SpartanNash Co (SPTN) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Spartan Stores Incorporated fourth quarter and fiscal year 2011 earnings conference call.

(Operator Instructions).

It is now my pleasure to introduce your host, Miss Katie Turner of ICR. Thank you, Miss Turner. You may begin.

Good morning, and welcome to Spartan Stores Incorporated fourth quarter and fiscal year 2011 earnings conference call. By now, everyone should have access to the earnings release for the period ending March 26, 2011. If you've not received the release, it is available on the Investor Relations portion of Spartan's website at www.spartanstores.com. This call is being webcast, and a replay will be available on the Company's website.

Before we begin, we'd like to remind everyone comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that might 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 condition.

Additional information about risk factors and the uncertainties associated with the Company's forward-looking statements can be found in the Company's earnings announcement, annual report on Form-10K, and the Company's other filings with the SEC. Because of 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 statement.

This presentation will include non-GAAP financial measures as defined in Regulation G. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure, and the other information required by Regulation G, is included in the Company's press release issued after market close yesterday, which has been posted on the Investor Relations page of Spartan's corporate site. It is now my pleasure to introduce Mr. Dennis Eidson, President and CEO of Spartan Stores Incorporated for opening remarks.

Thank you, Katie. Good morning, and thank you for joining our fourth quarter and fiscal year 2011 earnings conference call. With me this morning are members of our team, including our Executive Vice President and Chief Financial Officer, Dave Staples, our Executive Vice President of Merchandising and Marketing, Alan Hartline, our Executive Vice President of Retail Operations, Ted Adornato, and our Executive Vice President, General Counsel, Alex DeYonker.

I'll begin by providing a brief overview of our business progress and financial performance, and then Dave will share some more specific details about the 2011 financial results, as well as our outlook for fiscal 2012. And finally, I'll provide some closing remarks, and we'll open up the call to take some questions.

I'm pleased that we concluded fiscal 2011 with a strong fourth quarter financial performance, as both of our business segments delivered increased sales and profitability over the prior year. The economy across our markets continues to gradually improve, as evidenced by the steady improvement in our sales.

During the year, we focused on providing consistent value to the consumer across our operations, and reducing operating expenses in an effort to maximize profitability. And as a result, our annual results exhibit sound fundamentals of our business model, and Spartan's ability to sustain profitability in a challenging environment. By carefully controlling our costs, the retail and distribution operations generated a combined $65 million in operating profit, and we achieved our third consecutive year of over $100 million in adjusted EBITDA.

Now, focusing on our operating segments for the quarter in more detail, we continue to make solid progress in our distribution segment in the fourth quarter. We achieved an increase in net sales through -- to additional pharmacy program business, and the addition of new customers late in the quarter. This represents the second consecutive quarter of increasing sales in this segment. Our improved sales, including a favorable mix of sales from our fresh and corporate brand offerings, combined with continued focus on operating efficiency led to a 12% improvement in adjusted operating earnings. In addition, on a year-over-year basis, we reduced our LIFO inventory investment by over $17 million.

One of the ways we remain focused on enhancing value, in both our distribution and retail segments, is by continuing to expand our corporate brand program through new innovation. During the year, we introduced over 300 new items. These products further enhance our strong portfolio of corporate brands, and thus expand our value offerings, while giving consumers even more product choices. These efforts were rewarded in our fourth quarter, as our sales penetration for our corporate brands again, exceeded the national average in the retail segment. We again, anticipate approximately 300 more new items in fiscal 2012, with an even healthier concentration in our fresh departments. We'll also continue to move forward with improved packaging designs that incorporate current nutritional trends, as well as further improvements in the quality of our existing strong product line up.

During fiscal 2012, we'll continue to work aggressively to increase sales penetration with our existing distribution customer base, seek new independent customers, enhance our value-added service offerings, and further improve the efficiency of our operations.

In the retail segment, comp store sales improved on a sequential basis for the fourth consecutive quarter, while adjusted operating earnings increased 60%, due mainly to improved fuel margins and lower associate incentive and benefit costs, partially as a result of cycling an employee benefit change that negatively impacted last year's earnings.

