SpartanNash Co (SPTN) 2013 Q2 法說會逐字稿

Good morning, and welcome to the Spartan Stores, Inc. second 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. Please go ahead, ma'am.

Thank you. Good morning, and welcome to Spartan Stores second quarter fiscal 2013 earnings conference call. By now, everyone should have access to the earnings release for the second quarter ended September 15, 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 November 7, 2012.

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 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 second 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 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 and 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.

Thank you, Katie. Good morning and thank you for joining our second quarter fiscal 2013 earnings conference call. With me this morning are members of our team, including our EVP and Chief Operating -- Chief Financial Officer, Dave Staples, almost promoted Dave there for a minute; EVP of Retail Operations, Ted Adornato; our EVP of Wholesale Operations, Derek Jones; and our EVP, Merchandising and Marketing, Alan Hartline; as well as our EVP and General Counsel, Alex DeYonker.

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

As a reflect on the second quarter, I'm pleased with our team's ability to deliver improved value to our consumers and despite a challenging economy, we continue to execute on our strategy and delivered results in line with our guidance. We are experiencing signs of improvement in the Michigan economy with a slight year-over-year increase in the number of people employed and an improving economic base, albeit at a slower pace than we originally anticipated.

We remain focused on all aspects of our business in order to drive sales, and are encouraged by the initial benefits of our recent pricing and promotional efforts as well as the new Valu Land store format, which I'll discuss more in a few moments.

First, I'll review our distribution segment results. Our distribution segment sales increased approximately 1.2% for the quarter due to our success in attracting new customers with our value-added offering. I'm pleased to report that this represents the eighth consecutive quarter of sales growth in this segment. On the product side, we are driving both distribution and retail sales through the expansion of our private brand program.

During the quarter, we launched 75 net new private brand items for a total of over 200 items year-to-date. We ended the quarter with approximately 4,100 items, and are on track to introduce a total of four -- total of 400 private brand new items this year, representing an increase of 10% since the end of fiscal 2012.

This program remains a key element of our strategy to increase our value proposition and we continue to see upside in terms of unit penetration. Private brand penetration at retail was approximately 23.5% in the fiscal year-to-date period, which continues to place us above the national average.

In addition, in early October, the Company and the union representing our warehouse transportation and maintenance associates, we had applied a three-year labor agreement. The previous five year contract expired in October 2011 and the associates for working under an approved one-year extension. This new agreement will continue to provide our associates with a competitive wage and benefit package, while giving the Company additional flexibility to enhance the efficiency of its operations in a more competitive cost structure. The timely completion of this negotiation is a testament for the good relationships we have with our associates.

Going forward, in the distribution segment, our team will continue to increase our value-added service offering and sales penetration with existing distribution customers, seek new independent customers, and further improve the efficiency of our distribution operations.

Turning to retail, net sales in our retail segment approximated the prior year and comp store sales, excluding fuel, declined 1% which was in line with our expectations. As anticipated, a shift in the calendar, [what do we call], higher volume summer sales days out of the second quarter and had a negative impact of approximately 70 basis points on our comp store sales. Additionally, inflation also decelerated in the quarter versus the first quarter of fiscal 2013 by approximately 120 basis points.

As we discussed in the first quarter, we were encouraged by the customer response for Yes Is More promotional program, which included a 90-day Price Freeze on over 300 items that consumers buy most including bread, chicken and eggs.

Based on the success of the program, we launched Phase II in the second quarter called Yes Is Even More featuring an extension of the 90-day Price Freeze and Even More great values. While the price freeze has impacted retail margins, we were very pleased with the positive trends in market share and volumes on a comparable period basis. Furthermore, our customer survey data continues to point to higher levels of overall customer satisfaction, value and price perception.

Let me remind you that our YES Rewards program is an innovative points based initiative. To give you a bit of perspective on the magnitude of the benefit we're providing to the consumer, we issued approximately 210 million points in the second quarter, of which approximately 90% were redeemed by our loyal customer base. We believe this redemption rate demonstrates that our value proposition is resonating with the consumer. Additionally, we continue to register new households in the program and have increased active households to 894,000 as of the end of the second quarter.

