SpartanNash Co (SPTN) 2009 Q4 法說會逐字稿

Greetings and welcome to the Spartan Stores fourth quarter and year end conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. Ladies and gentlemen, I must remind you that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that involve significant risks and uncertainties. Actual results may differ material from the results discussed in these forward-looking statements.

Internal and external factors that might cause a difference include among others: competitive pressures among food retail and distribution companies, the uncertainties inherent in implementing strategic plans, and general economic and market conditions. Additional information about risk factors and the uncertainties associated with our forward-looking statements can be found in the company's earnings announcement, annual report on form 10K, and the company's other filings with the SEC. Because of the risks and uncertainties, investors should not place undue reliance on forward-looking statements. Spartan Stores disclaims intention or obligation to update or revise any forward-looking statements.

It is now my pleasure to introduce your host, Dennis Eidson, President and CEO, for Spartan Stores. Thank you. Mr. Eidson, you may begin.

Thanks, Melissa. Good morning, everyone. Thank you for joining our fiscal 2009 fourth quarter year and end earnings conference call. With me this morning are members of our team including: Executive Vice President and CFO, Dave Staples, Executive Vice President of Retail Operations, Ted Adornato, Executive Vice President of Merchandising, Alan Hartline, Executive Vice President of our Supply Chain, Derek Jones, and Executive Vice President and General Counsel, Alex DeYonker. This morning, I will begin by providing an overview of our quarterly financial results and business progress, Dave will then provide a detailed review of our fourth quarter and fiscal year financial results as well as a broad financial outlook for the coming year. I will rejoin the call following Dave's remarks to provide an overview of our business plan for fiscal 2010.

Let me begin by saying that we are very proud of our business achievements during both the fourth quarter and the fiscal year, which would not have been possible without the hard work dedication, and skills of our management team and our associates. I want to thank all of our managers and associates for the contributions for what has been another successful year for Spartan Stores. We are pleased we've continued our solid financial performance considering the ongoing economic weakness. During the quarter, we observed that consumers are becoming strict and disciplines about discretionary spending. As a consequence, they continue to place a heavy emphasis on value in their purchase decisions.

We are somewhat encouraged by the recent economic news that points towards signs of economic stability, as the weekly initial jobless claims were lower, housing prices are declining at a slower rate and the consumer confidence index for April rose higher than expected, however we expect the current weak economic environment to continue through fiscal 2010. During this challenging economic cycle, we have remained steadfast in our commitment to a fundamental consumer-centric business strategy. This commitment has allowed to us stay center on the consumer and anticipate their changing needs while providing the flexibility to adjust our marketing and merchandising tactics in a way that brings more value to the consumer and affectively adapts to their changing purchasing behavior. During fiscal 2009, we experienced overall inflation, but at a slower rate during the fourth quarter, and we actually experienced deflation in certain product categories late in the quarter. With that context, we are pleased to report record operating and net earnings for both our fourth quarter and fiscal year.

Operating earnings for the quarter improved about 14% to $17.3 million, and net earnings rose 10%, to $8.9 million. Consolidated net sales for the quarter increased nearly 2% to $581.3 million, as we benefited from the sales contribution of the acquired VG stores, and from positive comparable store sales at our other supermarkets. At the end of last year we embarked on an aggressive capital investment program with the goal of remodeling a total seven retail stores, and building a replacement store in strategic markets that held our most promising market share growth opportunities. In order to optimize the performance of our retail store network we also plan to divest or close some of our previously acquired stores and continue the conversion of select Felpausch stores to other retail banners. In addition, we expected to implement efficiency improvements in our distribution business, seek expansion opportunities in adjacent markets, and sell the assets of our remaining [farm] retail operation. We are very pleased we completed other achieved significant progress on each of these objectives during the fiscal year.

During the fourth quarter, we substantially completed two major remodels and completed a store relocation project. Consumer response at the stores has been very good and we are satisfied with the results. In fact, our relocated stores is now one of our highest volume stores on a weekly basis. As the fiscal year concluded we had finished major remodel work on seven retail stores, completed a major store relocation project, and opened three more fuel centers. During the year we rebannered a total of five Felpausch stores, converting one to a D&W fresh market and Family Fare. We also closed one Felpausch and sold another to a distribution customer. We are satisfied with the sales trends and performance of the remodeled stores as well as those that have been part of our capital program during the last two years. During the past two years we have now performed major remodels or relocated 14 stores, representing approximately 17% of our store base prior to the VGs acquisition. While we have a handful of store relocations, and several significant remodels scheduled during the next two to three years, we believe our store base is in great shape and provides our customers high quality shopping experience.

