SpartanNash Co (SPTN) 2011 Q2 法說會逐字稿

Greetings and welcome to the Spartan Stores, Inc. fiscal 2011 second-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 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 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 of Spartan Stores Inc. Thank you, Mr. Eidson, you may begin.

Thanks, Jackie. Good morning, everyone, and thank you for joining our fiscal 2011 second-quarter earnings conference call. With me this morning are members of the Spartan team, including our Executive Vice President and CFO, Dave Staples; our Executive Vice President of Merchandising and Marketing, Alan Hartline; our Executive Vice President of retail operations, Ted Adornato; our Executive Vice President of Wholesale Operations, Derek Jones; and our Executive Vice President and General Counsel, Alex DeYonker.

Let me begin this morning by providing you with a brief overview of our business progress and financial results, and then I'm going to turn the call over to Dave to give you more details about the quarter's financial results as well as a financial outlook for the remainder of fiscal 2011. I will rejoin the call following Dave's comments and add some concluding remarks.

We are encouraged, actually, by the improving business and financial trends reported in the second quarter, including a net pre-tax benefit related to our warehouse consolidation initiative. Our operating earnings for the quarter were $22 million, placing the performance only slightly below our record second-quarter earnings level in fiscal 2009. Comp store sales trends have improved for the past two quarters, in line with our expectations.

From a cash flow perspective, year to date we generated more than $45 million in cash from operations, which is approximately 11% higher than the same period last year. Our Distribution efficiency improvements, inventory reductions and operating cost containment were key drivers to the strengthening of the balance sheet.

At quarter end we reduced our net long-term debt by more than $37 million compared with the same period last year, and we reduced our investment in inventory by more than 10%. The economic and competitive environment certainly remains challenging, but we remain focused on the consumer and continue to improve our business fundamentals. We are more confident today about our business than we were a year ago at the same time. And, although we're still getting some mixed signals from the national economy, data would suggest that the Michigan economy has at least stabilized. For example, the unemployment rate in Michigan has actually improved relative to this time last year. Our business trends also seem to mirror our national trends in that more affluent consumers appear to be recovering a bit more rapidly than others.

From a competitive perspective we cycled a number of stores that opened in our markets last year while one new store opened during the second quarter and two are expected to open during the current third quarter.

Some other important business trends include a moderation in Retail product price deflation and a modest level of product cost inflation. During the quarter we completed a major store remodel project and rebranded the store to a Family Fare, improved both store and Distribution center productivity and experienced improved performance at our fuel center operations. Today, consumer acceptance of the rebranded Family Fare store has been very good.

Lastly, we continue to work closely with our Distribution customers to bring value-added offerings to the consumer that are relevant in today's current environment. These efforts contributed to the improvement in our Distribution segment sales trend.

And with that overview, I'm going to turn the call over to Dave. Dave?

Thank you, Dennis, and good morning, everyone. I will now provide more details about our second-quarter financial results and some broad financial guidance for the second half of fiscal 2011.

Consolidated net sales for the 12-week second quarter were $602.1 million compared with $610.2 million in the year-ago quarter. The decline related primarily to lower Retail sales caused by the prevailing economic and competitive market conditions, partially offset by higher fuel sales. Distribution and fuel center sales represented slightly over 41% and 5%, respectively, of consolidated sales compared with 41% and 4%, respectively, in last year's second quarter. The consolidated gross margin rate for the second quarter increased 20 basis points to 22.5% from 22.3% in last year's quarter. The change was driven by improved Retail margins and the benefit of a LIFO inventory valuation credit related to our warehouse consolidation initiative, partially offset by a higher mix of Distribution and fuel center sales and lower procurement gains due to the reduced inventory investment.

Second-quarter operating expenses included pre-tax restructuring charges of $200,000 related to the warehouse consolidation and a $100,000 pre-tax charge related to the loss on the sale of assets. Excluding these items the ratio of operating expenses to sales improved to 18.7% compared to 18.8% last year, indicating that we are producing better expense leverage through our cost containment efforts despite higher debit and credit card fees, utility expenses and employee benefit costs.