We also continue to leverage our pharmacy and fuel programs as value-added rewards for our consumers. Our pharmacies posted an 8% increase in comp script count, and we opened one new fuel center, bringing the total to 29. Our pharmacy and fuel programs differentiate our offer and deliver both convenience and value, which enhances our relationship with our most loyal customers, while providing a vehicle that drives traffic in store. From a competitive perspective. We experienced no new supercenter openings in the first half of the year and cycled through the only supercenter opening from last year that was impacting our corporately owned stores. Currently, we do not expect any competitive openings to affect our corporate-owned retail locations in the second half of fiscal 2013.

Moving on to our capital plan, during the second quarter, we completed remodels of two stores and opened one new fuel center. During the remainder of the year, we expect to complete two additional major remodels. We continue to work on rolling out our new value-based concept Valu Land and plan to open three new stores by the end of the fiscal year. The three sites have been chosen and contracts signed, so these are well underway. In the meantime, we remain encouraged by the early customer response to our latest opening and believe Valu Land will provide organic growth opportunities, both inside and outside of the state of Michigan. We look forward to sharing our progress with you in the future quarters.

With that overview, I'll turn the call over to Dave for more detail on the second quarter financial results and an outlook for the remainder of fiscal 2013. Dave?

Thanks, Dennis, and good morning, everyone. Consolidated net sales for the 12-week second quarter increased to $621.6 million from $619.6 million in the year ago quarter, as higher distribution and fuel center sales offset a slight decline in supermarket sales.

Distribution and fuel sales represented 41.7% and 7.6% respectively of consolidated net sales compared to 41.4% and 7.2% respectively in last year's second quarter. The consolidated gross profit margin for the second quarter decreased 40 basis points to 21% from 21.4% in the same period last year. The decline in gross margin was primarily due to the continued impact of reduced inflation driven inventory gains in both the distribution and retail segments, the extension of the Price Freeze and Yes Is Even More promotional campaign in the retail segment, and the mix shift towards distribution and fuel sales, which carry lower margin than our retail sales.

Second quarter operating expenses were $111.3 million, or 17.9% of net sales compared to $112.8 million, or 18.2% of net sales in the same period last year. Our expense leverage was driven by continued productivity improvements in the distribution segment, lower employee-related expenses, and the absence of unusual corporate professional fees recorded in last year's second quarter. These items were partially offset by a non-cash pre-tax asset impairment charge of $400,000 compared to a restructuring benefit of $100,000 last year.

Adjusted EBITDA for the quarter was $29 million, or 4.7% of net sales compared to $31.1 million, or 5% of net sales last year.

Earnings from continuing operations for the second quarter of fiscal 2013 were $10.4 million, or $0.47 per diluted share, including an after-tax asset impairment charge of $200,000, or $0.01 per diluted share, and an after-tax benefit from the sale of asset of $400,000, or $0.02 per diluted share.

For the second quarter of fiscal 2012, earnings from continuing operations were $10.3 million, or $0.45 per diluted share, including an after-tax charge for unusual corporate professional fees of $700,000, or $0.03 per diluted share.

Turning to our operating segments. Second quarter net sales for the distribution segment increased 1.2% to $259.2 million from $256.2 million in the year ago period.

Second quarter operating earnings for the distribution segment increased 22.7% to $10.8 million compared to $8.8 million in the same period last year. The operating earnings increase is largely due to the cycling of the $1.2 million in unusual corporate professional fees, lower employee-related expenses versus last year, and continued improvements in warehouse operating efficiency, partially offset by lower gross margin due to reduced inflation driven inventory gains as the rate of inflation continues to decline on a quarter-over-quarter basis.

In our retail segment, second quarter net sales were $362.3 million compared to $363.4 million in the same period last year. Comparable store sales, excluding fuel, were down 1% due in part to the calendar shift, which negatively impacted comparable store sales by 70 basis points and a deceleration inflation rate.

Retail segment operating earnings for the quarter were $8.1 million compared to $11.2 million in the second quarter of fiscal 2012. The operating earnings decrease was due to higher promotional expenses associated with the second phase of our Yes Is Even More promotion, lower inflation driven inventory gains, lower fuel margins on the asset impairment charge.