During the year we also completed the acquisition of 17 VGs food and pharmacy retail stores and continued working on their integration. As we've stated in the past, these stores are quality assets and located in markets where we want to be long-term participants. We retained a great team of associates with the stores who are consumer focused and accustomed to delivering a wonderful shopping experience and providing exceptional retail environment. We are working with this team to leverage the benefits of our larger scale, to realize the related purchasing and operational synergies that we believe exist while continuing to great service tradition VGs is known for. We also believe there are opportunities to further enhance the value proposition of these stores through improve promotional and merchandising programs as well as higher penetration of our private label products. Recognizing the more conscious budget conscious consumer we proactively introduced value added, oriented programs across our operation during the year. We've introduced $4 generic prescriptions to the Family Fare and D&W pharmacies during the third quarter. In addition given our concentration on the Grand Rapids area we have been able to offer market wide fuel promotions as a consistent part of strategy and continued to enhanced private label program with the introduction of new products such as our Spartan brand all natural fresh chicken.

During the fiscal year question introduced more than 200 new private label products. We are pleased to be providing these well received excellent values to consumers at a time when they need it most. We made additional investments in technology, equipment and processes at our distribution segment during the course of the year. These investments include complete a reracking project at our Grand Rapids grocery warehouse that will make the movement of goods and use of resources much more efficient. Implementing an inventory management system, that will allow us to improve our customer fill rates while better managing our inventory levels. And achieving better alignment and balance in our delivery schedules which has helped make our routing more efficient and increased our low density. These achievements will make our distribution operation more efficient, while creating incremental operating leverage and increased capacity that will be even more beneficial when the economy recovers.

Lastly in today's economic climate, there is much attention focused on company balance sheets. We are pleased to have maintained a solid balance sheet and we are well capitalized with significant existing borrowing capacity under our revolving credit facility. Our strong capital position along with the borrowing capacity and cash flow generation ensures that we have the financial resources necessary to continue fueling our growth plans, while giving us the ability to further reduce our outstanding borrowings. With that overview, I'll turn the call over to Dave for a detailed review of our fourth quarter and year end financial results. Dave?

Thank you, Dennis, and good morning, everyone. I will now provide additional details about our fourth quarter and year end financial results, and review our performance outlook for fiscal 2010. Consolidated net sales for the 12 week fourth quarter increased to $581.3 million, from $570.7 million in the year ago quarter, which included approximately $4 million in sales related to the Easter holiday. The sales improvement was due to retail segment which had incremental sales contributions prom the acquired VG stores and 1.2% growth in comparable store sales excluding the impact of fuel sales and the Easter holiday sales included in last year's fourth quarter. Partially offsetting net sales gains were lower sales in the distribution segment, which were due primarily to the reclassification of sales from the acquired VG stores to retail segment and the previously mentioned pharmacy program sales.

Gross margin for the fourth quarter increased 240 basis points to 23.3%, from 20.9% in last year's quarter. The improvement due mainly to higher mix of retail sales which represented 57% of consolidated sales compared with 48% in last year's fourth quarter, and $1.1 million net LIFO inventory valuation credit compared to a net LIFO expense last year. Please note that the LIFO net credit this year was partially offset by lower inflation sensitive procurement gains as well as we began cycling the onset of this inflationary period during the quarter. As a percent of sales fourth quarter operating expenses increased to 20.4% from 18.3% in the same period last year. The increase was attributable primarily to the higher retail operating cost structure associated with the retail sales mix change. Fourth quarter operating earnings improved by double digits for the 13th consecutive quarter to $17.3 million, an increase of 13.6%, from the $15.2 million reported in the same period last year. The improvement was a result of higher sales, gross profit margins and the effects of our cost containment initiatives.

