SpartanNash Co (SPTN) 2012 Q3 法說會逐字稿

Good morning and welcome to the Spartan Stores third quarter fiscal 2012 earnings conference call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead, Ma'am.

Good morning and welcome to Spartan Stores third quarter fiscal 2012 earnings conference call. By now everyone should have access to the earnings release for the third quarter ended December 31, 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 February 23, 2012. Before we begin, we would 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 differences include - among others, competitive pressures among food retail and distribution companies, the uncertainties inherent and 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 third quarter earnings release in fiscal 2011 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 statements. This presentation will include non-GAAP financial measures as defined in Regulation G. A reconciliation of these non-GAAP financial measures show the most directly comparable GAAP financial measures and the other information required by Regulation G is included in the Company's earnings release issued after market close yesterday, which is then posted on the Company's website.

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

Thanks, Katie. Good morning and thank you for joining our third quarter fiscal 2012 earnings conference call. And with me this morning are members of our 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; and our Executive Vice President of Whole Sale Operations, Derek Jones; and our Executive Vice President General Counsel and Secretary, Alex DeYonker. I will begin by providing you with a brief overview of our business and financial performance for the third quarter. Then Dave will share some more specific details called the third quarter financial results, as well as our outlook for the fourth quarter of fiscal '12. Finally, I will provide some closing remarks and we will open up the call to take some questions.

I am pleased with our ability to increase or consolidated net sales and generate third quarter earnings in line with our expectations despite experiencing a more challenging sales environment than we originally had anticipated. Both the distribution and retail segments contributed to our consolidated net sales growth, in fact, this is the fifth consecutive quarter of year-over-year sales growth in the distribution segment. Our consolidated sales performance combined with productivity improvements in each segment, and tight cost controls enabled us to report an increase in adjusted EBITDA as compared to the same period last year.

Now, I will focus on distribution segment results for the quarter in a little bit more detail. Our distribution sales increased approximately 2% for the quarter, as a result of new customer growth and improved pharmacy sales. I am particularly pleased by our ability to continue to attract new business, and I believe that our sales performance demonstrates that independent retailers continue to appreciate our value-added model. We continue to focus on delivering value in our distribution and retail segments as the consumer's still experiencing a challenging, economic environment. As you are aware, our private brand program continues to resonate with our consumers. The continued acceptance of our existing private brand products, the evolution of our packaging design, and the launch of 180 new items in the quarter has driven our year-to-date unit penetration at retail to 25%. This penetration rate exceeds a national average by over a 150 basis points.

For the full year fiscal 2012, we expect to introduce approximately 400 new private brand items, an increase of 33% from the 300 that we had previously anticipated. Our new product introductions further enhance the value offering to our distribution customers while providing the end consumer with even more choices. Going forward, our distribution team will continue working aggressively to increase our existing customer penetration and add new customers in adjacent markets as well as enhance our value-added service offerings. Net sales in our retail segment increased approximately 2% due to higher fuel retail prices and increased fuel volume. These gains were partially offset by decline in comp store sales of 1.2%, excluding fuel.

The decrease in our comp store sales was primarily due to a couple of factors in the quarter. First, unseasonably warm weather in Michigan has negatively impacted sales. Second, we continue to be impacted by cautious consumer discretionary spending trend. These headwinds were partially offset by the benefit of our Yes loyalty program rollout at the D&W Fresh Markets and Family Fare banners. While the Michigan economy continues to improve, overall consumer discretionary spending is still negatively pressured due to a slight decline in the number of people employed in the state, higher fuel prices, and an increase in food inflation. As we previously communicated, employment is a significant driver of our sales performance. Therefore, while the current environment is still challenging, we do remain confident that a number of people employed in Michigan will begin to grow, and Spartan Stores is well-positioned for increased sales.

As previously mentioned, we completed the rollout of our Yes loyalty program for the remainder of our chain, and it is now universally available at any of our banners across the state. To date, we are pleased with the approximately 800,000 households that are using the program and the nearly 450,000 active e-mail addresses. In fact, over 80% of the transactions and 90% of supermarket sales were through the program in the third quarter. We believe this participation rate will grow in the coming months as more households adopt our point-based reward program, as an innovative approach to providing value and improving the overall shopping experience. It will likely be 12 months to 18 months before we recognize the full benefits from the program. The insight we are gaining into our consumer preferences will be very beneficial to us along the way.