During the fourth quarter, we rolled out our loyalty card program to the VG food and pharmacy retail consumers, and the initial response by the VG's customers has been great. We continue to be pleased with the progress of the program, the valuable insight it is bringing to both our marketing and our merchandising efforts, and more important, the enhanced value, that it's providing to our consumers. Some of the key features of the loyalty program include points that can be accumulated and redeemed for free merchandise, clubs that target key demographics, and direct mail promotions to specific consumers. In addition, we've just begun to test a fuel rewards offer, in partnership with Speedway. Under this offer, VG's customers that do not have a VG's fuel center located at their store, will be able to earn fuel discounts at Speedway fuel centers. Speedway is the market leader for fuel in Michigan, and thus we're really excited about the opportunity.

During the fiscal year, we continue to upgrade our store locations, and I believe these investments have positioned us to take advantage of the economic recovery as it unfolds, and allow to us provide a strong alternative to the competitive formats in the markets we serve. From a competitive perspective, our fiscal 2011 results were impacted by supercenter openings in the second half of fiscal half of 2010, as well as in fiscal 2011. The good news is, that activity is behind us, and our outlook for 2012 only includes one incremental supercenter opening, which we expect during the first quarter.

We've made many fundamental changes and structural improvements to our operations during the past several years that have strengthened our position as a leading supermarket operator, and a highly efficient, value-added distribution partner for our independent customers. As a result of the changes, we remain confident about the strength of our market position and the long-term growth, as we move beyond these challenging times. And with that overview, I'm going to turn the call over to Dave. Dave?

Thanks, Dennis, and good morning, everyone. I will now provide you with more details about our fourth quarter and fiscal year 2011 financial results, as well as some broad financial guidance for fiscal 2012. Consolidated net sales for the 12 week fourth quarter increased 2.3% to $571.5 million, compared with $558.8 million in the year ago quarter. Both the retail and distribution segments reported improved sales during the quarter. Distribution and fuel center sales represented 43.6% and 6.1% respectively of consolidated net sales, compared with 43.7% and 5% respectively, in last year's fourth quarter.

The consolidated gross margin rate for the fourth quarter increased 10 basis points to 22.7% from 22.6% last year. The increase was due to improved margin contribution from the Company's distribution segment, and higher fuel margins, partially offset by lower retail supermarket margins. Fourth quarter operating expenses were $113.9 million or 19.9% of sales, compared with $117.3 million or 21% of sales in the same period last year. Excluding a pre-tax charge associated with restructuring costs of $200,000 this year and $4.8 million last year, the adjusted operating expense to sales ratio was 19.9% in the fourth quarter of fiscal 2011 versus 20.1% last year.

The continued leverage of our operating expense was due to a shift in mix of sales towards fuel, productivity improvements in the distribution and retail segments, and cost containment initiatives which were partially offset by higher debit and credit card fees and higher employee incentive compensation costs. Adjusted EBITDA for the fourth quarter of 2011 increased 14.2% to $25.5 million or 4.5% of net sales, compared to $22.3 million or 4% of net sales last year. Excluding the previously mentioned net charges, adjusted earnings from continuing operations from the quarter increased 19.5% to $7.8 million or $0.34 per diluted share, compared to $6.5 million or $0.29 per diluted share last year.

Our distribution and retail segment sales increases improved overall margins, and a continued focus on cost control and increased operating efficiencies related to our spring 2010 warehouse consolidation initiative, primarily contributed to the earnings improvement.

Turning to our operating segments, fourth quarter distribution net sales increased approximately 2% to $248.9 million from $244.3 million last year. The sales improvement was due to stronger pharmacy program sales and new customers gained. On an adjusted basis, operating earnings increased over 12% to $13.7 million this year, compared to $12.2 million last year. The increase was due to procurement-related gains, an additional $700,000 in LIFO inventory valuation credit driven by our inventory reduction efforts, operating efficiencies and expense leverage, partially offset by higher transportation and employee incentive compensation expenses.

