SpartanNash Co (SPTN) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Spartan Stores Inc. first-quarter 2013 earnings conference call. All participants will be in listen only mode. (Operator Instructions)

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 Ms. Katie Turner of ICR. Ms. Turner, please go ahead.

Thank you. Good morning, and welcome to Spartan Stores' first quarter 2013 earnings conference call. By now, everyone should have access to the earnings release for the first quarter ended June 23, 2012. 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 16, 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 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 first-quarter earnings release, fiscal annual report on Form 10-K, and in 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 measures and the other information required by Regulation G is included in the Company's earnings 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.

Thanks, Katie. Good morning, and thank you for joining our first quarter fiscal 2013 earnings conference call. With me this morning are members of our team including our EVP and Chief Financial Officer, Dave Staples; our EVP of Retail Operations, Ted Adornato; and our Executive Vice President of Wholesale Operations, Derek Jones.

I will begin by providing you with a brief overview of our business and financial performance for the first quarter, and then Dave will share some more information and specific details about the first quarter financial results as well as look our outlook for the second quarter and the full fiscal 2013. Finally, I will provide some closing remarks and we can open up the call and take some questions.

Well let me begin by providing you with an economic overview of our market. The pace of the economic recovery remains slow. The unemployment rate in Michigan has been relatively stable in the first quarter of fiscal 2013 and is approximately 200 basis points below the same time last year. But it has been up slightly over the past couple of months. The improvement in rate has been driven more by people exiting the workforce than actual improvements in employment.

For the first quarter the number of people employed in the state per the Bureau of Labor Statistics Household Survey was up slightly at 39,000 versus the prior year. The good news is that there were more people employed on a year-over-year basis for the first time in awhile which is clearly a positive.

We are encouraged by the improving sales trend in our retail segment and the continued growth in our distribution business given the environment that I just described. By remaining focused on the controllable aspects of our business and taking steps to enhance the value we provide with our products, pricing and promotional strategies we achieved growth in both our Distribution and Retail segment sales and lowered our operating expenses compared to the same period last year.

In addition, we remain committed to increasing the return to our shareholders as demonstrated by the increase in our quarterly dividend and share purchases.

Now focusing on our Distribution segment results, our Distribution segment sales increased approximately 0.5% for the quarter, which is the seventh consecutive quarter we show improved sales primarily due to new customer growth in the quarter. We continue to focus on best serving our distribution customers by providing value-added services including enhancing our product offerings and providing them with the technology to make better purchasing decisions.

Our robust distribution website and hand-held technology provides customers with comprehensive product and logistics information at the back office or on the store floor. We believe these value-added tools help to set us apart from other wholesalers and make Spartan the go-to distributor in the markets that we serve.

On the product side we continue to drive both retail and distribution sales through the expansion of our private brand program. This program provides value offerings for our distribution customers and more choices for our end-consumer both of which are critical components of our strategy to weather the current economic environment and enhance our product offerings.

During the quarter we launched 136 net new private brand items and ended the quarter with approximately 4,000 items in our lineup. For full-year fiscal 2013 we expect to introduce approximately 400 new private brand items, representing an increase of 10% from fiscal 2012. Over the remainder of the year we will continue to direct our efforts on increasing sales penetration with our existing distribution customer base, securing new independent customers, improving the efficiency of our current operations and further enhancing our value-added service offering in order to drive both our distribution sales and profitability.

Total net sales in our retail segment for the first quarter were comparable to prior-year, however our comp store sales excluding fuel actually increased 0.1% which represents a significant improvement in our run rate. We are pleased with our progress on this front which we attribute to several factors including the launch of our Yes Is More promotional program and anticipated sales benefit from a calendar shift and our capital plan activity.

As you are aware, one of our key initiatives has been our Yes Rewards Loyalty program which provides many value-added benefits to our consumers including free or discounted groceries and select free prescription drugs. In fiscal 2012 we completed the rollout of the program to all of our supermarket banners and we now have over 862,000 households registered in the program at the end of the first quarter. Further, approximately 86% of the transactions and 94% of the sales were through the program during the first quarter of 2013.

