SpartanNash Co (SPTN) 2010 Q3 法說會逐字稿

Greetings and welcome to the Spartan Stores, Inc. Fiscal 2010 Third Quarter Earnings Conference Call. (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 earning 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, Inc. Thank you, Mr. Eidson. You may begin.

Thanks, Rob. Good morning, everyone, and thank you for joining our fiscal 2010 third quarter earnings conference call. With me this morning are members of our team including Executive Vice President and CFO, Dave Staples; Executive Vice President Merchandising and Marketing, Alan Hartline; Executive Vice President of Retail Operations, Ted Adornato; Executive Vice President Wholesale Operations, Derek Jones; and Executive Vice President, General Counsel, Alex DeYonker.

This morning I will provide you with a brief overall of our business progress and third quarter financial results. And Dave will then provide you with a more detailed look at the financial results and our outlook for the fourth quarter as well as provide some guidance for fiscal 2011. I'll then rejoin the call and give my concluding remarks.

I'll begin by saying that we're pleased to continue reporting relatively strong operating profits and EBITDA by historical standards. These financial measures remain amongst the highest levels that we've achieved in recent memory.

I believe it's important to place this performance in the proper context. Despite our significant economic, market, and competitive challenges, on a year-to-date basis, we generated cash from operations of $54 million and EBITDA of more than $80 million. We're also well on our way toward achieving annual EBITDA of $100 million or more. This would be our second consecutive year of generating $100 million in EBITDA and only the second time we-- since we've become a public company 9 years ago.

But putting our numbers aside for the moment, I'd like to provide a little bit more color around the current operating environment. As you know, Michigan's economy is suffering. We mentioned in our press announcement that the official unemployment rate during the quarter was approximately 15% and our state has had the highest rate of unemployment in the nation for a staggering 45 consecutive months. When considering the underemployed and those who have stopped seeking employment, Michigan's unemployment increased to a rate that exceeded 21% during the third quarter.

As a result, the economic and market conditions that we've been working through weakened further, during the third quarter and, consequently, consumer spending continues to be restrained. Consumers appear to be buying only for their immediate needs and are very focused on value. And while price is clearly an important component of value, we all understand that value is certainly more than just price. Customers also place a lot of importance on convenience, service, variety, and freshness. And as a company, we've been focusing on addressing all of the drivers.

In our retail segment, I'm happy to say that we're making good progress on our value scores. Based on our internal consumer surveys, perceptions about both price and value have been improving. While we are pleased with the direction of these scores, we're working to get even better and believe there's ample room to improve.

In our distribution segment, now more than ever, we remain focused on providing a value-added experience for our independent customers. We've expanded private label offerings and the sharing of new merchandising and promotional strategies. We continue to work with our customer base to satisfy their consumers' desire for value.

During the quarter, we also continued to experience product price deflation that we believe impacted sales in both of our segments by approximately 2%. Both our distribution customers and our corporately-owned stores also continued to experience an increasingly intense competitive environment as existing competitors fought for share and new supercenters and value formats opened in the trade area. In addition, our retail fuel margins had a very difficult comparison to unusually high levels in the year-ago quarter.

Despite these business conditions, we continued making significant progress with our business plan. During the quarter, we completed a major remodel project and closed a nearby store. We opened 3 more fuel centers, bringing our total to 24; closed 1 underperforming store; and we sold a store to one of our distribution customers. We also continued to make progress on our Glen's customer loyalty program. Though this program is only six months old, we are beginning to gain more insight about the customer shopping preferences, which enables us to better understand the effectiveness of our marketing programs and to make appropriate adjustments that will deliver even more value to our customers.

We continue to be pleased with the performance of our private label program, as the sales penetration continued improving in the quarter. Based on items scanned on a comp store basis, our private label sales penetration reached 27.2% during the third quarter compared to 26.4% in the same period of fiscal 2009. Additionally, we launched nearly 250 new items during this year and firmly believe that our private label program has more room to grow.

In the distribution segment, we are pleased and on a year-to-date basis, we've achieved a net gain in distribution customers and we continued to enjoy one of the lowest attrition rates in the industry. We believe it had solid opportunities to expand sales with existing customers and to attract new customers continue to exist.

With that overview, I'll turn the call over to Dave. Dave?

Thank you, Dennis and good morning, everyone. I will now provide some additional details about our third quarter financial results, review our outlook for the last quarter of fiscal 2010, and provide some general guidance for fiscal 2011.