From a cash flow perspective, our operating cash flow was $20.1 million at the end of the second quarter compared to $35.7 million for the same period in fiscal 2012. The decrease was principally due to the timing of working capital requirements, which will reverse over the remainder of the year.

In addition, as we previously mentioned, in the first quarter, we prepaid $9.8 million in federal taxes to take advantage of certain tax law changes, which will reverse over the remainder of fiscal 2013.

During the second quarter, we also repurchased 30,000 shares of our stock for a total of $500,000, and now is slightly less than 50% of our [$50 million] share repurchase program still available for future stock repurchases. Total net long-term debt was up $32 million to $147.5 million as of September 15, 2012 versus $115.5 million at the end of the second quarter of fiscal 2012, primarily reflecting the uses of cash previously mentioned.

On a sequential basis, we reduced our net long-term debt by $7.1 million from the first quarter and we expect to further reduce it and return to more normal levels by the end of fiscal 2013.

I will now provide further detail on our outlook for the remainder of fiscal year 2013. We expect comparable store sales for the remainder of the year to trend favorably when compared to the second quarter of fiscal 2013, due to continued promotional programs, store remodels, more seasonal weather patterns, and the timing of the Easter holiday.

As a reminder, we are cycling the aggressive roll out of our loyalty program to Family Fare and D&W in the third and fourth quarters of fiscal 2013, which will slightly offset these favorable factors.

We believe diluted earnings per share from continuing operations for the last half of the year will slightly exceed the prior year results, excluding the 53rd week last year and previously disclosed items that are not expected to recur in this year's fourth quarter.

The combined effect of these items in the prior year's fourth quarter was a benefit of $0.11 to $0.12 per diluted share, predominantly related to the 53rd week of LIFO credit, favorable incentive compensation expenses and occupancy costs.

And finally, we reiterate our previous guidance for capital expenditures for fiscal year 2013 to be in the range of $42 million to $44 million, with depreciation and amortization in the range of $39 million to $40 million and total interest expense in the range of $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. Well in conclusion, we are encouraged by the progress we made on a number of fronts in the first half of fiscal 2013. We've entered the second half of the year with some momentum and have opportunities to build on the success of our loyalty program and deepened our consumer relationship. We plan to make additional strategic promotional and capital investments in both our distribution and retail segments to attract new customers and enhance our programs for consumers.

Yes Is Even More campaign is providing the benefit anticipated, and thus we expect to continue the Price Freeze strategy. We are committed to mitigating the retail margin impact through a combination of strategic promotional and capital investments to drive higher volumes, while focusing on a disciplined approach to managing our controllable costs to improve profitability long-term.

For distribution and retail operational improvements today, our testament to the efforts of our dedicated associates, consumers, independent retailers and suppliers, and on behalf of the management team and the entire organization, we thank them for their continued dedication and support.

And with that, we'll now open the call to your questions. [Michael]?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Chuck Cerankosky, Northcoast Research.

Good morning. When you're looking at the second half of the year and you're talking about the promotional programs, the YES Rewards and the Price Freeze, what kind of balance are you looking at between the sales growth and gross margin impact and operating profit margin as this thing proceeds through the rest of the year, Dennis?

Yes. (technical difficulty) we gave you some guidance with respect to comps, and I think we -- we're going to stay obviously with that, that we have just given you. We do believe that the investment that we made in margin has been worthwhile, but we also believe as we're learning now six months into the program, there are ways to potentially mitigate that investment. So, the positive tonnage we generated in Q2 is really heartening to us and really gives us a little bit of courage to do some things with respect to staying aggressive.

So, I think our -- we've given you guidance on the bottom line, we've given you guidance on the top in terms of comps, and we're telling you that we think we can mitigate the investment. But we're really pleased with the results we've gotten from the Price Freeze program. I mean, some of the categories have lifted dramatically as a result of the effort. Now we've had, I think, [Deli Ham] for -- it will be nine months at the end of this cycle, at $299 a pound for the whole duration. Our deli lunch meat business is up 15% in the whole Canada. Fresh chicken business is up 24%. We've had tuna in the first two cycles. Our tuna volume is up 40%, and that's a whole category. So you see it's resonating with the consumer and we're just feeling pretty bullish about it.

