things that is really working well for us. We invested in the private label program for the last five years. The organization has been developing what I consider to be one of the best private label programs in the food retail, and it's paying off for us. This is the time when a good, solid, robust private label program will work. So it's -- I think that if you were to say anything that would be the sort of star of our business, of our operation.

The other thing is, we have a pretty good capital plan. We have been able to acquire businesses and invest in these businesses and make them far more productive than they were before we acquired them. If you look at D&W and Felpausch, they are working nicely for us. We have also been able to pick off one and two stores that we really don't talk about very much because it's small. But the onesies and twosies have really helped us also, so we are pretty happy with what is going on.

So you are seeing a somewhat more challenging consumer environment. How is the consumer behaving around your fresh categories, not only in the D&W stores, but I am looking for a comment regarding the entire chain? And that would include everything from the better cuts of meat to prepared foods and produce and organics where you offer it?

Chuck, I would like to hand this off to Dennis Eidson, whom you know very well.

I think we are -- it's oftentimes very difficult to really get a great read on that whole trade down environment. I will tell you in Petoskey we did this remodel. We really upscaled the store and put more natural organic and fresh offering and the story just took off like a rocket ship. So there is an example, Chuck, where regardless of the economy, that demographic profile is really resonating. Our offer is resonating with them significantly.

We continue to see natural organic do very well. I would say to you that we have focused ourselves, from a promotional perspective, in some of the middle and down markets with a more aggressive promotional strategy on center of the plate protein. So we are driving some of the mix change trying to get our offer more relevance.

The meals made easy promotion that we are running, I think, has gotten a little bit of traction. So again, we are trying to add value to that consumer shopping experience, putting some fresh foods in with some core staples in order to make that shopping experience easier and add more value. So lots of moving parts, and we have such a diversity in demographic that I am not sure I have a good one-size-fits-all answer for you.

I guess that is a good thing you don't have a one-size-fits-all. Is it getting more difficult to maintain the differentiation against your supercenter competition?

You know, I don't think so. I think in some respects, it's a little bit easier. And because of our size, I think we find ourselves being a little more nimble than our competitors. Our footprint is pretty tight. We live here; we know the marketplace. Craig talks about the private label emphasis; our numbers are terrific. We are pleased with that.

Bakley asked about the fuel, we have been experimenting with some different type of fuel promotions. Unequivocally, the stores that have fuel on pad are clearly performing better than those without fuel. We have done things with items to drive volume in the supermarkets. We have aggregated some volume incentives to drive that volume and to get a gas discount.

As you know, we are seamless at the pump was that fuel discount. When you take that right from the checkout, you go to the pump, you see the retail fuel dropped $0.20 a gallon, it's pretty powerful for the consumer to see that. And again, we think it adds to the whole value proposition.

All right, thank you very much.

Karen Short, Friedman, Billings, Ramsey.

Hey, guys. Congratulations. Just a couple housekeeping -- if you said it, I missed it. Dave, what was the LIFO charge in this year and last year's quarter?

Total LIFO charge, if you notice also in the press release, we put that back in the chart.

Oh, sorry. I didn't catch that.

We broke that out.

Oh, yes, yes. Okay, sorry.

You got it?

Yes, I got. And then, I just was looking -- obviously, I don't now if this is something you have the ability to provide now -- obviously, we have restated numbers for the first quarter now taking the pharm out of both segments. Do you happen to have the EBITDA, and I guess for distribution, the EBITDA and then for retail, the revenues and EBITDA on a restated basis for the next three quarters? Do you have that handy?

Not sitting right with me, but that is something we could talk about. I mean, you can kind of get, I think, a feel for that run rate. Because if you look at our Q last year, we ended up restating the year and the quarters when we put it in discontinued ops. So you have the run rate from last year and then you have this quarter.

Okay.

Because we had -- when you put it in disco ops it comes out of all of those numbers.

Right, okay. Okay, and then just looking at your distribution margins, sequentially -- I mean, obviously, normally the second quarter and the fourth quarter had the highest margins, and first and third are lower. But I was just noticing, last year your distribution margins in the third order were flat sequentially from the second. I was wondering if there was a reason for that?

Looking to model this year, obviously, forgetting the noise of the pharm. I'm having just (inaudible) I should have seen that we still have 3Q lower than 2Q? Like was last year an anomaly versus a trend?

Yes, I think with everything going on, I think your more historical run rates are always the way to look at it. In any one quarter, at any one time, you can get a blip here or there.

Okay, and then on your tax rate, it was a little higher than I would have expected. So can you just explain, I know it is pharm related?

Yes, what happens is Michigan has changed their rates. So there is sort of two events, the first event, right, is that, obviously, the Michigan business tax now is an income tax. So that changes the historical run rate, which you already anticipated. But then what happened in the pharm transaction, while the Michigan income tax is theoretically an income tax, they also include a gross receipts tax.

So when we sold the script list out of the pharm stores, that is treated as a gross receipt. So Michigan gets a cut of that, even though the locations were predominantly in Ohio. It just gets into a formulaic type of deal. The reality is, because of the gross receipts from the pharm, we had to pay more Michigan income tax. That is an event that is for this quarter only. As we move forward then the rate will go back down more to that 39.1% that we say is more normalized.

We will have a little impact, I guess, in the second quarter, because we will have that final transaction. But that is just one -- nowhere near the same magnitude. It would be, I would think, fairly insignificant.

