SpartanNash Co (SPTN) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Spartan Stores, Incorporated fiscal 2010 first-quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions.) As a reminder, this conference is being recorded.

Ladies and gentlemen, I must remind you that comments made by Management during today's call will contain forward-looking statements. These forward-looking 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 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 introduce your host, Mr. Dennis Eidson, President and CEO for Spartan Stores, Incorporated. Thank you, Mr. Eidson. You may begin

Good morning, everyone, and thank you for joining our fiscal 2010 first-quarter 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 Wholesale Operations, Derek Jones; and Executive Vice President, General Counsel, Alex DeYonker.

This morning I will first provide you with a broad view of our quarterly financial results and business progress. Dave will then provide a more detailed review of our first-quarter financial results, as well as our financial outlook for the remainder of the fiscal year. I will then rejoin the call following his remarks to provide you with an overview of our ongoing business plans.

I want to begin by saying that we are pleased to have improved our EBITDA performance and cash flow, while maintaining operating profits, despite the difficult economic context in which most businesses and particularly retailers are currently operating. Our first quarter EBITDA improved by 9% to $24.9 million, while cash generated from operations improved 21% to $16.5 million.

We are certainly not immune from the effects of continued economic weakness, rising unemployment, lower consumer spending, deflation in certain product categories, and competitive store openings. These macroeconomic factors continue to influence consumer purchasing behavior, particularly in our Northern Michigan and Southeast Michigan markets. Additionally, the unseasonably cool summer weather has had an effect on the Northern Michigan tourism industry. These adverse economic and market conditions have clearly influenced our core retail and distribution sales during the first quarter, and we expect them to increasingly impact our business as the year progresses.

Our distribution customers are also not immune to these factors. The collaborative relationship that we enjoy with our customers through our private label programs, our marketing and merchandising initiatives, and our shared market insights helps both parties to better compete in this challenging environment. As expected, the rate of inflation in the first quarter slowed relative to last year, leading to lower procurement gains and a lower LIFO valuation expense. In addition, we experienced deflation in certain high-volume categories, such as dairy, meat, and produce and saw a significant decline in retail gas prices relative to last year.

Our private label sales penetration growth continued to outpace the industry during the quarter, as cautious consumers continued to place more emphasis on product value. Our broad portfolio of private label products deliver excellent value to consumers, which is particularly important in today's economic environment. We believe that our improving sales penetration rate demonstrates that point very well.

During the quarter we continued integrating the acquired VG's retail stores and gained more insight about consumers in those markets. While the current environment is very challenging, this knowledge will help us to further refine our product and service offerings and make our marketing and merchandising programs more effective in this and future economic climates, while bringing even better values to our consumers.

In addition, we continue working to leverage the benefits of our scale so that we can realize additional purchasing and other operational synergies that will provide long-term value, while helping to mitigate the current economic influence.

We remain pleased with the execution of our capital investment program. During the quarter we finished remodeling two stores that were nearly complete at the end of the fourth quarter. And we finished remodeling projects on two additional stores late in the quarter. These stores are located in key markets that we believe will be -- will provide good long-term investment returns. We held grand opening events at all four of the stores during the first quarter, and we were pleased with the overall customer response.

In addition to these projects, we continually strive to optimize the performance of our entire store network by assessing the performance and long-term growth potential of each individual store. Consequently we closed one store during the quarter and we expect to close an additional two stores in quarter three.

We also made good progress with our new customer loyalty program, completing its launch in our Glen's retail stores. We're enthused about the program because it has been well received by our Glen's customers and will provide us with keen insight about customer preferences. The information garnered from the program will allow us to develop a much sharper consumer focus and make more effective use of marketing and merchandising resources, while generating additional sales growth opportunities. The program will give customers the opportunity to gain added values by providing them with the ability to accumulate points which are redeemable for free or discounted merchandise.

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

Thank you, Dennis, and good morning, everyone. I will now provide some additional details about our first-quarter financial results and review our performance outlook for the remainder of fiscal 2010.

Consolidated net sales for the 12-week first quarter increased to $596 million from $586.7 million in the year-ago quarter. This year's first quarter included approximately $4.2 million in sales related to the Easter holiday. The sales improvement was due primarily to the net incremental sales contributions from the acquired VG stores. Partially offsetting the improvement were negative comparable retail store sales of 1.8%, which excludes fuel and Easter holiday sales benefits, lower fuel center sales due to reduced prices at the pump, and lower pharmacy program sales in the distribution segment.