These improvements, however, were partially offset by lower inflation sensitive procurement gains in our distribution segment during the quarter and higher cost associated with the VG's acquisition and capital investment program in our retail segment. Fourth quarter earnings from continuing operations reached $8.7 million, or $0.40 per diluted share compared with earnings from continuing operations of $7.8 million or $0.36 per diluted share last year, representing an 11.2% increase. Net earnings for the fourth quarter $8.9 million or $0.41 per diluted share, compared with $8.1 million or $0.37 per diluted share in the year ago period, representing a 10% increase. Turning to our business segments, fourth quarter distribution sales were $249.2 million compared with $297.4 million in the same period last year. Sales decline related to the reclassification of $35 million in sales to the acquired VG store, lower volumes in our pharmacy program which total approximately $7.5 million in quarter, and the absence of approximately $2 million in Easter holiday sales this year.

As we stated during our last call, the pharmacy distribution program is marginally profitable and provided mainly as a value added service to our distribution customers. Distribution operating earnings improved for the 14th consecutive quarter to $14.6 million, from $10.9 million in the same period last year. The earnings increase was due mainly to improved sales mix, the benefit of operating expense controls and a $2.1 million LIFO inventory valuation credit recorded in the current year. The LIFO valuation credit was partially offset by lower inflation sensitive procurement gains due to the decelerating rate of product cost inflation in the fourth quarter.

Fourth quarter retail sales increased 21.5%, to $332 million from $273.4 million in the same period last year. The improvement was due to incremental sales contribution from our acquired VG stores and 1.2% increase in comparable store sales excluding fuel and Easter holiday sales, partially offset by a decline fuel sales due to lower pump prices, the absence of approximately $2 million in Easter holiday sales this year, and $5.1 million in sales related to the store divestiture activity for the current and prior years. The comparable store sales improvement was driven mainly by the performance of stores included in our capital investment program and the success of our value oriented promotional programs.

Fourth quarter operating earnings in the segment were $2.7 million compared with $4.3 million in the same period last year. The decline was primarily the result of increases of $1 million the LIFO inventory valuation charge and $1.1 million in startup and other costs associated with the retail capital program. In addition approximately $300,000 of the decline attribute to lower market wide fuel margins in the current quarter and $100,000 in training and startup costs related to the VG's acquisition. For the full year consolidated net sales rose 4% to $2.6 billion, generating an 18% improvement in operating income to $72.7 million. Net earnings for the year increased 13.1%, to $38.8 million, or $1.78 per diluted share from $34.3 million or $1.58 per diluted share last year.

As Dennis mentioned we continued to maintain a strong balance sheet and capital position as well as healthy liquidity. Total long-term debt including current maturities and capital lease obligations decreased by $21.7 million, from the outstanding balance reported at the end of the third quarter. Our net cash generated from operations increased more than 19% in fiscal 2009 to $80.9 million. The improvement in cash flow and higher earnings allowed us to pay down $21.7 million in outstanding borrowing which significantly exceeded our goal of paying down $10 million by the end of the fiscal year. Our balance sheet remains healthy with a long-term debt to capital ratio of approximately .48:1, and we still have more than $100 million of borrowing availability under our existing credit facility. In addition EBITDA for the year increased 17.3%, to $107.9 million from $92 million last year.

I will now cover our outlook for the remainder of fiscal 2010. We expect to report higher year-over-year consolidated gross profit margin rates during fiscal 2010, due to the increasing mix of retail sales and our anticipation of higher profit margins in our retail segment. Contributing to this improvement will be continued strength in our private label sales, implementation of additional merchandising and pricing initiatives, and expected lower fuel costs. In addition we will be implementing the measures outlined in our press announcement to reduce our operating costs and we expect these steps to generate up to $5 million of cost savings in fiscal 2010. As Dennis mentioned, we expect product cost inflation to continue to moderate during fiscal 2010, and as such we may experience some effect on retail and distribution sales, as well as lower inflation sensitive procurement gains. The lower inflation rate however will also reduce our LIFO inventory valuation charge and partially help mitigate the sales and procurement gain impact through the first three quarters of fiscal 2010.

