SpartanNash Co (SPTN) 2012 Q1 法說會逐字稿

Good morning and welcome to Spartan Stores First Quarter Fiscal 2012 Earnings Conference Call. By now everyone should have access to the earnings release for the first quarter ended June 18, 2011. For a copy of the release, please visit Spartan Stores' website at www.spartanstores.com under For Investors. This call is being webcast and a replay will be available on the Company's website until August 10, 2011.

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 conditions.

Additional information about risk factors and the uncertainties associated with Spartan Stores' forward-looking statements can be found in the Company's earnings announcement fiscal 2011 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.

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 measures, any other information required by Regulation G, is included in the Company's earnings press release issued after market close yesterday.

It is now my pleasure to introduce Mr. Dennis Eidson, President and CEO of Spartan Stores, for opening remarks.

Thank you, Katie. Good morning and thank you for joining our first quarter of fiscal 2012 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 and General Counsel Alex DeYonker.

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

I am pleased that we started fiscal 2012 with a solid first quarter financial performance and results that were in line with both our guidance and expectations. We achieved year-over-year sales growth for the third consecutive quarter in our distribution segment while continuing to enhance our value proposition to the consumer and tightly managing the controllable aspects of our business, which resulted in improved profitability in our retail segment.

Combined, our distribution and retail operations generated $14 million in operating profit and our net earnings, adjusted for certain non-recurring items, increased by 2.7% or $0.01 per share over the prior year.

Focusing on our operating segments for the quarter in a little bit more detail, we continued to make solid progress on our distribution segment during the first quarter. We achieved an increase in net sales due largely to the addition of new customers and improvement in our pharmacy program business and increased sales to existing customers. I believe this speaks to the customer acceptance of the value-added model that we employ.

I'd like to give you an update on some significant technology enhancements we've made or are in the process of making for our distribution customers as we strive to provide them with the most advanced tools in the wholesale grocery industry, as well as a superior customer experience. In the last year we have focused on our distribution website to make upgrades which provide our customers with comprehensive product and logistics information.

For example, when the new technologies are fully implemented the customers will be able to track the progress of their orders through the order process and even access the location of the delivery truck in route. In addition, we've just started to pilot new handheld technology for our independent customers, which will provide them with up-to-date online information for improved accuracy and decision making.

Our recently released enhancements have received very positive feedback from our distribution customers. We believe that the combination of our enhanced website and the latest handheld technology gives our customers some of the most advanced and comprehensive tools in the wholesale grocery industry.

We remain focused on enhancing value in both our distribution and retail segments by continuing to expand our corporate brand program through new innovation. Consequently, our retail segment sales penetration for our corporate brands continue to exceed the national average in the first quarter.

Our relationship with Topco allows us access to a significantly variety of products at better cost than we could achieve ourselves. During the quarter we introduced over 130 new items across the store. One example of this is the pet category, where we have introduced the PAWS program, allowing us to better serve the core consumer that owns a pet, with more variety and at a better cost. These new product introductions further expand our value offering to our distribution customers while giving the end consumers even more choices.

Another area where we're continuing to innovate is in the packaging of our corporate brands. During the second quarter we will begin to roll out packaging that emphasizes key nutritional information in an easy to read format. This, when combined with our nutritional guide, will assist consumers in making healthier eating decisions.

Going forward, we will work -- we will continue working 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 distribution operations.

Focusing on the retail segment in more detail, the Michigan economy has certainly shown some improvements from its previous lows. However, this important has been mitigated by higher fuel prices which have impacted consumer's discretionary spending and an uptick in unemployment over the last few periods, which actually resulted in fewer people employed during the first quarter than at the end of last year's fourth quarter. As a result, our comp store sales, excluding fuel, stabilized as we expected. However, we're pleased to report our adjusted operating earnings increased over 20%.

Our key initiatives in 2012 to achieve continued improvement in our retail segment include further 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 a continued emphasis on providing health and wellness solutions to the consumer.

We are excited about our loyalty program, which is scheduled to roll out in the second half of the fiscal year. This program will provide an array of values to the consumer, such as special clubs, point-based rewards and technological efficiencies for realizing savings. In return, we will have better connection to the consumer than ever before.