Gross margin for the first quarter increased 230 basis points to 22% from 19.7% in last year's quarter. The improvement was due mainly to the higher mix of retail sales, which represented approximately 57% of consolidated sales compared with 49% in last year's first quarter.

First-quarter operating expenses included a provision for asset impairment and exit costs of $600,000 related to a store closing and $400,000 of costs related to the launch of our customer loyalty program. Including these items, operating expense increased to 19.5% from 17.1% in the same period last year. The overall rate increase was attributable primarily to the higher operating cost structure associated with the increased mix of retail sales.

First-quarter operating earnings of $15.1 million were comparable with last year. EBITDA for the quarter increased more than 9% to $24.9 million from $22.8 million last year.

Earnings from continuing operations, which include higher interest expense related to the additional borrowings for the VG acquisition, were $6.8 million, or $0.31 per diluted share compared with $7.1 million, or $0.32 per diluted share last year. Last year's first-quarter net earnings included earnings from discontinued operations of $2.3 million, or $0.11 per diluted shares, due to the sale of script files associated with our closed Pharm operations. As a result, net earnings for the first quarter were $6.9 million, or $0.31 per diluted share, compared with $9.5 million, or $0.43 per diluted share in last year's quarter.

Turning to our business segments, first-quarter distribution sales were $253.4 million compared with $298.1 million in the same period last year. The sales decline was due primarily to the reclassification of $34.3 million in sales to the acquired VG stores and lower pharmacy program sales of approximately $7.7 million.

Distribution operating earnings improved for the 15th consecutive quarter to $7.8 million from $7.5 million in the same period last year. The improvement was due to an improved sales mix and the benefit of operating expense controls. Operating earnings also benefited from a swing in LIFO inventory valuation to a $2 million (sic - see Press Release) credit this year compared with an expense of $6 million (sic - see Press Release) last year. The benefit, however, was more than offset by lower procurement gain.

First-quarter retail sales increased 18.7% to $342.7 million from $288.6 million in the same period last year. The improvement was due to the incremental sales contribution from our acquired VG stores and Easter holiday sales, which were approximately $2.2 million. The sales increase was partially offset by a 1.8% decline in comparable store sales, which excludes fuel and the Easter holiday sales benefit, lower fuel sales of $7.5 million due to significantly lower retail gasoline prices, and the loss of $4.8 million in sales from three stores that have been closed and one store that was sold since the first quarter of last year.

First-quarter operating earnings in the segment, including the previously-mentioned provision for asset impairments and exit costs, lower retail fuel margins and costs related to the launch of our customer loyalty program, were $7.3 million. Retail operating earnings benefited from the VG's acquisition and a reduction in LIFO inventory expense of $300,000.

We continue 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, declined to $195.8 million. Net cash generated from operating activities for the quarter increased by 20.7% to $16.5 million. Our balance sheet remains healthy with a long-term debt-to-capital ratio of approximately 0.43 to 1.0 and a debt-to-EBITDA ratio, based on our trailing four quarters EBITDA, of 1.8 to 1.0. We also have more than $110 million of borrowing availability under our existing credit facility.

I will now cover our outlook for the remainder of fiscal 2010. We now expect comparable store sales to decline in the low single digits for fiscal 2010 due to the factors we've already discussed and the strong comparable store sales growth we reported in the second and third quarters last year. For the remainder of the year, comparable store sales are expected to decline by more than the amount we reported in the first quarter.

In the distribution segment, excluding the reclassification of approximately $78 million in sales for the acquired VG stores for the remainder of the year, we expect sales to perform in a similar manner to the retail segment when compared with the prior year's level. This guidance includes an expected drop in pharmacy sales of approximately $4 million in the second quarter related to customers who exited the program.

From an earnings and cash flow perspective, we continue to expect growth in consolidated EBITDA for fiscal 2010, and earnings from continuing operations to be slightly below fiscal 2009's record levels. We completed a major capital project early in the second quarter and are scheduled to complete one at the beginning of the third quarter. Store opening, remodel, and divesture costs related to our capital program will be $3.3 million for the remainder of the year, compared with $2.8 million in the same period last year.

The timing of these costs for the third and four quarters changes slightly relative to last year, with approximately $1 million of costs switching to the third quarter this year versus the fourth quarter last year. Approximately $1.1 million of these costs will be incurred in the second quarter this year compared to $0.9 million in last year's second quarter. Total capital expenditures for fiscal 2010 are expected to range from $48 million to $52 million, with depreciation and amortization expense ranging from $34 million to $36 million and interest expense approximating $13 million to $14 million.