On a consolidated basis we anticipate that LIFO will approximate the fiscal 2009 levels by year en. Considering the current economic trends and competitive store openings which we expect to impact our comparable store sales by 1.7 percentage points, we -- comparable store sales could be a slight decrease during fiscal 2010. Our VG's acquisition should add approximately $215 million to our annual retail sales, but add $105 million in consolidated net annual sales, because there is a former distribution customer their distribution sales are eliminated. For fiscal 2010 we expect to complete major remodel projects on an additional five stores, complete the construction of relocated store, complete one new store late in the year, and open an additional six fuel centers. Valuating our store base for remodel relocation and closing activities is a continuous process intended to optimize the performance of our entire store network.

We expect the sales decline related to store rationization decisions and store base rationization activity carried forward from last year, to be approximately $20 million for fiscal 2010. Store opening, remodel and divestiture costs related to the projects mentioned are expected to be approximately $5.2 million in fiscal 2010, compared with the $4.2 million spent last year, due to the cost of the related store closures and accelerated depreciation associated with these activities.

In the distribution segment, excluding the reclassification of approximately $110 million in sales to the acquired VG stores, we expect sales to be comparable to 2009's levels. This guidance includes an expected drop in pharmacy sales related to customers that exited the program of approximately $11 million, with $7 million occurring in the first quarter and additional $4 million in the second quarter. We expect to achieve solid consolidated EBITDA margin and dollar growth in fiscal 2010. Consolidated earnings from continuing operations are expected to proximate fiscal 2009 levels due to an incremental pension expense of approximately $1.3 million, an increase in the effective tax rate of 70 basis points due to effect of the new Michigan business tax, and the expense increases and cost reduction efforts previously discussed. Total capital expenditures for fiscal 2010 are expected to range from $48 million to $52 million, with depreciation and amortization expense ranging from $33 million to $35 million, and interest expense approximating $13 million to $14 million. In addition, due to our solid cash generation, we expect an additional $10 million to be available to paydown long-term borrowings.

You should also note that we adopted two accounting pronouncements that will effect our fiscal 2010 financial reporting and prior periods. These were disclosed in our press announcement. Adoption of these pronouncements will result in additional annual non-cash interest expense of approximately $3.4 million and $3.1 million in fiscal 2010 and 2009 respectively, and will increase the weighted average number of diluted shares outstanding. The weighted average number of diluted shares outstanding for fiscal 2009 will increase by approximately 460,000. We expect the weighted average number of diluted shares for fiscal 2010 to further increase an additional 240,000 shares as a result of equity compensation programs. I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. I just wanted to reiterate that we are very pleased with our consistent performance during this very troubled economic period. During the current year our objectives are to be relentless in our execution of a consumer centric business strategy. On the retail side, this means sharpening our focus on providing consumers with better values and attractive product promotions, as well as being more strategic with our pricing strategy. For example, we have not had a loyalty card program in any of our stores, but we just began piloting a new loyalty program in one of our northern Michigan retail markets. We expect this program to garner much richer insights about consumer preferences and purchasing behavior which will allow us to be more effective with our marketing, merchandising and pricing strategies. We plan to roll out this program to all of our 34 Glen's stores by the end of the second quarter. During the year expect to continue benefiting from the private label program as well as our targeted capital investments.

As Dave mentioned we expect to complete major remodel activity on five additional retail stores, complete a store relocation, build one new store, and open six additional fuel centers. All of this activity will be performed in markets where we have the best market share growth opportunities. In addition, we expect to have substantially integrated the VG's acquisition and to have begun to achieve operational synergies by fiscal year end. We remain enthused about the long-term performance potential of these stores. In our distribution segment, we are continually seeking new customers, exploring strategies to enhance sales with our existing customers and looking for ways to improve efficiency and create additional operating leverage.

I want to conclude my remarks by again thanking all of our hard working managers and associates for their efforts during these very difficult times, as well as our distribution and retail customers for their continued support. We are taking advantage of this uncertain economic period to strengthen our company's position and build customer loyalty by making select strategic investments in our stores and distribution network, and by further leveraging the competitive advantages that we enjoy through our private label program, local market knowledge and insight, and our distribution support services. Our solid financial position will also provide us with the ability to take advantage of other strategic opportunities as they become available. We will now open up the call for your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from the line of Bakley Smith with Jefferies & Company. Please state your question.