Our 66 pharmacies are becoming increasingly relevant to the customer as they search for both convenience and value. We believe our pharmacy program combines both of these elements in a way that provides the consumer with the best overall program available in the marketplace. Our 5.6% increase in script count for the quarter is a testament of the program's strong acceptance thus far. In addition, our fuel rewards program, which we recently expanded across the state of Michigan through our enhanced Speedway partnership, allows us to provide a differentiated way to add value to both the end consumer and our distribution customers as we position Spartan stores for increased long-term growth. We will continue to focus on the Yes Loyalty Rewards, fuel rewards, and pharmacy rewards initiatives for the remainder of fiscal 2012,and into fiscal 2013 as we strive to achieve further improvements in our retail segment.

Now, I will provide you with a brief update on our capital plan. During the third quarter, we completed two major remodels and opened one new fuel center. We are very pleased with both remodels to date as their sales were up double-digits for the quarter. We also began to incorporate some of the aspects from our D&W Fresh Market format into other remodels where the demographics make sense. For instance, we now have Starbucks coffee shops in several Family Fare and VG's locations. From a competitive perspective, we experienced no new supercenter openings in the third quarter, and do not expect any openings to affect our retail locations during the remainder of fiscal 2012 or the next fiscal year.

With that overview I will turn the call over to Dave for more detail on the third quarter financial results and the outlook for the fourth quarter of fiscal '12.

Thanks, Dennis. Good morning, everyone. I will now provide you with more details about our third quarter financial results, as well as our guidance for the fourth quarter fiscal 2012. Consolidated in net sales for the 16 week third quarter increased 1.9%, $797.2 million compared to $782.3 million in the year ago quarter. Both the distribution and retail segments reported increased sales during the quarter. Distribution and fuel sales represented 44.4% and 6.8% respectively of consolidated net sales compared to 44.3% and 5.2% respectively, in last year's third quarter. The consolidate a gross profit margin for the third quarter decreased 70 basis points, 20.4% from 21.1% last year. The decline was primarily due to a higher mix of fuel sales, and increased LIFO expense for approximately $1.8 million, and a slightly lower fuel gross margin rate this year versus last year. The increased LIFO expense was a result of higher inflation in this year's third quarter versus last year, and the cycling of the $700,000 LIFO inventory credit provision from lower inventory levels in last year's third quarter, due to our warehouse operational improvements.

Third quarter operating expenses excluding restructuring, asset impairment, and other gains or losses were $150.5 million or 18.9% of net sales, compared to $150.6 million or 19.3% of net sales the same period last year. Our expense leverage was improved by a shift in mix of sales towards fuel, productivity improvements in each segment, favorable health care expenses, and general cost containment initiatives. These improvements were partially offset by two previously communicated items, which include [high earn] set of compensation of $1 million associated with the timing of the prior year's provision, an increased labor and marketing expense of $800,000 related to the launch of our Yes loyalty program during the quarter.

Adjusted EBITDA for the third quarter increased 1.1% to $26 million or 3.3% of net sales, compared to $25.7 million or 3.3% of net sales in last year's third quarter. Earnings from continuing operations, excluding certain items in the third quarter of fiscal 2012 and fiscal 2011, would have been $5.1 million or $0.22 per diluted share, compared to $6 million or $0.26 per diluted share last year. Excluded items for the third quarter of fiscal 2012 were $400,000 after-tax gain on the sale of assets and the previously mentioned $500,000 after-tax expenses associated with a swap agreement termination. As a reminder, the third quarter fiscal 2011 included a $1.5 million net after-tax benefit, primarily associated with lease terminations and pension curtailment income, partially offset by asset impairment charges. Third quarter earnings from continuing operations as reported, were $5 million in fiscal 2012 and $7.5 million in fiscal 2011.

Turning to our operating segments, third quarter distribution net sales increased 2% to $353.8 million from $346.9 million last year. Distribution segment operating earnings were $10.9 million compared with $13.2 million last year. Excluding a $2.2 million pretax benefit reported in the third quarter last year. The operating earnings decrease was principally due to $1.5 million increase in LIFO expense as a result of last year's inventory reduction generating a credit provision in this year's higher inflation, as well as increased incentive compensation $600,000 due to the timing of the quarterly provision of last year.