So right now the read, I guess, is the second half is maybe a little bit less in that margin investment, but we will see margin investment?

You will continue to see margin investment.

Okay. And you mentioned you are rolling something out, I missed, that was [taken in overall] and something out to Family Fare and one of the other banners. Where was that or --?

Chuck, I think you're probably referring to the comment we made that last year in the third and fourth quarters, we were rolling out Yes Is More program to -- or the YES program, not YES, but YES program to Family Fare and D&W for the first time. So that would mitigate some of the other positive things that are going on in the third quarter.

Okay, got you, got you. That's -- that was the year ago (technical difficulty). And then can you give us an assessment of Valu Land at this point? You're obviously rolling it out, but what do you learn in the first couple of stores that will be put into the stores that will open in the second half? And is this a program that accelerates greenfield store opening program that accelerates because of the state of the economy?

Yes, I wish we had more color to give you from the last time -- we don't have -- we still have Lansing, the Lansing location is our prototype and we continue to talk to customers and understand what is driving, they're visiting the store and becoming loyal customers there. Not a whole lot has changed since the last call. We do have these three stores that are going to open before the fiscal year is out, and two of them within the next 45 days or so.

[To tweak] a few things on decor and signage, we've taken the item count down a little bit from where it was. We saw more variety than was meaningful, we've made a little adjustments. But on balance, Chuck, pretty close to the pro forma we had in place. We are anxious to see this in another marketplace. The next three stores will be in metropolitan Detroit and the larger population base in the surrounding prime trade area. So we're anxious to see how it resonates there.

About the future openings, to be honest, this second half [debut of three].

Well, it was still in a bit test mode, but you should expect that it will be a more aggressive store count in next fiscal year than we had in this fiscal year, and the same for the following fiscal year. We think we can ramp it up pretty quickly. They're pretty easy to open. The opening -- preopening expenses are relatively nominal. The capital investment isn't too great. So we should see our pace quickening as you look at the out years.

What's your cost to open -- to develop and open one of these?

We're spending about [$1.5 million] in capital to get the store opened, which as you know is much less than a conventional box and it's just a simpler business to run all around, which is how you can afford the lower prices and you price cheaper than the competitors. And so it would be nice for you to actually touch and feel one. And if you get into the market, we'd be delighted to host you.

Thank you.

Karen Short, BMO Capital Markets.

Hi. Just a couple of clarifications. First, private label about 23%, that was the percent of units at retail, correct?

23.5% year-to-date units at retail, which is a (multiple speakers) it's actually it isn't about, it is [60.68 points] more than the national average for the same period.

Okay. And what's the penetration at distribution?

Penetration at distribution is significantly less. As you know, our distribution customer base has a whole different fleet of store sizes and shapes, and it (inaudible).

No. The distribution [it appears to be] between 17% and 18%.

Yes. I don't have it right in front of me, Karen. I can get back to you with that. But, to this point, it usually runs 17% to 18%, trails the corporate store, but trends similarly.

Okay, that's helpful. And then just looking at your -- all these initiatives you have, have you seen any competitive responses from your increases in promotional activity?

Yes, yes. Our footprint is so tight and our competitors are so few. I've kind of been cautious (inaudible) not a lot actually. I mean, they -- some. But no one has taken the list of Price Freeze items and just gone [underarm or matched arm]. And I think everybody is -- our competitors continue to run their programs and we have not seen a lot of reaction.

Okay. And the two or the three more Valu Lands that you're going to be opening, those are new locations or those are conversions?

We don't anticipate, at this moment, any more conversions, Karen. So the Valu Lands we'll be talking about on the go-forward are going to be -- probably brownfield would be the more appropriate term. And by the way, the Spartan wholesale customers for that same period is 16.78%.