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

Thanks, Dave.

Once again, we are really pleased with our ability to continue to deliver an improved EBITDA and cash flow performance, as well as maintaining our profitability. Although we face near-term headwinds, we are taking advantage of this uncertain economic period, to challenge ourselves to find new ways to build customer loyalty and to provide value, cultivate new distribution customers and develop programs to increase our sales penetration with our existing distribution and retail customers. We are working to leverage the competitive advantages that we enjoy with our private label program, local market knowledge and insight, and our distribution support services, to try and offset the current challenges.

We have spent many years building Spartan Stores into a premier regional grocery retailer and distributor, and enjoy a strong market share position in our key markets. I believe that we have the right business strategy, available resources, and employee talent to meet the current challenges. And I remain confident that we'll be even better positioned as we emerge from the existing economic downturn.

We are also encouraged by a number of market-specific events. General Motors recently announced its intent to produce small and compact vehicles in plants in Orion Township and Pontiac, Michigan. GM also has plans to manufacture the engines for its Chevy Volt and Cruz vehicles, as well as assemble the lithium high-end batteries for the electric car here in Michigan. In addition, General Electric recently announced plans to open an advanced manufacturing technology and software center in Michigan that will employ 1,000 additional scientists, engineers and technologists. These facilities are expected to open or be in production late this year and into and through 2011. In addition, more than $1 billion of new investments are being deployed in West Michigan to diversify its economic base, including investments in healthcare, research, and medical education facilities.

Additionally, we have maintained a relatively low operating cost structure for many years, and with the previously announced cost containment initiatives and the ongoing efficiency improvement initiatives in our distribution operation, we're making incremental gains in our operating leverage. These gains will benefit profits when sales growth begins to recover.

I want to conclude my remarks by again personally thanking all of our hardworking managers and associates for their efforts during these difficult times. It is their individual and daily contributions that make a real difference with our customers and to our overall performance.

With that, we'll now open up the call for any questions.

Thank you, sir. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions.) Chuck Cerankosky; Northcoast Research.

Good morning, everyone. Dennis, if you're looking at your grand opening approach this year, how does it differ from a year ago?

Grand opening of the stores that we've completed?

Yes. I mean, how are you approaching that process, given the changes in the economy?

You know, similarly, Chuck. We have been pretty pleased with the results we've gotten from our grand opening strategy and how we promote a new store. And so the approach hasn't changed very much. We're probably considered pretty aggressive in the way we launch a new store as it relates to item price, advertising and those stores that have opened with fuel centers we've tended to get a bit creative with fuel promotions during that grand opening cycle that are clearly above and beyond what would normally be seen.

Are you promoting different items than a year ago? Are the promotions deeper? I mean are people looking for different, say, proteins because of the recession? I'm just trying to get a flavor for how you're maybe adjusting things at the margin.

We're seeing a shift. I mean, obviously, everybody is talking about the flight to value and we're seeing it and feeling it. And so we're trying to respond accordingly. So you may see less steak features and more chicken features as part of our offer week in and week out. And, again, as the commodities give us openings to move into a lower priced protein -- we have pork declines. We were aggressively promoting pork. So I think we try and time that with respect to the market conditions.

But ValuTime is another area where, as you know, is our entry-level private label brand. It continues to grow for us and we continue to add items to that portfolio. We're now up to somewhere around 250 items that we're promoting in many stores week in and week out. They're a staple in that circular.

One of the things that benefits us, as a producer of our own circular, is we have the benefit of being able to version appropriately for the demographics of a particular market. We take advantage of that. We run more versions than I'd like to admit, but we think it's the right thing for the end consumer.

Could you put some numbers around the private label sales penetration you've seen year over year?

Sure. We -- this is unit penetration, which is typically what we give you. In the quarter on our comp stores our unit penetration was 24.65% of the items that were scanned through the checkout. That's a Nielsen statistic. We're showing the US average for the quarter is somewhere around 23.5%. So you can see we have a nice lift versus the national average. That 24.65% is 1.83% up from prior year's quarter one. So you can see a nice lift.

Okay.

By the way, the other thing that that does -- and we're delighted with the penetration -- but it also has a depressing impact on the comp store sales. Now, we attempt to model that and we do it every quarter. It was probably a little bit more than 50 points of comp store impact, the switch from branded to generic.