Third quarter retail sales increased 1.9% to $443.5 million compared to$ 435.4 million in the same period last year. Retail segment operating earnings for the quarter increased 77.8%, $1.6 million compared to $900,000 last year. This improvement excludes this year's gain on the sale of assets of $600,000 on a pretax basis and the segments $200,000 portion of last year's net pretax benefit. The increase in operating earnings is primarily attributable to lower healthcare expense, higher fuel margin cents per gallon, labor productivity improvement, and benefits from cost containment initiatives. These items were partially offset by lower comparable store sales as well as increased expenses in LIFO expense $300,000, net of compensation of $400,000, and $800,000 of expenses associated with the Yes loyalty program rollout.

We continue to provide strong levels of net cash provided by operating activities of $51.2 million for the year-to-date period ended December 31, 2011. Total net long-term debt was down $25.6 million or 17% to $124.2 million versus $149.8 million at the end of the third quarter fiscal 2011. As of today, we have no outstanding balance on our revolver, providing the Company with significant capacity to execute our strategic priorities.

I will now provide further detail on our outlook for the fourth quarter fiscal 2012. We believe our comparable store's run rate will be negatively impacted in the fourth quarter by 1% to 2% due to cycling last year's fourth quarter benefit from the introduction of the Yes loyalty program -- at one of our banners, slower start to the quarter due to the unseasonably warm weather in Michigan, and a shift in the new year's holiday calendar. We actually had the first two days of the quarter impacted by the calendar shift, as the new year's holiday moved to Sunday and the official observance moved to Monday.

As a result, we expect earnings from continuing operations for the fourth quarter to approximate last year, excluding the fifty-third week and unusual items that do not reflect the ongoing operating activities of the Company. As reminder, this year's fourth quarter will include an extra week. We expect the extra week will contribute to approximately $0.05 per share to our income from continuing operations in the fourth quarter. For the full year of fiscal 2012, we expect capital expenditures to be in the range of $44 million to $46 million, its depreciation and amortization ranging from $37 million to $38 million, total interest expense approximating $15 million, including the swap termination charge. This concludes our financial discussion, and I will turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. Going forward, our fiscal 2012 and beyond, we believe our strong balance sheet provides us with financial strength to pursue strategic growth opportunities in both the distribution and retail business segments as we further position Spartan Stores to take advantage of improvements in the overall economic environment as they occur. We remain intently focused on continuing to improve sales growth and profitability, as we further enhance the value proposition to the consumer and achieve additional operating efficiencies while managing the controllable aspects of our business. We believe that programs like our Yes loyalty rewards, pharmacy rewards, and fuel rewards will continue to help improve our consumer relationship and long-term top line results as we deliver consistent value and convenience.

We will continue to differentiate our go-to-market strategy from our competitors and strengthen our value-added partnership with our distribution customers to increasingly position Spartan Stores as a leading grocery distributor. We remain confident in our long-term business strategy, and we will seek prudent growth opportunities in our existing or other markets. Our experienced Management teams focus on discipline and balanced growth has Spartan Stores are well-positioned for increased success in the long-term. With that, we will now open up the call for any questions.

Thank you. We will now begin the question-and-answer session.

(Operator instructions)

Chuck Cerankosky, Northcoast Research.

Dave -- real quick question to start off with -- the real estate gain, where in the P&L did that appear? What line item?

It is in our SG&A line.

SG&A, oh, great.

Dennis, how are you looking at inflation right now? Not only for the final quarter of the year, but, say, all of 2012?

I look at where we finished the third quarter, we think we may have reached the top and are starting to come down a little bit on inflation in total. It is a mixed bag. Some departments are continuing to show some inflation -- center stores a little more inflationary than it has been. Produce is a category that has gone from inflationary to basically no inflation, and early in the fourth quarter, significantly deflationary.

I think on balance we see the fourth quarter may be a little softer inflation than we had in the third quarter. And then, the balance of the year, I think we are going to see it continue to come off. I think the USDA has forecasted 2.5% to 3.5% for the full year, and I think that is about what we are thinking.

Where would you put that number at for the third quarter?

The third quarter we were around 5%.

Can you talk about how the consumer was behaving around the Christmas holidays? The big eating holidays?

