SpartanNash Co (SPTN) 2014 Q1 法說會逐字稿

Good morning and welcome to the SpartanNash Company first-quarter 2014 conference call and webcast.(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Christine Gleim of ICR. Please go ahead.

Thank you. Good morning and welcome to SpartanNash Company's first-quarter fiscal 2014 earnings conference call.

By now, everyone should have access to the earnings release for the first quarter ended April 19, 2014. For a copy of the release, please visit the SpartanNash website at www.SpartanNash.com under For Investors. This call is being recorded, and a replay will be available on the Company website for approximately 10 days.

Before we begin we would like to remind everyone that the 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 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 risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's first-quarter earnings release and in SpartanNash's annual reports on Form 10-K and in other recent filings with the SEC.

Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP metrics and comparable period measures to provide investors with useful information about the Company's financial performance. 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, which was issued after market close yesterday.

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

Thank you, Christine. Good morning and thank you for joining our first-quarter fiscal 2014 earnings conference call. With me this morning is Dave Staples, our EVP and Chief Financial Officer, as well as various other members of our executive team.

Today I will begin by providing you with a brief overview of our business and highlights of our financial performance for the first quarter, then Dave will share some additional detail about the first-quarter financial results and our outlook for the remainder of fiscal 2014. Finally I will provide some closing remarks, and we will open up the call and take some questions.

We are pleased to report the first-quarter adjusted earnings ahead of the guidance that we provided on our call in early March. Our results were driven by our merger with Nash Finch and a 2.5% increase in comp-store sales. It's our third consecutive quarter of positive comp-store sales and the largest increase in over four years.

This positive sales performance was due to our ongoing strategic pricing, promotion, and product initiatives; favorable weather events early in the quarter; and a benefit from the timing of the Easter holiday this year, which shifted the post-Easter week of low-volume sales out of the first quarter and into the second quarter.

Now reviewing our food distribution segment results, sales showed significant growth from the prior year, due primarily to the sales contributions from Nash Finch and a 4.4% increase in our legacy operations as a result of a new customer last year, as well as the timing of the Easter holiday. We continue to enhance our value-added service offerings and find new ways to help our distribution customers gain and maintain a competitive edge through productivity and efficiency initiatives.

To this end, in February we consolidated the operations of our Cincinnati, Ohio, warehouse into our Lima, Ohio, facility. This move has not only improved our operational efficiencies but also improved the service to our customer base, as we have increased the overall inventory turns and product assortment for those customers who were previously served by the Cincinnati facility.

We are committed to realizing the potential of our buying power, maximizing our efficiencies, and providing products and services that best support our customers. I am happy to announce that we have just completed negotiations on our labor agreements at both our Westville and Bellefontaine facilities.

Net sales in the retail segment were also up significantly due to the merger and positive comp-store sales in our legacy retail operations. Comp-store sales excluding fuel increased 2.5%.

As anticipated, sales benefited from the timing of the Easter holiday. And we estimate that the shift of the post-Easter week of sales into the second quarter had an approximately 70 point positive impact on comp-store sales. These gains were partially offset by $15.6 million in fewer sales due to the closure of certain stores and lower retail fuel prices compared to the prior year.

We continue to believe that the successful retailers of the future will be those that are best able to connect with the consumer base, based on their shopping experience and what they continue to desire. As a result, we have engaged a loyalty management company to help us leverage and further develop our analytic capabilities and to apply the findings to allow us to serve our consumers on a more personalized basis.

We are currently in the development stage of our new system and hope to begin piloting the system in the next month or so. While we currently only deploy our loyalty program in Michigan, these learnings should help us across all retail banners and in serving our distribution customers.

On the product side, we continue to drive both retail and food distribution sales through the expansion of our private brand program. During the first quarter we added approximately 100 net new products, and we expect to add approximately 300 unique new items for the full year.

We also continue to focus on private brand penetration, and at the end of the first quarter private brand unit penetration in our Michigan retail operations was at 24.7%, which continues to place us above the national average. The penetration in our Western stores is not quite up to this level and represents a growth opportunity for us as we are able to reset, remodel, and reflow these stores over the next couple of years.

This was the first full quarter of military operations under SpartanNash, and sales in the military segment were less than anticipated. We expect that as the commissary system returns to a more normalized operating environment, sales will rebound to more historic levels.

