SpartanNash Co (SPTN) 2009 Q3 法說會逐字稿

Good day and welcome to the Spartan Stores, Incorporated, conference call. At this time, all participants are in a listen-only mode. Please note this call may be recorded.

Ladies and gentlemen, I must remind you that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates, and projections that involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

Internal and external factors that might cause such a difference include, among others, competitive pressures among food, retail, and distribution companies; the uncertainties inherent in implementing strategic plans; and general economic and market conditions. Additional information about risk factors and 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.

It is now my pleasure to turn the conference over to Dennis Eidson. Please go ahead, sir.

Good morning, everyone, and thank you for joining our fiscal 2009 third-quarter earnings conference call. With me this morning are members of our team including EVP and CFO, Dave Staples; EVP of Retail Operations, Ted Adornato; EVP Merchandising, Alan Hartline; EVP Supply Chain, Derek Jones; and EVP General Counsel, Alex DeYonker.

This morning, I will begin by providing you with a brief overview of our third-quarter financial results and business progress. Dave will then give you a more detailed view of our third-quarter financial results as well as our financial outlook for the remainder of the fiscal year. I will rejoin the call following Dave's remarks to provide you with an overview of our business plans for the last quarter of our fiscal year.

I will start by stating that we are very pleased to continue our long track record of operating earnings improvement, particularly in this challenging and recessionary economic environment where consumers have become even more value conscious. As many of you realize, we have had a consumer-centric business strategy for many years. This fundamental strategy has served us well, but has been particularly effective during this weak economic cycle.

Our overarching focus on the consumer provides us with key insight about purchasing behavior and the flexibility to quickly shift our marketing and merchandising strategies in a manner that delivers even more value to our customers. For example, during the quarter we launched our new $4 generic prescription program in our West Michigan market and offered consumers exciting deep discount fuel promotions. Both of these programs have been very well received by our consumers.

In addition, we have worked diligently over the years to develop a premier private-label program which offers customers more than 3,000 corporate brand products. These product offerings are serving us particularly well as the consumer shifts towards a more value orientation.

Turning to the third-quarter financial results, we are pleased that our solid operating earnings and retail comp store sales growth continued. This quarter marks our 10th consecutive quarter of retail sales growth and 12th consecutive quarter of double-digit operating earnings growth, demonstrating our sustained growth and profitability in a competitive environment and through the economic recession that began earlier in the fiscal year.

The benefits of our capital investment program and consumer-centric strategies were evident as retail comp store sales improved by 3.3%, excluding fuel.

During the quarter, we also completed one major remodel project and held that store grand reopening. Consumer response at the newly remodeled store has been very good and is meeting our preliminary performance expectations. On a fiscal year-to-date basis, we have now completed six major store remodels and are very pleased with the sales trends and performance of these remodeled stores, as well as those that were remodeled last year.

During the last week of the third quarter, we completed the acquisition of 17 VG's Food and Pharmacy stores. Although only five days of the operations were included in our third-quarter results, the ongoing results are in line with our initial expectations. We are really enthused about these stores because they provide us with a quality operation in a new retail market.

I will remind you that more than $30 million in capital investments were made to these stores during the past five years, and this prior investment really allows us to be more targeted with our future capital investments and to focus on only the opportunities that will generate the best investment returns.

In our distribution business, third-quarter sales declined modestly due to a lower sales volume in our nominally profitable pharmacy distribution program, and the elimination of the sales to the acquired VG's stores. The pharmacy program is provided principally as a value-added service to our distribution customers, and some have chosen to exit the program.

Despite the slight sales decline, operating earnings in the segment increased for the 13th consecutive quarter.

During the quarter, we substantially completed the grocery warehouse re-racking project and expect to begin benefiting from greater operating efficiencies by the fiscal year-end.

With that overview, I will turn the call over to Dave Staples for a detailed review of our third-quarter financial results. Dave?

Thank you, Dennis, and good morning, everyone. I will now provide you with some additional details about our third-quarter financial results and review our performance outlook for the remainder of the fiscal year.

Consolidated net sales for the 16-week third quarter were $781.9 million, compared with $787.8 million in the year-ago quarter. Retail segment sales increased in the quarter due to a 3.3% growth in comparable store sales, but were offset by lower sales related to our marginally profitable pharmacy distribution program and the elimination of the distribution sales to our acquired VG's stores.

Gross margin for the third quarter increased 60 basis points to 20.1% from 19.5% in last year's quarter despite significantly higher LIFO inventory charges this year. The improvement in the margin rate was due mainly to a higher mix of sales from higher profit retail sales and improved margins in our retail segment.