Hey, guys. Just first question, can you give us some idea on the distribution side like the same store sales distribution number, I mean in organic growth a lot has to do with VG's and the pharmacy? Just wondering what's going on there.

It's a tougher number to measure, we do track it, it's running flattish would be I say a descriptor. And not all retailers are created equal. Some are doing better than others, but on balance a flattish performance.

Okay. Great. And on the VGs, obviously you mentioned a couple of times there was a higher performing asset when you bought it. What kinds of things do you think you can do just to -- in the spirit of improving everything, what can be done to improve VGs, do you have any plans in the pipeline for that?

We sure do. This is a great business, a family-owned business, has a great culture. And we want to leverage all of that. Their customer stat scores are off the chart. But we also know that there are certain elements of our programs that when put into place will improve the performance. Private label is a big example. They're underpenetrated with private label. We have opportunities there to do some things with fuel centers that we think can help us significantly. We are in the process of putting in a couple of Starbucks locations in some of the upscale VG stores which we think can add tremendous value. And a more disciplined approach that we take as a chain operator that maybe a family-owned company doesn't take, I think when you put that all in mixer, there are significant synergies for us.

Okay. And mentioning this loyalty card, where do you see that going? Are you thinking about, I don't know, contracting with one of the data gathering companies to try and target -- get real specific data on your customers perhaps tailor marketing, tailor promotions etc., by customer?

We actually have customers in our distribution base that have a loyalty program that is -- has actually been domiciled here in our IT department. So it's not like we are devoid of knowledge about loyalty cards, tracking the data, we've invested in some technology that's more robust. We don't have at this point any plans have like a [dumb humvee] relationship if you will, but we are poised to be able to dissect the data, turn it in to actionable data and target consumer business clusters but ultimately individually. Knowledge is power, we have a little bit of a blindspot as it relates to our customers today and we think this is the right approach at the right time and we are excited to get it kicked off.

Thanks.

Thank you. Our next question is from the line of Chuck Cerankosky with North Coast Research Holdings. Please state your questions.

Good morning, everyone. I've got a couple questions for you. First, Dave, what was the inventory writeup charge in the fourth quarter related to the VG's acquisition, and maybe have it in dollars and cents per share?

Yes, so you are talking about the profit elimination?

Yes.

It was about $300,000.

So as I recall the total might be more than that, so we might see more in the current quarter?

No. You took a little bit in the fourth quarter, so I mean I'm sorry in the third quarter, so total is about $450,000.

So $450,000, $300,000, and all right, so we -- that should get it like a normal tax rate?

Yes, our normal adjusted tax rate.

Okay. And all right. You didn't break that out in the press release, did you?

No.

Alright, but that seems to be a clear add back. When we look at this new ruling on those convertible bonds the non-cash interest, can you just get in briefly how the market rate is calculated? And my tendency is to think about that as an add back as well. It seems like just a theoretical accounting game when in fact you did a really smart financing.

Yes, we don't want to comment on our good friends at the FASB, but I think we agree. Practically speaking what happens is the accounting gurus have decided they want you to try to provide a market based interest rate as you proposed there. And what we use, you really use your experts at the time, and they working with you to figure out if you had done say a different kind of financing without the conversion feature, what might your interest rate have been. And so you then use that interest rate to impute a totally non-cash interest charge onto this financing. And so I think we concur with you, if you really try and understand the business, it doesn't appear to be anything that you would keep impacting the number, it would be added back. Certainly it's not cash. And so you can imply the rate based on the $3.4 million that we said need to be in there. But we use some people in the industry to help us estimate what a piece of debt without that conversion feature would have gone for at the time.

Okay. What -- and you included this non-cash interest in your fiscal 2010 guidance, correct?

No, not on the flat earnings. That would be pre that, because it hits both years, Chuck. I mean we have to restate prior years as well. So if you look at what's going to happen, when we start in 2010, we will take a -- by the end of the year we will have expensed $3.4 million in interest, our 2009 year will be restated by $3.1 million in interest. So it adjusts all years presented.

Got you. All right. Now what's the offsetting entry on the balance sheet for this, because it's got to create I guess a deferred asset of some kind?

Yes. What they end up doing is they bifurcate the $110 million liability into an equity component and a debt component. So our debt will go down, and our equity will go up.

