SpartanNash Co (SPTN) 2017 Q1 法說會逐字稿

Good morning, and welcome to the SpartanNash Company First Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Katie Turner for opening remarks. Please go ahead.

Thank you. Good morning, and welcome to the SpartanNash Company's First Quarter fiscal 2017 Earnings Conference Call. On the call from the company are Dave Staples, President and Chief Executive Officer; and Chris Meyers, Executive Vice President and Chief Financial Officer.

By now everyone should have access to the earnings release, which went out yesterday at approximately 4:05 p.m. Eastern time. 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 we 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, distribution in -- food companies; the uncertainties inherent in implementing strategic plans and integrating operations and acquired assets, and general economic and market conditions.

Additional information about the risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the company's first quarter earnings release, fiscal annual report on Form 10-K and in the company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on 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 more 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's now my pleasure to turn the call over to Mr. Dave Staples.

Thank you, Katie. Good morning, everyone, and thanks for joining us today. The format of today's call will include my brief overview of the quarter and an update on our business. Then Chris will give you additional detail on our operating and financial results before we open the call for your questions.

Before we get into the quarter, though, we want to wish Dennis Eidson a happy retirement and thank him for his leadership and providing such a solid foundation from which we will continue to build and grow our company. Under his guidance, SpartanNash has achieved remarkable success, including the transformative merger with Nash Finch and positioning our food distribution, military, and retail segments for continued success and growth. I'm grateful to Dennis for not only his contributions to the company but also for all he has done for me as a mentor and a leader. It is an honor and a privilege to succeed him as Chief Executive Officer, and I look forward to continuing to work with him in his capacity as Chairman. I think he has reminded me many times, by the way, I think I'm still on his speed dial, so I think that relationship will continue closely.

And now back to the quarter.

We're very pleased with our first quarter results, which reflect the successful implementation and execution of our strategies. Our first quarter net sales increased 5.4% to approximately $2.4 billion due to the contributions from the Caito Foods Service acquisition, and organic growth in food distribution. Adjusted EPS also increased to $0.55 per diluted share. Chris will provide additional details regarding sales and earnings comparison in a few moments, but let me first provide some detail on our operating segments and strategic initiatives.

In our food distribution segment, we generated our fifth consecutive quarter of sales and adjusted earnings growth over the prior year, as contributions from Caito and organic sales growth of 4.2% more than offset the negative impact of food deflation.

Consistent with our philosophy of providing increased value to our customers, we are focused on improving and expanding our offering, from new organic products to an enhanced private brand portfolio. I'm happy to report that we continue to see increased acceptance of these programs across our independent customer base. In fact, for the first time ever, our model store event was held in an independent customer's newly remodeled store. For those of you not familiar with this event, a model store is where we set a store with all of our latest programs and design features, and then invite our store managers and independent store owners and managers to see these ideas in a live environment.

We then staff the key departments with category managers to explain why the various programs have been put into place, and the types of results we are getting from them. Turnout for the event was fantastic as we had over 70 independent customers and prospective customers in attendance. As I reflect on this event, there can be no greater honor for our company than have one of our outstanding independent operators choose to host this event.

Additionally, we continue to make improvements to our supply chain, and further optimize our network to gain better economies of scale and attract and retain accounts. We consolidated one warehouse facility during the quarter, and believe there are additional efficiency opportunities to be realized over the next couple of years. With enhanced network capabilities, innovative logistics solutions, and a solid pipeline, we believe we are well positioned to continue to grow our food distribution business.

Finally, during the first quarter, we completed the acquisition of Caito Foods Service and Blue Ribbon Transport, and began integrating them into our operations. Although the integration is proceeding slower than anticipated, I'm extremely encouraged by the demand that appears to exist for our new processing capabilities. It is also great to see how well the teams are working together and that we are seeing the benefits to our organization as we strengthen our fresh product offerings and tap into the significant ready-to-eat opportunities.

We also made progress towards launching production in our new Fresh Kitchen facility in Indianapolis. The kitchen has begun initial operations and is starting to produce a very limited product set. We anticipate completing the start-up phase of this operation by the end of the second quarter to early in the third quarter.

