SpartanNash Co (SPTN) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Spartan Stores, Incorporated fourth-quarter and fiscal year 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

Thank you. Good morning, and welcome to Spartan Stores' fourth-quarter and fiscal year 2013 earnings conference call. By now everyone, should have access to the earnings release for the fourth quarter ended March 30, 2013. 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 for approximately 10 days.

Before we begin, we would like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties. Actual results may differ materially from our results discussed in these forward-looking statements. Internal and external factors that may 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 the risks and uncertainties associated with Spartan Stores' forward-looking statements can be found in the Company's fourth-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 disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation will include non-GAAP measures and comparable period measures, including or excluding the 53rd week in fiscal 2012, to provide investors with useful information about the Company's financial performance. A reconciliation table on these non-GAAP financial measures to the most closely 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 fourth-quarter and fiscal 2013 earnings conference call. With me this morning are members of our team; including our CFO, Dave Staples; our EVP of Retail Ops, Derek Jones; EVP of Wholesale Ops, Ted Adornato; our EVP of Merchandising and Marketing, Alan Hartline; as well as our General Counsel and Secretary, Alex DeYonker.

Today I will begin by providing you with a brief overview of our business and financial performance for the fourth quarter and fiscal year, as well as some comments on our plans for next year. Then Dave will share some more information and specific details about the fourth quarter financial results as well as our outlook for the first quarter and fiscal year 2014. Then finally, I will provide some closing remarks, and then we'll open up the call for some questions.

We are pleased to report the fourth-quarter earnings that exceeded the guidance we provided on our last call in mid-February. Our encouraging results were driven by improvements in both the distribution and the retail segments, as we gain new customers and continue to refine our promotional and loyalty programs. In the fourth quarter, we also benefited from the early Easter holiday, and our team's continued focus on expense management. As a result, we generated an approximately 5% increase in net sales, and an over 14% increase in adjusted earnings from continuing operations, when excluding the 53rd week in last year's fourth quarter, and the non-recurring charges in this year's fourth quarter. We believe that in the current challenging economic environment, our strong value proposition, between a combination of price, promotion, including fuel, selection and convenience, continues to resonate with consumers.

Now, reviewing our distribution segment results. Sales increased 3.4% for the quarter on a comparable 12-week basis. It was primarily as a result of new business gains and the calendar shift of the Easter holiday selling week into the fourth quarter. One of our key growth strategies for the distribution segment has been to add new customers in adjacent markets. And during the fourth quarter, as we previously reported and discussed, we entered into a partnership with a new customer in Ohio to become its primary wholesale grocery supplier, and began distribution to its 11 stores late in the quarter. As a result of this and other new accounts obtained of the year, we actually ended fiscal 2013 providing service to 390 independent distribution customers, up from 375 at the end of fiscal 2012.

Our value-added services continue to be a differentiator for us in the distribution segment, as evidenced by Spartan continuing to be awarded new business. We believe maintaining a strong partnership with our distribution customers is very important. Such a partnership includes sharing with their customers retail programs and operational initiatives that we have implemented, that could help them to grow and optimize their business in the long run. We also believe that it is our responsibility as a partner to share new ideas and strategies to help our customers to enhance their overall operations, which we believe further separates us from other competitors in the industry. I am pleased to say that our transparent and trustworthy business practices were recently recognized by Forbes Magazine, when we were included in the list of America's 100 Most Trustworthy Companies. This distinction is particularly meaningful to us, as it certainly validates our commitment to transparency, and our core operating principles of honesty and integrity.

Net sales in our retail segment increased 6.1% on a comparable 12 week basis, due to the sales contribution of the store we acquired at the end of the third quarter, as well as increased fuel sales and positive comp store sales. Comp store sales, excluding fuel, increased 0.4%. As anticipated, sales benefited from an early Easter holiday, but were negatively affected by the continued shift of the pharmacy sales mix toward generic medications. We estimated that the Easter shift had approximately a 70 point positive impact on the comp store sales, and that the shift to generics from a mix perspective, when you exclude the impact of volume and inflation, had an approximately 70 point negative impact on comp store sales.

As you recall, we first introduced our Yes Rewards program in 2010, through our Glen's banner, and subsequently rolled out to all of our banners. The rollout was completed during the third quarter of fiscal 2012 at our Family Fare and D&W Fresh Market locations. While we still have a long way to go, we have learned a lot about our consumers and continue to refine our ability to connect with them. We are pleased with the consumer's response to date, and in fiscal 2013, approximately 90% of our supermarket sales were generated through the program.