These participation percentages increased over the fourth quarter rates by 5% and 2% respectively. This growth in such a relatively short period is evidence of the growing traction of this program and our new Yes Is More campaign. Building on the success of our Yes rewards program we launched our Yes Is More promotional campaign in late April as part of our commitment to deliver more value to our consumers.

A key component of the program was the introduction of a 90-day price freeze on over 300 items that consumers buy the most including milk, bread, chicken and eggs. The program was brought to life through a multimedia campaign including television, radio and print and included a complete redesign of in-store promotional materials. In addition, we are reaching out to our consumers through digital touch points which include our Yes website and new mobile app as well as targeted email offers.

The first round of the campaign wrapped up two weeks ago and we consider it a resounding success with growth in the number of Yes Reward members and supermarket sales through the program. While it did impact margins, as Dave will discuss in a moment, our customer satisfaction scores show significant improvement for both price paid and value.

As a result of the early success of the program we have launched the second round of the promotion in the first week of our fifth period. In addition to Yes Is More our consumers continue to be rewarded through our pharmacy and innovative fuel programs. Our pharmacies posted a 6.4% increase in script count and we opened another Fuel Center bringing our total to 27, introducing our fuel values to even more consumers.

Before turning over the call to Dave I will provide you with an update on our capital plan. During the first quarter we opened one new store, our new value-based store Valu Land, in Lansing, Michigan and one new Family Fare store with a Fuel Center that represented a relocation of an existing store and we remodeled two stores. Additionally, three Glen's locations, including the two remodeled during the quarter were converted to our Family Fare banner.

As we discussed last quarter we are excited for the potential for our new Valu Land format particularly for today's price conscious consumer. With a footprint that is slightly half the size of our traditional stores, Valu Land is an everyday low price neighborhood grocery store offering a broader assortment of products including more national brands and quality fresh produce and meat when compared to the limited-assortment competitors.

We converted three stores to the Valu Land format last year but the Lansing location is the first new store under this banner. We are encouraged by the early customer response and first quarter sales were in line with our expectations. We continue to work on developing an incremental three to five locations which we expect to open this year.

During the remainder of the year we expect to complete four additional major remodels and during the second quarter we have already opened two new Fuel Centers, bringing our total to 29 which will complete our efforts for this year.

From a competitive perspective we experienced no new super center openings in the first quarter and do not expect any openings to affect our retail locations in fiscal year 2013. In fact, we just cycled the only super center opening impacting our corporate owned stores from last year.

With that overview I will turn the call over to Dave for more detail on our first quarter financial results and outlook for the second quarter and for full fiscal 2013. Dave?

Thanks Dennis and good morning everyone. Consolidated net sales for the 12-week first quarter increased to $603.9 million from $602.6 million in the year-ago quarter. Both the distribution and retail segments reported increased sales during the quarter.

Distribution and fuel sales represented 42.8% and 7.5% respectively of consolidated net sales compared to 42.7% and 7.4% respectively in last year's first quarter. The consolidated gross profit margin for the first quarter decreased 60 basis points to 20.2% from 20.8% in last year. The decline in gross margin was primarily due to lower than anticipated distribution and retail margin rates as a result of the impact of reduced inflation-driven inventory gains, the launch of the Company's Yes Is More promotional campaign in the retail segment, market conditions in certain Fresh departments as well as grand opening promotional expenses.

First quarter operating expenses were $110 million or 18.2% of net sales compared to $111.3 million or 18.5% of net sales in the same period last year. Our expense leverage was driven by productivity improvements in the distribution and retail segments as well as lower employee incentive compensation expense. These items were partially offset by increased marketing and supply expenses associated with the Yes Is More promotional campaign and the two new and two remodeled store brand openings.

We continue to be very pleased with our team's ability to manage the expense side of our business. Adjusted EBITDA for the quarter was $22.6 million or 3.8% of net sales compared to $24.6 million or 4.1% of net sales last year. Earnings from continuing operations for the first quarter of fiscal 2013 were essentially flat at $6.1 million or $0.28 per diluted share compared to $6.1 million or $0.27 per diluted share last year. The $0.01 difference was due to lower weighted average shares outstanding resulting from our share repurchase activity.