Consolidated net sales for the 16-week third quarter were $786.9 million compared with $781.9 million in the year-ago quarter. The increase was related to incremental sales from our acquired stores and the opening of three additional fuel centers. Our sales trends were adversely affected by the weak economy, significant product price deflation, market competition, and consumers continued shift to private label products.

The consolidated gross margin rate for the third quarter increased 90 basis points to 21% from 20.1% in last year's quarter. The improvement was due mainly to the higher mix of retail sales, which represented approximately 56% of consolidated sales compared with 49% in last year's third quarter.

Operating expenses were 19.3% of net sales compared with 17.8% of sales in the same period last year. The rate increase was due primarily to incremental costs and sales related to the acquired retail stores, a $715,000 store closing charge, and lower sales volumes, partially offset by lower incentive compensation expense and other expense reduction initiatives.

I want to point out that we accrued significantly lower levels of incentive compensation costs in the third quarter relative to last year. This year's incentive compensation was approximately $2.1 million lower than last year's third quarter. And on a year-to-date basis, we are running $3.5 million lower than the year-ago period.

Third quarter operating earnings were $13.7 million in this year's third quarter compared with $17.9 million last year, which was a third quarter record due in part to the inflationary environment that existed at the time.

EBITDA for the quarter was 3.3% of net sales compared with 3.8% in the same period last year.

Earnings from continuing operations, which included higher interest expense related to the additional borrowings for the VG's acquisition, were $5.3 million or $0.23 per diluted share compared with $8.1 million or $0.36 per diluted share last year.

Net earnings for the third quarter were $5 million or $0.22 per diluted share compared with $8.3 million or $0.37 per diluted share in last year's quarter. The net earnings included a loss from discontinued operations of $200,000 or $0.01 per diluted share compared to earnings from discontinued operations of $200,000 or $0.01 per diluted share last year. The earnings from discontinued operations in the prior year relate to the divestiture of our farm retail operations.

Turning to our business segments, third quarter distribution sales were $343.6 million compared with $397.9 million in the same period last year. The sales decline was due primarily to the reclassification of $44.2 million in sales to the acquired VG stores to our retail segment, product price deflation, and the weak economic environment. Again this quarter, we estimate that approximately 2% of the distribution sales decline related to product price deflation.

Distribution operating earnings, however, improved for the 17th consecutive quarter to $11.7 million from $11.1 million in the same period last year. The improvement was due primarily to an improved sales mix of higher margin product, lower employee incentive compensation and benefit costs, and lower operating expenses. Lower inflation-related procurement gains, however, were mostly offset by the benefit of a $200,000 LIFO inventory valuation credit this year compared to an expense of $900,000 last year.

Third quarter retail sales increased 15.5% to $443.4 million from $384 million in the same period last year. The sales increase was due to the incremental sales contribution from our acquired stores, the operation of three more fuel centers, and higher average retail prices at our fuel centers. This increase was partially offset by 6% lower comparable store sales and the loss of $6.4 million in sales related to 3 stores that have been closed and 1 that was sold since last year's third quarter. We estimate that price deflation impacted comparable store sales by approximately 200 basis points. In addition, we believe that competitive store openings contributed approximately 200 basis points of the decline and the increase in private label sales contributed approximately 30 basis points to the trend.

Third quarter operating earnings were $1.9 million compared with $6.8 million in the same period last year. The operating earnings decline was due to lower sales volumes, lower gross margin rate, and a non-cash charge of $715,000 related to a store closure.

Product price deflation, heightened market competition, and the weak economic climate contributed to the lower profit margins as well as much lower fuel margins compared with the third quarter last year. We estimate that the lower fuel margins this year cut our third quarter operating earnings by approximately $1.8 million or $0.05 per share.

These impacts were partially offset by a lower LIFO inventory charge of $100,000 in this year's third quarter compared with a $500,000 charge in the same period last year.

Our balance sheet, capital position, and cash flow generation remains strong. Year-to-date net cash generated from operating activities increased by 16% to $54.3 million due to improved inventory leverage and working capital management as well as the timing of certain payments.

Total long-term debt, including current maturities and capital lease obligations, was $203.8 million, which was a modest increase from the balance at the end of the second quarter. The increase was attributable to certain real estate financing activities and the timing of inventory purchases following the holiday selling season.