This is fun for accountants.

Oh yes, it's part of the job retention act for the CPA.

So your ROE will go down as a result and your debt ratio will go down. All kinds of stuff moves around. Okay. Turning to VGs, Dennis, what's been done, what needs to be done to get it largely integrated for the full year?

Responded a little bit of that to Bakley. We have plans in place with some capital as I discussed with fuel and in Starbucks.

Dennis, I'm thinking of the system stuff and the backstage operations as opposed to merchandising, more just how what you need to do to fit it in to our way of operating.

One of the nice things about rolling up distribution customers is there are opportunities that exist where they've already been integrated into your systems. Basically the back door stuff is all done, we don't have anymore of that work left to do. We are putting in across our entire network a new pharmacy program and that's going across all of our stores, VGs will have that integration. Basically that's work that's completed, Chuck.

Excellent. So it's the merchandising thing that needs to be done. When you look at the VG stores, are you worried that putting private label in there is going to upset what's been working?

VGs has been a Spartan customer for 48 years, I think is the number. And their customer base is clearly attuned to Spartan brand. The brand performs very well there, I think that they were in some instances not as aggressive with introducing new items, maybe not as aggressive with promoting private label, but as we look at our -- take D&W as an upscale brand, if you will, our private label is performing great there. Private label has never been more relevant to the consumer and we are all reading the same information, and our results are tracking with everything that's being published nationally, I really don't see a risk in that, Chuck.

Okay. If you can talk about the Michigan economy, obviously the eastern part of the state is different from the west, at least based on the news we read. Are you seeing that when you look at your business?

There is certainly a lot of uncertainty about the economy. I think Michigan is not unlike the rest of the country, and it's tough, people are concerned about what is going to happen next. I think the psychological part is probably as important or more important than actually what is occurring. Our unemployment rate is up here, it's up in the country in general. I think we've just figured over the last two years we figured out a way to navigate through the waters and we are going to continue to do that going forward. We don't have a magic eight ball that's giving us any answers, but I have confidence in the management team here that we will be able to figure it out.

Alright. Thank you very much and good luck for this year.

Thanks, Chuck.

Our next question is from the line of Megan O'Hara with FBR Capital Markets. Please state your question.

Yes, hi. This is Megan on for Karen Short. The first question I guess on the retail, can you talk about the cadence of sales throughout Q4?

One of the things that happened in the fourth quarter and then subsequently in the quarter we are in now, is we have the noncycling Easter event. That happened week 51 of our fiscal year, week 11 of the quarter. So Megan that makes it nearly impossible to look at the queue, and say, here is what happened from a cadence. I would say that if you look at the last eight or 12 weeks of our business, which envelops both Easters we are pretty consistent with the guidance we provided in terms of revenue.

Okay. And then I guess if you could give a breakout of traffic versus basket in the comp?

Yes. In the quarter, if I strip out Easter which does have an impact, our customer count was basically flat for the queue. And our sales per transaction was positive, that 1.2%, which gets you to the 1.2% comp that we published.

Okay. And then have you given the impact of Easter?

I think we gave 80 points.

That's a fair number to use.

Okay. And just a follow up on VGs, can you discuss specifically how sales trends are looking at the VG stores versus the rest of the chain and especially given their exposure to Detroit?

Megan, we just have historically not commented on individual banners and performance, and I would say that maybe relatively speaking the kind of sales trend we are seeing at VGs compared to the relative sales trend we are seeing in the balance of the corporate stores is similar.

Okay. And how many of those stores directly compete with Kroger?

Out of the 17 stores, I think all but one has Kroger as a direct competitor.

Okay. And on your loyalty card program, how did you decide to start with the Glen stores?

There were an assortment of reasons, but one of the factors that played into it is, as you know growing through acquisition you end up with assimilating a lot of brands, and I would say I'd characterize our brand architecture as maybe cluttered as we bought in the D&W, VGs, Family Fare. The Glen's market gave us an opportunity to launch the program in one brand with a large enough group of stores for us to be able to get an effective reading.

Okay. Just to switch gears a little bit. Why did you have a LIFO credit in distribution and a charge on retail side?