Second-quarter operating earnings were $22.1 million compared with $21 million last year. This year's operating earnings included $1.2 million in pre-tax net benefits related to our warehouse consolidation initiatives. Excluding the benefit, operating earnings for the quarter were $20.9 million. Adjusted EBITDA for the quarter, which excludes the previously mentioned net pre-tax benefit, improved to 5% of net sales compared with 4.9% in the same period last year. Second-quarter earnings from continuing operations increased 8.1% to $11.3 million or $0.50 per diluted share compared with $10.5 million or $0.47 per diluted share in the year-ago quarter. Excluding the previously mentioned net benefit related to the warehouse consolidation, adjusted earnings from continuing operations were $10.6 million, $0.47 per diluted share.

Turning to our business segments, second-quarter Distribution net sales were $248.6 million, which was comparable to the same period last year but an improvement from more recent trends. Despite operating earning, distribution operating earnings improved to $10.7 million compared with $10.6 million in last year's second quarter. On an adjusted basis, which excludes the previously mentioned net pre-tax benefit of $1.2 million, operating earnings were $9.5 million. The net pre-tax benefit relates to the warehouse consolidation project and consists of a $1.5 million LIFO inventory valuation credit partially offset by $300,000 in restructuring charges and lower procurement gains. The change in adjusted operating earnings was due to lower procurement gains because of less investment in inventory from ongoing reduction efforts that were outside of the warehouse consolidation initiative and higher employee benefit expenses which were partially offset by better operating efficiency and expense leverage.

Second-quarter Retail sales were $353.5 million compared with $360.2 million in the same period last year. The change in sales is due primarily to a 4.7% decline in comparable store sales excluding fuel centers, which is a 1.4% improvement from the prior quarter, and the loss of $5.8 million in sales related to three stores that were closed or sold since first quarter last year. These unfavorable items were partially offset by an increase in the number of fuel centers in operation, higher average Retail fuel prices per gallon sold and benefits from our capital investment program.

We estimate that overall Retail price deflation had virtually no impact on sales during the quarter. In addition, we believe that competitive store openings and the cannibalization effect from new and reopened stores contributed approximately 100 basis points to sales decline.

Second-quarter Retail operating earnings improved 9% to $11.4 million from $10.4 million in the same period last year. The improvement was primarily the result of higher fuel and supermarket margins and better store labor productivity, partially offset by store reopening costs that were $200,000 higher than last year's second quarter and higher credit, debit card fees and utility costs. We estimate that fuel sales added approximately $0.02 per diluted share to the second quarter's profitability.

We continued to generate strong cash flow, and our balance sheet improved during the quarter. On a year-to-date basis, cash from operating activities improved 11.2% to $45.5 million. As of September 11, 2010, net long-term debt including current maturities and capital lease obligations net of cash and cash equivalents decreased $37 million to $149.2 million from the balance at the end of last year's second quarter. I wanted to point out that we are now using that debt in these ratios, which takes into account our cash and cash equivalents. We are using this measure instead of total debt because we have a fixed interest rate swap on the outstanding portion of our revolver, and are thus not able to pay the revolver down below the agreement threshold.

Our leverage ratio strengthened during the second quarter with a net long-term debt to capital ratio of 0.34-to-1 and a net debt to EBITDA ratio based on trailing four quarters EBITDA of 1.47-to-1. On an equivalent measure basis, the ratios were 0.4-to-1 and 1.7-to-1 at the end of last year's second quarter. Today we also have approximately $133 million of availability under our existing credit facility. I want to remind you that the third quarter is typically when we seasonally add to our investment in working capital, making these ratios somewhat less favorable. We would expect to be back to current levels by year end, assuming similar historic trends for our business.

From a capital investment perspective, we completed a remodel project late in the second quarter and reopened a store as a Family Fare. We also opened a new Family Fare store early in the third quarter, which was a store relocation project to replace an existing Felpausch store.

I will now provide some broad guidance for the remainder of fiscal 2011. We expect business conditions to remain challenging but improve during the remainder of the fiscal year. We are encouraged by the trend in Retail price deflation, which was negligible during the quarter, and are experiencing a modest level of product cost inflation in certain center store and fresh product categories. We expect to cycle the remainder of last year's competitive super center opens by the end of the fiscal year. During the remainder of the year we expect Retail comparable store sales excluding fuel centers to improve relative to the second-quarter results with a modest improvement in the third quarter. Distribution sales for the third quarter are expected to approximate the year-ago levels.