Turning to our military segment. Sales continue to benefit from our fresh business but not enough to offset the ongoing commissary challenges and the impact of the New Year's Day shift. We are excited to continue to support DeCA's private brand initiative and anticipate shipping the first products in the second quarter. We expect the full private brand rollout will take a couple of years, but will have a meaningful positive effect on DeCA's consumer offering well before that completion. We continue to bid on new business and look for additional avenues to better serve our military heroes.

In the retail segment, we're generally pleased with the first quarter results, as we remained on our sales trends despite several headwinds, including the shift of New Year's Day into the first quarter, ongoing deflation, and unseasonably warm weather in our Northern geographies. In terms of region performance, Michigan was impacted by the mild winter, but we've seen sequential improvement in comparable sales trends over the last 5 quarters in the West, despite economic pressures in certain of those markets. We've been particularly pleased with the Omaha region, where we are seeing continued positive results following our store improvements and rebranding to Family Fare.

In the first quarter, we worked towards the development of a new click-and-collect program. Assuming results are in line with our expectations, we will begin to roll out the program in Michigan during the second quarter and anticipate having up to 25 or more stores online by the end of the year.

We continue to be excited about the rollout of Open Acres, our new fresh brand, and the positive response from customers in both corporate-owned and independent retail stores. For the first quarter, private brands' unit penetration in our retail operations was 22.6%, which exceeds the national average. We ended the quarter with approximately 4,900 unique private brand items as we continue to enhance our assortment.

We also continue to refine our customer segmentation, market basket pricing, and data analysis to offer more relevant products and better value proposition to our customers. We have updated our in-store merchandising and are using our retail customer segmentation findings to develop sales enhancing tools for our independent customers.

One final note before I turn the call over to Chris. We are excited to have announced several personnel developments that demonstrate the strength of our management team, our succession planning process, and our ability to attract quality associates.

Most recently, we promoted Kathy Mahoney to President of MDV while continuing her responsibilities as our Executive Vice President and Chief Legal Officer. Kathy is a seasoned executive with proven leadership skills and is a wonderful choice for this role. She's been involved with our military operations for many years and is incredibly passionate about serving the military.

Additionally, we promoted Pat Weslow to our Senior Vice President of Distribution Sales. Pat will oversee all of our customer relationships and sales initiatives for our distribution business. Pat has outstanding experience in our industry and is a fantastic leader. I'm looking forward to his incremental impact on our company.

While we're very excited to promote from within, we are also excited to have recruited some new leadership into the team, including our new Senior Vice President of Supply Chain, Tom Lee, who most recently worked at Walmart. Tom has incredible experience in all aspects of the supply chain, is extremely customer-focused and will bring a very strategic mindset to the team.

I'm incredibly proud of what our management team has accomplished over the years, and these moves only make it stronger.

With that, I'll turn the call over to Chris.

Thank you, Dave. I will begin with some highlights of our first quarter results and then review our guidance for fiscal year 2017.

While we had a slow start to the year with the shift of New Year's Day into the first quarter and unseasonably warm weather in our northern geographies, we delivered adjusted EPS of $0.55, which is better than last year and above our expectations of flat to slightly negative earnings. As anticipated, the New Year's Day shift negatively impacted earnings by $0.03 per diluted share, but the quarter was also negatively impacted by higher health care expenses, some of which were anticipated based on the timing of certain health care funding requirements.

The higher health care expenses negatively impacted the results by approximately $0.04 per diluted share compared to the prior year quarter. The negative impacts were partially offset by a $0.03 per share benefit as we adopted the newly required accounting standard for taxes related to share-based compensation. We expect the new accounting treatment, which is impacted by fluctuations in our share price, to predominantly benefit the first quarter and not materially affect the remaining quarters of 2017.

In terms of operating performance, we had a solid quarter and grew adjusted EBITDA by over $2 million over the prior year based on many factors that were discussed in our review of the operating segments. In our food distribution segment, we generated our fifth consecutive quarter of sales and adjusted earnings growth over the prior year quarters. Sales were up $172 million or 17.3% due to contributions from Caito and organic sales growth of 4.2%, as we continue to leverage our network and provide value-added services to our customers. Sales continue to be impacted by deflation mainly in meat, dairy, and produce. Food distribution deflation for the quarter was 171 basis points, which was lower than the 225 basis points of deflation in the previous quarter. Inflation continued to improve during the course of the quarter and was particularly impacted by produce in the first part of the year.