We continue to believe that we offer the best model for supplying the military's needs and are exploring other opportunities to serve even more sectors of the government's operations. Additionally we recently completed a major expansion of our military distribution center in Landover, Maryland, which we expect will improve operational efficiencies and open up new markets.

Moving on to our capital plan, during the first quarter we completed three major remodels and store re-banners. We also closed three underperforming supermarkets, one of which was subsequently sold during the second quarter. This brings our store count to 169 supermarkets and 32 fuel centers at the end of the quarter.

During the second quarter, we plan to complete three major remodels including two re-banners and to begin construction on four more. In addition, we plan to begin construction on two new stores, one of which is scheduled to open in Indiana in the third quarter and the other in North Dakota in early 2015.

For all of fiscal 2014, we plan to complete 10 major remodels and five minor remodels. We also plan to complete 16 store re-banners, build up to two fuel centers, begin construction on two new stores, and expand the military distribution center just mentioned.

As we have discussed previously, we plan to continue to evaluate our store base to ensure that all of the locations meet our brand and profitability requirements. We have closed three stores year to date and continue to believe that as many as 10 stores may be closed in fiscal 2014.

Before I turn the call over to Dave, I want to make a brief comment on our integration efforts ongoing at SpartanNash. We continue to be highly optimistic about the merger and how the two companies are coming together. While we are still early in the process, the integration is on track and we are absolutely pleased with our progress to date.

We plan to begin the systems integration work later this summer and through the fall, including consolidating our general ledgers and our retail stock ledgers as well as various distribution and merchandising systems. As a result, we continue to expect that we will meet or exceed our current-year synergy target and believe synergies will accelerate in 2015 and 2016, ultimately reaching our $52 million synergy target as we had previously communicated.

With that overview, I will turn the call over to Dave for more details on our financial results and outlook for the remainder of fiscal 2014. Dave?

Thank you, Dennis. Good morning, everyone. As a reminder, our fiscal year-end was changed from the last Saturday in March to the Saturday nearest to December 31; and as a result our first quarter consists of 16 weeks.

Consolidated net sales for the first quarter increased 199.1% to $2.3 billion compared to $780.3 million in the year-ago quarter. The increase was due to $1.5 billion in sales from Nash Finch, a comparable-store sales increase of 2.5% in our legacy stores, and sales to new food distribution customers. As Dennis mentioned, we benefited from the later timing of Easter this year, which accounted for approximately 70 basis points in comparable-store sales, and favorable weather conditions early in this quarter.

Consolidated gross profit margin for the first quarter was 15% compared to 22% in the prior year due to the shift in sales mix between divisions as a result of the merger and the impact of continued low inflation. In addition, in the first quarter we incurred a LIFO charge of $2 million compared to a $400,000 credit last year.

First-quarter adjusted operating expenses were $317.1 million or 13.6% of net sales, compared to $149.4 million or 19.1% of net sales last year. The increase on an absolute basis was due to the inclusion of the Nash Finch operations, including a $2.1 million step-up in depreciation expense resulting from the reevaluation of assets acquired in the merger, as well as an additional $2.8 million in stock compensation expense versus the prior year. The decrease in rate was due primarily to the shift in sales mix between divisions as a result of the merger.

These results exclude $4.2 million in expenses related to the merger; $1.4 million in asset impairment and restructuring charges; and $1.3 million in gains on asset sales in the current year's first quarter; and $1.2 million in asset impairment charges in the prior-year first quarter.

Adjusted EBITDA for the first quarter was $64.9 million or 2.8% of net sales compared to $35.6 million or 4.6% of net sales last year. Adjusted earnings from continuing operations for the first quarter were $15.2 million or $0.40 per diluted share on approximately 37.7 million shares outstanding, compared to $11.4 million or $0.52 per diluted share on approximately 21.8 million shares outstanding last year.

These results exclude a number of one-time and unusual expenses including expenses related to the merger of $0.07 per diluted share, and asset impairment and restructuring charges for store closures and the closure of the Cincinnati, Ohio, distribution center of $0.02 per diluted share, partially offset by gains on sales of assets of $0.02 per diluted share. For the prior-year first quarter, adjusted earnings from continuing operations exclude a debt extinguishment charge of $0.08 per diluted share and asset impairment charges of $0.03 per diluted share.

