SpartanNash Co (SPTN) 2009 Q2 法說會逐字稿

Good day, 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, 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 reports 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 the Executive Chairman of the Board, Craig Sturken. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining our fiscal 2009 second quarter earnings conference call. With me this afternoon are members of our team, including President and newly-appointed Chief Executive Officer, Dennis Eidson; EVP and CFO, Dave Staples; EVP of Retail Operations, Ted Adornato; EVP of Merchandising, Alan Hartline; EVP of Supply Chain, Derek Jones; and Executive VP and General Counsel, Alex DeYonker. As you may have read from our recent press announcement effective yesterday, Dennis Eidson is our new Chief Executive Officer. Dennis and I have worked together for over ten years, and I believe he is classically trained to be a successful CEO. The longevity of our relationship -- and more importantly, his contribution in helping to development and implement our successful business strategies during the past five and a half years -- gives me confidence that he is the right individual to lead our organization going forward.

He possesses an exceptional understanding of the industry and our markets; and I reiterate my full and enthusiastic support of Dennis. I also want to note that he has the full support of our Board, Executive Management team, and our associates. I will now turn the call over to Dennis for an overview of our second quarter financial and operational performance. Dennis?

Thank you, Craig. And good afternoon, everyone. I'd like to begin by thanking Craig for his assistance in ensuring a smooth leadership transition. I'm distinctly honored to be in the position to lead Spartan Stores along its future growth path. We have an exceptional organization, filled with a very talented, knowledgeable and hardworking group of executive managers and associates which give me great confidence in our future.

On today's call, I will begin by providing you with a brief overview of our second quarter financial results and business progress. Dave will then give you a more detailed view of our second quarter financial results, as well as our financial outlook for the second half of the fiscal year. I will rejoin the call later to provide an overview of our business plans for the remainder of fiscal 2009. Before I begin discussing our second quarter financial and operating results, I want to express my enthusiasm for our recently announced pending acquisition of VG's food and pharmacy operations. I am enthused because this acquisition provides us with a foothold in eastern Michigan, a market where we have no retail presence, and gives us an excellent growth platform in that marketplace. VG's is an exceptional retail supermarket operator with very keen insight into their markets. They run a great business, as evidenced by the more than $30 million in capital investments that they have made in their stores during the past five years. I also want to sincerely thank VG's for their many loyal years as a distribution customer. This transaction will unite two strong retail supermarket operators with long standing and successful histories in the grocery industry, while providing future growth and operational improvement opportunities.

Turning to our second quarter financial results, our strong performance continued into the second quarter despite the current economic head winds. We are very pleased to report solid sales and profit growth this quarter, marking our tenth consecutive quarter of sales growth and our eleventh consecutive quarter of double digit operating earnings growth. As we anticipated, retail comparable store sales rebounded strongly from our first quarter results, driven by favorable weather conditions for the last two-thirds of the quarter in northern Michigan and the benefits of our capital program. We firmly believe that our consistent and sustainable performance demonstrates the effectiveness of our business strategy, capital investment program, and the commitment of our management team and associates. Our hybrid business model provides us with strategic flexibility that has allowed us to respond effectively and adapt to changing market and competitive conditions brought on by economic cycles. During the quarter, we continued executing our capital improvement program by directing investments to stores that have excellent market growth potential.

We finished remodeling two additional stores in the second quarter: One under our Glen's Fresh Marketplace banner in northern Michigan; and one Felpausch Food Center was converted to a D&W Fresh Market. We have now completed five major store remodels so far this year. We are very pleased with the sales trends at these recently remodeled stores, and in stores that were remodeled last year. I want to point out the major remodel project at our Glen's Fresh Marketplace store in particular. This store represents a dramatic improvement in the total shopping experience for consumers in that geographic market and provides a unique shopping experience for this northern Michigan area. This store includes a significant expansion of products and services, including expanded produce, meat, deli, bakery offerings, fresh sushi, wine specialists, Starbuck's Coffee kiosk, imported specialty cheeses, a wide variety of crusty artisan breads, and an abundance fresh seafood, while maintaining the same strong center store offering and the value that Glen's is known for.

Our distribution business continues to perform very well. During the quarter, we fully cycled the Martin's new business and a majority of new business dollars generated from former Jack stores purchased by our customers last year. As mentioned during our last conference call, we are currently in the middle of a grocery warehouse reracking project. This effort will help improve productivity in our grocery warehouse facility, and we expect to be substantially complete with this initiative during our third quarter. With that overview, I will turn the call back over to Dave for a detailed review of our second quarter financial results. Dave?

