SpartanNash Co (SPTN) 2016 Q2 法說會逐字稿

Good day and welcome to the SpartanNash Company's second-quarter 2016 earnings conference call and webcast.

(Operator Instructions)

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

Thank you. Good morning and welcome to SpartanNash Company's second-quarter FY16 earnings conference call. By now everyone should have access to the earnings release for the second quarter ended July 16, 2016. For a copy of the release please visit SpartanNash's website at www.spartannash.com/investors.

This call is being recorded and a replay will be available on the Company's website for approximately 10 days. Before I begin we'd 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 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 amongst food retail and distribution companies, the uncertainties inherent in implementing strategic plans and general economic and market conditions.

Additional information about the risk factors and uncertainties associated with SpartanNash's 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 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 a comparable period measure to provide investors with useful information about the Company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and the other information as required by Regulation G is included in the Company's earnings release which was issued after market close yesterday.

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

Thanks, Katie. Good morning and thank you for joining our second-quarter FY16 earnings conference call. With me this morning are Dave Staples, our EVP and Chief Operating Officer; and Chris Meyers, our EVP and Chief Financial Officer, as well as other members of our Executive team. On the call today I'll provide a brief overview and highlights of the second quarter. Dave will then give you an update on our business segments and Chris will offer you additional detail on our financial results and guidance before I issue some closing remarks and then we will open up the call and take some questions.

We are generally pleased with our second-quarter performance and continued traction on our overall business plan. We achieved adjusted earnings per diluted share of $0.58,which was $0.05 better than the prior year against the backdrop of a challenging operating environment as our efforts to drive new business and improve operational efficiencies helped to mitigate the impact of deflation on our bottom line.

We continue to take steps to position the Company for growth through new customers, enhancements to our merchandising, pricing and promotional strategies and by improving operations and expense leverage through our supply chain optimization and merger integration efforts. We are excited about the initial rollout of Open Acres our new private brand for fresh products as this will provide customers and both Company-owned and independent store locations with quality fresh products at a significant savings. We also continue to invest in select retail markets and recently completed the eight remodels and re-banners to Family Fare in Omaha, Nebraska, improving our offering to the customer while highlighting our variety and value especially as it relates to produce and private brand.

On the distribution front we continue to be encouraged by our diverse pipeline of sales opportunities. I'm very proud of our dedicated associates, who continue to work hard to drive greater customer engagement, improve the overall shopping experience and ensure excellence for our retail food distribution and military customers and for our organization as a whole and its ability to deliver upon our commitments to our shareholders. And with that I'll turn the call over to Dave.

Thank you, Dennis. The second quarter was another example of the successful execution of our key operating initiatives. In our food distribution segment, despite continued deflation primarily in protein and dairy, we generated sales growth over last year mainly due to new accounts in our core business as well as growth in alternative channel. We believe the sales pipeline continues to be strong as we remain focused on providing supply chain solutions for a variety of different industries.

During the quarter we continued to expand our merchandise and marketing programs with our independent customers and we continue to work on initiatives to improve operations, including our supply chain optimization and asset utilization efforts. As a result, we consolidated our warehouse in Statesboro, Georgia, with our facility in Columbus, Georgia, midway through the quarter, which represents the fifth distribution center we've consolidated since the merger with Nash Finch in 2013. The organizational efforts involved in these undertakings highlights our dedication to improving the efficiencies of our entire network and providing enhanced product freshness and selection as well as lower cost to our customers.

In the retail segment sales were negatively impacted by the deflationary environment, also primarily in proteins and dairy as well as competitive store openings, many of which were cycled by the end of the second quarter and will be cycled through the third quarter. We estimate that these factors combined had an impact of approximately 200 basis points on comparable store sales. From a geographic standpoint, in Michigan we've been extremely pleased with customer response to our five remodeled stores and are seeing positive returns from the improvements to our shopping experience particularly in produce.

The grand reopening for our Grand Haven D&W store was held in mid-June to very positive customer response and we look forward to continued application of these successful experiences and strategies to our other retail stores. In the West, although we cycled some competition, we negatively impacted comps at eight of our Omaha stores due to significant remodeling efforts. Additionally, one of the more significant ongoing issues in this region remains the downturn in the oil economy which has had a significant impact on our stores in North Dakota.