As a percentage of sales, third-quarter operating expenses increased to 17.8% from 17.6% in the same period last year. The increase was attributable primarily to the sales mix change just mentioned.

Third-quarter operating earnings improved by double digits for the 12th consecutive quarter to $17.9 million, an increase of 17.4% from the $15.2 million reported in the same period last year. The improvement was the result of higher retail sales and better margins in our retail segment.

Third-quarter earnings from continuing operations reached $8.7 million or $0.40 per diluted share compared with adjusted earnings from continuing operations of $7.5 million or $0.35 per diluted share last year, representing a 15.5% increase. The adjusted number excludes $2.7 million nonrecurring tax credit mentioned in our press release. Including the tax credit, last year's third-quarter earnings from continuing operations were $10.3 million or $0.47 per diluted share.

Net earnings for the third quarter were $8.9 million or $0.41 per diluted share compared with an adjusted $7.9 million or $0.36 per diluted share in the year-ago period, representing a 13.5% increase. Again, the adjusted number excludes the effects of the tax credit. Net earnings including the tax credit were $10.6 million or $0.49 per diluted share.

Net earnings include earnings from discontinued operations of $200,000 or $0.01 per diluted share compared with $300,000 or $0.02 per diluted share last year.

Turning to our business segments, third-quarter distribution sales were $397.9 million compared with $410.7 million in the same period last year. As previously mentioned, the sales decline was related to lower volumes in our pharmacy program, which totaled approximately $9.1 million in the quarter, and the elimination of distribution sales to our acquired VG's stores, which totaled approximately $2.6 million.

As Dennis stated, it's important to understand that the pharmacy distribution program is marginally profitable and provided mainly as a value-added service to our distribution customers.

Distribution operating earnings improved to $11.1 million from $10.9 million in the same period last year. You may recall that we had a significant increase of nearly 49% in operating earnings in the third quarter last year due to new business. The third-quarter improvement was due mainly to continued expense control, but was partially offset by a $700,000 increase in the LIFO inventory charge.

Third-quarter retail sales increased 1.8% to $384 million from $377.1 million in the same period last year. The improvement was due to a 3.3% increase in comparable store sales, excluding fuel, which was driven mainly by our capital improvements and value-orientated promotional programs. In addition, we had five days of sales from our 17 acquired VG's stores, which totaled $5.1 million.

The sales improvements were partially offset, however, by lost retail sales from four stores that were sold to distribution customers since the third quarter of last year; the closing of one retail store in the first quarter; and lower fuel sales due to the decline in retail pump prices. The sale of the stores and the store closings reduced sales by approximately $9 million for the quarter.

One of the store sales occurred late in December. It was a smaller acquired Felpausch store that had annual sales of approximately $3.5 million.

Third-quarter operating earnings in the segment increased 58% to $6.8 million from $4.3 million in the same period last year. The improvement was primarily the result of higher comparable store sales, better gross profit margins, and improved profitability in our fuel center operations. Additionally, retail store opening and remodel activity costs were approximately $400,000 compared with approximately $1.3 million in the same period last year.

Total long-term debt including current maturities and capital lease obligations increased to $241.3 million as of January 3 from $154.4 million at March 29, 2008. The increased borrowings were the result of our VG's acquisition.

As noted in our press release, we also executed an interest rate swap agreement effectively fixing the interest rate at approximately 3.3% on $45 million of the incremental borrowings. As a result, we now have approximately $155 million of our outstanding long-term debt with an effective fixed interest rate of below 3.4%. We expect to pay down approximately $10 million of the outstanding floating-rate long-term debt by the end of the fiscal year.

Although our debt level increased because of the acquisition, our balance sheet remains healthy, with a long-term debt-to-capital ratio of approximately 0.5-to-1, and we still have more than $100 million of borrowing availability under our existing credit facility.

Year-to-date cash generated from operating activities more than doubled to $46.8 million from $19.8 million in the same period last year, due to improved earnings and the cycling of new distribution business secured last year, which in the short term increased our working capital requirements.

I will now cover our outlook for the remainder of fiscal 2009. We expect comparable retail store sales to increase in the low single digits during the remainder of fiscal 2009, but below our third-quarter results due to the cycling of sales from stores remodeled last year. This year's fourth quarter will additionally be negatively affected by the shift in the Easter holiday into fiscal 2010's first quarter. The Easter holiday contributed approximately 1% to comparable store sales in last year's fourth quarter. As a reminder, there is no Easter holiday included in fiscal 2009.