First quarter fiscal 2013 includes the net after-tax benefit of $600,000 or $0.03 per diluted share and the first quarter of fiscal 2012 includes the net after-tax charge of $500,000 or $0.02 per diluted share due to changes in the state of Michigan's tax laws.

Turning to our operating segments, first quarter net sales for the distribution segment increased 0.5% to $258.3 million from $257.1 million in the year-ago period. First quarter operating earnings for the distribution segment increased 5.7% to $7.8 million compared to $7.4 million in the same period last year. The operating earnings increase is due to lower incentive compensation expense versus last year and continued improvements in operating expense controls, partially offset by lower gross margin due to reduced inflation-driven inventory gains. The reduction in these gains is the result of the decline in the rate of inflation on a quarter-over-quarter basis.

In our retail segment first quarter net sales were up approximately $0.2 million to $345.6 million compared to $345.4 million in the same period last year. Comparable store sales, excluding fuel, were positive 0.1%, a significant improvement from our previous run rate. As Dennis previously mentioned one of the factors that helped our comps was the calendar shift which resulted in one more week of summer activity in this year's first quarter.

Retail segment operating earnings for the quarter were $3.9 million compared to $6.6 million in the first quarter of fiscal 2012. The operating earnings decrease was due to the launch of our Yes Is More promotion and expense associated with our new and remodeled store openings. In addition, our margin rate was impacted by lower inflation-driven inventory gains, market conditions in certain Fresh departments and grand opening expenses, partially offset by lower employee incentive compensation and ongoing cost containment initiatives.

From a cash flow perspective our operating cash flow was a negative $19.2 million for the first quarter of fiscal 2013 compared to a positive $6.7 million for the same period last year. The decrease was principally due to the timing of seasonal working capital requirements given that the first quarter t his year ended one week closer to the July 4th holiday than last year. In addition, it reflects a $9.8 million non-recurring federal tax payment to take advantage of certain regulations which resulted in the lower provision in this quarter. The cash impact of both of these items will be reversed over the remainder of fiscal 2013.

During the first quarter we repurchased 604,000 shares of our stock for a total of $10.9 million and have approximately 50% of our 50 million share repurchase program still available for future stock repurchases.

Total net long-term debt was up $19.6 million to $154.6 million as of June 23, 2012, versus $137 million at the end of the first quarter fiscal 2012, primarily reflecting the uses of cash previously mentioned.

Additionally during the quarter, as previously announced, we amended our credit facility in June to increase operational flexibility and extend the maturity date to June 2017. The initial amount of the facility is $200 million with a committed accordion feature that would increase the facility up to $235 million and an additional accordion option which could take total availability to $300 million subject to lender approval. Interest expense related to the facility is expected to be reduced by approximately $400,000 annually.

Based on our anticipated strong cash flow and the non-recurrent nature of the just mentioned first quarter cash payments we expect our total net long-term debt to return to more normal levels over the remainder of fiscal 2013.

Finally, as previously reported, due to our solid financial condition and anticipated healthy cash flow our Board approved a 23% increase in the Company's quarter cash dividend to $0.08 per share of outstanding common stock for an annual rate of $0.32. Our prior quarterly cash dividend was $0.065 per share for an annual rate of $0.26. We believe that cash flow from operations and the approximately $155 million of availability under our revolving credit facility will be sufficient to fund our operations and strategic growth initiatives as well as continue to return capital to our shareholders through the quarterly dividend or share repurchases in fiscal 2013.

I will now provide further detail on our outlook for the second quarter and remainder of fiscal year 2013. We expect comparable store sales for the second quarter will be lower when compared to the first quarter of fiscal 2013 by 1% to 1.5% and earnings from continuing operations will be slightly below the prior-year results. This guidance reflects our continued expectation of continued economic challenges, the lower inflation-related gains and the calendar shift.