Our long-term debt to capital ratio of approximately 0.43 to 1 and a debt to EBITDA ratio based on trailing 4 quarters EBITDA of 1.9 to 1 remain healthy. We also have approximately $120 million of availability under our existing credit facility.

We expect our debt and inventory levels to return to more normalized levels in the fourth quarter.

We continued to make progress with our capital investment program during the third quarter. In addition to finishing a major remodel project, we also began construction of a new D&W Fresh Market and a new Family Fare store, which will be a relocation of an existing Felpausch facility. The D&W Fresh Market will open during the first quarter of fiscal 2011 and the Family Fare relocation will take place late in the second quarter. Additionally, we completed a real estate transaction that will allow us to undertake another relocation project in the future.

I will now cover our near-term outlook and provide some guidance for fiscal 2011.

We expect the retail comparable store sales trend, excluding fuel, to decline by approximately 2% more to 8% in the fourth quarter, due to the inclusion of the acquired stores, the cycling of our highly successful 8-week grand opening of a relocated store, and the continued difficult retail climate. We do, however, expect an improvement from that level beginning in the first quarter of fiscal 2011 as we cycle through competitive openings and no longer are comparing results against grand-opening activity. In the distribution segment, we expect sales to decrease by a rate that is slightly higher than the decline reported in the third quarter, excluding the impact of the acquired stores. These factors will continue to compress year-over-year earnings in the fourth quarter.

Looking out to fiscal 2011, we now expect annual earnings for the year to be slightly higher than the level we will achieve in fiscal 2010. As stated in our press announcement, by the end of fiscal 2010, we will have made significant progress on our retail, distribution, and information systems capital investment program. In fact, during the past 3 years, we've invested more than $140 million into our operations. And as such, we intend to reduce the level of our capital investment in fiscal 2011 to approximately $30 million to $35 million. Our 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 $35 million and total interest expense, including the implicit non-cash interest cost related to our convertible notes, of approximately $16 million to $16.5 million.

During the fourth quarter, we expect to reduce our distribution inventory and overall debt levels. We expect our long-term debt to decrease by approximately $10 million.

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

Thanks, Dave. I want to start my concluding remarks by mentioning that our management team and all the associates here are doing a terrific job considering the current economic and market challenges. Although the economic and competitive climate will remain challenging and likely get modestly worse before improving, we expect to sustain our solid financial and operating performance as we navigate through this difficult period.

Our near-term outlook is cautious. But over the long term, I believe there are good reasons to be optimistic as more favorable business trends begin to develop late in fiscal 2011. For example, the rate of product price deflation should begin to temper in the coming year at the same time we start to cycle the competitive store openings. Additionally, we also believe that Michigan's unemployment rate will begin to stabilize.

The warehouse consolidation and cost restructure initiatives that we began in the fourth quarter will provide benefits in fiscal 2011. As you may have read in recent press announcements, we reached an agreement with the collective bargaining unit employees at our Plymouth, Michigan dry grocery warehouse that paves the way for the transition of these operations to our Grand Rapids distribution center. The re-racking project at our Grand Rapids facility has significantly improved our space utilization and leaves us with capacity to serve both existing and new customers. In addition to the operational efficiency improvements we expect to gain from this decision, our distribution customers will benefit from an improved quality of service through the consolidated facility. We expect to complete this service transition by the end of the fourth quarter.

In conjunction with this initiative, we also reduced certain administrative support positions to better align our cost structure with the current level of business activity. We believe that these initiatives will help ensure that we remain a low-cost and efficient grocery distributor for many years to come and will strengthen our leadership position in Michigan while improving opportunities to expand services into adjacent markets. We expect to realize additional inventory and working capital improvements once the warehouse consolidation project is complete.

On the retail side, we also have opportunities to increase the penetration of our private label sales, especially in the fresh food categories. In fact, we intend to introduce more than 100 fresh private label products during fiscal 2011. We are also very pleased by the fact that nearly 90% of our sales at our Glen's stores are being made by customers who are enrolled in our loyalty program. While we have yet to extract the full benefit of the program, we are encouraged with the early results and with the knowledge and insight that we are beginning to obtain in the process. We expect to leverage this knowledge to expand the program and make it even more effective by bringing customers better value and rewarding our shoppers' loyalty.

As you would expect, we will continue to look for ways to satisfy an increasingly value-oriented consumer, given our view of the environment in Michigan. We have plans to further enhance the value of our product offerings and services, allowing us to bring our customers a comprehensive set of offerings that will continue to include fuel promotions, discount pharmacy programs, private label products, and special price promotions. And to that end, we intend to enhance the communication of those offerings and are currently in the process of developing an even more effective promotional campaign. This program will feature in-store as well as-- and circular enhancements.