I think the cautious consumer was with us the whole quarter. Frankly, my earlier remarks said, despite a more challenging economic environment than we thought, if you look at what is going on in our market -- we are primarily Michigan; we have some distribution volume in Indiana and Ohio -- but when you see the unemployment rate in the state of Michigan get published from a year ago in December to this year, it went from 11.1% down to 9.3% -- that is a 1.8% improvement -- you get pretty excited about that. But the fact of the matter is, that if you actually look at the number of jobs in the state of Michigan, December '10 to December '11, there are actually less jobs -- not a lot less, but a few less jobs. And the reason for that is, there is some 100,000 people that have come out of the workforce as they are reported in the unemployment statistics.

So I don't think it is surprising that we are not getting the benefit of what we believe is an improving economy, because we are challenged a little bit with unemployment. And I think the consumer continues to reflect that. Trying to save every penny and the percentage of product that we sell at regular retail is reduced from what it was a year ago. And I think that just tells you, she is looking for value, whether it is in something we are doing around the loyalty program with the points-based features, we are selling more promotional product than we have before.

That is very interesting. How about organics and natural foods? Whole Foods, as you probably saw, reported a very strong quarter yesterday, and I was wondering if any of that type of strength was reflected in your D&W stores or some of the Glen's units.

We have a proprietary private brand on national organic called Full Circle, and actually our volume in Full Circle year-over-year for the quarter is negative, and year-to-date is also negative. I think the demographic profile for the majority of our business is very much unlike what Whole Foods is experiencing, what their demographic profile is. Having said that, D&W Fresh Markets, which are stores located in the best demographic in our marketplace, continued to be the best-performing brand and comped positive in the quarter. So I think there is some resilience, continues to be some resilience with that consumer.

Do you think you will have a challenge growing distribution sales going forward?

You know, Chuck, five consecutive quarters, we have been positive. And I am not sure there are a lot of our competitive set that are experiencing that similar trend, so we are feeling pretty good about that.

We have been able to add new business. I think there is some 17 new distribution locations in place this year's third quarter, compared to the same timeframe a year ago. Congratulations to not only our business development team, but for the strategy of the Company, that we go to market a little differently than some of the competitors and with value added service model. I think there is still more to get, but it is challenging. It is a significant decision for an independent retailer to change wholesalers, which makes it even more impressive that we have been able to do that over the last several years. We continue to see growth for new business on the horizon.

Karen Short, BMO Capital.

Back to this asset gain -- that was included in your reported $0.22, right?

It was excluded from the $0.22. If you want to adjust it -- what ends up happening, Karen, is we have the $600,000 gain and then you have an $800,000 charge for the swap; those are both in our reported number, which is slightly lower than the $0.22. But the $0.22 is our adjustment.

What was the fuel? What was the gas margin this quarter? And what was the benefit to earnings?

The benefit was probably $0.015, and we usually don't disclose the margin. We believe we had about a $0.015 improvement to our earnings because of fuel. Last year was probably closer to $0.02. So while it improved, the year-over-year numbers actually probably a little less help year-over-year this year than last year.

I think we have that in color. The margin was up $0.025, $0.024 a gallon from last year's third quarter. So the margin was up, Karen, on a cents-per-gallon, by about $0.024. And of course, the retail was up too. The retail was up $0.44 a gallon. Also, is it helping that consumer that's stretched a bit, with the price of gas continuing to go up? And our balance were positives. We were positive, again, 1.9% on gallons for the quarter, despite the fact that we continue to see miles driven decline across the country.

Then looking at the comp a little bit, it seems like when you were on the third-quarter call, that you felt that things were kind of improving a little bit. I am sorry, the second-quarter call, things are starting to look a little bit better. In terms of sales trends and obviously that did not pan out this quarter and you called out some things. Maybe can you talk about the cadence of sales in the quarter?

I think you are right. You are reading it right. When I started today, I said I was pleased that we got to our expected profitability despite a more challenged sales environment than we originally anticipated. And we talked about a couple of them. But the snow thing -- I hate talking about the weather, to be quite honest with you. But weather, for us, impacts us in a number of different ways, particularly snow. So if you are familiar with our northern Michigan marketplace. Those are mostly resort areas, resort communities, and they're dependent in the winter on snow. Whether it is skiing or snowmobiling, which is a big sport here.

Basically, there is no snow on the ground in northern Michigan, and we have not had any snow to speak of. And the same thing with the marketplace in general. Although it does not have that same tourist impact, and the balance of our portfolio that it has at Glen's -- if you get a snow forecast that we are going to get three, four, five, or 10 or more inches of snow, we get a significant rush of volume. And I say, we, the industry. I mean if you are operating a food store, that is what happens. We just haven't had it. Those can be million-dollar events, Karen. That is a big part of it.