The calendar shift will impact reported comparable store sales excluding fuel by approximately 50 to 100 basis points. As a result of the calendar shift, a higher volume sales week moved out of the second quarter and into the first quarter and a lower volume sales week in September will shift out of the third quarter and into our current-year second quarter.

As we look to the remainder of the year we expect the economic recovery to continue although at a slower rate. We also expect lower inflation-related gains when compared to the prior-year for the next couple of quarters. However, we expect the unfavorable impact to be lower in the second and third quarters of fiscal 2013 than we experienced in the first quarter.

For fiscal 2013 we expect flat comparable store sales. We also anticipate that earnings per diluted share from continuing operations for fiscal year 2013 will approximate fiscal year 2012 excluding the 53rd week last year despite the negative impact of $0.05 to $0.06 per share as a result of the net effect of favorable items realized in the fourth quarter of fiscal 2012 that will not continue into fiscal 2013.

These items related predominately to the LIFO credit realized in the prior-year quarter due to lower than anticipated inventory levels, favorable incentive compensation expenses and favorable occupancy costs.

We currently expect capital expenditures for fiscal year 2013 to be in the range of $42 million to $44 million with depreciation and amortization in a range of $39 million to $40 million and following the amendment of our credit facility we now expect total interest expense to approximate $13 million to $14 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, we are pleased with the improvement in our comp store sales trend which we believe is driven by our continued solid execution and ability to provide the brands and products and services that best deliver value and convenience to our consumer in today's economy.

We are encouraged by the sales performance of our latest Valu Land store and continue to work on opening three to five Valu Land locations in the remainder of fiscal 2013 as well as remodels and re-banners of our other store formats in selected markets. We continue to expect the pace of the economic recovery in Michigan to be slow and are focused on positively impacting factors within our control that can improve our financial performance in both distribution and the retail segments, namely our product pricing and promotional strategies.

With an overarching focus on enhancing the value proposition, we will continue to refine our operating strategies to more effectively navigate these more challenging times and best position us for when the economic environment improves. Additionally, we will continue to monitor the industry landscape for potential acquisition opportunities in each segment, as well as work hard to expand our distribution segment customer base outside of Michigan.

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

Thank you. (Operator Instructions) Our first question comes from Chuck Cerankosky of Northcoast Research. Please go ahead.

You nailed the pronunciation. Good morning.

Good morning, Chuck.

I just wanted to first ask Dennis about the store conversions from Glen's to Family Fare. Does that indicate anything about the future of Glen's or what is sort of behind that decision?

We have been playing around a little bit with that. I think we now have, Dave may help me, eight stores that we have re-bannered to Family Fare. The majority of those are on the Southern tier of the Northern Michigan but up against the southern marketplace.

We have converted them post-capital expenditures in most instances. We are measuring those results. They have been very favorable as we have converted. The brand, Family Fare, seems to have a better value image in the marketplace once we measure that post-conversion. So we could see over time more of those stores converted.

Do you think over time the Glen's banner could be more like D&W? A little more upscale in general as opposed to how it is now?

No, I don't see it that way, Chuck. The demographic profile in Northern Michigan for the most part, and there are always some pockets, probably does not lend itself to a significant expansion to the Fresh Market brand. As you do know, our north Petoskey store we do have a Glen's Fresh Market that has been performing very well for us but that market is very seasonal and has the kind of clientele that looks for a wider wine assortment, as an example. Starbucks resonates in that market. The Boars Head lunchmeat.

We really try and do this as locally as we can as it relates to the offer and the branding.

You said each of the Glen's has been remodeled before the name changes?

I think there is maybe one exception to that where the geography in [Harrison] we converted without a remodel but for the most part the answer to that is yes.

Okay. Looking at the private label product introductions that looks great. How is private label performing this year? Can you give us any numbers as a percent of sales, unit growth and that sort of thing?

Private label for the quarter at retail, this is a number we usually give, the unit penetration was 23.64% and it continued to outpace the national number by 87 points. Nationally it was 22.77. So that is good. It was a little softer than prior-year as was the national number. We had a promotion shift. We think that will reconcile itself moving forward.