Following the close of the quarter on July 20, we celebrated the grand reopening for these eight re-bannered and remodeled Family Fare stores and relaunched the Omaha region of 14 stores as Family Fare. As part of this initiative we have invested in programs and product variety that make these stores more in line with today's consumer expectations. While our focus was across the store we have made strong investments in produce and our private brand products that ensure our customers have access to a wide variety of organic produce and other such products.

We are also focusing on value, particularly on key products and categories where we have some of the lowest pricing in the region. We also completed the rollout of our customer loyalty program that launched an exciting and comprehensive marketing campaign with TV, radio, print and in-store signage to better highlight the variety and value that we offer across the Family Fare banner. Additionally, we continue to invest in our analytical tools and believe that our customer segmentation model will enable us to better understand our customers and personalize their offers based on the products and value they desire.

On the product side, we continue to expand our private brand program for both our distribution customers and Company-owned stores with a focus on healthy and fresh items. During the second quarter we began rolling out Open Acres, our new private brand for fresh product. We piloted the brand in Michigan and began rolling it out to other parts of our distribution and retail networks at the end of the quarter.

We will continue to expand our product offerings with fresh chicken and other proteins in the third order. This new brand has been well received and closes the gap in our portfolio of private brands that existed in our non-Michigan footprint. It also provides high-quality products at a significant savings to our customers.

For the second quarter, private brand unit penetration in our retail operations was 21.1%, which continues to place us above the national average. We ended the quarter with approximately 7,000 total private brand items.

Turning to the military segment, we were pleased to see positive sales growth of 1.7% over the prior year, which significantly exceeded the performance of DeCA. The sales gains were primarily due to the expanded distribution of fresh product. We continue to work on increasing our service offerings to new and existing vendors and to focus our efforts on sales and margins in our core business.

With that I'll turn the call over to Chris for further details on our financial results and an update on the outlook for 2016. Chris?

Thank you, Dave, and good morning, everyone. I'll begin with a detailed overview of our second-quarter results and then review our guidance for FY16.

Consolidated net sales for the 12-week second quarter increased to $1.83 billion or 1.8% growth, compared to the prior quarter. Consolidated gross profit margin for the second quarter was 14.4% versus 14.6% in the prior-year quarter. It primarily reflects the mix of business operations, new business and deflationary impacts.

Second-quarter adjusted operating expenses decreased $1.5 million from $224.9 million to $223.4 million and improved 30 basis points on a rate to sales basis compared to the prior-year quarter when excluding charges primarily related to restructuring and merger integration for both periods and net gains on property sales and expenses related to tax planning initiatives in the prior year. The adjusted second-quarter results exclude $5.7 million of restructuring costs associated with warehouse consolidation and asset impairments of underperforming retail stores and $900,000 of ongoing merger integration and acquisition costs.

The prior-year quarter excludes $300,000 of gain from the sales of assets and $200,000 of merger integration and acquisition costs. The decrease in adjusted operating expenses as it related to sales was primarily due to lower depreciation expenses associated with fully depreciated assets, utility and occupancy costs and various operating expenses resulting from productivity and efficiency initiatives, partially offset by higher healthcare costs. Adjusted EBITDA for the second quarter increased $200,000 to $58.7 million or 3.2% of net sales versus 3.3% of net sales last year.

Adjusted earnings from continuous operations for the second quarter increased $1.9 million to $21.7 million, or a $0.05 per diluted share increase to $0.58 per diluted share, compared to $0.53 last year. These results exclude net after-tax charges of $0.11 per diluted share related to the adjustments previously mentioned. For the prior-year second quarter, adjusted earnings from continuous operations included net after-tax gain of $0.01 per diluted share in related to a benefit associated with tax planning initiatives as well as previously mentioned adjustments.

Turning to our operating segment, second-quarter net sales for the food distribution segment increased to $820.3 million from $782.7 million in the prior-year quarter primarily due to new business gains but also the growth of existing accounts. Second-quarter adjusted operating earnings for the food distribution segment increased 16.7% to $21.6 million from $18.5 million last year. The increase was primarily due to new sales, supply chain optimization efforts, merger synergies and lower depreciation expense, partially offset by higher healthcare costs.