And again, I think, as we were looking at the second quarter -- after the second quarter, and it is a 16-week third quarter so it is a longer view -- we really felt like we were going to have a better jobs environment, and it just hasn't come to fruition. It is going to come. There is no question in our mind. It is going to get better. The [bottled] forecast called for now, we are seeing more like a 14 million unit kind of forecast, we will get better. But at the moment, we are not getting better. And so we are treading more water than we would have hoped we were going to have to tread.

But we are feeling a little cautious, and I think on balance we have been a lot more transparent with our expectations with you folks over the last several quarters than maybe we have in the past, because it is a pretty dynamic environment, and we are trying to give you the proper guidance.

Two other questions, on the comp -- could you give some color -- are D&Ws comp positive?

D&Ws are comping positive. And D&Ws have been comping positive, Or I am looking at a trend here for at least, I can tell you, six quarters in a row, and I think it is more.

Just wondering, in terms of the strong prescription trends, what do you think the driver of that is? Is there any fallout from the Walgreen Express Scripts? Or what do you think?

I don't believe we have any fallout in our third quarter from eScript. That was a January event for Walgreen, although there was some noise around it in December, and so our quarter ended in December. Just to remind you, when we did not end the call here with a script, it is part of the YES launch. We have always had in our pharmacy program a $4 and $10 generic prescription drug plan. $4 for a 30-day, $10 for a 90-day.

In fact, we have been doing that -- do you guys know for how long? Alan, do you know? Six years. I think Walmart made that in vogue some time ago. And with the launch of YES on top of that, we now offer free prenatal vitamins, free antibiotics, and free diabetic medications -- which is really the big one because that is a maintenance drug.

So when you put those two together, we clearly have the best offer in the marketplace, unequivocally. And it really is resonating. Again, you talk about customers looking for value. They are going to come for that value, and we believe that, that pharmacy customer is core and critical to our long-term success. It is the most valuable customer in terms of loyalty, that you have in your store. And it also ties in specifically with our health and wellness initiative. And we have talked about that in the past. And our nutrition guide, tie that in with the pharmacy, and more recently what we are doing, along with the industry, on tracks up front, with our private label packaging, and I think we begin to build a more comprehensive health and wellness platform to build off of. It is a tactic, but is also very strategic for us to try and build that pharmacy scrip volume.

Any change in the competitive environment?

No, not really. We are feeling that 5% inflation, I think, probably a little more uncomfortable than the industry would like. And it has been that way for a while, so I think we are in a spot where there has been and continues to be a little lag in passing on of some key pricing. But nothing unusual. I would say margins are probably a little more pressured than they were a year ago, but nothing really crazy. It is just, in our marketplace anyway, because of the dynamics I expressed around employment and et cetera, I think everybody is just fighting for more tonnage. It is a tough environment.

The last question -- given that it is tough -- I know you have talked about this in the past -- obviously, your competitors are feeling the same kind of pain. Anything on the horizon or anything that might be a little more imminent in terms of acquisition?

We are, as you know, committed to growing the Company long-term, and we have demonstrated our ability to grow the Company through acquisitions. That is our strategy and will continue to be our strategy, but to really try and put any more color on that Karen, it is difficult. Hopefully we will be able to move that ball down the road some time.

That you would have the appetite, depending on the asset. Okay. Thanks.

Scott Mushkin, Jefferies.

I know you've shared before what you think is going on with your market share, and I was wondering if you had any thoughts, with the cost being a little more negative than you thought? Do you think you maintained your share with that, or did you think that you lost a little this quarter?

Share is such a hard thing because it depends on what you are measuring, right? We are measuring food channel. You're measuring food, drug mass. You're putting in Dollar Stores -- I don't know. We do have a schedule that we look at, and I'm not sure that I have all of the confidence in the world in it, but I would say that what it would suggest to me, that of the four primary competitors in this space here in the market, there is probably one that is growing a little bit of share, and the balance are not. And we are getting some leakage into the alternative sector, dollar, and probably a little bit in limited assortment.

So I would say, honestly, I think we probably lost a little bit of share, but I don't think we are unique in that regard.