Turning to our operating segments, first-quarter net sales for the food distribution segment were $971 million, compared to $336.7 million in the year-ago quarter. The increase in sales was due to $619.6 million in sales from Nash Finch and new business gains.

First-quarter operating earnings for the food distribution segment were $19.3 million, when adjusted to exclude $4.9 million in expenses related to the merger integration and restructuring, versus $19.3 million last year, as the gains from the sales volumes of Nash Finch's food distribution operations were largely offset by: $2.6 million of the accelerated compensation expenses due to modifications of our stock compensation plan; a $2.1 million step-up in depreciation expense resulting from the revaluation of assets acquired in the merger; $1.4 million in higher LIFO expense; and lower inflation-related gains.

In our retail segment, first-quarter net sales were $678.6 million compared to $443.6 million last year. The increase in sales was due to $241.4 million in sales from Nash Finch and positive comparable-store sales, partially offset by $15.6 million in fewer sales due to store closures and lower retail fuel prices. Comparable-store sales excluding fuel increased 2.5% for our Michigan retail operations.

Retail segment operating earnings for the quarter were $7.1 million when adjusted to exclude $600,000 in net gains on asset dispositions and impairments, versus $3 million last year when excluding asset impairment charges of $1.2 million. The improvement in adjusted operating earnings was due to our merged retail operations and closed store locations, partially offset by lower inventory gains due to the lack of inflation, lower fuel profitability, and $500,000 in higher LIFO expense.

In our military segment, first-quarter net sales were $684.2 million and operating earnings were $5.6 million, including $500,000 in LIFO expense.

From a cash flow perspective, our current year-to-date period operating cash flow was $32.6 million compared to $35.4 million for the comparable period last year. The decrease was the result of the change in timing of incentive compensation payments due to the change in fiscal year-end, and $7.6 million in payments related to merger integration activities, partially offset by other working capital changes.

Total net long-term debt was $590 million as of April 19, 2014, versus $142.4 million at the end of the first quarter last year, due to the incurrence of $436.1 million in debt as a result of the merger and the acquisition of two supermarkets, offset by the positive cash flow from operations.

I will now provide further detail in our outlook for the second quarter and full year of fiscal 2014. Given the continued lack of center store inflation and a consumer that is pressured by low income growth and higher energy costs, we are cautiously optimistic about the second quarter. While we expect to benefit significantly from the merger, we will be facing difficult sales comparisons in our legacy business as we cycle the acquisition of a retail store and the new distribution customer last year.

We will also be impacted by lower sales due to closed stores and the impact of the post-Easter selling week. Despite these headwinds, we continue to expect retail comparable sales to remain positive, ranging in the 0.5% to 1% range.

Due to these sales factors, the impact of the step-up in depreciation, and the expectation that LIFO will continue to negatively impact results, we are anticipating that adjusted net earnings per share for the second quarter will be at or slightly below last year's comparable second-quarter results of $0.46 per diluted share.

On a full-year basis, we continue to expect fiscal 2014 consolidated net sales to increase between $7.9 billion and $8.04 billion, adjusted EBITDA to be in the range of $230 million to $239 million, and adjusted earnings per share from continuing operations to be approximately $1.65 to $1.75, excluding integration costs of approximately $7.4 million after tax and other impairment and one-time expenses. We expect that capital expenditures for fiscal-year 2014 will be in the range of $77 million to $82 million, with depreciation and amortization in the range of $89 million to $93 million, and total interest expense in the range of $26 million to $28 million.

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

In conclusion, we certainly are encouraged by our first-quarter performance, which reflects our merger with Nash Finch. Our top priority remains the successful integration of our merged companies. And as I previously mentioned, we are pleased with our progress to date.

We also are committed to increasing shareholder value and are taking steps to drive our top and bottom line in the current environment, including investing in our retail food distribution and military segments, refining our promotional efforts, and strengthening our private brand offering and loyalty programs. We continue to be in a strong financial position and intend to leverage our competitive position, scale, and financial flexibility to take advantage of other strategic opportunities that may present themselves to us.

With that, we will now open up the call and take some questions.

(Operator Instructions) Karen Short, Deutsche Bank.