In our retail segment, second-quarter net sales decreased $14.3 million to $501.8 million due to a 3% decline in our comparable store sales excluding fuel. $9.8 million in lower sales due to retail store and fuel center closures and $4.1 million due to lower retail fuel prices compared to the prior year. These were partially offset by contributions from the stores acquired in the second quarter of last year.

Comparable store sales reflect the challenging economic and deflationary environment as well as competition, particularly in our Western region. Retail segment operating adjusted operating earnings for the quarter increased to $15.5 million from $14.7 million last year. The increase was primarily due to improved fuel margin, favorable rebate programs and lower operating costs, particularly in utilities, partially offset by the impact of lower sales.

In our military segment, second-quarter net sales increased $8.4 million to $505.4 million, primarily due to new business gains associated with the distribution of fresh products, partially offset by lower sales at DeCA operated commissaries. Military adjusted earnings were $2.2 million compared to $3.9 million last year. The decrease was primarily due to higher healthcare costs, a lack of inflationary gain and changes in business mix.

From a cash flow perspective, our current year-to-date operating cash flow was $54.7 million, compared to $123.4 million for the same period last year. The decrease was due to changes in working capital, particularly around the timing of vendor and tax payments and increased working capital requirements to support sales growth. The total long-term debt was $468.7 million at the end of the quarter, compared to $464.1 million at the end of FY15.

We ended the quarter at a net long-term debt to adjusted EBITDA ratio of 2 times which meets our stated, targeted ratio. As we look to the second half of the year, we are cautiously optimistic given the deflationary environment. But we remain on track to achieve our financial objectives for the year.

Based on the first-half results and our outlook on the remainder of the year, we are maintaining our previously issued 2016 guidance of adjusted earnings per share from continuous operations of approximately $2.07 to $2.18, excluding merger integration costs and other one-time expenses and gains. Our guidance is based on expectations for the second half of the year of sales growth in the food distribution segment, continued contributions from the new fresh business in our military division, which will lessen the volume impact of negative comp trends at DeCA operated commissaries, slightly negative to flat retail comparable store sales, reflecting the deflation and competitive sales environment, partially offset by improvements resulting from capital investments, merchandising initiatives and the cycling of competitive openings.

From a profitability perspective, we continue to anticipate that the fourth-quarter adjusted earning per diluted share from continuous operations will be lower than the prior year due to significant inflation-related benefits from LIFO realized in the fourth quarter of 2015 of approximately $0.07 per diluted share. We continue to expect that capital expenditures for fiscal year will range of $72 million to $75 million with depreciation and amortization in the range of $76 million to $78 million and total interest expenses ranging from $18 million to $20 million.

I will now turn back over to Dennis for his closing remarks.

Thanks, Chris. In summary, I am pleased with our continued execution on our strategy of delivering profitable growth and shareholder value. Despite the ongoing economic conditions and competitive headwinds, the underlying fundamentals of our business remain solid and we have a number of growth initiatives underway as well as a strong pipeline of sales opportunities. We continue to make investments in our business through projects and process improvements that we believe will drive earnings and free cash flow in the future years.

We continue to implement initiatives to enhance our merchandising, pricing and promotional strategies in order to drive greater customer engagement and improve the overall shopping experience. We also continue to invest in select retail markets and to expand our natural and organic offerings and private brand, including our new fresh Open Acres brand, to provide our customers with quality products at affordable prices.

We remain focused on operating our business with a disciplined approach in driving improved operational efficiencies through the supply chain and our food distribution and military channels. With a strong balance sheet we will also proactively pursue financially and strategically attractive acquisition opportunities.

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

(Operator Instructions)

Scott Mushkin with Wolfe Research.

Hey, guys. Thanks for taking my questions, and as I always say, wow, talk about taking lemons and making them lemonade, because I think last time we talked the industry was not doing well, but it seems like we've really stepped down if you look at the CPI numbers and, of course, some of the competitive climate.