Thank you, Dennis. And good afternoon, everyone. I will now review more details of our second quarter financial results and provide you with our performance outlook for the remainder of the fiscal year. Consolidated net sales for the 12 week second quarter reached 626.8 million, an increase of 4.8% from the 598.1 million reported in the year ago quarter. As Dennis mentioned, this is our tenth consecutive quarter of net sales growth. The increase was due primarily to higher fuel sales, strong retail comparable store sales growth of 4.1% excluding fuel, and incremental sales to new and existing distribution customers. Gross margin for the second quarter decreased 20 basis points to 20.3% from 20.5% in last year's quarter. The decline was due mainly to a higher mix of sales from our lower margin fuel operations, partially offset by an improvement in distribution margins.

As a percentage of sales, second quarter operating expenses decreased to 16.7% from 17.2% in the same period last year. The decrease was attributable to the sales mix change just mentioned, along with better operating leverage from the increase in sales volume and the absence of Michigan's single business tax expense, which as we have previously disclosed was legislatively changed to an income tax. The SBT expense totaled 600,000 in last year's second quarter. The decline, however, was partially offset by higher compensation, utilities and fuel costs, as well as higher credit card fees. Second quarter operating earnings reached a quarterly record of $22.5 million, increasing 16.9% from the $19.3 million reported in the same period last year. The improvement was a result of higher retail and distribution sales, better distribution margins and operating leverage, store level efficiency gains in the absence of the SBT expense; but was partially offset by a higher LIFO inventory charge. Second quarter earnings from continuing operations reached 12 million or $0.55 per share, increasing 45.6% from the 8.3 million or $0.38 per diluted share we reported in the same period last year. Last year's earnings included a $2.7 million noncash charge related to the change in Michigan's business tax structure.

You may have noticed that our effective income tax rate is running slightly higher than in the past. This is due to the change in Michigan's tax structure from the single business tax to a combination of gross receipts and an income-based tax. Going forward, we expect our effective tax rate to be approximately 40.5%. Net earnings for the second quarter increased 21.6% to 11.1 million or $0.51 per diluted share, compared with 9.1 million or $0.42 per diluted share in the year ago period. Net earnings included a loss from discontinued operations of $1 million or $0.04 per diluted share related primarily to the farm operation wind down and exit costs. This brings our year-to-date net aftertax gain on the farm transaction to $1.6 million. In the year ago quarter, we reported earnings from discontinued operations of $800,000 or $0.04 per diluted share, which included a gain on the sale of assets relating to the closing of five farm stores and one convenience store.

Turning to our business segments, second quarter distribution sales increased 3.2% to 303.3 million, which is the highest second quarter sales in the past eight years, from 293.8 million in the same period last year. The sales improvement was due primarily to increased sales to new and existing customers, and product cost inflation. Distribution operating earnings improved 30.8% to 10 million, which is also a second quarter record from 7.6 million in the same period last year. The improvement was due to higher sales volumes, better fixed cost leverage, improved gross margin rates, favorable procurement and programming initiatives and the SBT expense -- single business tax being replaced by an income tax, which was partially offset by a higher LIFO inventory charge. Second quarter retail sales increased 6.3% to 323.5 million, from 304.2 million in the same period last year.

The improvement was due to higher fuel and comparable store sales, driven by a favorable summer season at stores in our northern Michigan market, and sales gains due to our capital program. Excluding fuel sales, comparable store sales increased 4.1% for the quarter. Our acquisitions and expanding capital program have contributed to retail net sales growth that has averaged over 20% on a year-over-year basis each quarter for the past ten quarters. Second quarter operating earnings in the segment increased 7.8% to 12.5 million from 11.6 million in the same period last year. The improvement was primarily the result of higher sales and better efficiency at the store level, but was partially offset by the start up costs associated with remodel activity and a higher LIFO inventory charge. Total long term debt, including current maturities, declined slightly to 149.9 million as of September 13th, 2008, from 154.4 million at March 29th, 2008.