This improved connectivity will allow us to better market to the needs of our consumer and deliver even more value. While there will be initial costs to launch the program, we expect long-term top line benefits to provide a positive return over the following 12 to 18 months.

In addition, we will continue to invest in our store base and expect to complete eight major remodels and two to three new fuel centers during fiscal 2012. In fact, we just opened a new fuel center last week which fills a geographical gap that existed in our west Michigan market.

From a competitive perspective, we experienced no new activity in this quarter, but just had an opening in the second quarter. As we previously discussed, this is our only expected supercenter opening this fiscal year. We also expect to cycle two prior year supercenter openings during the third quarter.

Looking forward, our strategic initiatives, when combined with a lighter competitive opening schedule for the year, should result in continued improvement of our business trends during the second half of fiscal 2012.

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

Thank you, Dennis. Good morning, everyone. I will now provide you with more details about our first quarter fiscal 2012 financial results, as well as some broad financial guidance for the second quarter and fiscal year 2012.

Consolidated net sales for the 12-week first quarter increased 4.4% to $602.6 million compared to $577.2 million in the year-ago quarter. Both the distribution and retail segments reported improved sales during the quarter. Distribution and fuel sales represented 42.7% and 7.4%, respectively, of consolidated net sales compared to 42.5% and 5.2 %, respectively, in last year's first quarter.

The consolidated gross margin rate for the first quarter decreased 110 basis points to 20.8% from 21.9% last year. The decline was due to a higher mix of fuel and distribution sales, a LIFO charge of $700,000 this year versus a credit of $1.8 million in the prior year, due principally to the warehouse consolidation, as well as a lower rate of procurement-related gains in this year's first quarter compared to the prior year. During the quarter, we experienced a higher level of overall product cost inflation as well as increases at the retail price level. These increases took effect across all categories.

First quarter operating expenses were $111.3 million or 18.5% of sales compared to $113.3 million or 19.6% of sales in the same period last year. During the quarter, our team continued to do a good job of managing our controllable expenses. The adjusted first quarter operating expense-to-sales ratio improved to 18.5% this year versus 19.2% last year as a result of incremental sales leverage on fixed costs, a higher mix of fuel sales, lower health care expenses and the impact of our cost containment initiatives.

Adjusted EBITDA for the first quarter increased 6.7% to $24.6 million or 4.1% of net sales compared to $23 million or 4% of net sales last year.

I will now discuss some key items that impacted earnings for the first quarter of this year and last year. As we mentioned in our earnings press release, the Michigan legislature enacted the new Michigan corporate income tax during the first quarter of fiscal 2012. This new tax replaces the Michigan Business Tax, or MBT, effective January 1st of 2012.

As a result, our first quarter of fiscal 2012 included a one-time, non-cash income tax charge of $500,000 due to the write-off of net deferred tax assets and liabilities related to the MBT that will no longer be realized as a result of the elimination of this tax. Once implemented, the impact of the new tax code should result in an annual decrease in income tax expense of approximately $500,000.

Excluding the $500,000 tax charge in the first quarter of fiscal 2012, our effective income tax rate was 38.5% versus 39.1% last year. The prior year's first quarter was impacted by a net $600,000 pre-tax charge, primarily due to our consolidation of the Plymouth, Michigan satellite warehouse into our Grand Rapids, Michigan facility. This net charge was comprised of a $2.6 million restructuring charge and a $2 million LIFO credit due to the resulting lower inventory levels.

Excluding the previously mentioned one-time, non-cash income tax charge in the current year and the pre-tax items associated with the warehouse consolidation initiative last year, adjusted net earnings increased 2.7% to $6.5 million or $0.29 per diluted share, compared to $6.4 million or $0.28 per diluted share in the first quarter of fiscal 2011.

Turning to our operating segments, first quarter distribution net sales increased approximately 4.8% to $257.1 million from $245.3 million last year. On an adjusted basis, operating earnings were $7.4 million this year compared to $8.5 million last year. The decrease was due to a lower rate of procurement gains, increased LIFO expense and the cycling of a favorable settlement of a claim in the prior year.