For the remainder of fiscal 2009, we expect to invest capital in and complete two major store remodels near the end of the fourth quarter; a major store relocation project; and begin construction of a relocated Glen's store. Additional store opening and remodel activity costs are expected to be approximately $1 million in the fourth quarter.

In the distribution segment, we expect our third-quarter sales trend to continue into the fourth quarter because of the effect of the pharmacy distribution program and elimination of distribution of sales to our acquired VG's stores. Distribution of sales to customers that exited our pharmacy distribution program were approximately $6.9 million in last year's fourth quarter and approximately $29 million on an annualized basis.

We continue to expect year-over-year operating earnings growth in this segment as we focus on efficiency improvements, cost controls, and procurement and merchandising opportunities.

We expect total capital expenditures for fiscal 2009 to range from $58 million to $60 million with depreciation and amortization expense ranging from $26 million to $29 million and interest expense to be approximately $11 million.

Our VG's acquisition should add approximately $300 million to our annual retail sales, but add approximately $150 million in total net annual sales because as a former distribution customer their distribution sales are eliminated. Distribution sales to these stores totaled approximately $35 million in last year's fourth quarter.

We continue to expect the transaction to be slightly dilutive in the fourth quarter, due to transition costs and the elimination of the related fourth-quarter distribution profits for our base inventory shipments to these stores. We then expect the transaction to be modestly accretive in fiscal 2010 and increasingly so thereafter as acquisition synergies are realized.

I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. We are very pleased with our consistent performance during this troubled economic period. Our consumer-centric strategy has been the bedrock of the consistent performance and has positioned us particularly well as the consumer gravitates back to meals at home or trades down and is more discriminate in their shopping choices.

With the introduction of our $4 generic prescription and discounted fuel programs, we are taking even stronger actions to further enhance our value proposition with consumers. Our robust private-label program and targeted promotional programs are features that have been effective in building loyalty and attracting new shoppers. In fact, during the fourth quarter, we launched our first-ever Spartan brand fresh chicken program. This program will bring better value to our consumers while expanding the breadth of our products to include another center-of-the-plate offering.

We will continue to analyze and closely monitor consumer buying patterns and make adjustments to our marketing and merchandising strategies accordingly, while maintaining our focus on profit growth and performance objectives.

During the remainder of the year, we will focus on the integration of our VG's retail acquisition to capture the expected operational synergies and continue executing our capital investment program across our store base. As I mentioned in our last call, the majority of the VG's stores are service and product focused, well run, have great associates, and have successfully competed with national and regional chains for many years. Their fresh product offering is outstanding and helps tremendously to differentiate the chain from others, as well as their service and quality.

In addition to these stores, we have more work remaining to fully integrate our Felpausch retail stores. We continue to improve their facilities and refine their marketing, merchandising, and promotional programs while looking for additional opportunities to enhance our value proposition in order to more fully realize their performance potential.

In the fourth quarter, we have completed the relocation of one of these Felpausch stores and will complete a major remodel of another near the end of the quarter. Both locations will be rebranded as Family Fare. The relocated store opened on January 19 and is being well received by the community. By the end of the quarter, we will have just a handful of remaining Felpausch stores where we believe significant capital expenditures are still required along with rebannering.

As David mentioned, under our capital program, we also expect to complete one additional major store remodel of our Glen's banner late in the fourth quarter and have begun constructing a new Glen's store. The new store will replace an existing Glen's location in Manistee, Michigan.

In our distribution segment, we are continually engaged in seeking new customers and in exploring opportunities to expand sales with our existing customers. In addition, we constantly evaluate our supply chain to determine where service capabilities and operational efficiencies can be improved.

Although we are putting the finishing touches on our grocery warehouse re-racking project, a number of operational improvement opportunities remain. Our warehouse throughput and inventory management initiatives are ongoing and will help gradually improve our service quality and operational efficiencies.

I want to conclude my remarks by thanking all of our hard-working associates for their efforts during these difficult times, as well as thank our distribution and retail customers for their continued support. I believe our disciplined teamwork and focus on financial structure has positioned us to be able to take advantage of the VG's opportunity and that it will continue to provide us with the flexibility to take advantage of other strategic opportunities as they become available.

We will now open the call for your questions.

(Operator Instructions) Karen Short, FBR Capital.

Hey, great quarter.

Thank you.

Hey, a couple questions. I guess, to start with retail, well, retail and the competitive environment in general. Just wondering if you could give us some color on what you're seeing in the competitive environment. Are there any competitors that are feeling the pain particularly? And what are you seeing in terms of your market share?