Fourth quarter retail sales increased 2.6% to $322.6 million, compared to $314.4 million in the same period last year. The increased sales were due primarily to higher retail fuel selling prices and a new supermarket location, partially offset by a decline in comparable store sales excluding fuel of 0.9%. We are pleased with the continued improvement in our comparable store sales trend. And although we reported a 0.9% decline excluding fuel, the fourth quarter results are significantly better than the third quarter comparable store sales decline of 4.4%, and represent the fourth consecutive quarter of positive momentum.

During the quarter, we experienced a modest level of overall inflation of the distribution cost level as well as the retail price level, which was driven by significant increases in the perishable departments. We believe that the retail sales benefit generated by this inflation was substantially offset by the impact of competitive store openings and the cannibalization effect from our new or relocated and remodeled stores.

Excluding the retail's segment share of the previously mentioned net pre-tax charge, fiscal 2011's adjusted fourth quarter operating earnings were $2.4 million, compared to $1.5 million in the same period last year. The increase in adjusted operating earnings was attributable to lower employee incentive costs, improved fuel margins and the cycling of the costs of an employee benefit change last year, partially offset by lower supermarket gross margins, due in part to the to the launch of the YES card at the VG's banner, and an increased LIFO inventory valuation charge.

Now, focusing on our fiscal year 2011 financial results, consolidated net sales for the fiscal year were $2.53 billion, compared with $2.55 billion last year. The annual net sales decline is due to lower sales volumes as a result of the economic and competitive market environments, partially offset by higher retail fuel selling prices and a new store. Also contributing to the decline were lost sales of $13 million related to retail stores that were closed or sold during fiscal 2010.

Adjusted net earnings from continuing operations for fiscal 2011, excluding the impact of the $1.8 million after-tax restructuring, were $30.7 million or $1.36 per diluted share, compared with $29.9 million or $1.33 per diluted share last year. As reported, fiscal 2011's net earnings were $32.3 million or $1.42 per diluted share.

We continue to report strong levels of net cash, with cash provided by operating activities of $89.8 million for fiscal year 2011. As of March 26, 2011, total net long-term debt decreased by $45 million to $131.1 million, from $176.1 million at the end of last year. Our financial position continued to improve, as the Company's total net long-term debt to capital ratio is now 0.3 to 1 at the end of the fourth quarter. And the net debt to adjusted EBITDA ratio on an annual adjusted EBITDA basis is at 1.26 to 1.

I will now provide some broad, forward-looking guidance. As Dennis mentioned, the Michigan economy is gradually improving, and we believe that our sales trends will similarly continue to improve over the course of fiscal 2012, especially in the second half of the year. We expect to experience a moderate level of overall product cost and retail price inflation in the coming year. These trends should result in a significant increase in LIFO expense for next year. I would also like to remind that you fiscal 2012 is a 53 week year.

As you are aware, a growing number of consumers continue to receive supplemental government assistance for their food purchases. The State of Michigan has implemented a change to the timing of the disbursement of these funds during fiscal 2012, which will move the pay out of funds from an 8 day window during the first part of the month, to a 19 day window by year-end. We believe this new payment schedule will negatively impact our sales trends during the first half of the year, due to a shift in the timing of these payments relative to our first and second quarter endings.

The timing of these payments, the increased price of fuel, along with the shift in the timing of the Easter holiday have made the first quarter sales trends more difficult to analyze at this time. Considering all of these factors, we expect retail comparable store sales for the first quarter fiscal 2012, excluding fuel, to be similar to the fourth quarter of fiscal 2011, with distribution sales again, increasing compared to last year's levels. We anticipate fiscal 2012's first quarter adjusted net earnings will approximate last year's performance, as the earnings momentum from the fourth quarter will be impacted by higher LIFO expense, and margin compression on the fresh side of our business, due to the current volatility in commodity prices.