First quarter retail sales increased 4.1% to $345.4 million compared to $332 million in the same period last year. Our comparable store sales rate for the quarter was consistent with the fourth quarter of fiscal 2011 as expected.

The retail segment's operating earnings increased 23% to $6.6 million compared to $5.4 million last year. The increase in operating earnings was attributed to lower health care expenses and benefits from cost containment initiatives, partially offset by increased credit and debit card fees. We continue to report strong levels of net cash provided by operating activities of $6.7 million for the first quarter. Current year cash flow was lower than the prior year first quarter due to increased working capital as a result of higher sales and the payment of fiscal year 2011 incentive compensation.

As of June 18, 2011, total net long-term debt was $137 million versus $173.5 million at the end of the first quarter of fiscal 2011. Our total net long-term debt-to-capital ratio is now 0.3 to 1 at the end of the first quarter, and the net debt-to-adjusted EBITDA ratio on an annual adjusted EBITDA basis is at 1.3 to 1.

I will now provide some broad forward-looking guidance for the second quarter and fiscal 2012. As Dennis mentioned, the Michigan economy has shown improvement from its prior lows and is now at a more stable level. However, the unemployment rate and related employment deteriorated slightly over the first quarter from the prior year fourth quarter. These trends have been somewhat further impacted by higher fuel prices, which continue to impact the consumer's discretionary income and in turn their spending.

As a result of this more static environment and the shift in the food stamp distribution schedule, which we estimate will impact retail sales by approximately $1.5 million for the quarter, we expect our second quarter distribution sales growth and retail comparable store sales rate, excluding fuel, will be comparable to the first quarter of fiscal 2012's results. Net earnings for the second quarter are expected to approximate last year's adjusted second quarter performance.

For the second half of fiscal 2012, excluding the 53rd week, we continue to expect comparable store sales to turn positive as we benefit from cycling fiscal 2011's competitive store activity and as we continue to execute on our capital investment program, roll out our loyalty program across the remaining banners, and the economy continues to experience inflation. We also expect fiscal 2012's adjusted net earnings, excluding the 53rd week, modestly exceed the performance in fiscal 2011 as we benefit from the second half of the year sales momentum and our cost containment initiatives yield further benefits.

As Dennis mentioned, the loyalty program roll out will result in initial launch expenses. These expenses are expected to approximate $1.5 million during the third quarter of fiscal 2012. We expect capital expenditures for fiscal 2012 to be in the range of $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. I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. In closing, for 2012 we'll remain intently focused on continuing to improve sales growth and profitability in both the distribution and the retail segments, enhancing the value proposition to the consumer and achieving additional operating efficiencies, while managing the controllable aspects of our business.

We've made many fundamental changes to the -- in structural improvements to our operations in becoming a value-added (inaudible) to our distribution customers and have strengthened our position as a leading supermarket operator. As a result of the changes, we remain confident in our long-term business strategy, and we will continue to seek growth opportunities in our existing markets or other states through new customer development or acquisitions.

Our experienced management team's consistent focus on disciplined and balanced growth has Spartan Stores well-positioned for increased success long term. And with that, we'll now open the call up for any questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions).

Phil, did we lose you?

No, I'm here. I have Scott Mushkin from Jefferies in the queue.

Yes, good morning. This is actually Brian on for Scott. Thanks for taking our questions. Dennis, the industry appears to be passing along some pricing, but with the current state of the consumer, especially in Michigan, unemployment in the 10.5% range, how do you think this plays out in the back half of the year? And what can you do to maybe drive further sales despite the stickiness of the consumer?

Well, I think there is some inflation, and I don't think it's much more than a historical average. And I think we, like the rest of the industry, are expecting it'll continue through the year. But a little bit of inflation has always been pretty good for food retail.

Now, we talked about some of the initiatives we have outlined for the back half of the year. Certainly the launch of our loyalty card we have a lot of excitement about here. As you know, we deployed that in VG's in the last fiscal year, and it's got some of the best comp sales improvement in our corporate portfolio. So that's certainly one.