First quarter adjusted food distribution operating earnings increased 15.1% to $33.1 million, as organic sales growth and supply chain improvements were partially offset by the negative impact of the New Year's Day shift and food deflation.

In our military segment, sales were down 4.6% or $31.2 million due to sales declines at the DeCA-operated commissaries and the shift of New Year's Day into the first quarter, partially offset by growth in the new Fresh segment. Adjusted first quarter operating earnings for the military segment were $1 million, down from $3.7 million due to lower sales volume and the holiday shift, as well as higher health care costs and a large insurance claim in the quarter.

In our retail segment, net sales were down approximately 2.8% or $16.9 million from the same period last year due to a combination of factors, including the decrease in comparable store sales, $11.5 million in lower sales as a result of store closures, and the holiday shift, partially offset by higher sales from increased fuel prices. Comparable store sales, excluding fuel, were negative 2.2%, and reflect a 40 basis point negative impact from the New Year's Day shift. Comp sales were also impacted by competitive new store openings in both our Michigan and West regions, and the impact of warm weather in the northern geographies as well as the ongoing food deflation. When adjusting for the holiday shift and the impact of new competitive openings, our comp store sales slightly improved in the fourth quarter of last year, which demonstrates sequential improvement. Deflation in retail was 88 basis points for the quarter compared to 129 basis points in the fourth quarter of 2016.

First quarter adjusted retail operating earnings decreased 26.7% to $4.5 million versus $6.1 million in the prior year due to higher health care costs, lower comp store sales, and the shift of New Year's Day, partially offset by the improved margin rate and the closure of unprofitable stores.

From an operating cash flow perspective, we used $10.3 million in the first quarter compared to $10 million provided last year. The increase in cash used was primarily due to the timing of working capital payments, which we believe to be temporary. For the first quarter, we also paid a quarterly cash dividend of $0.165 per share, which was a 10% increase from the prior year. We're committed to returning capital to our shareholders, and this was the seventh consecutive year of raising our dividend.

Our total net long-term borrowings increased $249.4 million to $656.1 million at the end of the quarter compared to $406.7 million at the end of 2016. This was largely a result of funding the Caito and BRT acquisitions but also due to the timing of working capital payments.

Net long-term debt-to-adjusted EBITDA ratio, which hasn't been adjusted for the pro forma impact of Caito, was 2.8x and, compared to last quarter, was impacted by the acquisition. We remain committed to our target of 2.0x and, excluding any further M&A activity, expect this ratio to improve over the second half of the year as we grow sales, improve operating efficiencies, and pay down debt as well as incorporate Caito's results into the metric.

Now turning to our guidance for 2017.

We're excited about our growth opportunities and are reaffirming our previously issued adjusted earnings guidance for fiscal year 2017. This guidance is based on the Caito integration meeting expectations for the second half of the year, and the return of a modest level of inflation. Accordingly, and consistent with the first quarter results, we anticipate the second quarter to slightly exceed the prior year's, and continue to work through the integration.

As Dave mentioned, the customer results -- response to improvements that we've made in our western stores, particularly Omaha, has been encouraging. Overall, we're on track to achieve slightly negative to flat comparable retail store sales that improve through the course of the year. In our military business, we expect sales to be impacted by the ongoing challenges at DeCA, but anticipate shipping the private brand products to commissaries during the second quarter. We expect limited financial contributions from DeCA private brand program for the year due to the start-up costs associated with the rollout of the program.

In terms of guidance, we are reaffirming our 2017 adjusted earnings from continuing operations of approximately $2.26 to $2.35 per diluted share. Excluding merger, acquisition, and integration costs, as well as other adjusted expenses and gains, we expect that the reported earnings from continuing operations will now be in the range of $1.99 to $2.08 per diluted share, compared to $2.10 to $2.19 previously. This is based on the expected Fresh Kitchen start-up costs, a retirement stock compensation award, and other anticipated integration and restructuring costs. We continue to expect capital expenditures for fiscal year 2017 to be in the range of $70 million to $72 million, depreciation and amortization now equaling $86 million to $88 million due to the addition of Caito, and total interest expense remaining at $25 million to $27 million.