We also continue to leverage our pharmacy, as well as our fuel program. Our pharmacy script counts were up nicely year over year as the consumer to advantage of our rewards programs. Our pharmacies posted a 3.9% increase in comp script count for the quarter, and a 5.9% increase for the full year. As I already mentioned, however, the continued shift from branded to lower price generic prescriptions is leading to a mid-single-digit decrease in our average script price, negatively affecting our overall comparable store pharmacy sales, while improving our profitability. Our fuel promotions continue to resonate with consumers during these times of high fuel prices, and are yet another way for us to connect with them on a consistent basis.

Another key strategy for the company has been the development and expansion of our private brand program for both our distribution and our retail customer segments. While sales of private brand products have declined slightly over the year, as consumers felt a little better about the economic conditions, saving money is still an important requirement for a large percentage of our consumers. We believe that our private brand offering is a great way to deepen our relationship with consumers and distribution customers and gain increased loyalty. As a result, we continue to add new products, refine our brand identity and packaging, while continuing to ensure that our assortment remains relevant. We are committed to providing the best value for our consumers, as well as our distribution customers and the right mix of national of private brands for them to choose from.

At the end of the fourth quarter, we had approximately 4,150 private brand products, represents a 6% increase from fiscal 2012. This has helped us to achieve fiscal year 2013 unit penetration in our retail stores of 24.6%, which is approximately 1.3% greater than the national average as reported by Nielsen. For fiscal 2014, we expect to continue to build our premier private brand program, and introduce approximately 300 new items, as well as to pursue opportunities in the fresh department. We launched Spartan Fresh Selections in 2011, and now have over 600 product offerings in this program.

Moving on to our capital plan, during the fourth quarter, we had no major remodels, but we opened one Valu Land store in Dearborn, which is a suburb of Detroit. This is the fourth Valu Land location for the fiscal year, and brings the total store count to seven. Our store growth plans for fiscal 2014 include up to 13 rebanners of Glen's locations to Family Fare brand and the completion of up to 12 minor remodels and three major remodels. Many of the remodels will be associated with the rebannered locations. We also plan to open up to three Valu Land stores in the coming year. We continue to further fine-tune our Valu Land concept, and want to have what we believe is the right mix of product and pricing, before pursuing a more aggressive store rollout of this brand.

In fiscal 2014, our distribution team will continue to focus its efforts to drive sales growth by increasing existing customer penetration, and adding new customers in adjacent markets, as well as enhancing our value-added service offerings. In addition, during the first and second quarter of fiscal 2014, we will be testing warehouse automation that will help improve Spartan's productivity and operational efficiencies. This automation will entail the use of pneumatic robotic high-lows, to perform certain unloading and storage tasks. Assuming the tests are successful we could begin to realize benefits from these expenditures during the second half of fiscal 2014. Before I turn the call over to Dave, I'm also pleased to report that we have increased our quarterly dividend by 12.5% to $0.09 per common share for shareholders of record on June 7, and payable on June 21, 2013. So with that overview, I will turn the call over to Dave for more detail on the fourth-quarter and the full-year financial results, as well as an outlook for the first quarter of fiscal 2014. Thanks.

Thanks, Dennis, and good morning everyone. As Dennis mentioned, our fourth quarter last year included a 53rd week. To provide a better measure of our business trends, I will be discussing our fourth-quarter and full-year financial results on an adjusted and comparable 12-week and 52-week basis, except where noted. Adjusted results do not include the 53rd week from last year, which accounted for $49.8 million in sales, $26.7 million at retail, and $23.1 million at distribution, and $2.4 million in operating profit, $1.5 million at retail and $900,000 at distribution. This year's adjusted fourth-quarter results also exclude charges related to debt extinguishment, restructuring and asset impairment charges. The fourth-quarter earnings press release includes a table that provides more detail on these items.

Consolidated net sales for the fourth quarter increased 4.9% to $592.8 million, compared to $565 million in the year-ago quarter, due to strength in both the distribution and retail segments. Approximately 60 basis points of the consolidated sales improvement for the quarter were due to the calendar shift of the Easter holiday into the fourth quarter. Distribution and fuel sales represented 43.3% and 7.5% respectively of consolidated net sales, compared to 44% and 7.1% respectively, in last year's fourth quarter. The consolidated adjusted gross profit margin for the fourth quarter increased to 22.4%, compared to 22.2% last year, primarily due to the improvement in the retail segment, partially offset by a decrease in the LIFO credit, compared to the prior year.