I think the overarching point about private label is we have treated it as a strategic plank here since the day I came. We are pleased with the growth. We think the product is great. We like the packaging redesign. We have been innovative with a number of items and we think there is plenty of upside in terms of private label penetration going forward. The consumer in every bit of research you are reading about supermarkets is saying generally they have tried more private brands during this economic malaise. They like them and they are going to continue to buy them going forward. I think it is a good thing for the industry.

When you are looking at Spartan sales across your private labels, the good, better, best, how is that shaping up? Are you seeing it skew middle, high, low? Any comment there?

The workhorse for us is really right in the middle. The Spartan brand. It accounts for over 90% of the volume we do in private brands. Actually this is a little weird, in the first quarter both the high end and the low end softened a little bit from a year ago and the middle performed better.

I would have guessed we would have done a little better on the upper end than we did, but we didn't. So those are our numbers.

Okay. And when you look at sales mix across your various banners is it telling you anything about the consumer above and beyond that they are cautious? Would you want to comment on anything the way people are --

We look at that in our stores. We look at that in the marketplace. You try and figure out a pattern of what is selling and what isn't selling. There is just not a clear-cut picture there. I can't bucket...hey the indulgent stuff is really taking off or the value stuff. It is not very clear.

There are several categories across the marketplace that continue to struggle; frozen food being one of those; prepared meals, I don't know if that is more customers don't want to pay that incremental cost and they prefer to cook it at home. But no one category jumps out at us there as moving one way or the other.

Alright thank you.

Our next question comes from Ryan Gilligan of BMO Capital Markets. Please go ahead.

Hi, good morning. This is actually Ryan Gilligan on for Karen. Can you talk about the different initiatives such as the S card, the pharmacy program, the partnership with speedway and the price freeze and what impact they are having on results? And is there room for improvement? If so, when will you see it?

Boy, that is a lot of questions, Ryan. Good morning. We are generally pretty energized about the whole Yes Is More campaign and we kind of bucket all of those initiatives that you referred to under that Yes Is More.

The price freeze was a key component of what we launched in Q1. It did remarkably well for us. I think I characterized it as a resounding success. We just launched phase two, another 90 day price freeze which we are referring to as Yes Is Even More and we repeated some of those key items that we froze for 90 days. You are talking about eggs under $1.00, bread under $1.00, head lettuce is $0.88 every day. Boneless, skinless chicken breast is $1.88 every day.

Those items resonated with the consumer and I think as you know we do kind of a constant customer feedback loop and our scores for value and price significantly improved during the quarter. But that was kind of the key component. We redid all of the store POS to tie-in and it looks great.

We are on TV in our core markets and that certainly helped drive that. It embraces all of this. When we are on TV and talk about the pharmacy program and that we can get free antibiotics and free diabetic meds under the umbrella. We run a $0.50 off on fuel with a $75 purchase it is a TV event.

So I think the marketing is comprehensive and I think it is doing its job to deliver the message to the consumer. Obviously we think there is more upside or we wouldn't continue to mine in that field in terms of trying to attract not only new customers but get a larger share of wallet from the existing loyal customer and now that we have card data across the whole portfolio we are able to do more targeted events to be more relevant with the consumer on offers.

So I rambled on maybe a little bit but I think we see more upside.

Okay, thanks, that is helpful. Has there been any competitive response to these initiatives? How would you characterize the competitive environment?

I wouldn't say there has been no competitive response but I also wouldn't say that we have been hit head-on with a direct response to any of those initiatives specifically.

Lastly, can you maybe quantify the operating profit dollar impact of these initiatives on this quarter's results?

I don't think we are prepared to quantify them specifically. We called out clearly they had an impact on the retail operating results. We may have revved our engines a little too aggressively in a couple of places and any time you launch a new program you want to kind of set back, evaluate and tweak a little bit. Clearly there was a negative impact on net profitability but moving that comp store sales trend from what was a negative three in Q4 to just eking over positive certainly felt pretty good.