I know we have talked about the current environment and I don't want to beat it to death, but I don't think we really talked about what you have seen so far in January. And the data does not look -- actually, it's worse for some reason. Even though the macro data seems to be improving, the food at home channel seems to be struggling, maybe except for Whole Foods, When you look at it, even though we know there is very strong [R-squareds] to employment, I think that you referenced that employment is really the key factor here. What do you think about January? Do you think it is really just weather and some other factors? I know you are seeing the same trend in your business for January -- it was just tough?

It is lumpy for a number of reasons. Dave articulated the shift in the holiday, and that is real. And so anybody that started the quarter with that same calendar is going to feel that. Or the formal holiday shifted to Monday this year and dumped into the fourth quarter. That is a big number; that is impacting things. In our case, the weather is a big factor as well in January and early February. Last year, for example -- I've been here almost ten years, and last year, last week, we essentially closed the office because of a big snow event here in west Michigan. Plus, that has a big impact, as I said, we could have snow effects that exceed over $1 million a week. What --

On the positive side, is that correct? They tend to be positive events for you guys?

A year ago would have been a positive event. So you are cycling a positive event with not the same activity, right?

Right.

So weather is a part of it. Like I said before, I hate talking about the weather; I hate that, but it is reality for us. In terms of the core consumer sentiment, I still think it is tough here. I think she is still struggling. And take the Fresh Market stores out, because they continue to perform well. But she is still struggling to stretch that nickel. And so we feel that it is probably going to continue to be tough, and we gave you some guidance about it is going to be a little tougher, part of it about the weather and the calendar, but it doesn't feel good. To be honest with you, it is still tough.

(Technical difficulty) Unfortunately, when Dave was going through it, it was going in and out; I'm trying to understand if there are some changes there?

But before I get there -- as we look, though, it does seem that one of the auto companies are at least headlined saying they're going to increase a number of jobs; those are good paying jobs. Do you anticipate, once we get through this period in the fourth quarter, it's going to be a little difficult as we get into next year and we actually do see this job growth, that your business -- I hear you are cautious very near-term, but it seems like underlying that may be some cautious optimism as well, or am I misreading that?

I think you are reading it exactly right.

I'm sorry to do this, but I want to make sure I understood what you said about the fourth quarter. I don't know if you can maybe just summarize it in 30 seconds. Is there a change there or not?

You're talking in the comp run rate?

Just a guidance overall.

In the comp run rate, I guess we are saying that our run rate will change by 1% to 2%; we will be negatively impacted by 1% to 2%, so that would be a change. And then our earnings guidance was that we will approximate the prior year. Excluding the 53rd week and any of the unusual items that aren't normally what we consider normal operating issues.

That is unchanged, right?

What's that?

That is unchanged -- the approximate, the prior year?

No, that is probably a little lower than what we had given last quarter.

Okay. A little lower. Thanks. Sorry to do that.

Thank you, Scott.

[Al Jain], Cantor Fitzgerald.

I want to follow up on -- I think there was an earlier question about inflation trends; and I think, Dennis, you confirmed that you are seeing some moderation and inflationary pressures. But as a related question -- can you confirm your outlook for LIFO in the fourth quarter? And I am sorry if you already covered that in your prepared comments, but if there is any way to quantify that, it would be great.

For overall LIFO -- actually, you're looking for a dollar amount?

Yes, a corresponding dollar amount.

What we are figuring here, is that we are going to still see a LIFO environment, because we are still are going to have inflation over the prior year, because -- so we will still have a charge, I think, that is greater than the prior year. But maybe not quite to the same significance as we had in this quarter. And we've kind of given that guidance before. We are looking for probably, with this quarter was about $1.8 million of an incremental charge to the prior year. The fourth quarter is probably going to be in that $1 million range for an incremental charge over the prior year.

I want to follow up with a question about the general volume weakness for the industry that we have all sort of heard about. Are you seeing any significantly higher levels of vendor support from manufacturers, as they are dealing with their own volume pressures? Can you comment at all on the impact from incremental levels of vendor support, and if you are seeing any increases in this area, would your inclination be to reinvest that vendor income and lower prices, or not necessarily?

We are not seeing a significant change in vendor participation. But I can tell you we are consistently trying to find ways to deliver more value to the end consumer. And we are certainly not reluctant to reinvest margin back into the business to drive that growth.

One final question -- on fuel, are you seeing anything of any significance in the current quarter in terms of profitability? I guess, specifically on both the gallons and cents-per-gallon basis, are you seeing any change in the fourth quarter based on year-over-year comparisons, and is there any significant change in those metrics sequentially?