So I guess my question is -- as you look at the back half of the year, what do you guys think are the biggest risks? We haven't seen Walmart move into territories where you guys are and lower price. I don't think that company is on a sustainable path.

But I was wondering, if you guys look at your Business, is there any light at the end of the tunnel as far as the industry environment goes? Do you worry about Walmart expanding into -- the price-cutting into your areas -- and just your state of the union as we look at the back half.

That's a lot of questions there. So I think we provided some pretty specific guidance on the back half of the year. When you look at the segments, we're calling out that food distribution is going to be positive in the back half, and we identified retail comps of being slightly negative to flat. And that is despite headwinds, and there are.

And the deflation is the elephant in the room. Everybody is fighting with that, as are we.

We were 2.1% deflationary in our wholesale business and 1.09% deflationary in retail. So we've got to digest that. We don't think that's going to fix itself in the back half of the year. I believe that we will be deflationary, and I believe the full retail will be deflationary for the whole year.

We've got some positive things going. We talked about the relaunch of Omaha. We rebranded in eight stores in that marketplace, and launched them early here in the third quarter. And we bolted on the six stores that we rebranded a year ago to Family Fare, so it's like a 14-store launch. We expect to get some benefits from that.

We also think we will be cycling some competitive activity, and have cycled some that will also improve our comp run rate in the back half of the year. So we are, I think as Chris pointed out, cautiously optimistic. We feel pretty good about being able to maintain the guidance of $2.07 to $2.18, and in spite of a pretty difficult environment. I don't think when we put those numbers out at the end of last year we were expecting to be this deflationary, or deflationary at all.

So pricing, Scott, is very dynamic. It's market specific. We watch all of our competitors every day on pricing, including Walmart. I think we stay very in tune to that. We will act accordingly as the market dictates. But right now I would not characterize the activity that we see with regard to promotion and pricing as being irrational in the markets we are operating in.

Thanks for that answer.

Kind of a quick follow-up -- obviously, you have your own retail business, but then you have the distribution business where you are serving retail customers -- and then you have multi-business. But if we were to look in the current trends, obviously the deflation has gotten worse, and at retail I think there's a lot of debate -- is it -- we hardly ever see deflation at retail unless the economy is poor, but we are seeing it this time.

So as you look at your distribution business, and we fast-forward, say your customers in that business come under a lot of pressure, how do we think about your contracts with them, how you deal with them, and if the business deteriorates further at retail specifically, vis-a-vis your distribution business? And then I'll yield, and thanks for taking the questions.

Hey, Scott. This is Dave. Well, I think it's a dynamic world out there, right? And so the way we look at distribution, there's multi-fronts that we focus on. So with our current base of customers, we're constantly striving to stay in tune with the best, the latest, and most important trends at retail, and help offer them programs to combat -- and get in line with those trends, and combat competitors and grow their business that way.

One way we work with them is to sell them more and different items that change the complexion. So even though the retail world could be difficult, we're looking to sell more organics to them, more fresh products that we may not be selling, or to provide them with programs that would help them drive their center store or fresh better or more effectively than they have in the past.

And so that's what we've always done, and so we've gone through tough times before and we've been able to come up with these kind of merchandising strategies and programs. And we've been able to work our way through that, and I would think we would continue to do that.

In addition, we look at how do we get new customers? And we have historically been very successful at that, and we continue to be successful, and we expect to be successful in the future.

I think from our distribution perspective, it's all about being more nimble. It's all about offering better product and services, and helping our retailers succeed and getting through tough times by getting new customers, as well as selling more to existing customers as we find new ways for them to be more effective.

Thanks, guys. Appreciate it.

Shane Higgins with Deutsche Bank.

Good morning. Thanks for taking the questions. Did you guys really see any meaningful change in week-to-week sales volatility during the quarter? And your comps did improve sequentially; was that fairly even throughout the quarter, and have you continued to see that improvement third quarter to date?

Yes. So our retail sales week by week, obviously any food retailer, we look at store by store every day, right? So there's always something going on, and we -- in fact, we'd say the change in some of it is driven by pay, some of it is pay cycle, some of it is EBT, et cetera. So that's the normal course.