Okay. Dave, a question for you -- in that guidance of interest expense of $13 million to $14 million, is the new noncash interest component going to be around 3-...$3.3 million? Do you have a -- can you fine tune that at all?

Yes. I mean, that's still that same general area.

All right. Thank you.

Simeon Gutman; Canaccord Adams.

Dennis, can you just maybe give a prognosis for the channel? And what I'd like to understand is anything you can measure in terms of channel erosion. If that's the case, if consumers, whether you see it in retail or distribution, are just spending less in this channel or actually diverting dollars more aggressively than before? And then going forward -- and I know this is tough to predict; I'm just curious about your own observation -- how long does that take to correct? Maybe it depends on the magnitude of an economic recovery, but do you think this channel is still going to be as strong as it is coming out of it?

Simeon, those are good questions and tough questions. And I don't know that anybody can quantify how long it's going to take to correct. But, no, I think we are seeing some channel erosion. You -- I'm reading some Nielsen and IRI data that suggests that supercenters are gaining nationally. And part of that is because the advent of more supercenters being built. Right? And Wal-Mart's -- kind of proxy for supercenters -- when you look at national numbers is converting discount stores and adding more square footage to the market, so I think it's natural. And I also think because the consumer is so focused on value that there has been a little bit of a flight to the -- a price guy. And we don't match Wal-Mart price for price, as you all know, and nor do any of our competitors in the conventional space. So I think we're seeing a little bit of that.

I think there's been a little bit of appeal from the consumer to the limited assortment guys. They're both here in our marketplace, Save-A-Lot and all the dollar stores are obviously reporting some very good numbers. So I think we'd be in denial if we said there wasn't channel erosion. I think there is.

Having said that, in the context of our environment here, I feel pretty good about where we are today. We've got quite a bit of competitive activity, like supercenter new openings and even some conventionals in a marketplace where -- by the way, we probably should have included in the script, the State of Michigan is now running 15.4% unemployment, which if you look at that versus a year ago, the State was running at 8.5% unemployment. So nearly a doubling, and yet we're putting up numbers that I think are competitive.

So I think we've been pretty effective, primarily through our core offer and promotion, in driving the top line. I think it's going to -- who knows how long it's going to take to correct? Part of it is, when does the recession end or, if it has ended, when do the consumers get their confidence back? We had, two months ago, consumer confidence went up and then we've had two consecutive months where it's gone down. I think that's a bigger issue. And will there be a more value-focused consumer going forward? Probably, but I think we can compete in that arena as long as it's not as drastic as it is today. And I think we're in a position to grow our sales going forward.

And maybe can you just talk about -- I think one of the things that you mentioned in the fourth-quarter call, was competitive openings. And I know -- or it probably affected the number this quarter. I don't know if you can quantify that. I don't know the timing of those. But are they hurting the retail or even some of your distribution customers more than they did based on historic estimates? Is that something that's telling you the way the customer is voting today?

And then, second, just in terms of -- not an EDLP pricing strategy, but just being sharper on the existing prices, is that a -- I don't know, is it a temporary or permanent solution to getting a value equation? Or do you think the operators need to migrate more towards EDLP over time?

The comp hits from the new supercenters that have opened may be a touch stronger than we would have anticipated. Some of them are pretty new; others are -- have been with us for much of the quarter. So maybe a little bit more pronounced, but maybe too early to tell whether we're going to settle in a place that is more pronounced than has been historical.

And as it relates to the pricing scenario, we're a little bit unique in our marketplace because Meijer is here. So like I said, most people use Wal-Mart, supercenter and Wal-Mart, interchangeably and Meijer is a significant player here. And Meijer's pricing strategy is not everyday low price. They're a high-low supercenter with some more aggressive pricing than you'd see in a conventional, but they're not all the way to Wal-Mart. We tend to be pretty tight to Meijer, which by definition, puts us a little tighter to Wal-Mart than some others.

And so I think in our specific case in the State of Michigan, because the competitive set is that, we feel pretty comfortable where we are with our pricing strategy. And I don't think that an everyday low price strategy is necessarily the right tonic in this environment. I don't think you've ever going to get credit for price. I shouldn't say ever. I think it would be very, very difficult to get credit for price over Super Wal-Mart. I don't know how much it would get you. And I think being competitive on everyday price and winning on promotion is a formula that can work.