Would it be fair to say that the calendar shift helped this quarter's comp by 50 to 100 basis points too?

It would be fair to say that.

Okay thanks.

Our next question comes from Scott Mushkin of Jefferies and Co. Please go ahead.

Hey guys, thanks for taking my questions. So, if you look at the run rate as we are going from this quarter into next with all of the calendar shifts is it decelerating a little bit? The same? How should I think about it? I guess I'm just a little bit confused on kind of how things are trending currently.

Good morning, Scott. You are referring to retail comps and profitability?

Exactly. Retail comps.

I think, we tried to give you pretty specific guidance or we did give you pretty specific guidance in Q2, right? Negative 1% to negative 1.5% and 50 to 100 points of that being a reaction to the calendar shift. We tried to anticipate that question and answer it.

Probably putting just a little bit more texture on what we are feeling at the moment, the consumer still doesn't feel like she is back by any stretch. Our traffic is pretty good and I think I have said this before and it almost sounds silly it is like she has a finite amount of dollars and she spreads it accordingly.

We are feeling a little bit of softening in the sales per item, Scott. We had some deflationary pressure in some categories in the quarter like dairy and produce. The good thing is, in both of those areas we are selling more tonnage and we are getting more dollars despite the deflationary impact. A little bit soft, not significantly different.

That is perfect. That is exactly what I was looking for so I appreciate the color. As we move forward talking about inflation expectations there has been so much written in the press about the drought. Clearly inflation has come down currently but as you guys look out, what do you think the impact is going to be as you move into the later part of this year into next? What do you think the consumer's ability is to absorb any kind of inflation that comes at them?

We have chatted a little bit about this on past calls. The consumer's reaction I think it depends. We are reading the same thing you are, Scott. It sounds like in the short run the corn crop could have the effect of actually having some of that beef come to market a little bit sooner because it is a better investment than trying to feed them with the expensive grain so we may actually see a little bit of a dip in beef prices but then I guess the forecast would be for that to be reversed in 2013 and maybe in a pretty significant way.

I think the government today is looking at beef. Year-to-date the statistics on consumer price is up nearly 7% on a year-to-date basis. They actually show the full-year at 3.5% to 4.5% which reflects I think some softness in the back half of the calendar year but they are also looking at 4% to 5% next year which is a bit on the high end.

I guess I would say we are seeing that and we believe in that. We have seen things like poultry go up significantly. I think our most current four-week period we have seen poultry costs go up 18%. That is sizeable. I think that feed impacts poultry obviously much quicker than it does the beef herd. So we are seeing that.

But on balance if you look at the full-year inflation it still looks like it is going to be that 2.5% to 3.5% for food at home. I think the historical average is 2.8%. The forecast is for maybe 3% to 4% next year so maybe a little bit on the higher end, but we are not ratcheting back up to that 6% or 7% we saw a few years ago.

I think if we can stay around that 3% that we be okay as it relates to the consumer but I think all bets are off by commodity. If we get double-digit spikes in beef then she retrenches and she changes which protein she buys.

Perfect. I just have one more. The balance sheet is in really good shape. You have been an acquisitive company in the past. Haven't seen anything in awhile now. Clearly there is a company out there that has put themselves up for sale. At least to a degree. Can you just give us the parameters in kind of what you are looking at? Would you be interested in any of those assets? That's it for me. Thanks for taking my questions.

This is Dave. We are always interested in whatever goes on. There is so much going on in that one instance you are talking about I think it will take time to see how that all shakes out. Depending on how they would come about their process and what types of assets might come on the market we would always be interested.

So we try to keep our ear to the ground and monitor developments like that as well as others and see if there is something reasonable that would work out for us.

As we pointed out in the script and we talked about this morning, we continue to want to be acquisitive for the right opportunities. It is a core plank to the strategy of the company.

When you do that are you thinking distribution? Would you do a combination of distribution and retail? How do you think about it as far as the asset base goes?

It is typically we look at whole segments and we look at which one provides the greatest return. So it could be distribution. It could be retail. I guess it could be a combination of that if that were to provide the best overall return.