Okay. And then I guess the last question I had is, obviously there's a lot of discussion at the Wal-Mart Analyst Day about new store openings and I know you gave comments on what to expect for the rest of the year. But I guess the first question is, wondering if you have any visibility on whether or not there will be any neighborhood markets opening up against you next year? And then -- and as well, any visibility in what the supercenter openings will be for the next fiscal year? And then any comments or color on how neighborhood market opening would affect you versus the supercenter? Thanks.

We do not have any visibility on neighborhood markets coming into the marketplace this year or next year. We do have some visibility on supercenter openings in the marketplace. I think [Lenovo] is one that we believe will -- Wal-Mart supercenter that will open against a corporately owned store next fiscal year, probably toward the middle or the end. And Karen, we don't -- we haven't had any neighborhood markets in our near geography. We haven't studied them aggressively. I don't know that I would not be able to give you a really robust answer on what that impact might look like.

Obviously, we would prefer as everyone [that they now] penetrate the market. I think Michigan is a bit of the unique marketplace in a lot of different ways, it is a state that is not building population, we're actually showing a little bit of decline in population. We certainly have lots of square footage of food retail and really, over the past several years, there's been very limited new square footage for food retail developed. I would think it's probably (inaudible) that, not the most likely candidate.

Yes, I would think so too. But, okay, thanks for the clarification.

Scott Mushkin, Jefferies & Company.

Hey, guys. Thanks for taking my questions. I wanted to start out with a little bit of a strategic question. First of all, if I look at your EBITDA dollars, they're kind of bouncing around here [kind of $100 million to $105 million] range, let's just say is round numbers. My question is, with your current footprint, can that number meaningfully grow as we move in to the next few years? I'm not asking for a guidance or anything, but just can you conceptually grow with what, Dennis, you just described is going out, Michigan is slightly shrinking. Is it -- can we get the EBITDA dollar growth back, because you were growing it back I think last decade? So that's question number one. And my question number two is, it seems like as you've mentioned Valu Land going outside of Michigan. If you can't really get a decent growth rate in Michigan, is your appetite for going outside of Michigan going up? How might we see it? And if you could give us some parameters, if you were to make an acquisition or organic growth on that?

Yes. The answer to the first question is yes. EBITDA growth is attainable and I think there's a number of ways that we'll be able to do that and are planning to do that, not the least of which is Valu Land. We think that is going to be accretive as we move forward and is a key component to our topline and bottom line growth strategy.

Secondarily, we do believe that there are still roll-up opportunities with regard to independent customers that we can execute in the marketplace. And those tend to be lumpy and you [can't] always predict when they're going to come, but it is another plan to our strategy that we're going to continue to probe on. We do have an appetite to grow outside the state of Michigan and we've been very clear about that, and I think that can manifest itself in a number of different ways. Valu Land would be one of them, and I think is very likely.

Secondarily, we continue to work very hard as value-added wholesaler to try and add distribution volume outside of the state of Michigan that we can service here from Southwest Michigan. And that's kind of a stay tuned having distribution customers change wholesalers is really it is a process, it's not an event and we're working very hard at that.

I think if you look at the distribution segment and for eight consecutive quarters, we've posted positive sales gains, and I think you've benchmarked that against other wholesalers that are operating in our geography. That's a pretty good story.

So I think that's the other way. And of course, being acquisitive outside of the state boundaries is also something that is in our strategic plan. So I think there are multiple ways that we could accomplish that.

And would you like a facility, a distribution facility outside of State of Michigan, or do you feel comfortable you can service what you need to out of your current --?

No, I think in a perfect world, we would see another distribution facility outside of the state of Michigan.

Okay. So then -- that's great, great answer. I appreciate. Then as a follow-up, just to try and understand kind of where the management's head is. You looked back over the last three or four years, clearly the business is being challenged. You seem a little bit more positive on your own business. And is that confidence in that or am I -- first of all, am I reading that right? And then secondly, it seems like that business is stable, you're kind of comfortable. Are you feeling -- we haven't seen acquisition in a while even in in-market. Are you feeling more comfortable it's time to get more offensive as far as the strategy goes, or no?