I want to conclude my remarks today by personally thanking all of our hardworking managers and associates for their efforts during these challenging times.

We will now open the call for your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Karen Short with BMO Capital Markets. Please go ahead with your question.

Hi, everyone.

Good morning.

Hey, Karen.

Hey, so a couple questions. Maybe talking about the comp that-- the deceleration that will happen from the third quarter to the fourth quarter based on VG's partially. Can you maybe just separate the two? Like how much is VG's and how much is this grand reopening?

Karen, although we'd like to provide even more color for you, because of such a tight geographic marketplace, I think we'd prefer to stay away from that specific of data. But, you're reading it correctly. And as we pointed out, that's a little bit tougher environment on the east side of the state.

Okay. Yes, I guess by my math the VG comp is really not good. I mean to-- if you scan your store base, your existing store base is kind of doing a minus 5 or 6 comp. The difference on VG's is fairly dramatic, but can you comment on that at all or--?

Well I think the VG-- the impact of VG's is causing the overall comp number to decline. And trust me, I mean it's hard to even write negative 8 on a piece of paper and talk about that being the comp. But that is what we view the marketplace is going to bring to us in Q4. I think more importantly than that, we're feeling pretty good about cycling out of those comps early in fiscal '11 as we talked about and the rate continuing to improve from there. So I think we have a relatively significant bump in the road but not one that we can't overcome. And we're feeling confident that the strategies we have in place are going to continue to deliver solid performance on the bottom line.

And maybe can you give a little color on the traffic versus ticket I guess and tonnage kind of in the third quarter and then like the change would be in the fourth quarter? Is it mostly traffic? Is it ticket?

It is both, Karen. I will say that the impact of traffic is being felt more in northern Michigan than it is in the balance of our portfolio. The Glen's market is extremely challenged with unemployment. Some of those northern Michigan communities are really struggling. In the northeast part of the state, from November to December, the unemployment went up from 16.7% to 18.7% as an example of what we're experiencing up at Glen's. So that is kind of impacting the traffic a little bit more significantly. But we're feeling it on both sides.

Okay. And then just to-- if I can I guess paraphrase for the third quarter, you also-- so you had the $0.05 gas margin hit. Obviously, the environment's tough. But you also had $0.03 for the higher integration expenses, right? There was like a million dollar shift in the third quarter that was in the fourth last year. Is that right?

You're talking about the $750,000 (sic - see Press Release) for the retail store closing?

No, I was just talking about overall integration expense. I thought in the second quarter you talked-- you pointed out that the year over year the third quarter had a shift of a million?

Well I think it's mostly the integration related-- I think what we were referring to is the $750,000 (sic - see Press Release) for the store charge. We highlighted that $715,000

Yes. Okay and then in your CapEx, can you maybe highlight or kind of give us some details on what you're cutting out in your reduction in '11?

Well we have or we've got two new stores that we're building.

Okay.

One here in Grand Rapids as a fill-in and we have a new store in Battle Creek that's under construction. But the biggest delta of what's coming out is less remodel activity than we had in fiscal '10. As we've pointed out, we've spent quite a bit of capital and primarily in retail store remodels over the past several years. And we're getting to a place where we're pretty comfortable with the base. So the remodel schedule will be significantly less than it was a year ago.

And then when I think about the benefit of the DC consolidation throughout the fiscal year, is it pretty evenly split or is it more backend loaded or how--?

I think that'll-- it'll roll in I think relatively evenly. I mean cause though the real heavy lifting happens this quarter. We really do the transitioning. Now, clearly in the first quarter, you still have cleanup. But we disclosed that one-time net number of $200,000 to $600,000 that we thought might wrap up a lot of those inefficiency charges in the first quarter. But, yes, the benefits from the consolidation from an operational perspective should begin pretty much on track in the first quarter.

Okay. And then I guess the last question or two maybe. If you could talk a little bit about the competitive environment, like where-- what kind of operator are you seeing it mostly from or is it broad based? And then what's your-- in terms of the number of competitive openings in 2011, you know number of supercenter, number of new Meyers, number of smaller format Meyers. Maybe get some color on that?