Then on your $2.5 million remaining start-up throughout the year, that is I think what you commented on.

Right.

How will that be split throughout the quarter?

Well, you know, if you divide the stores into it, the key will be the two to three in the third and the major relocation in the fourth they will be the predominant drivers of that. The new store that is substantially complete with new accounting rules will contribute as well in the fourth quarter, actually maybe late in the third as well. Because once we sign the lease, we have to start amortizing the ground rent. Then there will be certain costs as you are getting it ready to open, depending on when we actually finish it going into next year.

So you know, I would say maybe the heaviest component of that would be in the third. But you are going to still see sort of a pro rata share of that into the fourth.

Okay.

It's driven by those events that we talked about.

Okay, sorry, I jumped on the call a little late, I don't know if you went into this, but do you have some idea -- obviously, even though your margins came down at retail, did you comment on how much promotional or grand reopenings might have had an impact on your margins at retail?

Yes, if you look at what we put out, it was $800,000. But then, I guess for fair disclosure purposes, we had about $500,000 of start-up last year for the Felpausch. So if you are trying to net unusual items, there is like a $300,000 impact.

But you are lumping promotional spend in that eight?

Yes, all of it.

Okay, okay, great. Thank you.

Sarah Lester, Sidoti & Company.

Good morning. I have a question just about inflation. If you have seen -- if competing retailers, especially the supercenters, passing on inflation to customers and also talk about how successful you have been at passing inflation to customers on the retail side.

Sarah, good morning. You know, the inflationary run rate in Q1 was not a lot different than what we saw in Q3 and Q4. I would say the competitive climate is about the same. You know, item-by-item there are some categories where they are a little tougher to move. The market is moving slower. Others they move immediately. But on balance, I think it's about average. I don't think we are feeling inhibited by the ability to pass on inflation, generally speaking.

Okay, have you felt -- so in the past quarter, have you felt like it's a little bit tougher or Q1 is comparable to Q3 and Q4 of last year?

I think it's comparable.

Okay, thank you. That's all.

[Edward Kumal], Four Rivers Capital.

Hi, good morning. I was wondering, Craig, if you could talk a little bit about the distribution business? I have a little trouble backing out all of the moving parts on distribution in terms of just looking at the ongoing profitability of just let's say, your business with existing customers. Is the margin continuing to go up because of the efficiencies you are putting in place, plus passing along some inflation, things like that? Or is that relatively stagnant and the improvement in profitability is from the new customers?

Lots of things are helping us on a distribution side. Naturally, the new business, the higher volume we put through the distribution center helps us with our fixed cost rate, et cetera. We also have -- we are a dynamic company in that we operate two businesses with both a retailer and a wholesaler. We are not like a self-distributing chain, whereas let's say market gains or forward buying with price increases would go to the retail side of the business.

You know, you take Kroger, it all goes -- it all shows up in the retail, it's one big bucket. Where with us, all of that stays on the distribution side. So what you are seeing is a benefit to our distribution, on all of the procurement that does not get passed on to the retailer. Because we are a wholesaler, we treat our retail stores exactly like we treat any other retail stores that we supply. And that really is helping us on a distribution --.

The other point maybe worth making, and it's in the script, but when we eliminate Felpausch, alright that profitability -- we eliminated Felpausch from the distribution business over a year ago, but the profitability stays in the distribution P&L. It has the effect of increasing the profitability rate and distribution.

Okay, and I guess one of the other things I was getting at was during times of inflation, historically, sometimes the wholesalers can make a little bit more extended profit either on forward buy or a whole host of other tools you have available to you -- to your retail customers. And I was wondering whether or not you were continuing to see that? I was just trying to get down to what your ongoing distribution profit growth is, whether it's, let's say, accelerating or its flat or whatever?

I think, yes, it is -- it's in our profit growth. I don't see any real changes in the short term from what we have experienced per se, Q3 and four and our first-quarter.

All right, thank you.

(Operator Instructions) Chuck Cerankosky, FTN Midwest.

Thank you. Craig or Dennis, can you talk a little bit about the outlook for adding new distribution customers this year and were there any in the quarter? How much of the distribution segment sales increase reflected inflation in the quarter?

You asked about five questions right there, Chuck.

Trying to get my money's worth, Craig.

First of all, on the new customer front, you know us, Chuck. We are always working on that. We feel that there is opportunities for us. We think there is a lot of good opportunity for us. We look at the entire arena. We know who our competition is. We have a relationship with retailers and it's something that we work hard at. But, gee, if we had something cooking, I couldn't tell you that. It's just not anything that we could disclose. But we don't see the future any different than the past when it comes to being able to add new distribution business.

On the inflation front, you know, yes, there is inflation. We are not seeing any different kind of inflation rate than anybody else in the industry is. It's in the low single digits, and it's reality. It will probably stay with us for a while. On the macro front, the gasoline thing, which is in our total numbers, that really -- which we don't report as comp, but gasoline -- $4.00 a gallon gas is an impact.

So if we took say 3% to 4% out of the sales growth in the distribution revenue in the quarter, that would be accurate or reasonable?

It's probably a reasonable guess, yes.

Thank you.

At this time I am showing that there are no further questions.

Well, if there are no more questions, we will conclude the call. On behalf of Dave and Dennis and everyone at Spartan, I thank you for joining us and look forward to our next conference call. Thank you.

This does conclude your teleconference at this time. You may disconnect whenever you wish.