Our capital plan is poised to deliver some incremental sales in the back half of the year. But I think the inflation piece is being passed on relatively rationally. I'm frankly a little more concerned about the employment picture and the gas price. I mean, you look at gas in our market it's up $1.05 a gallon from prior year in the first quarter. That's a 40% increase in gas, and that is taking a lot more of the discretionary income that the consumer has available out of her pocket than the inflation in food prices.

And I guess to follow up on the fuel, the roll out of your fuel program and the alliance with Speedway, is that fully rolled out now to all your markets and maybe any insights or results that you have from the rollout of the program?

We announced that, that that was going to be a test on the east side of the State with our VG's banner. And so we're still in pilot. We've got a couple months under our belt. I'd say that it appears that we are getting the kind of activity and redemption that we expected, but it's still early. I'll tell you, Speedway is the price leader in Michigan. They have stores all across the state. And even though we're giving those discounts out in the eastern side of the state, they're redeeming them statewide, so customers understand the value of that gas discount and they're using them.

That's great. Thank you. And then one more, I think you said eight remodels this year. Are those in the D&W style, the new one, and how are you looking to expand that format over time? Any thoughts there would be appreciated.

We don't have in that eight-store remodel I think there was one D&W store that's in the core Grand Rapids market in an inside location that does great for us that we spent some money on. And aside from that, I think the portability of that D&W Fresh Market concept is something we consistently are interested in deploying further.

We've got some ideas about where that could be down the road. I'd say a little bit of the economic environment has kept us maybe more aggressive than we would have been if we didn't become ground zero for the great recession. But we think there's some upside there.

That's great. I appreciate it. Thanks very much.

Thank you. Our next question is from Karen Short with BMO Capital Markets. Please proceed with your question.

Hi, good morning. This is Ryan Gilligan standing in for Karen. Just a couple of quick questions, do you guys have an update on supercenter openings scheduled for 2013?

Supercenter openings for '13? I don't know that we have that at our fingertips. Dave, I'm not sure -- do we have that?

Not off the top of my head, but it's not significant. It's a couple I think at most.

Yes. I'm trying to wrack my head. I know of one for sure. Ryan, that's something we could provide. I mean it's information we have, but it's a modest number. It may be one or two.

Yes.

Okay, great, and can you give us the basis point impact on distribution margins from the lower rate of procurement gains?

We don't usually disclose that.

Okay. And then what about your thoughts on the use of free cash flow in terms of priority and stuff like that?

Well, I mean, as you are aware we just recently announced an increased dividend and a repurchase program that are available to us. And in the past we've repurchased debt when that made economic sense. And so I think the increased dividend is certainly one of our thoughts. The repurchase of stock would certainly be another avenue that's now available to us.

We do keep committed to growth, though, and so I think our first and foremost intention would be to use it to grow the business further. However, I think we think we can accomplish all of those.

Okay, great. And last question, do you guys have or have you thought about the impact on the business from the finalized Durbin Amendment?

Yes, we have. It's pretty complicated. It's an interesting -- it's interesting how it finally resolved itself. The Fed had initially proposed a $0.12 number and then I think the bank lobbies were very effective in getting them to move that up considerably, probably more into the mid-$0.20 number. So it will have a positive effect on us.

There's a couple, I guess, exclusions that make it somewhat hard to estimate at this point. Smaller banks are excluded from this, and you don't really know what percentage of your transactions are processed through these smaller institutions. And so it is really an estimate. Our estimate is somewhere between $0.5 million to $1 million a year benefit. And recall this doesn't come into effect until October, so we'll have a little less than a half year of that in the current year.

Great, thanks. That's it for me.

(Operator Instructions). There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thanks, Phil. Well, I'd like to conclude our prepared remarks by thanking all of the Spartan associates for starting fiscal '12 off so strong. And we appreciate the continued support from our valued consumers, our independent retailers, suppliers and shareholders and are looking forward to delivering continued improved financial results for the balance of fiscal 2012.

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