Improved earnings and working capital management led to a significant increase in year-to-date cash generated from operating activities, to 23.3 million from 4.3 million in the same period last year. The working capital improvement resulted primarily from our continued focus on working capital efficiency, timing of new business in the prior year and the collection of customer advances related to the new distribution business gained last year. In addition, our cash balance improved to 28.5 million, primarily because of the proceed gained from the sale of our farm stores and the continued improvement in our business operations. We currently do not have have any borrowings outstanding on our revolving credit facility, and are using our cash balance and cash flow to fund operating activities. I will now cover our outlook for the remainder of fiscal 2009.

Excluding the effect of our recently announced acquisition, we expect comparable retail store sales to increase in the low single digits during the remainder of fiscal 2009, due to our capital investment program, and then as our marketing and merchandising programs are further refined to meet the current economic conditions and consumer purchase trends. The comparable sales growth rate achieved in our second quarter will be tempered by the cycling of the benefits of fiscal 2008 second half capital investments and single store acquisitions, as well as the absence of the Easter holiday in this year's fourth quarter. For the remainder of fiscal 2009, we expect to invest capital in and complete two or three additional store remodels, a major store relocation project, and begin construction of a new D&W store. In addition, we expect to open one additional fuel center in fiscal 2009. Additional start up costs for grand reopenings, promotion and store repositioning are expected to be approximately 1 million during the second half of fiscal 2009.

On the distribution side of our business, we expect sales volumes growth to taper off during the remainder of fiscal 2009, as we fully cycle our Martin's business -- cycled our Martin's business, and a majority of the business from customer purchases of Farmer Jack stores during the second quarter. From a profitability perspective during this second half of 2009, we will cycle substantial year-over-year increases that occurred in fiscal 2008, and consequently expect profitability growth in the second half of the fiscal year to be at a more normalized level. We anticipate that total capital expenditures for fiscal 2009 will range between 55 and 60 million. Depreciation and amortization expense should range from 26 to 29 million, and interest expense should be approximately 11 million. We expect the VG's acquisition to close late in our third quarter. The acquisition should add approximately 310 million to our annual retail sales, but add approximately 160 million in total net annual sales, because VG's is currently a distribution customer and the distribution sales will be eliminated following completion of the transaction.

This transaction will be slightly dilutive in this year's fourth quarter due to transaction costs and the elimination of VG's related distribution segment profits in this year's fourth quarter for the base inventory shipped to these stores once they're corporately owned. We then expect the transaction to be modestly accretive in fiscal 2010, growing thereafter as synergies are realized. I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. We performed remarkably well during the first half of fiscal 2009, yet recognized that more opportunities exist to improve sales and profitability. We have an exceptionally talented and very dedicated team of associates, which is a great foundation on which to continue to build upon our success. As we work through the current economic cycle, we will remain steadfast in our focus on a consumer centric business strategy that provides exceptional service and delivers good value to our customers. The near term economic cycle is expected to become even more challenging, with many variables impacting the consumer in ways that are both favorable and unfavorable to our business. However, we are confident that we can maintain our success because of our hybrid business model, diversification in our retail store banners and our portfolio of corporate brands. To take advantage of favorable consumer trends, we will continue to emphasize programs related to pharmacy, fuel, healthy life styles, food at home and value offerings, including our premier portfolio of private label products.

In addition, our capital investment program is very visible and evident to consumers, which has helped strengthen our market position during this weak economic cycle. During the remainder of the year, we will continue integrating the Felpausch acquisition and make targeted capital investments to stores and markets with the best growth potential. In addition, following the completion of our VG's acquisition, we will begin working on the integration of those operations and refining our market strategy in order to optimize the performance of these stores and ultimately realize the expected operational synergies. We will also work to further refine and adjust our marketing, merchandising and promotional activities in order to realize the full profit potential of select retail stores and to keep aligned with any change in the economic conditions in consumer purchasing behavior. The full performance potential of our Felpausch retail stores has yet to be realized. We expect to continue making good progress with the sales and profit performance of these stores during the remainer of fiscal 2009, as store relocations and remodel activity improve the store image, and as we adjust the marketing and merchandising programs to better match the demographics in our individual markets.

Our focus for the remainder of the fiscal year will be on delivering value to our existing customer base, executing our existing capital plan, and completing and integrating the VG's acquisition. Let me spend a couple of additional minutes on the VG's acquisition opportunity. VG's is a wonderful operation and has successfully competed with national and regional chains for many years. It has an outstanding fresh product offering and differentiates itself on service and quality at a good value. This opportunity provides us not only with quality facilities, but also great associates, and it will be a strong foundation for our future. In our distribution segment, we are considering seeking new customers and exploring opportunities to expand to our customers. We constantly evaluate to determine whether service capabilities and efficiencies can be improved.