For the full-year of fiscal 2012, we expect comparable store sales to turn positive in the second half of the year, as we benefit from an improving Michigan economy, cycle fiscal 2011's competitive store activity, continue our capital investment program, and roll out our loyalty program across the remaining banners. We also expect fiscal 2012's adjusted net earnings, excluding the 53rd week, to modestly exceed the performance in fiscal 2011, as we benefit from the second half of the year's sales momentum, fresh commodities stabilize, and our cost containment initiatives yield increased benefits.

Capital expenditures for fiscal 2012 are expected to range from $42 million to $45 million, with depreciation and amortization ranging from $36 million to $38 million, and total interest expense approximating $15 million. This concludes our financial discussion. And I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. In closing, our priorities for fiscal 2012 will be continue to focus on improving sales growth, in both the distribution and the retail segments, enhancing the value proposition to the consumer, and achieving additional efficiencies while managing all of the controllable aspects of our business. The key initiatives to achieve these results will include the continued development of our corporate brand program, roll out of our loyalty card program to the remainder of our banners, a focus on fresh excellence across our banners, and continued emphasis on providing health and wellness solutions to the consumer.

In addition, we'll continue to invest in our store base, and expect to complete to complete 8 major remodels, and add 2 to 3 new fuel centers during fiscal 2012. These efforts, combined with a lighter competitive opening schedule for the year, including as I mentioned earlier, only one supercenter in the early to mid second quarter, and modest inflation should result in much better second half business trends.

Our experienced management team will continue to seek proven growth opportunities in our existing markets for our adjacent states through new customer development or acquisitions. And we remain confident in our long-term strategy. We believe our disciplined, balanced approach has positioned Spartan Stores to succeed now, and for many years to come. And with that, I will open up the call for your questions.

Thank you.

(Operator Instructions).

Alex Bisson with Northcoast Research.

Good morning, and thank you for taking my question. I guess first off, you noted a new distribution client late in the fourth quarter. Could you talk a little bit about that client, how meaningful they could be, what kind of customer, et cetera?

Yes. We were referring less referring to a new customer, and more to a variety of new customers that we've picked up commitments for in the fourth quarter. There's been some activity in metro Detroit, where we picked up a group of stores, or store group. Also some activity in Lansing, where we've generated some volume with 3 stores coming on board. Another retailer that we currently service, has purchased some stores from a previously supply SuperValu customer, he's switching those stores over. So it's really an assortment of stores that have onboarded with Spartan, and we're delighted.

That's certainly good stuff. I guess, moving along. Could you talk a little bit about mix of sales, and what that means, or what you can draw from that about where the consumer is at?

Mix of sales, as I guess you're referring to retail. What we saw in Q4, and then we're seeing a bit of a change here in Q1. This protein inflation, the meat department has I think, caused consumers to shift their mix of proteins, beef and pork are extremely high. And we're seeing a little bit of movement into poultry. I think with the increased gas prices, consumers are maybe turtling up a bit, we're over $4.00 in the state of Michigan. So we're seeing a bit of a mixed change there. Produce was -- spiked very high in Q4. We had some categories that -- like celery was up 50% plus, lettuce up nearly 30% on the cost of goods, and even bananas were up 10%. And we worked hard to stay competitive as we always do on those key commodities, but it's also put a little bit of pressure on fresh margins. So we're seeing a little bit of a mix change there.

Okay. And my final question for, and you already kind of alluded to this, but just the impact that fuel is having on you, how you think consumers are reacting to fuel? And how important are your fuel stations, and the fuel loyalty partnership of Speedway? How important are those to customer loyalty and traffic, et cetera?

We think the fuel offer's extremely important, and we've gone from no fuel centers in fiscal 2004 to 25 fuel centers in fiscal 2011, and we've made a significant investment in fuel. We are absolutely convinced that fuel drives volume, when you appropriately tie it to incentives for the consumer at the supermarket. It's interesting, as the price of fuel goes up what we see, is customers becoming even more loyal to the fuel rewards. So the percentage of the gallons we sell on promotion go up, as the price of fuel goes up.