Third quarter was very good, as we talked about a little bit earlier. And we are into the fourth quarter here. I think the numbers may be a little bit softer, but not enough to say that, that is where it is going to land. It could change overnight. So -- no step change here that we see so far.

Is that softness that you alluded to, is that on the fuel margin specifically?

Cents per gallon. We don't look at margin rate in fuel, because the price per gallon just distorts that.

(Operator instructions)

We do have a followup question from Karen Short, BMO Capital.

I was wondering -- on your last call, you mentioned you had extended the union negotiations, the union negotiations were still ongoing; and I was wondering if there was an update on the status of that?

I think what we hopefully said last time is that we had extended the union contract for one full year. So that contract expires on October of this calendar year, 2012. So we will be sitting down with the union sometime later this calendar year.

Okay. Got it. Thanks.

We also have a followup question from Chuck Cerankosky, Northcoast Research.

Dennis, can you talk about fiscal 2013 story development?

2013 what development?

Store development, new stores, remodel -- what you are thinking about at this point?

Chuck, this is Dave.

We will have a pretty solid capital program. I think it will be in line, probably from a spend perspective, where we are this year. We have a relocation under way that will open very early in the year. So it will be a ground-up store, relocating an existing store in our Family Fare banner. And we will be in that eight range for significant remodels, and I would say a fairly similar capital plan to what you saw this year.

How about gas stations?

We will still be looking at a couple.

A followup from Scott Mushkin, Jefferies

I want to get back to the volume questions and the inflation. This has been very controversial in the industry. In your judgment, have the high-end rates of inflation been hurting your volume? And as we move to next year, let's say we do decelerate to the 2% to 3% level -- in your experience, you guys have been in the industry for a long time. Is that helpful to the business? Especially if we get employment growth kicking in? Or how do you view it?

I do believe that you've cut it right again. I do think there has been some pushback with inflation. The 5% -- even though 5% inflation is maybe a little bit more uncomfortable than where we'd want it to be -- it is an average, right. So that isn't really telling the story. When you get into categories like beef and pork, where you are getting double-digited, like 10% inflation, we look at add features that are $1, $2 a pound more than they were a year ago on key items, I think there is resistance from the consumer. She just backs off of that.

I do believe it has a negative impact in some categories on tonnage. I think the industry is living with that. I think that was one of the topics [set up] for my last week was living in a negative tonnage world. And it is tough. The flip of that is also true. And particularly, if you combine that with job growth and more consumer confidence, then I think we can see tonnage show some positive trends.

That is great. In your estimation -- I know this is controversial too, to some degree -- when your core consumer is a shopping you -- forget D&W for a second -- do you believe that person comes to the store with a certain amount of money to spend per week? So if inflation goes up, does that mean they make adjustments? Or do you think, particularly in a no-job growth environment, they are willing to step up and pay the inflation? What is your take on your core consumer?

It is funny, Alan and I were having this conversation this morning. And it just about feels that way, Scott. It's like, I have got that $57, and that is what I'm going to spend, and I got to make it stretch. And that is just anecdotal, I can't prove that. But it is the sense that we have, that there is just a limit to how much she is going to spend. And we are fighting for our fair share of that tonnage with a lot of different places these days, right? Whether they're home improvement stores, like Menards, or the Dollar guys, and everybody who is selling what we used to affectionately call, our stuff, there's not a -- now a lot bigger world where you can find our stuff.

Obviously, employment kicks in, that gets more money in people's pockets -- more money in more people's pockets -- inflation calms down, and that benefits your Businesses as it moves through '13, to bring this full circle.

I think that is absolutely true. And I will just throw a caveat at you -- the price of gas plays into that equation; so if we are in some kind of crisis and we are looking at gas over $4, I think all bets are off, because that is discretionary income that I think is in that food bucket. They are both necessities, and I have to get to work and I have to pay for the gas. And it goes there, and it probably is less inclined to come to the supermarket.

That is a very important caveat, thanks for throwing that in there.

No further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Eidson for any closing remarks.

Thanks, Maureen.

Just in closing, I would like to thank all of our valued consumers, our retailers, our associates, supply holders, and our shareholders for their continued support. And going forward our executive team remains focused on managing the business to report improved financial results over the long term. Thank you.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.