There are a number of distribution improvement opportunities available and we are currently working on warehouse (inuadible).

(OPERATOR INSTRUCTIONS). Our first question today comes from Karen Short from FBR. Please go ahead.

Hi. This is [Meagan O'Hara] on for Karen. First, we have some questions on the acquisition. Looking at the $85 million purchase price, how should we think about the multiple pay, given you already distribute to VG's? Because if we look at the multiple based totally on the retail EBITDA, it doesn't look cheap, but is there a contribution from the distribution segment included as well?

Yes, Meagan. I think that's an important point you make. When we work with our customer base, you know, and when you use what I would call historic multiples or industry multiples to determine the valuation, you really have to look at both pieces of a customer of ours' profitability. For one is the obvious EBITDA, as Karen worked through her analysis and you worked through her analysis of that operation. But then there's also a fairly significant component that resides in our warehouse operations, because we sell business -- you know, we sell product to them today. If this process would be conducted externally, any other potential buyers would be required by the customer's representative to pay them for that incremental value as well. And so you probably have, you know, a 2 to $3 million incremental amount of earnings that would be added to, you know, however you've determined your EBITDA to really look at a multiple.

Okay. Thanks. Also, can you provide some guidance regarding any incremental CapEx requirements going forward following the acquisition?

For the VG's operation?

Yes.

You know, there will always be a maintenance level of capital for any retail store; but this has been a chain that has believed very strongly in investing in their operations. I think, as Dennis alluded to earlier, they have put over $30 million in capital into this operation over the past last five years. So yes, you know, there will be some maintenance capital, but very minimal; and you know, there's probably a couple of stores we would like to do a remodel with, but other than that -- boy, this is a wonderful chain that has been very well-maintained by its current operators.

It is a great fleet of stores, Meagan, and it is very much unlike the condition of the Felpausch and the D&W acquisitions that required significant capital.

Okay. And do you anticipate additional opportunities to increase distribution penetration as a result of the acquisition?

Well, certainly if there are categories that VG's has not procured from Spartan, we will look at adding those to our portfolio, but not at the expense of hurting the customer experience. They run a great business. If you look at the average store volume at VG's, it is about $100,000 more than our average corporate store volume, and we are going to be very protective of not throwing out the baby with the bath water here.

Okay. And then if I could, just a few quick question on your ongoing business. I guess first on your updated guidance, it looks like last quarter you expected full year same-store sales to increase in the low to mid single digits, but yesterday's press release -- and as you stated today -- is saying that same-store sales are expected to increase in the low single digits for the second half. Is there a change in your outlook?

No, I mean really -- excuse me, Megan. This is Dave again. The last guidance we gave was for the year. This guidance we gave is for the second half. And so it really just reigns it in, and I think as you listen to our call, you know, we think the second quarter run rate will be a little bit tougher by the fact that we don't have Easter -- I'm sorry, the second half -- will be tougher by the fact we don't have Easter, and a couple of the other factors we mentioned, but no, it is still fairly consistent.

Okay. And can you just comment on sales trends and what you are seeing in the third quarter to date?

Yes, we still continue to be happy with our sales trends. So, you know, it is what? Four weeks in, and at this point, we feel pretty good about the direction we are going.

Okay. Can you give any numbers at, like in line with what we saw in the second quarter or -- ?

No, I mean, we don't give monthly comp guidance, so I don't think we would start now. But --

Okay. And then finally, if you could provide some color on both the competitive environment and consumer behavior, has the competitive environment intensified at all? Have you seen any changes in consumer behavior?

Well, this is Dennis. I will speak to that. I would say the competitive environment here has been relatively stable. And I know it sounds like a broken record, but the state of Michigan has kind of been in a bit of a doldrums relative to the economy for a while. So I don't think that we are experiencing anything that we haven't experienced in our past. [Inaudible] and the Super Wal-Mart seem to be behaving as rational competitors in the marketplace. But the consumer, I will tell you, is changing. You know, the last several weeks -- two to three weeks -- with what happened in the stock market, what's pretty interesting is we were watching our business trends. We probably couldn't have planned any better to have a private label -- our big private label sale of the year last week. We had spectacular results, performed much better than our private label sale did the prior year. Our private label penetration continues to grow. If you look at units, total store and our corporate stores were about 1% ahead of our penetration from a year ago.