As we came through the quarter, the comps got better as we got to the end of the quarter. We did disrupt our own Business, frankly, in Omaha in Q2. We had those eight stores really tore up. Those were pretty major remodels there. That had a negative impact on the trend as we came through the quarter. Without giving you numerics, we actually started out Q3 much better than we ended Q2.

Great. Thanks for that color.

I know obviously there's a lot going on out West. Just looking at your business in Michigan, obviously you guys have some weather-sensitive areas, northern Michigan, some of the vacation spots. How have trends been in that market? Obviously, not impacted by oil, just trying to get a sense of what's going on, competitive environment with the consumer and whatnot?

Yes, there is a dramatic difference between our performance in Michigan versus our non-Michigan retail portfolio. We just talked a little bit about maybe some self-inflicted pain in Omaha in Q2. Plus, that's a market that was extremely undercapitalized, and we've been working hard to improve our position there in the market.

Really excited about what we are seeing early in the relaunch. We've done some pretty interesting things there.

North Dakota, another difficult market that is a classic kind of boom-bust economy there with the oil industry. And I think I remarked the last time around, and it remains true in Q2, if you look at the latest EBT food stamp numbers, the US distributed 3.9% less dollars in food stamps, and I think the latest month we have information for is May.

North Dakota, actually, they increased food stamp distribution. It's the only state where we operate where there was an increase in food stamp distribution. Just a little bit of color on the economic environment there.

Oft-times reading the data is tough with North Dakota. A lot of people lose their job, they just walk away and they go back to wherever they came. A lot of them went out there transiently to work in that environment.

Michigan, clearly, is performing much better. Northern Michigan, I will say to you, despite the fact that we had a good summer, I would -- relatively speaking from a weather perspective. I don't think any of us believe that we enjoyed the kind of summer that we were hoping. We didn't have any kind of meltdown up there, but I was hoping for more. We got a little bit of additional competitive activity, but, on balance, our real challenges are in the West.

Great. Thanks for that color, Dennis.

If I could just squeeze in one quick one. The six acquired Dan's stores, were those in the comp base in the second quarter?

The Dan's stores --

They were not in the comp base for the second quarter, but they will be for the third quarter.

Got it. Thanks, guys, I'll get back in the queue.

Chuck Cerankosky with Northcoast Research.

Good morning, everyone. I want to touch on Omaha again, in that after the eight Family Fare stores opened, Dennis, how did you feel about their sales pace, and what did they do to the other stores in terms of cannibalization?

Yes, as I just alluded to, we are pretty pleased. It's early. I think we are into week four right now. Is that right, week four?

We are actually slightly exceeding our expectation in the eight stores. The first six stores we did about a year ago, so they joined in to the grand opening launch there. And there isn't a lot of overlap between the stores, so we more look at it as a 14-store kind of endeavor.

And so that market is completely now repositioned and re-bannered to Family Fare, save the three Supermercado stores. They are Hispanic merchandise, very well run, very good stores for us, that have a little bit of a niche there in that marketplace. But it's early, Chuck, but I'd say we feel pretty good.

Okay, that sounds great.

Could you review where the competitive openings have been hitting you throughout your retail territories?

Dave, do you have that off the top of your head?

Sure.

Is that fair for me to just throw the tough questions?

Chuck, you stumped us. (Laughter) Omaha clearly has been a site of significant competition over the past few years, and so one center where we've had the most openings over the past three or so years, would clearly be Omaha. Spotty, but with everything else going in North Dakota -- a couple, I would say, fairly competitive hits there. And then I think we've seen maybe northern Michigan with a few impacts that would've been surprising a little bit to us, but I would say that's where it's been mostly centered.

Okay. And then could you review, please, how gas performed in the quarter, gallons as well as profitability?

Yes, actually we had a good fuel quarter. Despite the fact gas was down about $0.31 a gallon from prior year, and it did negatively impact our sales by about $4 million, just the reduction in the price of fuel.

We were actually positive comp gallons for fuel in the quarter by about 0.5%. It was a good margin quarter for gallons for us, and it was about $0.015 incremental benefit to our EPS in the Q.

You said $0.015?

Yes.

All right. Thank you very much.