Fourth-quarter adjusted operating expenses were $112.7 million, or 19% of net sales, compared to $108.5 million, or 19.2% of net sales last year. The decrease in the rate was due to lower employee benefit related costs and promotional expenses, due to the cycling of the launch of the Yes Loyalty program for the West Michigan market, partially offset by higher incentive compensation and occupancy costs. Adjusted EBITDA for the fourth quarter was $29.6 million, or 5% of net sales, compared to $25.6 million or 4.5% of net sales last year. Adjusted earnings from continuing operations for the fourth quarter was $10.4 million or $0.48 per diluted share compared to $9.1 million or $0.40 per diluted share last year.

Turning to our operating segments, on a comparable 12-week basis, fourth-quarter net sales for the distribution segment were $256.9 million, compared to $248.5 million in the year ago quarter. Adjusted fourth-quarter operating earnings for the distribution segment were $17.5 million, versus $16.3 million in last year. The operating earnings increase was largely due to the higher sales and improved margins, partially offset by a decrease in LIFO credit of $900,000, compared to the prior year. In our retail segment, on a comparable 12-week basis, adjusted fourth-quarter net sales were $335.9 million, compared to $316.4 million last year. The over 6% increase in sales was driven by incremental sales from our grocery store acquisition, increased fuel sales, and positive comparable store sales.

Comparable store sales, excluding fuel, were up 0.4%, due in large part to the calendar shift Dennis mentioned. Retail segment adjusted operating earnings for the quarter were $2.5 million, compared to $800,000 last year. Improvement in adjusted operating earnings was due to the higher sales, improved margin, and operating expense leverage, due to a decrease in expenses related to employee benefits, decreased promotional expenses associated with the cycling of the Yes Loyalty program launch at Family Fare and D&W, partially offset by higher incentive compensation and occupancy costs. From a cash flow perspective, our operating cash flow was $59.3 million for fiscal 2013, compared to $93.7 million at the end of fiscal 2012. The decrease is principally due to the timing of working capital requirements, and timing of required tax payments associated with the change in state tax laws as we have previously discussed.

Total net long-term debt was up $32.3 million to $143.8 million as of March 30, 2013 versus $111.5 million at the end of fiscal 2012. Primarily due to share repurchases, timing of working capital requirements, cash payments made earlier in fiscal 2013, and the acquisition of a grocery store and fuel center, including the associated capital leases. As previously announced, we completed the redemption of the remaining outstanding $57.4 million aggregate principal amount of convertible notes and recorded after-tax charges of $1.7 million related to the redemption. As a reminder, we expect to save approximately $3 million in annual interest expense as a result of the private exchange completed in the third quarter and the redemption of the remainder of our convertible notes in the fourth quarter.

Now, to briefly review the fiscal 2013 annual results. On a comparable 52-week basis, consolidated net sales increased 0.9% to $2.61 billion, compared to $2.58 billion last year. Comparable store sales, excluding fuel, decreased 0.5% in fiscal 2013. Adjusted EBITDA for the year was $106.3 million, compared to $107.2 million last year.

I will now provide further detail on our outlook for fiscal 2014. We believe that the Michigan economic recovery is likely to continue on its current gradual pace in fiscal 2014, and we expect fiscal 2014 net consolidated sales and earnings from continuing operations to exceed our fiscal 2013 results, due to our investments in the retail and distribution segments, continued efforts to increase the value provided to our customers, and continued careful control of expenses. This guidance includes the negative effect of the Easter holiday, which fell in the first and fourth quarters of fiscal 2013, but will not be in either quarter in fiscal 2014. We expect the retail comparable store sales will turn positive in the second half of the year, as we cycle the grand opening of a relocated store in Grand Rapids, benefit from our capital program, and likely experience a higher level of inflation as the year progresses. We expect that capital expenditures for fiscal 2014 will be in the range of $42 million to $44 million, with depreciation and amortization of the range of $41 million to $43 million, and total interest expense in the range of $10 million to $11 million.