And [I want to fill] it is kind of our tone. But, yes, I do feel better about the fundamentals than I did six months ago. When you're starting to see the tonnage improve, the comps are getting better, and the fact that our consumer surveys are coming back far more positively at retail. As you know, we have this constant customer feedback mechanism as our check out, and our overall satisfaction scores continue to improve and maybe is importantly or most importantly in this kind of value driven world we are seeing scores on price perception go up rather significantly. As a matter of fact, in the most recent 12-week period, our score for positive price perception has improved by 11%, and we attribute that primarily to the Yes Is More and the Price Freeze. But I will tell you that -- and we've -- just cycling now a year of launching the YES loyalty card in the Grand Rapids market, our largest market, I think it's more than just the Yes Is More and the Price Freeze.

And we've got this points based program, I think consumers are finally kind of getting a little bit more ingrained into their value kind of equation. This week, we launched a free turkey with points for Thanksgiving. And so the points are resonating. Script counts being up 8%. I think is a pretty heavy number for us, and I think consumers are understanding the value of the [three drugs as well as the four in 10]. We're consistent with our fuel offer at $0.05 a gallon, but we pulse that up to $0.50 at least once a period, sometimes twice. And I think the synergy of all of that has begun to work, and I think drive that value equation for our consumers. And so, I'm heartened by that, the fact that, if you look at Nielsen data, at least the data I'm looking at, nationally we're reading about tonnage being negative in the space.

And the fact that we're kind of bucking that trend and the comps, remember that 70 points of that negative [1.2] really emanated from the shift out of summer as well as we paid 120 points of decelerating inflation, if you will. And that's why we're heartened. The private label business heartens us. It heartens me. You think about the recession, nearly two-thirds of customers said, they were -- they bought private brands and we're comfortable buying them prior to the recession. Now you have 27% more households say, they've moved to private brands during the recession and half of them say, they're going to continue to buy private brands, that's 16 million households nationally. I think there's gold in that buying, and I think we've been ahead of the curve as treating private brands as a strategic initiative, and we're poised to mining that gold.

And is this -- so that was great answer, again. But is this giving you more confidence at this time to go on the offensive strategically, and then our yields? Thank you for taking my questions.

I think we're going to be prudent. I mean, on the acquisition front, it takes two -- we need the right partner, and certainly we're willing to pay fair values, but the multiples and the industry have been so depressed with what's happened over the last several years, I think the targets potentially are looking for bigger numbers remembering the old days, right. And the fact that many of their P&Ls are also depressed, and they're maybe hoping that they can move those numbers up, so that they have a better base and maybe the multiple gets better. But I think generally, the answer to your question is, probably the timing is better now than it has been anytime in the last couple of years.

Perfect, thank you very much.

(Operator Instructions). Ben Brownlow, Raymond James.

Hi, good morning.

Good morning, Ben.

Talking about the market share and gain in overall market share there. Is there any data or color that you can provide around that?

I've put that in. Dave and I've put that in the release. I don't want to give you much color, Ben, and not because I don't want to be transparent. But our footprint is so narrow and our competitors are so few, that if I give you much more color, I'm not sure I'm doing the right thing to protect my business. I would say the reason we put it in there is because we are very encouraged by what we're seeing with regard to market share. And frankly, it's not only the retail side of the business. Our independent business is also seeing some nice movement in that number. So it's a positive number for us, and I don't really think I want to go much further.

I understand. And switching gears, the efficiency initiatives that you have with the distribution segment, can you talk about some of those initiatives going forward, second half this fiscal year and next fiscal year?

Well, we've got a number of things that we're working on. With the advent of the new contract, we have some flexibility that we didn't have in the old contract, and that certainly is something that we're going to put to good use. And it's not only with regard to hiring, but it's work rules and we're going to mine that data. And then the other thing is that there are some technology investments that we intend to make in the facility that will allow us to operate more efficiently and effectively. And the combination of those two could be pretty meaningful to us as we move forward.

Okay. And what's the timing on those technology investments?

Dave, what is --?

[Q4 into Q1 of that business].

So it will be at the end of next fiscal year.