Mark Wiltamuth with Jefferies.

Congratulations on turning the military back to positive sales trend. I wanted to -- you mentioned there about the improved fresh sales through the military. Is there something there beyond the poultry distribution you are doing for Tyson, or is that the primary driver?

We are distributing poultry for Tyson in many markets, but we are also in the distribution of fresh beef and fresh pork, as well. So that's driving some nice incremental sales for us, and drove some nice incremental sales in the quarter.

It feels good to get that business top-line positive, we agree with you entirely. And we will be able to enjoy that going forward.

Any thoughts on when the EBITDA performance starts improving directionally, since you got the sales moving now?

I wish you had an easier question. That has their challenges, and I think we don't exactly line up on quarters, obviously.

But they were -- their stores were negative, say, 5% plus in the quarter. And that makes it challenging for everybody that's servicing military resale, and we are included.

We're fortunate that we've been able to bolt on some new business, and despite those headwinds, have been able to get a positive top line. And we're hopeful that we can build on that momentum and get that bottom line to come along with it as we move forward.

So it sounds like the DeCA got worse. It was doing like a negative 4%, and now it's a negative 5%?

Yes, so I guess it did marginally get a little bit worse in Q2.

Okay. And then if you look over at retail, what are the next steps for you as you look at continuing to improve that acquired store base from Nash Finch?

Dave, did you want to take that?

Sure. I think as you look at what we've done, we've really worked hard to position our markets where we feel we have a strong concentration. So, North Dakota, that market from a capital perspective, from a store base, we feel very good about. We just need to get some oil wells opening up again. We don't want oil to go too high, but maybe we want it a little higher than it is.

So I think we are very well positioned there. I think with what we've done in Omaha, we feel very good about what an offer we're putting forth. We're trying some really strong techniques that the team has come up with in that market to differentiate our Business, and I think that feels good.

The remainder of the market, sort of in that Wisconsin-Minnesota zone, will be our next real concentration. We saw some capital deployed there, and to bring that base up, and there's some stores that we're very intrigued by that we think we can make a difference with. But I think it's going to be now a lot more about just continued blocking and tackling, getting Omaha to keep progressing in the manner we want, and then targeted but impactful capital in sort of that Minnesota-Wisconsin area.

Okay. And then a question on gross margins -- the gross margins were down 20 bps here, and one of the things you mentioned there was deflation. Is that in the distribution side that's hurting you on gross margin from deflation? Or just explain how that flows through because sometimes during deflation the gross margin percentage goes up, but the margin dollars are kind of hurt with the weaker sales.

This is Chris. I will tell you deflation impacts every one of our segments in a negative manner. Somewhat differently, but they negatively impact every single segment.

Distribution gets hurt because you don't get -- you get decreases on your inventory value versus increases. You have fewer forward-buy opportunities.

I think in retail, it has opportunities to increase your strength. So it affects negatively all our business segments.

Okay, thank you very much.

Ajay Jain with Pivotal Research.

Hi. I actually wanted to follow up on Mark's question on the gross margin performance. I thought that usually with any kind of incremental deflation, the gross margin percentage should typically increase, even if there's no change in gross profit dollars.

But putting aside the deflationary impact, apart from the change in mix and the new business that you are rolling out with the fresh categories, is there any added pricing pressure that's impacting the gross margin performance? And my question on price competition would really apply to all three segments, if you feel like you've needed to be sharper on pricing in any significant way based on the current operating environment?

I think, we got the question earlier about pricing and Walmart, and I would just tell you we are very tight to what goes on in everyday pricing, promotional pricing. We have a strategy on how we want to position our retail brands with regard to pricing, and we believe in it. And we think it's been relatively effective, so I don't see any sea change there.

And I just, the additional color on the margin piece is -- so you are right that sometimes you can get some stickiness to margins when you are getting deflation at retail, and that would be true. [IGA might be a] really good example of what happened in the quarter where on the Producer Price Index they were negative 75%, right? While the retail didn't immediately go down 75%, so there's an example of that.