We are running at about a 22.8% of units total store versus a 21.8 a year ago. So, continues to be strong. We are just looking at some numbers in different categories in growth and the trailing 13 weeks. Canning supplies -- you might not be surprised to know -- are up like 45% versus a year ago, to give you an idea what the consumer is doing today. I didn't know there were that many consumers that still knew how to can, but apparently so. Some of the discretionary categories continue to be a little bit softer, and we feel that. But of course, we are driving a lot of that behavior, too, by promoting value in our circular week in and week out, whether that's with the cuts of meat that we promote, more aggressively looking at value brands and private label. So there are a lot of moving pieces as we speak. Hello?

Our next question today comes from Bakley Smith of Jefferies & Company.

Hi, guys. And congratulations to Craig and Dennis there on the transition. I just wanted today ask -- I didn't know if you have given a number of this VG's, and Megan was asking about this, but what is the penetration you have with VG's at this point on distribution?

They have one of our better concentrators, Bakley, from a wholesale penetration standpoint. They're in the probably top quartile of concentrators.

Okay. And you're -- but it sounds like you are not advising us to get too excited because maybe there's some stuff that you can bring in house, but that you relatively have a good operation -- or have it going trying, (inaudible) things around and change too much.

Yes.

Is that correct?

Because they are a great concentrator, number one. Secondly, we -- the stores are terrific, by the way. This is just a premier organization, great boxes, and we have talked before. This is right down the middle of our strategy. You know, we have talked about making acquisitions where it's in an adjacent marketplace. This acquisition -- as you know, our prototype store is 48,000 square feet that we are building. 47,000 square feet. As I said, they average $376,000 a week -- that's nearly $100,000 a week more than our current portfolio. Stores are profitable. The employee base is spectacular. This is really a gem for us. You know, we have talked before about growing through acquisition and influencing timing. And this was interesting because, you know, there was some problems with health of second generation executive here, and they came to us and asked us if we would entertain this opportunity; and the cultures are even very similar, Bakley. So lots and lots of upside.

Okay. Great. And let's see -- second -- this is a quick one -- what are you seeing on fuel margins? Have you seen an improvement? We got some hint from Costco that they had seen an improvement on fuel margin with prices coming down. Are you seeing that as well?

Yes, well, that is the exactly the trend we see. In a micro sense, as cost of goods come down, our margins tend to creep up. As cost of goods ramp up, our margins tend to shrink a bit. So that's exactly the trend we see.

Okay. And if I could, just two quick ones more. Do you see any opportunity for distribution acquisitions out there? Would you entertain broadening -- I know you are going to have a lot on your plate -- but would you entertain expanding the footprint at all?

And we've talked about this before. Our future growth strategy certainly would include taking a look at distribution opportunities that were right. As we have talked, it would have to be in an adjacent marketplace -- we're not going to hopscotch around; but we want to be prudent with our capital and with timing. So it's a future opportunity that we certainly would be inclined to look at if it was the right situation.

Okay. And last one. You know, we've heard some noise, and some interesting stuff coming out of both the restaurant side and supermarkets where this notion of a consumer trade down is maybe stronger than at least we had predicted. Can you talk about that at all? I mean, are you able to see -- are you able to get any visibility in your trade area with what's happening with the away from home trade versus -- you know, just some -- do you see a pick up -- have you seen a pick up in prepared foods? Anything that would (inaudible)? I mean, we are just kind of trying to get a feel on what's going on with the financial crisis and everything that's going on, if you are seeing it.

You know, I think we are seeing the same numbers you are. I don't have access, nor have we found access to something that's really regional as it relates to food away from home, but all of the national numbers are showing that food away from home is declining, and I think we're now looking at -- this is the beginning of the third year of that phenomena, and I don't ever remember that happening in my career up until now. If you look at consumers and research, what they're saying is that they believe that eating at home is more healthy and that they plan on doing more of it because of the economy. When you look at some of the categories where we are seeing growth -- like boxed dinners for example. I know you wouldn't necessary call that home cooking, right? But that kind of product is really resonating with the consumer -- frozen entrees are going up. So we see signs that the consumer is eating more at home -- and that was the reference in the dialogue earlier today. There are some things favorable and some things unfavorable in this climate. One of the favorables is we believe that that shift from food away from home to food at home is working in our favor.