I think we can. The competitive environment I think probably like it is everywhere in the country is probably ratcheted up a bit. Everybody here is well fighting for share. I don't know what anybody's numbers are. We know what ours are but I would be surprised if we're-- our competitive set is running positive comps in our marketplace.

We continue to see pressure on everyday pricing as well as promotion. We did make some investments in pricing in the quarter, particularly center store base commodity items are under significant amount of pressure. And we-- that's where we made the majority of our investment. We're also feeling-- well the limited assortment guys, Save-A-Lot and Aldi, there's a little bit more presence. And we now have Save-A-Lot regularly running an ad, which is a little bit outside of what was their historical go-to-market strategy. And they almost feel very high-low in some weeks as we look at that. Particularly at the beginning of the month, Karen, where this whole government assistance money hitting the street and driving sales. That's something we didn't feel as acutely as we do today. But we do well at the beginning of the month and now we're feeling that softness at the end of the month.

So, all that's playing into it. But I wouldn't say it's critical or overly irrational. I'd say it's extremely competitive. In terms of the competitive openings coming into next year, we have Meyer opening in northern Michigan in a core retail market for us, which is going to occur in our first quarter.

And that's a supercenter or a smaller format?

It's a supercenter. To my knowledge, on the Meyer smaller footprint, 100,000-square foot stores, they've opened 1 store and they have announced a second one, both in Illinois. So we don't know of any announcement of any smaller footprint stores here in the state of Michigan at the moment. Don't know any more than those two.

Okay.

So that would be one Meyer up there in northern Michigan. We've got a super Wal-Mart coming in the third quarter in a core retail market in metro Detroit for us. And then there are some multiple other-- a couple other Meyers and another super Wal-Mart that would be more in ancillary markets to our core retail. So clearly a diminished impact of supercenter activity visa vie what we experienced this year.

Okay, great. Thank you.

You're welcome.

Thank you. Our next question is from the line of Bakley Smith with Jefferies & Co. Please go ahead with your question.

Hey, guys. Good morning. Most of my-- actually most of my stuff was really just touched on so, I was going to ask about the competitive activity. I mean I guess my question would be, as you look at your customers and sort of strategizing it to the alternate formats, I mean do you feel like when-- I guess my question is are you losing people to those formats somewhat irrelevant to what you're doing? Do you think people are just going to Wal-Mart, Meyer, etc. or like you had mentioned Save-A-Lot, you mentioned I believe Aldi. I guess my question is if you price to get them back in, do they come or do you feel like in some sense you're fighting a fight where people's mindset is taking them to larger format or alternate format? I mean I guess with the idea that do you, therefore, need to be or is it useful-- is it a useful investment to price to keep up with those guys? Or do-- are you generating what you want to generate when you price to compete with the bigger formats?

Good question. The answer to are we relevant? We clearly believe we're relevant. We believe the offer resonates. But I think if, you were to conclude at what point we're not relevant, I think you'd be saying I think the conventional supermarket sector isn't relevant. I don't think anybody believes that.

I think what we're experiencing here is ground zero for this economic recession is really that there's a lot of noise in the marketplace. When you look at the U6 unemployment number, the underemployed so it's really like 21.5%. That's nearly 1 in 4 folks want a full-time job and don't have one. So it's making the numbers here very difficult.

Again as I said earlier, I don't know anybody else's numbers but I would be surprised if anybody's running positive based on what we're seeing and our own observations, what we see promotionally. So when we price where we price, let me just remind you how we price is, because our primary competitor here is supercenters and limited assortment stores, we're very focused on that pricing metric. So, we're pretty tight delta to Meyer. Where there's a Save-A-Lot in the marketplace, we are synced right up, not only on the key items but we also go the extra step of merchandising those key items in mass quantities at the same or better retails of the limited assortment guys in order to drive that value perception to the consumer. And then what we also try to do is well you've got easier shop. So when you add in things like pharmacy, where we've robustly grown and our script count continues to be positive even throughout this environment, and fuel, along with the promotional program that we think is extremely relevant and a competitive everyday price, we are relevant.

I just think we need to get through what has now become the worst economic environment we've had in Michigan in anybody here's lifetime that we can remember. But I couch that by saying I said earlier in the call that the fact that we've got through this tough quarter. We have 2 consecutive years of $100 million of EBITDA. And remember, we're cycling what is basically a record year last year. But, we're doing these comparatives again. So I think we're in the right place. We're going to do more to drive that value equation. I spoke a little bit about that. There will be a campaign launch early next year to help us with that image. But I think we're going in the right direction.