That concludes my comments. Back to you, Dave.

Thank you, Chris.

In summary, our momentum is strong and we're excited about our prospects. We will continue to provide value and innovative solutions to our customers and further leverage our expertise and extensive network to drive new and exciting business. We have meaningful opportunities for growth through Caito and the Fresh Kitchen, our private brand partnership with DeCA, capital investments, and ongoing merchandising and marketing enhancements in our retail segment. And we believe the continuous improvements in our supply chain network will continue to yield improvements in our operating results going forward. We are confident that our commitment to delivering the best customer focus and service to our distribution and retail customers will result in another year of sales and earnings growth to our shareholders.

We are thankful for the confidence and continued trust of our customers, and for the contributions of our talented and dedicated associates, including our newest, Caito and BRT team members, who make it all possible. Thank you, and we look forward to another successful year, and we'll update you on our progress throughout 2017.

With that, I'd like to turn the call back to our operator and open it up for questions.

Thank you, Mr. Staples. (Operator Instructions) And your first question will come from Chuck Cerankosky of Northcoast Research.

When we look at the quarter, you talked about the warmer weather up north. Was that largely northern Michigan or do the Dakotas enter into that at all?

It predominantly would be northern Michigan. It was a unique winter, I think, somewhat everywhere, but I think Michigan, from a weather perspective, was the most significant.

Okay. And looking at store activity, can you talk about going forward where you expect relos, remodels, openings to occur? And what should we expect regarding additional store closures?

Yes, I mean, as we look across our chain, we'll have remodeling activities throughout the chain. They'll be in Michigan. They'll be in the West. We consistent -- continuously look at our core markets, and we're going to invest as it makes sense. From a closure perspective, it's nothing we really want to dwell on, but we will continue to look at our network and invest strongly in the core parts. And where it makes sense, where stores maybe don't fit the profile we're looking for, we'll continue to look for the best way to maximize the use of those stores, whether that be with a customer or whether that be in another format.

How about new construction, Dave?

We don't do a lot of new construction, Chuck, as you know. I mean, we will occasionally do that. We don't have any significant plans for new construction at this time.

The next question will be from Shane Higgins of Deutsche Bank.

Just wanted to know if you guys had any updates on kind of the level of accretion that you expect out of Caito this year, and then maybe how we should think about how that accretion is going to kind of flow through the P&L. Is it going to be more in the back half of the year? And then I just had a follow-up on the sales.

Yes, we have disclosed that we think the Caito transaction is going to be accretive to our earnings, and that's the degree that we've provided. It is included in our food distribution segment and will be going forward and it's also included in our guidance on a go-forward basis. But we had a start-up phase associated with the Fresh Kitchen in the first quarter from which we had a lot of costs associated with that program, but there was no revenue. We do anticipate the revenue and the eventual contribution to ramp during the course of the year, which would help us as well.

And in terms of the $550 million in sales that you guys expected for this year, is that still more or less on track? And then how quickly do you guys think you can grow that base of sales going forward? It sounds like you have quite a lot of demand for this product.

Yes, I would say in terms of the $550 million, the first quarter, there was extreme produce deflation that hit us, and that impacted the Caito business stronger than it would have impacted some other businesses that we have, but it's all produce. So I'd say it's maybe down a little bit from that previous guidance. But in terms of the ramp-up of the Fresh Kitchen, we have a strong backlog there. We believe that -- we want to make sure we open that Kitchen. We want to make sure we have the quality standards in place and that we're properly able to service customers as we do open the Kitchen, but there is a strong backlog and strong demand for those products.

Yes, I'll tag on to that. I think as you look at the model, too, I believe we lost a week in the first quarter based on when the transaction closed. So there's going to be 1 week less of sales. I believe the ramp-up in the Kitchen is a little slower than we originally anticipated as our customer as well as ourselves worked on menu-ing and quality and all the things you're going to want to do. So I think that's probably pushed that number off a little bit.