Okay. And the last two questions -- what's happening with regard to customer count? And then, two, on the second-quarter run rate perhaps being a little bit worse than the first quarter, is there anything geographic? I know you're right in the thick of the summer. Is it coastal weakness or is it broad based?

Sure. The traffic count in Q1 was slightly negative, like less than 0.5% negative. So we felt pretty good about that, holding the customer count, particularly against the backdrop of all of what's going on in our state. Right? We had Chrysler and General Motors file bankruptcy, believe it or not. I'm still shaking my head at that. And so we felt pretty good about that.

If you look at the second quarter, we're running a little bit more negative on customer count. However, to your very point, it is 100% attributable to the Northern Michigan geography. And it's our Glen's banner, which as you know, is really -- relies on the tourism industry to drive that business in the quarter, particularly this quarter, second quarter. So if you were to strip Glen's out, we'll actually be flat on customer count. If you actually looked at the core West Michigan market, which is our largest marketplace, this quarter we're actually running positive. So, again, I think we're feeling pretty good about how we've positioned ourselves.

But some of those external influences, like the tourism thing in Northern Michigan, and the weather -- I think, and I don't want -- I'm not sure if I have this right -- I think they're saying this is going to be the coolest summer that they've ever recorded here in Michigan, which clearly makes a difference for us. A lot of that tourism industry is folks that live in the southern part of the state, that go up north. They have this thing, going up north, if you're from here, on the weekend. But if the weather isn't conducive they just stay home. And I think we're feeling that pretty significantly up there at Glen's.

Okay, thanks.

Sarah Lester; Sidoti & Company.

Good morning. Do you have any recent figures on your market share?

We do use Nielsen for market share. I will tell you that we are in the midst of restating markets with the VG's acquisition and are kind of struggling to get numbers out that we're comfortable with. Having said that, with the advent of the supercenter openings that we've experienced, and even some conventionals, I would say that we would feel that we -- our market share has slipped somewhat in the last quarter. But I don't think it's in a place where we're feeling overly alarmed and I think of some of that as natural.

All right. And you talked about traffic, but could you also talk about basket in the first quarter and what you're seeing so far in the second?

Sure. In the first quarter, our basket size was slightly negative, by about 0.5%. And we had been running significantly better than that on our sales per transaction. Actually in Q4 we were 4% positive on that metric. I think the primary driver we're seeing is what's going on with respect to the average item ring, Sarah. And so we went from an average item ring in Q4 of nearly 5% positive to it basically flattening out, almost flat, in the first quarter. So that's a 5% relative shift. And we're feeling some of that on the sales per transaction.

And in the second quarter, again, that number is softer than what it was in Q1.

Okay. And then, just to get a better idea of what happens when these supercenters do open, can you talk about what happens in your stores and how traffic is affected? Is it sort of a sharp hit when the stores open, or is it a gradual impact?

Generally speaking, it is a -- we feel it significantly upon opening and our history has been that we fight back from there.

And so then is it sort of a gradual return, like traffic gradually returns back to your stores?

I would say, you know, each one of these instances is different. Right? I mean, is that supercenter like right across the street? Is it three miles down the road? Is it in the next town? So on a hypothetical I would say to you we continue to fight back. We feel them early. We continue to fight back. There are few instances where within a year we're all the way back home. I mean, let's face it, they're putting an extra 60-70,000 square feet of space in your trade area and they're going to do some proportion of business. Sometimes in a market up north, where we're the only other competitor there, we feel it more significantly. So I'm a little reluctant to give you a lot more, because it is not a one-size-fits-all description.

Did you also -- final question -- did you have any grand opening, or grand reopening, expense in the first quarter? I know that there was that $1 million in exit costs and the loyalty program, but were there actual grand reopening expenses as well?

Yes, I mean, we did have the grand reopening. And that is -- it was reasonably comparable.

Okay. So comparable to last year?

Mm hmm.

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

Bakley Smith; Jefferies.

Hey, you guys. Most of my questions have already been answered in terms of traffic and market share. But I was wondering, on the negative 1.8 [ID], could you give us, just flesh out a little bit, if you have some feelings for -- is it like a deflation on those fast moving commodities, trade down and some of the other factors? Like where are we weighted there?

I touched on one of them and that's the private label shift. And so we think that that was maybe just a little bit north of 50-point impact on the comps, which is clearly not insignificant. And the other thing is deflation. You know, our deflation primarily manifested itself in -- and I think everybody's saying the same thing -- dairy, produce, and actually, and meat. Difficult to model all of that, 'cause there are a lot of assumptions, but it wouldn't be a stretch to think it could be up to 1% of our comps were impacted by deflation in those three categories. So -- but you had inflation on other parts. Right? But those three categories clearly contributed to the negative impact.