Then I guess the second question on retail is -- can you maybe just go into a little more color on what is driving the improvement in EBITDA margins at retail, and where you think it could go?

Sure. On the competitive front, as you know, notwithstanding the five weeks we've owned the VG's brand, our primary competitors in our corporately owned stores are supercenters. It is either Super Wal-Mart or Meijer. I would say that the competitive environment hasn't changed dramatically. I think we are all searching for ways to really add more value to the consumer, and I think we've maybe had a little bit of a leg up on some of the things we've done and particularly as it relates to the strength of our private-label program.

I think -- and we use Nielsen to track market share, and there's the good and bad, the ugly, when you are using syndicated data. I would suggest that the numbers would tell us that we are building market share in our corporate retail geography. And we feel pretty good about that.

In terms of the EBITDA, obviously the comp sales store growth certainly doesn't hurt. But I would tell you that we have a relentless focus on our SG&A lines as well. I think the team here has done an outstanding job of squeezing cost out of the system without impacting the consumer. I think that has been a big driver as well.

So it is a tough environment, but we are feeling pretty good about where we are.

Okay, and what did -- do you have some color on private-label penetration, what it increased by, I guess sequentially at both distribution and retail?

We do. On the corporate retail side in the quarter -- again this is AC Nielsen data and units. In the quarter, we ran 26.4% penetration; and that compares to 23.7% a year ago, so a significant lift. The 26.4% compares to the US average of 23.36%, so again a nice lift versus the US.

On the distribution side, see if I can pull that number here. For the quarter, we ran a 21.63%. That compares to a 20.12% a year ago, so a 150 point lift. So as has historically been the case, our distribution customers lag us a bit but their trend is robust.

Okay. What was the year-over-year delta in gas prices? Just the average price at the pump. I don't know if you know that off the top of your head.

I think it was down somewhere around 15% to 20%.

Okay, okay. Then just switching gears to inflation versus deflation. I mean, there is obviously a lot of talk about the potential for deflation and it seems consistently retailers seem to be saying that some categories will see deflation but overall we won't see deflation.

But I'm just wondering if you could talk a little bit about what that environment would do to your business model in general, if we were to enter a deflationary environment.

First of all, I agree with your assessment about this inflation-deflation. We are seeing some deflation on commodity items, cheese from Kraft. I think we have had some oil, some flour, some coffee. But the processed foods we're not seeing that; I think that the increases we got are going to be pretty sticky for the CPG companies. We are working hard to try and get them to spend some of that money back with us. And then I think it may end up manifesting itself in more promotional spending.

Our business model as it relates to if there were deflation -- and we are not really seeing significant deflation, I want to make that clear. Actually in the quarter, we saw modestly robust inflation.

As a distribution entity, our center store, frozen, dairy, we have a cost-plus model that has a variable component and a fixed component. So the fixed component, the cent per case charge, really is a hedge against us getting hurt in a deflationary environment.

As it relates to retail, I think what has historically happened is as retails have gone up in an inflationary period, generally speaking there is a little bit of stickiness on them coming down when that inflation subsides. So I don't think the impact will be significant in either segment.

Okay, great. I will get back in the queue. Thanks a lot.

(Operator Instructions) Sarah Lester, Sidoti & Company.

Good morning. I was wondering if you could talk about in the retail segment how much of the operating margin improvement was from the improvement in steel margins.

Sarah, we don't break out our segments; but, you know, it was maybe a third or so.

Okay. Then just a small question. The peanut butter recall, I would expect that to not impact you too much. But could you talk about that briefly?

Yes, we are living through it like every other retailer. I was just remarking yesterday, I just felt that of all of the recalls I have gone through, this one has prolonged itself relative to the number of items that have come out. It seems like every day there is another SKU or two that we are being notified we have to pull.

We certainly don't feel comfortable about it. And the consumer trusts us as retailers, food retailers, with their health and well-being; and I think we have an obligation as an industry to really do a better job in this area.

Fortunately, we have had very, very little fallout in our private-label program. We've had three candy items that we had to pull. So I don't know if that answers your question, but --

Yes, that's all I have. Thank you.

(Operator Instructions) It does appear that we have no further questions in the queue at this time.

Okay, well if there are no more questions we will conclude the call. On behalf of Dave Staples and everyone on the Spartan team, I thank you for joining our call today and we look forward to discussing our fourth-quarter and fiscal year results with you during our next conference call. Thank you.

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time and have a wonderful day.