I will take that one, Megan. Couple of things, when you look at how long we been on LIFO, we been on LIFO much, much longer in distribution than retail we have a lot more layers in our distribution LIFO pool. That makes distribution sensitive to inventory fluctuations. As you know we been put in, as Dennis mentioned earlier, a new inventory system trying to become more efficient in our working capital management. We are always focused on inventory levels and there was also some changes in timings of Easter, all those things contributed to a more efficient inventory picture which in distribution is much more impactful on LIFO than it would be at retail. And secondly we find retail lags distribution a little bit as far as the cycling of inflation or some times the incurrence of inflation. So those two factors would be the major reasons.

Okay. And just one more question to follow up on that in terms of impact of inflation or deflation on the distribution side of the business. If you could just walk me through the various positive and negative impacts, I know you've talked about how it will impact the top line, but if you can discuss in terms of fewer floor buys and all the different impacts.

I'm not sure how -- what you are looking for. We are not going to go into specifics, we don't usually go to that level. But generally speaking, right, inflation and distribution drives a LIFO charge, if your inventories stay consistent or grow, and it also drives opportunities in the buying sector, for floor buys or price change type gains. Obviously that mitigates all those same levers fluctuate, and so while you benefit from that in times of raising inflation, as deflation comes down it mitigates those. LIFO and market gains are procurement gains are somewhat of a teeter totter, they tend to offset each other, in periods of inflation you get a higher LIFO charge, while at the same time you may have more procurement type gains, so I think you just have to think of it in that direction. I don't think we are repaired to go deeper than that.

Okay. That's helpful. Thank you.

(Operator Instructions) Our next question is from the line of Simeon Gutman with Canaccord Adams. Please state your question.

Hi, guys. Can you diagnose the customer you are seeing and some of the questions eluded to this, across your retail segments? I know we talked about private label as well as across into distribution, and I'm curious if you're starting to see anything different emerge, concurrent with a lot of retailers starting to think that the environment is stabilizing a bit. I'm curious what changes the customers are showing as this stabilization happens.

I would say, Simeon, that I'm not sure I would characterize our experience today as stabilizing significantly, changing significantly. We are still seeing as an example the first of the month being far more important on the revenue side than the end of the month, a lot of government assistance money is still flowing in at the first of the month, we feel that. We also are continuing as we talked to see private label grow, I think that's going to continue to grow. We see the entry level private label brand value time in our case growing at a significantly faster rate than the private brands are even growing. Liquor actually tends to be a favorable category, it has been for a while. I think we are seeing a little bit more of the same and not a turnaround if you will.

Right. And then I guess even in the higher end stores or the more upscale offering, versus the more mainstream, are there any differences in terms of product migration as one customer exhibiting -- I'm guessing there should be a greater private label migration, it might be counterintuitive because you might have opportunities even in upscale store. What else -- are there any nuances that also we can point to when maybe the customer will start to come out of this a little bit? Maybe starting to trade up in the meat category again?

I'd say our upscale brand D&W hasn't had all the trends as the balance of our base. There is a little more stability there for example, on government assistance as you would expect. We don't get that first of the month/end of the month sales trend shift at D&W. Categories like wine have continued to perform well for us at D&W, I would say that the whole value orientation continues to be a focus, even for the D&W customer. We are selling a larger percentage of our sales are generated in the ad program on both upscale and our mainline grocery stores. So I would love for me to be able to say to you, yes, we see this. We are not seeing a significant shift yet, Simeon.

How is high low pricing, I don't know if that's just limited maybe to D&W, or I guess the fresh -- or the family format. But is high low pricing still being received competitively in the marketplace or you just hear anecdotally there has been more of a migration, not an everyday low price, but just at least a perceptively lower shelf price format as opposed to the high/low which creates seemingly more of an upscale feel right now.

Well as you know we are a high low operator we go to market high low across all of our banners, as I just mentioned we are getting a higher percentage of total revenue done on the promotion. That hasn't changed. But we have actually tried to integrate some [EDLP] into that, bread, milk, eggs kind of thing at a lower everyday price. We've got a stable of value time products we offer at very, very competitive prices equal to sav-a-lot if you will, day in and day out to augment the high low, then we tried to add value to consumer in other ways like the $4 and $10 generic program that we have in place in the Grand Rapids marketplace as an example, [Meyer] doesn't have that, and they are a core competitor here.