Well, I mean obviously it's integrated the relevance of the conventional format is obviously still in place and all that. I guess my question is more, is it the best use of your spending to kind of go after people that maybe are going to end up going across the street anyway and perhaps you could protect margins a little bit by just say, hey these guys are going to shop us no matter what. I guess is it a fight worth fighting to try and get in there with-- and I'm not saying on-- obviously there's items you have to be competitive. But I'm saying for certain say seasonal type items or whatever is it-- is it worth going after the customer that right now is thinking that from these formats is just where he or she wants to go?

Is it a balancing act, basically. I mean there is some art to go with the science. And we're certainly-- we're cognizant of the fact that we need to deliver bottom line. We think we're staying true to the strategy we have in place and we think it's generating results that'll be-- we'd all like to do better. We think a fairly reasonable return in this environment. We kind of look at those almost one off.

As an example, we decided to play in the third quarter in the turkey game. Well, Wal-Mart came out and they were $0.40 a pound on turkeys across the country. And we beat that price in our strategy around promoting for the holidays. We think that was the right thing to do. Our core consumer deserved to have a price equal to or better than, in this case better than Wal-Mart. And we have a belief that if you win that early holiday of Thanksgiving, you get some benefit going forward. You got a lot of positive comments from consumers about how they appreciated the local grocer stepping up and providing extreme value. In some markets, we were actually $0.29 on turkeys. So, I don't think there's just a right line that you say you're not going to cross over here or there.

Okay. Thanks very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is from the line of Ajay Jain with Hapoalim Securities. Please go ahead with your question.

Hi. Good morning and thanks for taking my question. First on deflation, is it possible to just quantify the level of deflation in Q3 based on your cost of goods? And I also wanted to just revisit the question on average ticket and customer account in the latest quarter. If you have any feedback or if you can just quantify that a little bit further, I'd appreciate that. Thanks.

So Ajay, when you look at deflation, as we mentioned in the script, we're around the 2% mark we think. I think as you looked at deflation, it was interesting as it went over the quarter, some categories deflated-- had been running say at an inflationary rate and moved much closer to flat, maybe even a tad deflationary by the end. While other categories that had been higher deflation, moderated over the quarter. So, but in the end, when you mix all that together, just I guess to try to let everybody understand, this isn't some simple everything moves in the same direction analysis, about 2%.

Okay and as it relates to just trying to quantify the average ticket customer account, I know that Dennis mentioned that they were both down and both had some relative impact. But is there any frame of reference you can give?

I mean we don't disclose the specifics, but I mean the trend slightly worsened for us in the quarter. So I mean it was a slightly higher trend. I mean it is basket and it is transaction. And maybe slightly higher weighted to the transaction as a result of the activity up in Glen's.

Okay, great. Thanks. Thanks for that. And just in terms of the comp guidance for Q4, you've already talked about this. But can you give any additional color on the operating environment and to what's really behind the incremental sales weakness? Cause I'm under the impression that the official unemployment in Michigan is basically stabilized at around 15% over the last few months. And Dave, I think in your prepared comments, you talked about the impact of private label and competitive store openings on comps. But assuming the job situation has gotten dramatically worse within your markets, I' m just wondering if you have any further comment on what's behind the current rate of sales decline and where you're seeing the biggest impact right now from a top line perspective?

Well yes I guess first off I want to just expand a little upon your unemployment comment. Cause I don't think we agree with that. I think when you look at the overall unemployment rate in Michigan, it looks as though it's stabilized. And it looks as though maybe even it declined slightly. But when you look deeper into it, you find that's mostly I think because people dropped out of the market, out of the employment, the labor force, in other words. I think if you look at that U6 number, which the U6 number is really an unemployment factor that's published that includes underemployed and what you would call people sort of dropped out of the market. That actually is up 4 quarter rolling average that increased from about 20.9% to 21.5% over the third quarter. And then when you look at markets outside of southeast Michigan, where you had people drop out of the labor force, you have anywhere from 0.5% to almost 2% increase in the unemployment rate in November and December. So, it's a little bit more mixed than when you look at the high level.

So our belief actually is over the course of the third quarter, the unemployment situation in Michigan worsened some. And our belief is it may worsen some a little bit even into this fourth quarter. But then we do believe it'll stabilize. And over the next fiscal year and then we'll see some modest pop back like everyone else is talking about. But, we'll lag behind.