Good morning. It's actually Shane Higgins on for Karen. Thanks for taking the questions. Hey, you guys, what was the actual cost inflation in the first quarter?

Cost inflation from a distribution perspective in the quarter was just under 1%. It was actually 0.93%, as we tracked it.

Okay. Is that picking up at all into the second quarter to date?

You know, we are four weeks into the second quarter; we don't really have that tracked at this point as robustly as we normally would at the end of the quarter. I would say I think it's important when you talk about the inflation and it's 1% at the wholesale level, that is really being driven by only a couple of categories. I mean, meat, seafood, and dairy really drove that.

But the balance of the portfolio was really in some instances deflationary as it relates to dry grocery. So it's very lumpy in terms of how the inflation is coming at us.

Okay, great. Just, if I can ask on the comp, so the 2.5% comp, that is just the legacy Spartan stores, correct?

That's correct.

What was the breakdown between the traffic and the average ticket there?

We actually were slightly negative in transaction count, and we were positive in sales per transaction. That actually was driven by items per transaction being nicely up in the quarter.

We also continue to have pretty robust performance in pharmacy as well, and that comped positive. We are getting some inflation there. But even the script count, we have gone now 13 consecutive quarters with positive script count in pharmacy.

Okay, great. I don't know if you guys can give any color on how the Nash Finch stores are comping.

Well, obviously they are not in the comp. So they are -- probably the run rate of what you had historically seen on comp would have excluded the most recent market that we acquired, which was Omaha. And that business is probably running relatively similar to what it was before.

Omaha, like I said we're trying to get cycled through, a little tougher market. Walmart has certainly deployed lots of real estate in that market in the last year, so that's a little bit a tougher market for us at the moment.

Okay, thanks for the color. Just one last one, just a housekeeping question. Like what's the stock-based comp that you guys have built into the EBITDA guidance for the year? I think it was about $3.5 million for the first quarter; and that implies around $11 million or $12 million on an annual basis. I don't know if that's the right way to think about it.

No, really it accelerates. So the way it works is you get a -- well, the way it vests is because it continues to vest through retirement, once an associate hits retirement eligibility, whether they intend to retire or not, we have to immediately expense the entire grant, even though it vests over four years. So what happens now, because our grants are in the first quarter, we get a significantly higher amount in the first quarter.

And I think you will see it come out somewhere in that -- off the top of my head I think $6 million to $7 million range for the full year. You will actually see -- $6.9 million I think is what I guess, to be more precise. But I think what you will see is in the second and third quarter you actually will see a slightly favorable impact each quarter because of that acceleration in the first quarter.

Got it. Okay, guys. Thanks so much.

Scott Mushkin, Wolfe Research.

This is actually Mike Otway in for Scott. Thanks for taking the question. Just following up Shane's question on the legacy Nash Finch stores, you guys clearly haven't owned that business for a long time, but can you share some thoughts on what you're doing strategically with those stores to improve the sales levels?

And then are they priced where you want them to be? Is there a need to be some price investment over time? Just any color there would be great.

Sure, sure, we'll do that. We mentioned in the comments that the legacy Nash doesn't enjoy the benefit of having any kind of a CRM program. Ultimately we will be looking to deploy a loyalty program down the road in that portfolio of stores.

We are also looking to re-merchandise and reflow many of the stores in the portfolio. And some of that will take place in the next six months.

We have also got a fair number of remodels that are going to take place. We are making a particularly significant investment up in the North Dakota market, where we are getting strong population growth.

North Dakota has the lowest unemployment rate in the nation at 2.7%. I think I mentioned in the last call it's kind of refreshing to be in markets where population is growing and there's full employment.

So you can expect that we will be deploying capital strategically in the Nash Finch portfolio over the next couple years.

Okay, that's really helpful. Then, Dennis, I know you touched on the military business briefly, but last year seemed pretty difficult with sequestration. How are you guys thinking about the business this year and a little bit longer term from a growth perspective? I guess, what gets the commissary business back to a more normal run rate?

I think everybody -- obviously the sequester and all was difficult for the whole system a year ago. I think everybody is a little surprised that there is some softness that we are experiencing now with regard to commissary sales.

I don't know that anybody has put their finger on exactly why. We have recast those sales from a year ago into current quarters, and you will do the math; you will see -- I think that number is 3.3% or 3.4% negative as it relates to the MD segment.