Now, part of that, I will tell you, and it's hard to ferret it all out, is because we actually use it more of an offensive weapon as the price of fuel goes up. Consumers are looking for some relief on that fuel purchase. And in fact, this fuel just went to $4.00 here in Michigan at the beginning of the month, at the beginning of May. We actually doubled in our Grand Rapids marketplace, where we have full coverage, our normal fuel rewards from $0.05 on every $50.00 you spend, to $0.10. And we made a pretty big marketing splash with that, double the savings, and helping them get some relief from fuel.

Speedway is interesting, it's a the pilot program we have in place of VG's on the east side of the state. And it -- we're only in our tenth day, so I can't give you any details on how it's performing, but Speedway is the market leader in Michigan. And what we're doing there, is for ever $50.00 you spend at a VG's store, you get a $0.10 reduction on your fuel purchase at Speedway. The comments we're getting from consumers early on have been very, very significant. We think we've hit a home run there. We think we have the right partner in that marketplace. We're the market leader, and typically the low-price leader as well. So we're very encouraged by the fuel activity.

Great. Thank you very much, and best of luck.

Thanks, Alex.

Scott Mushkin with Jefferies.

Hello, thank you. So I just want a little, I guess, a record keeping issue. The LIFO issue for you guys seems bigger. And I was just wondering if you could just run us through, why it may be a bigger impact on your numbers this year, or it's what next year, or this year I guess.

I think it's really two things, Scott. As you looked at how effective we were in our warehouse consolidation program, that resulted in a fairly significant amount of inventory reduction, probably in that $8 million to $9 million range. But incrementally, we've always been focused on inventory management, and we were able to actually bring our total inventory down by about $17 million in the distribution segment. As a result of that, we ended up with a LIFO credit this year, and in the fourth quarter we talked about a $700,000 incremental credit over the prior year. So from a distribution perspective, we actually were in a credit position with LIFO this year, retail, we were in an expense position. But as we flip next year, to an inflationary environmental, and we don't envision that kind of inventory reduction coming out of the system, we're going to have a more normalized LIFO expense. So this flipping from a credit to an expense, is probably going to have an impact over $3 million to us, over the course of the year.

So it's basically the timing of your restructuring that maybe you kind of ate into some -- into some reserves, I guess, and so that is going to making the compares harder. Is that -- more or less -- did I get it right?

Well, it's the consolidation was part of it, but also our efforts above the consolidation, also reduced inventory, I would say, equally. But those two events, yes.

Okay. So, that's good. I appreciate the clarity there. So I guess my next question, is it seems like you guys had a much -- maybe even a better fourth quarter than you were expecting, as consumer trends improved a lot at the end of last year, beginning of this year. And maybe I'm reading too much into it., but I detect a little concern given what's gone on with gas prices and maybe some food prices, that the consumer's now -- it's gotten a little bit more murky, I guess. Is that right? Or is the first quarter seeming more murky to you guys, than where we came out of the fourth quarter?

I think that's fair, and we did have a better fourth quarter than we thought we were going to have. I think we were, very encouraged and pleased particularly with the revenue side, and the comps retail coming from a negative 4.4 to a negative 0.9. That was really encouraging for us.

Dave spoke a little bit about this food stamp shift. And I know it's complicated, and but -- I guess maybe just trust us, to tell that you it is creating a shift in the way we're seeing a consumer use those food stamps. And it's a pretty meaningful part of the our business, so that's making it a little bit murkier. The shift of the Easter holiday later in the month, just recently behind us, and then the post-Easter week. And so I think we do have a little less clarity on where the trends are going. And although we think we're going to be on the retail side around the same level of comps that we reported in Q4. And we're encouraged that we're expecting continued growth in the distribution segment.

Great. And then my final question, and then I'll yield, is that if you were going to look at 2008 and the compare it to today, I guess one of the things I'm interested in, is on the fuel side, I think you talked about the fuel program being very important, could you just give us a sense of what your fuel program looked like in 2008, and where it is today? Is it much larger? Is it much more significant, and potentially makes things easier for you, if we continue to see higher gas prices, as maybe almost a driver of market share? I was wondering if you could give us perspective there?