But I've got to tell you, I am just shocked at the number of inquiries we're getting and the different types of businesses that we're getting inquiries from. I mean, we don't have a sales force. I'm beginning to think we're never going to need one because people are seeking us out. The team -- the Kitchen was a very state-of-the-art facility, and the design firm that worked with us on it submitted it -- and I'll probably get the name of the magazine wrong, but I believe it was Food Manufacturers Magazine -- and we won like Facility of the Year. And so we just got a tremendous amount of publicity on this. We're getting wonderful inquiries from all different types of industries whether it be institutional or whether it be retail or whether it be other types of services that want to provide meals to people.

And so growth is not going to be the issue, I don't believe. I think it's going to be more just making sure we maintain the processes and the procedures that ensure the quality, and build that reputation that we want to build, and we're going to be very deliberate about how we roll that program out. Speed is not our objective. Top-notch, extreme customer satisfaction is our objective. And so we'll be very, very deliberate about that, but we're very, very excited.

And on the fresh-cut side, I think we're incredibly excited about those type of opportunities as well. And at the same time, we need to make sure the right processes and procedures and systems are in place to ensure that growth is not only of the utmost quality but also of the utmost -- the right profitability where it should be. So all those things we're putting a lot of effort on, and our outstanding associates at Caito, with everything you go through in a merger and launching a whole new business, are just doing a wonderful job and they're incredibly focused on making this into everything it should be. So we're very excited.

Great. And then if I could squeeze in just one more on the click-and-collect initiative. It sounds like you guys are reasonably pleased with how that's started. And just wondering if you could talk a little bit about the economics. Are you guys charging a fee for that service? And do you think you're picking up incremental sales or maybe just shifting sales to pickup from in-store?

Yes, we're very pleased. On one hand, I'm somewhat frustrated that it's taken us this long because this is an initiative we wanted to have in place, obviously, well before now. But I think on the other hand, the team has just done an incredible job on the partner they've picked to the extent where we really believe we're going to have the best-in-class solution when we have it launched here in the second quarter. And so at this point, we're really still in that "let's get the bugs all ironed out," "let's get it working", we'll, next -- within the next week or so, launch an associate test because we never want to turn anything on to the public until we're really confident that it's working right. And I think we're -- we'll run that for several weeks to make sure it's really in tune, and then we begin the rollout.

So in the second quarter, we should be moving forward with this. And as we said in the notes, by the end of the year, we expect to have a number of stores launched. Our belief is it will be incremental sales. We believe that this is going to be a substantial convenience. I mean, if you look at what differentiates our stores from the competition, it's the perimeter, it's our associates and the service we provide. And it's also the convenience. I mean, if you think about how our format operates, they're on your drive to work or they're on your drive home or they're where we end up going on a weekend. And that's a big part of our differentiation. Well, now we make it so you can just basically swing by and let us know when you're in the lot and your groceries are loaded in your car. So we think we can -- we think this will be an incremental play for us. But I'm sure there's some level of trading over, but I think all in all, there could -- it should be an incremental win for us.

The next question will be from Ryan Gilligan of Barclays.

So just to confirm, the step-up in D&A guidance, that's due to Caito, right?

Yes, it's due to us confirming the purchase accounting associated with the Caito transaction.

Okay. So then, I guess what are the offsets that are going to allow you to maintain earnings guidance despite an $0.11 hit from higher D&A? And I guess can you walk us through the scenarios that get you to the high end and the low end of your guidance range?

Yes, I think we remain comfortable with our guidance range, Ryan. And I don't think there's a -- we think the operations are continuing to ramp up and improve, and we think the Caito transaction is going to be able to accrete as it -- what we did in the first half of the year -- or the first part of the year when we initially issued our guidance.

But I think as you look at what happens, we get the integration in place over the course of the year for the business, Caito adds to the profitability, the Fresh Kitchen ramp up adds to profitability, and we continue to improve our core operations. I think that's how you think of our guidance.

Got it. That's helpful. And then just a few housekeeping questions. What are you expecting for a tax rate for the rest of the year? And also, what was the impact of gas margins in the quarter?

Yes, gas margins in the quarter, the profitability for fuel is relatively consistent with what it was in the first quarter of last year. In terms of the tax rate for the year, we did see that onetime pickup in terms of the stock compensation tax impact, but we expected the tax rate to be consistent with what it was in the prior year's. There's no meaningful difference in terms of our tax rate going forward after that.