Okay, thanks. And just, I was just looking for a little, I guess, local color for those of us not up in Michigan. I mean, what, as we look at, as we get nonstop news reports of dealership closings and plant shutterings and all those kind of stuff, what -- is there any change or is it getting worse do you feel like? Is it -- what are you seeing on the ground?

I think it's -- again, I mentioned earlier, I think it's as much the confidence, Bakley. We're still seeing unemployment, right? And the northern region actually -- well, for those who are local up there, has been hit harder. Southeast Michigan has been hit harder. West Michigan is a little bit better. It is our largest market, so good for us. We mentioned there's some other activity as it relates to particularly medical here. But it's difficult, I would say. The environment here is difficult and the mood is tough. And I think the confidence is tough. And I think it's going to take some time for people to realize, "Hey, I do have my job. I'm getting the same paycheck," and be maybe a little bit freer with spending. I don't know if anybody knows when that's actually going to occur. But at some point in time, things will get better in that regard.

And I'm absolutely convinced we have the right strategy, as I look forward two, three, four quarters out, to not only weather this, but we're going to be stronger for it as we come out the other end. And I think our independent customers are performing pretty well and in spite of the environment here. So we're cautiously optimistic.

Maybe you'll -- just maybe you'll get a lift from the football teams in the state as we enter the fall.

Well --

As difficult as that will be for you guys to cheer for the Wolverines.

Oh, come on. I'm going to be apolitical here and I'm going to ask for the next question. Thanks, Bakley.

(Operator instructions.) Chuck Cerankosky; Northcoast Research.

Go, Buckeyes.

Here we go.

Yes. Dennis, you were talking a little bit about the independents, but give us some color between where -- most of your corporate stores are in the western part of the state, most of your wholesale customers are in the eastern. What are some of the differences you're seeing in purchase patterns by customers?

Well, Chuck, I think when you look at that, I don't think I would say most of our customers are in the eastern side. I think our customers are fairly distributed. We certainly have a concentration of a number of customers in the metropolitan Detroit area, but other -- it's really fairly disbursed throughout the state. And I think they break down somewhat like we break down. If you're tourism-related, you're feeling more pressure maybe than if you're not tourism-related. Does that help?

Yes, well I'm thinking, are they -- are the independents successfully adopting to what the customer's looking for? Are they readily merchandising the ValuTime private label or the lower price points in perishables successfully?

Yes, I mean I think our customers have always been very nimble, right? And that's been sort of the key to their success. They're very in tune with their local markets. So yes, I think you do see them embracing the private label trend. You've seen our penetration with them increase. I think they alter their merchandising and promotional programs to address the area's needs they're in. When they're against the supercenter they do different things than when they're not. And we work hand in hand with them a lot on those types of things. That's part of our value-added strategy, is to consistently talk about ideas, A, that they may have or that we have and try to glean the best of both worlds. So, yes, we think they are navigating well through those obstacles.

Looking at some of these deflationary categories, how is volume growth in those?

Do you have (inaudible) number? I don't have it right in front of me.

It kind of varies by division. I don't have that exactly off the top of my head. But I think it's flattish at best.

Well, you mean --

You're talking about across our whole enterprise?

Well, you take some of those produce or dairy categories that saw the rather severe deflation. If units were 100 a year ago, what have they done as prices have come down? Are you suggesting they're still 100? That would sort of surprise me.

You're saying in unit growth? I was talking more in dollar growth.

Okay, got you. So you're saying in dollars the units are pretty much offsetting the infla -- the deflation?

Yes, because when I look at those -- and I'm now talking more on our distribution side of the house, those -- we're still seeing growth when you strip out the inflation of that category. [All sales] -- meat, or dairy I guess, is a flattish from a growth perspective. But on meat and produce we would still see that it were growing pre the inflation number.

In dairy, too. So much of that dairy, because that's a warehouse number, Dave, and we don't ship with milk.

True.

Fluid milk is the biggest item in the category and that is deflated significantly, not only in everyday price, but the marketplace has chosen to use milk, as I'm guessing is being done across the country, as a loss leader and driver, so our milk units at retail are up significantly. But it becomes more promoting the category.

Got you. Thank you.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to turn the floor back to Mr. Eidson.

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

Ladies and gentlemen, this concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.