Our expectation is based on the assumption that Retail price deflation will continue to be negligible, the economy will continue its slow recovery and that we will cycle the last of the prior year's competitive store openings during the remainder of the year. However, we had one incremental opening that took place in the second quarter and expect two additional openings in the third quarter of this fiscal year that will impact our current sales run rate and will not cycle until fiscal 2012.

From an earnings perspective we anticipate that the third quarter net earnings will approximate or slightly exceed last year's performance and that fiscal 2011's full-year performance will approximate or slightly exceed fiscal 2010's. Capital investment in fiscal 2011 will range from approximately $33 million to $35 million. We expect depreciation and amortization for the fiscal year to be approximately $35.5 million to $37 million with total interest expense of approximately $15 million to $15.5 million.

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

Thanks, Dave. As Dave just mentioned, we believe our business conditions and trends will continue to improve modestly during the remainder of the fiscal year. Our plans for the second half of the year are to work even harder to provide consumers with more value in both our Retail and Distribution businesses and to be prudent but more aggressive in pursuit of sales growth. Part of the value enhancements will be achieved by introducing more than 200 private brand products and the center store and fresh product categories under the new Spartan Fresh Selection brand. In addition, we will introduce our loyalty card program to another Retail store banner during the last half of the fiscal year.

From a capital investment perspective, we expect to open one new fuel center in the third quarter, bringing the number of fuel centers that we operate to a total of 25. We are also scheduled to complete a major remodel, or major remodel projects, on an additional three stores during the second half of the fiscal year.

In summary, during the remainder of the year our priorities will continue to focus on improving sales growth in both our Distribution and Retail segments, enhancing our value proposition and achieving additional efficiencies while containing operating costs. We will continue to seek prudent growth opportunities in our existing markets or adjacent states through new customer development or acquisitions. We are fortunate here at Spartan to have a strong and experienced management team along with motivated associates that will enable us to achieve these priorities.

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

(Operator instructions) Scott Mushkin, Jefferies & Co.

I don't want to sound like a Debbie Downer here, but the one thing that I did notice is that clearly you guys have done a great job, so I'm not trying to take anything away. But if you look at the stacked costs on a two-year basis, they are continuing to slide. So on a sequential it's gotten better. So I'm just trying to understand. It seems like you guys are a lot more positive. Do you think that positive feeling is coming just because the compares are getting extraordinarily easy as we move through the year? Or do you think there is something that you can point to trading off, something that is giving you a feel that the consumer is actually really changing? Because clearly the stacked numbers on a two-year basis is really not improving, it's actually decelerating.

Good morning, Scott, and I don't think you are being Debbie Downer, but I think we're trying to be realistic about what we see on the horizon. As we have talked about, this past year, and we are not quite through it yet, we have had a lot of super seller impacts in our business. So I think partially what we are seeing is the manifestation of that, and we will cycle out of that. And if we look at fiscal 2012 right now, I think our crystal ball suggests we may see only one new super center opening in our core Retail trade area.

As we suggested in the conversation this morning, the more upscale consumer appears to have bounced back better than the balance, and those stores that cater to that demographic are performing better. So we feel better about that.

We also believe that -- you know, the worst is behind us, we believe, in Michigan. Not that things are going to be great, but the unemployment rate that we are currently experience is 2% better than it was a year ago, on average, for the quarter. We were at 15%, 15.1%, 15.2% a year ago. We're currently running at 13.1%. It's not a good number, but relatively speaking it has improved.

So I think that, combined with the fact that some of the initiatives we have in place we feel good about, better about it this year than we did a year ago, which is what my comments were earlier. I feel good about the way we have been able to manage the business on a go-forward. I think we've done a nice job with the balance sheet and we are looking for opportunities to potentially grow the business.

That's good color. Not trying to take anything away from what you guys are doing. It's obviously been -- you've done a tremendous job. I had one other question, if I may. Clearly, we are seeing commodity prices increase in food pretty dramatically. I wanted to get your take on, out six to nine months, how do you think, if we get an inflation bubble again, how it will play out through your business?

I don't know that -- it depends, I guess, on how you define an inflation bubble. I'm not so sure we are going to see a spike up in input cost inflation from CPGs. I think we're going to get some inflation. We actually had inflation on our wholesale business as we track it in Q2, and it was a little more than it was in Q1. I think we're going to see more inflation in the balance of the year, but I don't think it will be inflation that's going to be difficult to digest, understanding we run two segments. In the Distribution segment, it basically is a pass-through, as you know. So it won't have much impact there. So I think maybe the real commentary is on what happens at Retail. I think if it's modest inflation, my read is that we will be able to pass it through. It has been -- I guess I'll just leave it at that. I think we will be able to pass through modest inflation, and I think that's what we are going to be looking at, modest inflation.