Okay. And then just two last ones for me. What sort of impact do you expect from the Easter shift? And if you have any sort of data or color you could provide around the fuel margin impact, whether it's [ECS] impact or just the absolute margin change on fuel?

Sure. If you look at Easter, it actually falls probably in the most favorable way it could. So it falls the day after the end of our fiscal year. So you basically get the entire selling week and then not the tough week after. So, how Easter works, you get a great sell into it and then it's a tough week after it and the holiday kind of blends out to be somewhat neutral when if you have pulled those weeks at the same period. So we'll get the maximum effect of having the selling week and then not the week after.

As far as fuel, fuel is pretty inconsequential for us this quarter, actually slightly negative, probably under a couple of hundred thousand dollars negative.

Okay, great. Thank you.

Chuck Cerankosky, Northcoast Research.

Thanks, guys. Looking at inflation over the rest of the year, Dennis, it's turned to, I guess, slight deflation in the most recent quarter across your whole sales mix. How do you see it shaping up for the rest of the fiscal year, given the theories about how the drought is going to impact pricing? And probably, more importantly, how do you see the CPGs passing those costs through and their willingness to offset some of that impact with trading consumer promotions?

Yes. We did both slightly deflationary on the retail selling price in Q2. And so that -- and we talked little about the 120 points that we decelerated from Q1 to Q2. I think we're seeing that kind of moderated. I don't think we're going to see a lot of inflation in the last -- at least in this fourth calendar quarter. We are seeing the same reports that you're alluding to around, so sort of some of what's going on with the price of feed, and particularly around proteins. Beef deal and even chicken seeing some pretty significant inflation. But it's been there a while. It may jump. Again, pork has softened a little bit. That's mitigating a bit. And the customer is shifting. So beef prices go way up. We (technical difficulty) a lot more chicken and the part of that we did, well part of it is the consumer looking for a value in terms of the protein.

So we don't see any gyration on inflation. And even looking into next year, the USDA is talking about a 3% to 4% inflation for food at home and it's really kind of a historical average. And the CPGs, the ingredient cost is just one part of that that cost of goods. When you take a look at about the packaging and the manufacturing expenses and the shipping, that -- those contribute more than the raw ingredient cost to that final end cost of goods. We're not seeing a lot of inflation or cost increases being passed through at the moment. There's some exceptions to that. We're seeing a little bit of strength in some of the dairy related product, milk, cheese, perhaps just took an increase. So -- but that's more of a one-off at the moment.

All right. Thank you very much.

Scott Mushkin, Jefferies & Company.

Hey, guys. So my question is, what -- and it's just kind of gauge and estimate from you. What percentage, if you were going to take Meijer and Wal-Mart out of the mix, and go to just to the traditional kind of supermarket industry. What between your wholesale business and your retail business, do you any idea, I guess on what your market share is in that, just that traditional marketplace?

We've done that work before, Scott. I just don't have it in front of me. I would just be guessing and I don't have that.

The second question is, because your tonnage is up, we've seen in some of our data and it's definitely outpacing the national tonnage by quite a bit at this stage. So do you think that's true in your markets as well?

Scott, I'm sorry. I didn't hear the first part of your question.

The tonnage, that our data shows you're gaining tonnage versus the national data, as well as, as what you said. My question is, do you believe the tonnage in your area you're gaining is --?

Well, yes. I think that -- yes, the answer is we're gaining tonnage and it's not because we think the market is growing. We believe that the tonnage in the market is negative and we're the outlier. Well, there could be more than one outlier. But we're going in the opposite direction of the market in terms of tonnage.

Okay. So you would attribute this as the -- the correction of my follow-up question. So you would attribute most of what you're seeing, not to an improving economy in Michigan, but mostly to the strategic things that you guys have done?

Absolutely.

Absolutely. All right. That's my follow-up question. Thank you.

Thank you, sir. And this concludes our question-and-answer session. I'd now like to turn the conference back over to management for any final remarks they may have.

Well, thank you all for participating in the call today and we certainly appreciate your interest in Spartan Stores, and we look forward to meeting with you at investor events in the coming months. Thank you.

And thank you for your time, sir. The conference is now concluded, and we thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.