So, I guess that's first how I would characterize that. And then, I would say in the majority of that incremental run rate is really the VG's inclusion and this cycling of the re-grand opening. And I wouldn't under-- I don't want to underemphasize the cycling of the re-grand opening. This was a phenomenally successful program for us. In the first weekend of the re-grand opening, that store did almost $900,000 in a week. And so, this benefit of that is somewhere between $1.2 million and $1.5 million in just the quarter for just that recycling. So that's a big part of the trend increase. VG's coming in is certainly a part of it and then, the decline in unemployment, a little big tougher economic environment. But the VG's and the cycling of the grand opening is a significant component of that trend change.

Okay, thank you Dave. And I also had a question in relation to vendor support, are you starting to see any incremental relief from manufacturers in terms of industry pricing? And as a hypothetical to the extent that you do get some additional vendor support going forward, would you be inclined to reinvest those benefits in the form of lower prices or not necessarily?

First question, we have not seen an appreciable difference in the amount of vendor support as we look at that metric. And secondly, I think it would depend on how it comes, Ajay. If the support is simply the fact that they're reducing everyday price, cost of goods, on the wholesale segment, clearly we just reduce it immediately and we pass that on to all the stores that buy out of the house. And then we would appropriately act at retail, mindful of the competitive set. If it were in additional promotional spending, it is likely in this environment that we're in today that we would probably aggressively spend that to attract more customer traffic and top line sales.

There has been more activity with the supplier community on coupons. Coupons are up significantly in terms of the number that are being dropped. I think the national number is like an 8% improvement. Our coupon redemption is significantly up. I think our quarter number says we're up like 32% on coupon redemption in the quarter. Again, that customer's driving toward value. And we've actually have invested with coupons. In some markets, we double coupons everyday up to $1.00. Other markets, we've run promotional-- week-long promotional campaigns where we double up to some multiple. And it does seem to pulse and has a role as part of the promotional portfolio.

Okay, great. Thank you. And just lastly, Dave I think on last quarter's call you gave some confirmation that the VG's integration would be slightly dilutive for this year. Can you just give an update on that process? And if possible, just qualify the earnings impact for this year and if you expect any residual impact on earnings heading into fiscal '11?

I think we would just-- we would stay with that. I mean we do believe that all-in the VG's operation will still be slightly dilutive. It's obviously a difficult environment on that side of the state. And I don't think we see any changes to that.

Okay, thank you.

Thank you. Our next question is from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your question, sir.

Good morning, everyone.

Morning, Chuck.

Hey, Dennis, can you talk about how prepared foods did during the quarter and how its quality mix or product mix changed versus a year ago?

I'm going to let Alan respond to that.

Yes, Chuck, from a center store standpoint, we continue to see a number of categories that resonate like frozen foods in the dinner segment, continue to go up, particularly at some of the lower segments within there. From a fresh standpoint, rotisserie chicken is still very relevant. Our fried chicken program still resonates. And then from our central kitchen, where we're vertically integrated here, we produce a number of easy-to-prepare meals. And although we've got a low base, we're seeing three fold multiples within that segment. And we started it at E&W and we continue to offer that up in other banners as well. So that's a focus for us that's clearly resonated with the customer.

And these would be meals either prepared in the store or in a central area?

Yes, it's in our central kitchen.

Okay. Dennis, when you're looking at your value proposition here, which is price, quality, convenience and it's a couple other things you mentioned, can you talk about where price ranks right now versus a couple years ago?

Well, Chuck, we are-- we're just over a year in our using the customer sat vehicle that I was quoting from. So I do have year-over-year numbers. Price is the metric on that survey that improved the most year over year. So and it spanned-- as you know It's an important driver of value. And we're really proud of that because we-- when we started on this value initiative, a little over a year ago, we had an objective to move that number. And we've done it. It still remains a number that's relatively low on the score. But when you think about the positioning of conventional supermarket against competitive set of limited assortment stores and dollar stores and supercenters, we don't have that low price position, but we're delighted with the improvement in the price proposition.

By that, you're talking where you were and now where you're perceived to be?

Correct.

Okay. Do customers care about quality right now? Well, I'm sure they do, but can you sort of quantify that? Where that matters and things like store convenience, store location?