For the first quarter, we expect consolidated net sales will slightly exceed last year, due to the acquired retail store and net new customer gains at our distribution segment. This guidance reflects the negative impact of the Easter calendar shift out of the first-quarter of fiscal 2014 and into the fourth quarter of fiscal 2013. The continued negative mix impact related to the pharmacy prescription conversions from branded to generic drugs, the cycling of extremely favorable spring weather last year, the cycling of the launch of the Yes Is More campaign in last year's first quarter, as well as the Grand Rapids store relocation, grand opening, and promotional activity. As a result, we expect comparable store sales in the retail segment to be down 2% or more for the first quarter of fiscal 2014. We believe earnings per diluted share from continuing operations will slightly exceed last year, when excluding the prior year's after-tax benefit of $600,000 or $0.03 per diluted share, due to changes in the Michigan state tax laws.

This concludes our financial discussion, and I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks Dave. We are encouraged by our fourth-quarter performance and solid end of the year, which reflect improvements across both our distribution and our retail segments as we gain new customers, and continue to refine our marketing and loyalty programs. We believe that the Michigan economy is likely to continue its gradual recovery in fiscal 2014, and we believe that we are well-positioned to benefit from these modest improvements, and plan to continue to build on our customer-centric platform and leverage our strengths in ways that best reward our consumers, independent retailers, associates, suppliers and shareholders. At this time, I would like to thank each of our constituents for their support over this last year. Our Company could not have achieved this level of success without you, and I want to say thank you. In conclusion, we remain focused on balancing sales growth with expense management as we invest in the value proposition that we offer our retail and distribution customers, to best position us for future improvements. We look forward to another rewarding and successful year, and with that, we will open up the call for your questions.

(Operator Instructions)

Ajay Jain, Cantor Fitzgerald.

I just had a quick question on the gross margin trends. I know some of the improvement was attributed, at least partly, to retail. It looks like the gross margins would have been higher without the impact of the LIFO comparison. So can you just give you any more color on what was behind the increase in gross margins last quarter, and if you see that improvement as a little bit of an anomaly? Or do you expect that improvement in the gross margin rate to continue to improve, based on what you are seeing in the current quarter? Thanks.

Yes we look at that, it really had a lot to do with cycling of some prior-year activity in that respect. So we don't think that is going to continue to project out into the next year. The margin environment I think remains as it has been for the past several years. And so I guess I wouldn't project that out going forward.

Okay. And in terms of your store development plans, it looks like the major focus is going to be on remodels this year. But in terms of any potential per square footage growth beyond fiscal 2014, would you say the main emphasis is going to be on Valu Land?

Yes it would be on Valu Land for square footage growth. And that's, with us, it's not all that robust. We haven't had a lot of square footage growth in the State of Michigan by any of the competitive set over the last several years. Again, the population here has been rather stagnant. There is no shortage of competitors and square feet in the marketplace.

Okay, and as it relates to Valu Land, I know you are in the very preliminary stages of sort of testing out that format, but what is the level of customer acceptance so far and is there any aspect of that rollout that maybe hasn't gone as well as you might have initially expected? Thanks.

I think the acceptance, the customers that are trying the store, love the store. The most recent three stores that we opened were in Metropolitan Detroit. That's a 5-million person marketplace and we have got three 20,000 square foot boxes that we're trying to get the message out about, and we knew going in, that wasn't going to be an easy task. It has proven to be even a little bit more difficult than we thought. There's a little lumpiness in the performance of the three.

So I think we are more about messaging at the moment, although we are tweaking some of the offer in the store, and we have been consistently experimenting with that. We still classify it as a test, even though we have seven stores open, we will clearly open an eighth one here in the near-term. And as I indicated, up to three in the full year.

Great thank you very much.

(Operator Instructions)

Chuck Cerankosky, Northcoast Research

This is actually Sam Knezevic on the call today for Chuck. Dennis, I was just wondering, you had mentioned, I think, in the prepared comments that private-label sales were maybe under little bit of pressure in the quarter. Could you just talk about maybe what categories in private label were performing the strongest, and maybe what areas were a little weaker during the period?

We were a little softer than prior year, as was the nation, on private label penetration. We still have the 24.6% penetration versus 23.2% for the national average on Nielsen. If you look at our brands, Spartan brand is continuing to be 90% of the private brand sales in the enterprise. That was a little bit softer.

We did see some strength from the Top Care brand, which is our HBC brand. We also saw some growth from the Full Circle Natural Organic brand. So those two showed some strength. But on balance, we were overall negative.

Got you. And how many new products do you expect to roll-out for your private brand this year?

We are anticipating 300 to 350 new items to be rolled out this year.

Okay, great. Thank you.

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

Thanks Andrew, and that does conclude the Spartan fourth-quarter and fiscal year 2013 conference call. We thank all of you for joining us today, and look forward to talking to again, and I guess it will be early August. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.