So we really try and look at each opportunity on its own merits and determine how does it fit with us long-term. How the return we are going to get off of that transaction work and does that fit within our parameters and we could make a move in either direction.

We have stated our preference initially would be to try to expand our distribution footprint first and that would be a preference, but again it would really depend on the potential returns of the opportunity.

Perfect. I guess I slipped one more in there. Thanks for taking them all.

That's alright.

Thanks, Scott.

One less next time.

Our next question comes from the line of Karen Short at BMO Capital Markets. Please go ahead.

This is actually Karen. How are you guys?

Good, Karen.

Hey, Karen.

A quick question for you on remodels and returns since you just kind of brought that up. I wanted to just talk a little bit about specifically your returns on your remodels and what you are seeing and I guess I would like to kind of break it down --

The first question is how many of your remodels are offensive versus defensive? Then what are the returns on each? Then when you look at your returns on your defensive remodels are you adjusting the sales base down? If you hadn't done it your sales would have dropped X% but you did it so they actually maintained their base level?

Can you maybe just talk a little bit about that?

Sure, was that one question?

All tied into one.

Let me try to go through the whole process for you. It always depends on the environment. So with only one competitive opening last year the majority of our capital program was clearly offensive and this year with no new openings it was offensive. It kind of depends on the market.

In a year where you have a number of supercenters opening it would probably cantor a little bit more to the defensive because we typically try to understand these people coming in advance and get a remodel done prior to their opening but we want to try and get the positive out of that before they start.

So as you discuss that, we have a hurdle. We are looking somewhere in that 15% mark. That fluctuates by type of remodel. To the extent it is a remodel with a substantial amount of deferred maintenance in that scenario you will probably get a lower return than the 15% including the deferred maintenance. Excluding the deferred maintenance we are still looking to get over that 15%.

On average I think our remodels over the course of time have done nicely and are approaching or being that 15%. But again that can vary depending on the year and some of the uncontrollable things that happen.

From a competitive scenario, when we look at that analysis, you are right. We do say, okay, if we do nothing our sales go to this and if we do something our sales will be that. That is how we measure that type of an impact. Because the reality is under most competitive scenarios then if you wanted to just strictly look at that return without that type of sale you would never remodel a store that was going to have a competitive hit initially. We all know that is the wrong thing to do in retail.

Right. Okay. Maybe switching gears a little bit obviously you guys have done a great job on keeping your customer and clearly maintaining relevance with your customer so that is not the issue.

I guess what I am wondering is, one of your peers has clearly experienced a situation where share repurchase driven earnings growth doesn't really help the stock price. It seems that operating profit is obviously a much bigger driver of how your stock performs. I guess I am kind of wondering as I look to your year this year it seems like you are going to be kind of flattish on operating profit yet you are looking to do share repurchases.

Is that kind of the right allocation of your capital if you don't really anticipate seeing much improvement in operating profit? Maybe just talk about how you think about that?

There are a couple of components to why we do the share repurchases. We don't do share repurchases to drive our earnings-per-share up. That is not our intent.

What we have done over the past couple of years is we have tried to benchmark ourselves to our industry participants and what we have tried to do with our latest moves in increasing the dividend as well as repurchasing shares was try to be more at par and obviously we are not fully at par with what a number of other participants in the industry are doing but we wanted to have programs in place that benchmark our return of capital to shareholders whether that be through a dividend or through a share repurchase to be more in line with our industry.

We are probably still not all the way up to the industry average in that area. We were looking to not give our shareholders a disincentive to invest in Spartan and keep that more focused on the operations. So our programs have been much more along that line than an attempt to increase operating earnings.

Okay. That was really helpful. Thank you.

This concludes our question and answer session. I would like to turn the conference back to Mr. Eidson for any closing remarks.

Thanks, Michael. In closing I would like to thank our associates for their hard work and our valued consumers, independent retailers, suppliers and shareholders for their continued support. We will continue to drive and improve our sales and earnings performance to our strategic initiatives and look forward to sharing our progress with all of you next quarter. Thanks.

The conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines and have a great day.