And on that tax thing -- I guess I'll step into the financial realm for a second here -- that will be a first quarter and a little bit of a second quarter event every year. So while we talk about it as a unique item, going forward it's not a unique item. I mean, this is a new accounting standard that we're required to adopt, and it will now take price fluctuations in our stock into account when the stock options or the stock shares vest.

And so I don't want everyone to walk away thinking this is some onetime tax thing. This is a methodology that will continue and will actually impact us whenever our restricted stock vests. And so just so you know, next year first quarter, we'll have this event again. If our stock price goes up, it's a good guy. If our stock price goes down, it's a bad guy. And there's a little bit of this activity that occurs in the second quarter as well, and so there will be some minimal impact. But we don't expect it to be very significant.

Unfortunately, it'll add more volatility to our tax rate in the first quarter on a go-forward basis.

Exactly.

Got it, that's really helpful. And then just quickly, what was the breakdown between ticket and traffic in the quarter? And where are comps quarter-to-date?

Yes. So, I mean, I think as you look at it overall, you'll find that the traffic was our biggest driver. But it really was, I think, centered in just a few of the regions, and a lot of that, I think, was somewhat weather driven and then just the business in a couple of those regions. But other than that, it was mostly just the normal trends we've had. As far as we go into second quarter, I think we've seen a really nice improvement from the first quarter overall rate, and I think we're kind of on the run rate as we progress through the quarter. So as Chris alluded to, with that holiday shift and the really off weather in January, our trend came much more in line with where we would expect it.

The next question will be from Scott Mushkin of Wolfe Research.

So I had a couple of housekeeping issues to start with and then I want to ask you a question. So the health care expenses you called out, is that a onetime thing? Or is that pressure going to last?

Scott, we're self-insured primarily for health care. We do have a stop-loss aspect of it on an individual basis. But unfortunately for us, health care can be very volatile, and there are quarters that are better quarters than other quarters. And by most standards for us, this was an exceptionally bad quarter from a health care perspective.

So you'd look at it more onetime?

We think that this is higher than what's forecasted to be for us, and we think it's a little bit higher for the -- by any historical means. And so we're hoping that it doesn't continue at that rate. But the other thing you got to consider is we also had a change in the way we did some of our expensing for our health care and the fact that we accelerated some costs based on ways some of the contributions for health care savings accounts happened. And so some of that, which was previously done during the course of the year, was accelerated to the first quarter. So about half of that impact was planned on our part.

Okay. Second question, going back to the last question about guidance. Just want to make sure I understood the nuances here and it's, again, more housekeeping. So you guys increased your D&A expense for the year expectations. That's correct? With purchase accounting?

Yes, so -- yes, let me clarify. If -- I will tell you that was a mistake when we issued our last guidance. Our guidance, when we issued it on an EPS basis, properly reflected D&A. It was probably a last-minute change as we were going through our purchase accounting, and we didn't properly state our guidance for D&A during the course of the year when we issued the individual D&As. But it was reflected properly in our EPS guidance.

Okay, that definitely clarifies that part.

It was a mistake on our part. I apologize.

It happens to me all the time. You've got a lot going on. So -- okay, so those are the housekeeping items. Then my question really goes to a couple of things. One is center store trends. Now I'm not just talking about your retail business, I'm talking about also with your retail partners. A lot of our -- you guys point to a lot of these common items, everyday essentials, wanting to move online. And I was wondering if you could talk to us about your center store trends with your own retail business and with your retail partners.

Yes, I mean, we won't break out categories, but I think as you look at what everybody's challenged with in the industry, certainly online is part of that. I think online is certainly even more powerful in certain segments than in other segments of the economy, right? I think in your major metropolitan markets, it's going to be even more pronounced than it is in your suburban and more rural areas. We typically operate in more of the suburban, rural markets, but it'll impact everybody to some extent. So there's no question that will be a trend we have to overcome.

I mean, the beauty, I think, that we see in this is that we have tools now to better directly contact and offer value to our customers on a very targeted basis. We also have the capability of putting in programs in markets where we can be very competitive and we get people in our stores consistently. So Scott, there will always be these types of headwinds, whether it be a new competitor, whether it be Walmart pricing, whether it be e-commerce.