We nicely grown our pharmacy business, that's a way to add value to that consumer that isn't necessarily high low. Then the fuel pieces has been important for us. Where we have day in and day out a discount on fuel, in Grand Rapids the whole marketplace and we've also done some things pretty creatively with fuel. We have done $1 off a gallon of gas when you spend hundred dollars, that resonated with consumers, so we are trying to mix it up a bit. And we launched a campaign several months ago, more ways to save. And we try and bucket all of our value propositions in that. And I think it's resonating a bit with the consumer.

And then just one more for Dave. On the margin side on the retail business, if you exclude the LIFO charges in this year and in the previous year, and you back away, and I guess all of that I think it was $1.1 million runs through the P&L in terms of investments, the margin, can you just tell me what the margin was on that basis? It looked like it performed better than at least the face value.

It certainly did. If you look at the four things we highlighted. I think you would will happy with how that performed. The incremental LIFO charge, the capital program charges, which is a lot of accelerated depreciation, which is non-cash, some of it obviously is the relaunch. Then what we think was sort of a brief period in time market contraction and fuel margins, started late in the maybe middle of the fourth quarter, maybe carried into the first quarter we are hoping we will get back to a normal scenario. When you take these three, four things out along with the $100,000 for the VG, yes I think you are happy with the retail margins.

Our next question is from the line of Sarah Lester with Sidoti & Co. Please state your question.

Good morning. I wanted to know, it seems like a lot of retailers over the past three to six months have been doing pretty significant inventory adjustments in response to consumers changing their shopping habits. And I was wondering if this affected you as well and how this impacted earnings if at all in the balance sheet.

Sarah, I think from that perspective, maybe in other retail segments, our model really isn't that susceptible to changing inventories. As you look at what we sell, it's a lot of the basic products with private label being I guess a significant differentiator between different brands. We haven't experienced any kind of inventory -- serious inventory markdowns to dramatically shift our mixes. So I guess that hasn't impacted us.

Okay. That's all I have, thank you.

Okay.

(Operator Instructions) Our next question is from the line of Megan O'Hara with FBR Capital Markets. Please state your question.

Hi, just a few follow0up questions. You broke out the anticipated 1.7% in impact from the new super centers, I was wondering if you could talk about why there has been a sudden acceleration in those openings and if there's any expected super center openings in the coming year?

I think more happenstance, I don't think it's necessarily -- they don't necessarily evenly flow. We have had several years where we had one, two, three, and -- easily digestible, in this year it just happens that we are going to have seven, we look forward to fiscal 2011. If I were to guess right now I would say the number might be one or two. So I think it all will moderate significantly. And going into 2012, it looks like that could be a similar scenario, so I think it's a bit of a blip. I don't think it's something strategic per se, but we are going to have a challenging year with seven.

Okay. And then if you can talk about the sales lift you saw on the remodeled stores, both offensive and defensive?

Number right off -- we've always given ranges Megan, we are happy with the sales list. For a major remodel we are typically looking for the 10% to 15% range. And I would say we have been pleased with everyone of ours.

Okay. And what are your expectations for CapEx beyond 2010?

For the next couple of years out, you're probably going to remain in that type of high [40s] to mid-[50s] range. I think we got a few more years of that and we can probably return to more normalized basis, depending again obviously on our acquisition activity.

Okay. Great, just one last question. Looking at the -- after adjusting for the new Michigan business tax, what kind of base tax rate should we be modeling?

If you just take last year's and add 70 basis points, I think you got that number.

Okay. Great, thanks a lot.

Okay.

Our next question is from the line of Chuck Cerankosky with North Coast Research. Please state your question.

Follow up is Dave, you talked about the $100 million of availability under the credit lines, how deep would you go into that for acquisitions? And I'm asking that in light of perhaps the current economy persuading some of your wholesale customers maybe thinking about selling sooner rather than down the road.

Yes. I think Chuck, we'd always want somewhere in the $50 million vicinity. So today we are up over $110 million of availability. So I think we think day in, day out, we will look at $60 million or more that we could do something with without having any incremental financing needs.

Thank you.

Thank you. Mr. Dennis Eidson, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments.

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

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