Yes, I'll try. In 2008, fiscal 2008, we had 16 fuel centers, and so we've moved that number from 16 to 25, so a pretty appreciable number. And the other thing that happened, is where they were placed. We now have enough density of fuel center locations in the greater Grand Rapids marketplace, which is our largest market to do market-wide promotions. And we couldn't do that prior.

So as I indicated earlier, we've gone from $0.05 to $0.10, for example, the month of May on fuel discounts. The other thing is the -- we've experimented quite a bit with fuel. It's amazing how many different promotions we've toyed with. And I think we've honed in on some that we have far more confidence in, as we've gotten through the learning curve. And of course, we weren't looking at $4.19 fuel in 2008, and I think the consumers have become more in tuned to our offer, and just fuel tied to supermarkets in general.

And I think we have a better program than our competitors do. The technology is better than our competitors have, where you can get that discount at the store, go to the pump, and see that price come down cents per gallon right at the pump. We think that's a competitive advantage. We've invested a lot in technology and we think we're reaping some of the rewards of that. So a little bit of the fuel thing, there's some -- it's a little bit of trying to make some lemonade out of the lemons. The price goes up to $4.00, how can we be more relevant with our offer, and we think we found a way to do that.

That's great color. Thanks. Appreciate it.

(Operator Instructions).

Karen Short with BMO capital.

Hi, there. Congratulations.

Thanks, Karen.

I'm just wondering, talking about fuel again, could you give me what the average price of gas was this year, versus last year in your market? Do you have that offhand?

Yes, the average price per gallon for the quarter was up $0.60 versus prior quarter -- or prior year fourth quarter.

Okay. And then talking a little bit about the extra week. I know you gave your comments on the full-year earnings in 2012, excluding the benefit of the extra week, can you just talk a little about how we should think about the benefit to operating profit for both divisions separately? Of the extra week?

Yes, I think if you look at it, the sales are pretty straightforward, they're somewhere in that 1.9% to 2%. And then from a profitability, in total, you're probably in that $2 million to $2.5 million range. Probably cant it a little bit more towards the retail side. And that's at the operating level.

Okay, thanks. And then when you talk about your comments on the first quarter this year versus last year, you're talking about operating profit of $14.1 million in last year's first quarter? I just want to make sure -- because I know there's really -- there's been some one-times, but I kind of show an adjusted $14.1 million for last year's first quarter? Does that sound right?

Boy, off the top of my head, that's probably in the ballpark. I don't have that right off the top of my head, but that's in the ballpark probably.

Okay. And then, did you give Cap Ex for this year, what it ended up at?

It ended up close to $35 million.

Okay. So just curious, why, what -- kind of what are the buckets that Cap Ex will be for 2012, because it seems to be a little bit higher than what I would have expected?

Yes, there is a couple of significant remodels we're doing, and they're in our mind, really core stores. So I think those are the two biggest drivers.

Okay. And then just some comments on the competitive environment in general, in terms of your ability and your competitor's ability to pass on price increases? What do you -- kind of elaborate a little bit?

Yes, I think I still characterize the competitive environment as a rational one. There are -- you get a flare up here and there. I think, on the ability to pass on prices, I mentioned a little bit about the, almost unbelievable inflation in some commodities and produce. Those spikes have made it more difficult on occasion to get some of the retails passed on in full, but that's expected when you're getting 30%, 40%, 50% increases. There's a little bit of a lag there. I would say our conventional competitor on the east side of the state has shown a willingness to rapidly move on cost increases that are coming through the system, maybe more rapidly than we've even seen in the past from them. And Walmart seems to be willing to move prices at a normal pace. We haven't seen a lot of change in that, other than the conventional competitor on the east side that's moving a little quicker.

Got it. Great. Thanks a lot.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Eidson's closing comments.

Thank you. I'd like to conclude our prepared remarks by thanking our Spartan associates for our achievements to date. We appreciate the continued support from our valued consumers, our independent retailers, our suppliers and our shareholders, and we look forward to delivering continued improved financial results in fiscal 2012.

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