In retail, when you look at your inventory not increasing valuation and you take inventories, you end up with inventory worth less than it was the last time you took an inventory, and it has a negative impact on your retail margins. So we feel like, even in retail where there's some stickiness to the gross margin on the cost-sale relationship, but on the devaluation of inventory, when actually in our P&L manifests itself in shrink.

And as Chris pointed out, on distribution, lack of forward-buys, that inventory appreciation, and likewise with military where there is no appreciation of inventory values. We feel that on our P&L.

Okay. And as you're rolling out the new fresh categories, would it be reasonable to assume that gross margin percentage continues to get impacted for the rest of the year, for the back half of the year?

Yes, I think, yes -- I'm not sure it's large enough to make a big difference, so these fresh categories that we are rolling out, which by the way is a big deal and we shouldn't minimize it. We've got like 61 items, I think, in the field now. We've got another 86 coming out in Q3, and we're going to end the year with somewhere about 175 items.

In the non-Michigan environment, the legacy Nash -- we try not to use those terms. We just didn't have a private brand program on the perimeter, so we weren't getting the opening price point covered and now we will be able to do that. And that has an impact not only in our retail stores, but a significant impact with our independent retailers.

We were forced to cover that with third-tier brands to protect the price point. The Open Acres launch I think has been well done. We are really excited about the brand packaging and the deliverables.

But if I were to say, Ajay, boy, let's put X points of margin on that, I think that would be pretty hard for me to do. We know inherently there's a benefit.

Okay, and I also just have a question on the wholesale segment. If you adjust for the impact of Gordy's, do you have any sense for what your organic growth rate would be for distribution segment revenue, like either on a run-rate basis or based on last quarter's performance?

Yes, so, I think what we discussed in the release with regard to the food distribution segment is that we were $820 million of revenue compared to the $782 million of a year ago. And then we said it was primarily due to the new business, but called out and growth of existing accounts. So I guess we're clearly saying there, we'd have been positive even without the Gordy's.

We haven't put a number on that. I don't think we necessarily want to do that, but we are very pleased to be able to say that -- make that statement that it isn't just the Gordy's business. So the team here has been working very hard, as Dave answered earlier with regard to new business and being creative about the type of accounts that we can attract into the portfolio. So we expect that to continue.

Okay. And if I could just sneak in one final question. I think in response to an earlier question, you mentioned that you're cycling out of some competitive store openings, and I think specifically in Omaha. Can you just give an update on how things are looking for the rest of the year in terms of the pipeline for competitive store openings? If you are expecting anything of any significance?

We don't have anything out of the ordinary in the back half of the year.

Okay, thank you.

Ryan Gilligan with Barclays.

Hello, good morning, guys. Just quickly on retail, can you give us the split between traffic and basket?

Yes, we were actually, in the quarter -- with 3% negative you might expect that. We actually were negative both in traffic and in basket size in the quarter. Again, this really is being driven by the West retail. But a little bit more in transaction than it was in basket for the quarter.

And I think to your earlier point, Dennis, the significant trend change for that in the third quarter.

Yes, absolutely. We're off to a much, much better --

In both of those areas.

-- much better start. Yes, sir.

Got it. So there's an improvement on the basket side, too, in the third quarter?

Improvement in the trend.

Got it. Makes sense, thanks.

And then, I guess can you just give us an update on the merger synergies? I know you said recently it will come in about $52 million this year, but can you just give us a sense by maybe how much and what kind of opportunities are remaining beyond that?

Well, we, as we talked about the synergies from day one of the merger, we called out that we would achieve $52 million combined over the three years. We're getting to the end of the three years. We haven't quantified the beat, but we are going to beat the synergies on the three-year, and I think it's been meaningful.

And hats off to the team here. Everybody worked really hard to harvest those. It will be a meaningful beat.

Will they still help margins in 2017?

Will it still help the margins in 2017? I would say that the farther we go, the less impact it will have, I think is a fair articulation of what happens with synergies. They don't go on forever. We do think there will be some synergies that we are going to accrue to the Business in 2017 however.

Got it. That's helpful, thanks.

There are no further questions, so this will conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Okay, William, thank you. And I want to thank everybody for participating today, and that concludes our remarks. And we look forward to meeting and speaking with everybody at the end of next quarter. Thanks.

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