Karen Short, BMO Capital Markets.

A couple questions, I guess, to follow on Scott's question. From where I sit, it seems like this quarter was actually pretty decent. But I guess your language changed a little bit, your wording on your fiscal 2011 guidance changed a little bit. I think you originally said you expect to exceed fiscal 2010, and I think in this quarter it was approximate or approximation to exceed. And I guess I'm just kind of wondering. You do seem a little more optimistic. Am I just reading too much into your verbiage? And then I guess on that, are you using $0.50 for the quarter or $0.47 when you kind of incorporate your language?

We are clearly using the adjusted number, the $0.47 number, so -- which probably gives it a lot more clarity as you look at the approximate to slightly exceed.

Okay, I think (inaudible) [in a ways], we don't have a, quote, unquote, a crystal ball. We model our business trends and our initiatives, and we think the language that we put forth in today's release reflects truly what we feel. We think we will approximate or slightly exceed. I'd love to be able to tell you we are going to wildly exceed it. But this road is pretty tough, but we are feeling pretty confident that we can deliver on those numbers of meeting last year or slightly exceeding them.

Okay, that's fair. And then I'm just wondering if you could talk a little bit about what you saw in terms of what drives the improvement in the comp or sequentially, and then went into the third quarter, what continues to be the driver.

Well, in the second quarter the majority of our improvement came from transaction count, from where we trended in Q1. So that was the key driver. And in Q3 it's really early for us to tell you we actually are improving in Q3, or -- we've got four weeks in, we are running better. Actually, we are running at a negative 4.2 in Q3, so another 0.5% better. And we think, based on what we see on the horizon here, we will be able to continue that improvement.

And, sorry, that is also traffic or transaction driven?

Well, it's actually -- in Q3 -- again, it's early. We are getting some benefit in sales per transaction this quarter.

And then, David, if you said this, I didn't catch it. Did you get what the actual fuel benefit was in dollars on the top line, and can you comment on the fuel margin impact in the quarter?

We did not comment on the fuel margin, but we did give the cents per share at $0.02. The dollars you can back into are somewhere in the $800,000 range.

Year-over-year increase?

Yes.

Okay, so I guess, if I try to do that exercise on taking back fuel in last year and fuel this year, you still saw a pretty solid improvement in the Retail operating margin. Maybe just -- I know you made some comments on it, but could you maybe just elaborate a little bit?

Well, if you look at our Retail margin overall, I think we had a very good quarter in our fresh group. I think that responded well and it probably was followed with a little bit of investment, offset a little bit with investment in the center store side. But overall I think we were happy with our performance, with the trend on the sales. But clearly the profitability.

And then just on the debt, what exactly did you pay down this quarter?

Well, it's twofold. We've gone to this net debt concept because we have the swap, so our revolver is really fixed at $45 million. We can't pay it down, so we basically build cash. But net-net, if you take that net debt look, we were $37 million year-over-year for the quarter.

Right, I just was looking at your balance sheet and I didn't see any change. That's why I was confused.

Correct, it's really the cash build. It would be the two things. When you're [looking] year-over-year, it would be that that we re-bought in the first quarter of the convert and then the cash build. That's how you get to 37.

And then just lastly, on the acquisition environment, how should we think about how you prioritize like Distribution acquisitions versus, say, a Retail acquisition? What are your thoughts on that?

Well, I think, as we said, we are always very opportunistic in both areas. We look for the best opportunity that presents itself at the time, and it could be either way. But a rollup of an existing customer or so is obviously going to be Retail. Expansion probably would lend itself towards Distribution, but we will be opportunistic with whatever offers the best opportunity.

Alex Bisson, Northcoast Research.

Could you talk a little bit about mix in products sold with particular emphasis on the fresh categories in prepared foods, and what that is telling you about where the consumer is headed?

Well, I will tell you, we had a good, fresh quarter. Our fresh performance was better than our center store performance. But I think part of that is the way we drove that from a promotional perspective. And our ready-to-go meals, [maybe] the -- it continues to show growth. But we have a wide variety of store demographic profiles. And again, in our D&W brand, that's really resonating better than it is in the balance of the portfolio.