Okay, great. Thanks very much, and congrats on a nice quarter. Thanks.

Thanks, Bakley.

Our next question comes from Alex Bisson of FTN Midwest. Please go ahead.

Good afternoon, everyone. I guess first of all, congratulations on a good quarter, and congratulations to you, Dennis, on the promotion.

Thank you.

As you look at VG's, are there any fuel stations there, and is that an opportunity?

It is absolutely an opportunity. There are zero fuel stations currently in the portfolio.

Okay. How quickly, you know, can you move? Can you get them at most locations or --

I don't know about most, but I would suggest at that there's an opportunity to move quickly on at least some locations. They had done some (inaudible) work at some locations, doing some of the appropriate upfront work that we may be able to mine those opportunities a little bit quicker. But the fuel experience for us -- expanding just a bit -- has really been -- has been terrific. I mean, we are enjoying the success of adding fuel to the pad. We continue to see comp sales grow, and we have begun to use fuel even more as a vehicle to drive value in our overall experience with our customers.

All right. That's all good to here. And I guess, just one question kind of keyed off from the press release. You indicated in the distribution business that you benefited from favorable purchasing opportunities and some merchandising initiatives. And going forward, you want to optimize your merchandising and marketing programs at retail. So I guess my question is, can you elaborate just a little bit on that? I guess some of it does touch on what you said about the consumer earlier, but could you add a little detail to that?

Yes. Well, you know, we already are a wholesaler; and as it relates to the current environment, with cost increases and some -- maybe more than modest inflation, we do avail ourselves to the opportunity to make some money on the inventory appreciation as a wholesaler. And we saw that in the Q. As it relates to driving value for the consumer at retail, you know, I think you might see us doing a little bit more as it relates to fuel, as I just kind of eluded to, because we feel like we are really getting some traction there. And we are also -- we think there's something to the whole health piece that we haven't totally mined -- and health and pharmacy I think is another area where you can expect to see us do even more in the coming months.

Excellent. Thank you very much.

(OPERATOR INSTRUCTIONS). It looks like we have a follow up question from the line of Karen Short. Please go ahead. Your line is now open. We are taking a question from Karen Short. It does look as if we have been disconnected from Ms. Short. We will take our next question from Bakley Smith. Please go ahead.

Hey guys. It is actually Scott here. I think we got disconnected by accident. If you look out into '09, one of the big concerns we had as a team is that pricing power at retail could kind of evaporate, clearly offset by maybe falling prices at -- you know, coming into -- you know, for you guys. As you look at that, what will happen, you know, a bigger impact do you think as we get to '09?

So I'm not sure that I understand your question, Scott. Commodity costs declining and -- is that what you're suggesting?

Yes, but we have been in an inflationary environment at the retail, too, so it's been both on the producer level but also at the retail level. So the question is, which one will have a bigger impact on your business -- the pricing power goes away at retail -- on the retail side, or your cost improves?

You know, the -- I think what history might show us is if we get some cost inflation that's a result of some commodity adjustment and some deflation, historically, some of that inflated retail pricing has stuck to the retailer's ribs. So I'm not -- I'm not sure that necessarily that would be a bad thing for us. We may just see some benefit on the retailer side. So obviously, if there is a reduction in the cost of goods, conversely, on the wholesale side of our business, we would immediately pass on that reduced cost of goods.

And then -- and just to understand the leverage, you know, one of the things that happens to sales when -- when, if your pricing sales tail off at retail, do you think it's still like kind of a good rule of thumb you need 2 to 2.5 -- say, 2, 2.5% to leverage your fixed cost, or are we in a different situation now where things are actually maybe a little bit easier to leverage, just generally across the industry?

I'm not sure that it's any easier, Scott. There's still plenty of cost pressures in the system anyway outside of the cost of goods, and so I'm not sure that would make it any easier.

All right. Thanks -- thanks for letting me jump in. Thanks for letting me jump in.

Thanks, Scott.

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

Well, if there are no more questions, we will conclude the call; and on behalf of Dave and Craig and everyone here on the Spartan team, I thank you for joining our call today, and we look forward to discussing our third quarter results with you during our next conference call. Thank you.

Thank you for joining us today. This does conclude your teleconference, and you may disconnect at any time.