Yes, we track those on the survey. And frankly, interestingly every one of our-- virtually every metric has improved and improved from a statistically significant-- in a statistically significant way. So they're all moving in the right direction, which again gives us a lot of confidence that the plan we have in place is resonating. What I might anecdotally say to you around quality is if you look at the brand portfolio, the Fresh Market brand on a relative basis is outperforming the balance of our brands. And, as you know, we go to market there with a more upscale positioning, with an emphasis on variety and quality. So you'll find larger sizes of fruit, for example, in the produce department, etc. So, it is interesting in this environment and admittedly those stores are placed in a demographic geography that would support that, but that they seem to be more resilient than the balance of the portfolio.

All right. When you look at easing of deflation, which might mean a bit of inflation, how concerned are you about that having a negative impact on volumes?

I think modestly concerned. I don't think we are going to see ramping inflation. Well, if you look at these deflation numbers, Dave was talking about negative 2% that we just experienced in this quarter and you kind of compared that to a year ago, at least on the wholesale side, we were seeing inflation of like 8%, 7%, 8% a year ago, right? So the delta's big. I think if you had 7%, 8%, 9%, you would see that reduction in units. And we actually saw that a year ago. But I don't think anybody's anticipating the inflationary return will be anything like that. I think we're seeing maybe modest inflation. I think the experts are predicting somewhere in the middle of the calendar year, we may see this begin to turn and like 2% or 3% is kind of the numbers that are being kicked around. I just don't think it'll be overly significant, Chuck.

All right. Dennis, how about taking the loyalty card to other banners? Any thoughts on that at this point?

Lots of thoughts on that. I would say to you that maybe a bit unlucky relative to the timing of our launching this, because there is so much noise in the marketplace. And we launched it in Glen's, in the northern Michigan unemployment as I pointed out in the northeast of almost 19%. It's not too dissimilar on the other side. It's probably been more difficult for us to understand what the impact of the card has been compared to our expectation. So, we're a believer. We like the data we're getting. We've tactically applied some of the learnings and in some instances with very significant responses. So I have no reason to believe that we won't ultimately roll that out. But I couldn't give you a timeline just yet.

So you want some-- a more normalized environment I guess before you'd roll it out?

More normalized environment. When we get to the middle of this year, we'll have year-over-year comparatives. We'll be able to better track customers' behavior. And but I think the card is-- having the data is important, however, you get it. We happen to have chosen a card. Having the data to be able to make more informed decisions about the consumers' habits, I think is critical for any food retailer going forward. You have to have a vehicle to collect the data.

All right. And then finally, are you seeing any of your independent retailer customers' stores available for-- sell back to you? I'm thinking of onesies and twosies here. Any of that going on in the market that could be an opportunity?

There's nothing we-- that is imminent. That is really a process that goes on over the course of a relationship with an independent retailer. But I wouldn't be surprised that some of that doesn't develop as we get into 2011.

Okay. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is a follow-up from the line of Karen Short with BMO Capital Markets. Please go ahead with your question, ma'am.

Hi, thanks. I just had an acute housekeeping and then a bigger and broader follow-up. Dave, what tax rate should we think about for 2011? And then also, you said you had two new stores in 2011. Can you give us timing on those?

Yes, so the tax value is about a 39.9.

Okay.

I think that's a fair rate all in. The stores, there's two new stores but one is a relocation of an existing store. So in our Grand Rapids market, we have that D&W Fresh store. That'll open up early in the first quarter.

Okay.

And then I'd say middle of the first quarter. And then the second store, which is the relocation of a Family Fare store, actually a Felpausch store that will become branded as a Family Fare, that happens middle of the quarter.

Okay. And then if I were to just think about VG's, I'm curious. When you took the chain over, where do you think the price gap was with say Kroger and also Wal-Mart? And what do you think it is now? Where is it now?

Well I mean I think based on our studies in the acquisitions, we were always very tight to Kroger. And I think we still are very tight to Kroger. I think to Meyer, the supercenter there, actually I think they were fairly in line with our corporate strategy. And I think we continue to keep them in line with our corporate strategy.

Okay, so right now, what we're seeing in terms of the operating margin is just a broad-based, not-- it's not necessarily VG's needing to be repositioned?

Correct.

Okay, thanks.

Thank you. There are no further questions in the queue at this time. I would like to turn the floor back over to Mr. Eidson for closing comments.

Okay. Thanks, Rob. 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'll look forward to discussing our fourth quarter and year-end results with you during the next call. Thank you.

This concludes today's teleconference. You may disconnect your line. Thank you for your participation.