But I think, if you look at -- and it's difficult -- what's going on with the consumer. It felt like in Q2, some of those more basic categories that we had seen over the last year or so that really were moving up -- commodity type sugar or flour, canned goods -- fell off a little bit. And they were sort of the slower categories, and we actually saw growth in organic, and not only in our stores, but across the portfolio, but also in the marketplace.

So I think that may signal maybe the beginning of a little better environment, but it's still early.

A similar question, but can you talk about the growth rate and maybe the relative growth of private label across tiers? So how did the opening price point do relative to some of the more upscale versions of private label?

I don't think we have that information at our fingertips, on the value tier. Alan, do you know the value tie-in versus -- ?

Yes. We saw some explosive growth on the fresh side relative to private brands, but a lot of that we perpetuated with a lot of new items and an emphasis there. ValuTime, our entry-level brand, is basically flat for the period, which kind of reflects a little bit of what Dennis was saying is -- in terms of some of the core commodity items flattening. Box dinners was a big one for us last year for ValuTime, and that one was actually down. So I think the growth engine for us continues to be the Spartan brand. Our Full Circle brand, which is our natural organic offering to the consumer, was up modestly. And that has been flat or declining over previous quarters. So we are starting to see some life within that brand as well.

What are you seeing from an acquisition standpoint on both the Retail and Distribution side? Are there more opportunities out there?

Well, I would think that the environment is a bit of a mixed bag. But clearly, we are not -- we wouldn't be out telegraphing what we saw or felt. We have continued to say, we would be opportunistic in any acquisition in either segment, depending on which opportunity gave us the potential for the best long-term growth.

And I guess one follow-up question -- barring acquisition, what are your plans for using your cash, given that it is building and you really can't pay down debt at this point?

Yes, Alex, I think, as we look at it -- and you say barring acquisitions; I don't think you can bar an acquisition because I think that is part of our strategy. So I think we remain committed to growing the business at this point, and so I think at this time that's what we'll hope to use it for. Should that not pan out, then we'll cross that bridge at that time. But currently, we remain committed to growing the business. We pay a dividend. It has a reasonable return on it, and we bought back some debt. And I think right now that's how our strategy plays out.

(Operator instructions) Ajay Jain, Hapoalim Securities.

Actually, most of my questions have been asked already, but I was just wondering, as far as the outlook in the back half of the year, is there anything that you guys are seeing out there that could potentially result in a decline in EBITDA over the balance of the year? There has been some news about irrational pricing in other regions like Dallas, for example. But as far as any competitive activity that you are seeing right now, is there anything that you are particularly worried about?

I don't think we see anything like that on the horizon. You never know. We have a competitive marketplace, but I think I've said this in previous conversations. I don't think it's an irrational marketplace. So we wouldn't see that as a significant risk in the last half.

Okay, and as far as the -- I don't know if you could pin down any EBITDA forecast, but are you looking for flat to slightly positive growth over the balance of the year? Is that a good characterization?

Yes, I think that's fair.

Karen Short, BMO Capital Markets.

I just had one housekeeping and then a follow-up. How many fuel centers do you operate now?

It's 24 today. We plan on opening up another one in the third quarter, for a total of 25.

So just one more for this year?

Yes.

And I was just curious. On the vendor side, are you seeing any shift in the type of support you're getting from vendors? Meaning, I guess, are they more reluctant to provide support until you can demonstrate that you can actually move the volumes? I'm hearing that from some other retailers, so I'm just curious.

No, I don't think we would characterize our relationship with the vendors that way. I think we have built a good partnership with the vendor community over our tenure here, and they are willing to participate with Spartan and our independent customers. And we are not feeling an inhibitor -- our top line being an inhibitor to generating interest in our programs.

Okay, and then just lastly, when you originally gave your commentary and your outlook for the year, you always knew you were going to have these two competitive openings in the third quarter, didn't you?

Actually, the one location maybe was not as clear to us as the other. So maybe that got us a little bit earlier in terms of timing, but ultimately we knew we would have them both.

(Operator instructions). There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Well, if there are no more questions, we will conclude the call. And on behalf of Dave and Alan and everyone here on the Spartan team, I'd like to thank you for joining our call today, and we look forward to discussing the third quarter during our next conference call. Thanks.

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