I think we're trying to work with DeCA to help do some things to improve their performance at retail, and I think that can bear some fruit. Obviously we will cycle some of the real negativity around sequester that we had a year ago; that will bear some fruit.

And it's also worth noting that as you look at DeCA sales this year, weather was really difficult. The Southeast got lots of snow. I think there's something like 200 commissary days of closure as a result of the weather that we incurred in Q1.

And those sales just don't bounce right back, right? Because a family needs goods and they go out and get them, and we are not available, or the distance is too long to slog through the snow.

So there were a combination of factors, but admittedly it doesn't feel as robust as we'd like it to feel. But we think long-term that we can get it back on a more normal run rate as we collaborate with our partners at DeCA and our CPG partners to move more tonnage through.

Okay, that's really helpful. I guess one quick one for Dave. The three stores that you closed in the first quarter, can you break that down between your legacy Spartan stores and the Nash stores?

That would be one in legacy, two in the new stores.

Okay, thank you very much. I appreciate you taking the question.

Ben Brownlow, Raymond James.

Good morning. Can you guys -- just digging into the retail same-store sales for the Spartan legacy, can you discuss a little bit more or give some color around what you're seeing between some of the upmarket brands like D&W versus the more value-centric type of banners like Family Fare?

Yes, you know it's kind of repeating the same old story that we've had for a while. But D&W continues to perform extremely well, had very strong comps, about 2% better than the Company comp. So that bifurcation continues to play itself out.

Even through this Ground Zero for the recession, D&W being in the upscale markets with an upscale offer has been our shining star. So continues to be the case.

Moving to the cost side, you noted meat and seafood and dairy. What were you seeing in a promotional environment, competitive landscape in those categories? Did you -- I guess how well were the consumers absorbing those higher prices?

Yes, it's -- the proteins are the biggest challenge. Beef being the backbone of the meat department has really been challenged. You're looking at retails even on, like, grinds which is supposed to be the economic alternative in beef, that are up to $1 more a pound that we had a year ago.

So we're getting an inflationary impact in our sales on meat; but the tonnage is showing some signs of stress as consumers are looking for more ways to stretch that dollar. So we are seeing that.

Promotionally it has been a little stubborn, I would say, at retail, with getting the price points to move probably at the rate that we would expect or one would hope they would move, to consistently maintain margin rates. But that is pretty typical in an environment like this where you are having that kind of inflation.

I beef on a year-to-date basis on the CPI is up nearly 6%. Actually I think it's a little more than 6%. I mean, pork is a little less than 6%. Seafood is at 6%.

That 6% on top of what last year was already a high number is causing I think that consumer to pause a bit. But I would say to you that the pricing, it's not irrational. It's maybe just slower to move.

That's helpful. Just last one for me, are you seeing any or have you realized any purchasing synergies with the merger yet?

I'd say the answer is yes, we have.

Okay, great. Thank you, guys.

(Operator Instructions) Ajay Jain, Cantor Fitzgerald.

Yes, hi. I mainly wanted to get your feedback on the Safeway developments, if there are any developments for you based on that transaction. I don't think you have a lot of direct overlap with Safeway or Albertsons.

But now that you've got the distribution network from Nash, could you potentially supply or even acquire some locations based on any divestitures by Cerberus?

We have very little overlap, Ajay. I mean, we have a little bit in the upper Midwest of overlap, but it's really de minimis. I would say that I think the likelihood that we are in a position to benefit from that transaction are not real high.

Okay, I was just wondering if you could facilitate any activity for your distribution customers, or even if you would have any direct interest potentially in the former Dominick's locations.

Yes, even the Dominick's thing has, A, been pretty well picked over. And, B, we just don't have a lot of presence in Chicago, quite frankly.

It was interesting where geographically quite close to Chicago that's been a trade area that both Spartan and Nash have not enjoyed a significant amount of market share.

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, Gary. I would like to take this opportunity especially to thank our associates for their really extraordinary efforts in bringing our two companies together while continuing to execute on their day jobs.

I thank all of you on the call today for your continued interest in our Company. And that concludes our first-quarter fiscal 2014 conference call, and we look forward to speaking with you again next quarter. Thanks.

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