And I think what we've shown is our convenience, our full service, our full shop, and being excellent on the perimeter and in the service aspects of that, keep us accessed to an awful lot of the market where we can continue then to be creative and thoughtful in how we entice people into the categories. Test a growing market. Hey, that'll have an Internet impact, but it's also an area we can develop further, the paper side. That's certainly an Internet opportunity, but we've been able to introduce some really great programs, and we've seen volumes pick up in those areas.

So it's a give and take. Hey, there's no question it's a new world and there's always new pressures, but it's an area we're going to continue to battle and be creative about. It's also how come we're transforming our business, right, and how we're expanding and our fresh offerings growing. And we're looking for new avenues and new directions to continue to be very relevant to the trends in the economy. So we don't bury our head on anything. We look to be very relevant, and we look to be meaningful in the areas we cover.

(Operator Instructions) The next question will come from Chris Mandeville of Jefferies.

So just want to start off with the competitive landscape. We've noted and seen a couple of bankruptcies out in the Midwest lately, although there has actually been a few specialty formats that continue to grow pretty rapidly. I was hoping you could talk a little bit about the competitive environment. Is there a need for further store closures? Or any signs from your competition that would lead you to believe that maybe they're on shaky grounds? And how has the retail environment been with respect to shelf pricing and promotion that we -- as we've seen maybe some more consistent reflation in recent months?

Yes. So Chris, you know what? I think as you -- the cases you cite, I think -- I assume one the ones you're referring to is Marsh. I mean, that company has been troubled for so long. I mean, I'm not sure the final outcome of that is a shock to anyone in the industry over time. You never know when, you never know how, but that's been a troubled asset for some time. And so I don't know I would read more into that than I've just said. Central, anything can happen. And that's been a business that I think has just maybe not stayed as relevant as it could be. Its customers were under some pressure with people entering the Chicago market. And I don't think I read widespread trends into that.

I think the world continues to consolidate. I think it's a -- right down the center of our strategy, right down the center of how we build our strategy that this consolidation would take place and will take place. And so I think from our perspective, this is what we've seen for some time, and this is how we've built our plan to take advantage of it. So I think it's -- retail is about competition. Now we say there's 3 things that are guaranteed, right, death, taxes and competition. And we've dealt with all different forms, from the advent of Walmart when they had no operations in Michigan and now they have hundreds -- well over 100 supercenters with Meijer. It's just not going to be something that goes away, and I think the consolidation will continue and I think we're going to benefit from that.

And then you actually mentioned some impact from new competitive openings in a market or 2. I apologize, I missed where you had mentioned those effects were taking place. Can you repeat that? And were those the same types of markets where you had actually seen a few store closures during the quarter?

They were not where we've seen closures. They were just sort of the normal kind of competitive impacts we have. So they weren't really centered anywhere in particular. I mean, just -- it's normal. It's pretty normal.

Okay. And then last one for me before I jump back in the queue. Dave, you had mentioned something along the lines of not currently having a sales force for Fresh Kitchen. Is that the plan at a later date? Or do you intend on asking your existing sales associates to learn about this value-added service? And I guess if the former, how should we think about that incremental cost? Or if the latter, how do we think about the learning curve for your sales force?

Yes, let me say initially, I thought, yes, I mean, as we got this thing up and running and we were comfortable with our ability to put out that quality product no matter who or where, that we would add some level of sales force. I'll be honest with you, if it keeps going like it's going, there'll be no need for that. I mean, I think we have really good connections throughout the various industries with our associates at Caito. Demand is coming from so many different arenas today where we're being contacted. Yes, I'm sure we'll put some mining in it as we progress, but I don't really expect any kind of substantial expense here.

And the next question will be a follow-up from Chuck Cerankosky of Northcoast Research.

In looking at your anticipated resurgence or recovery in inflation in the second half of the year, do you see that impacting your distribution segment more than the retail segment?

I think, Chuck, it leads always in distribution, right? Distribution reacts to those kinds of changes fairly quickly. Retail is always somewhat slower to react, slower to go down with deflation and always slower to rise with inflation, more so in the center of the store than on the fresh side but both can lag. So I think we'll see benefits in both. And again, our thought aren't for rampant inflation in the second half. I think we're still feeling it's a modest inflation in the second half. And so I think it'll impact them both but probably first -- distribution first and retail will lag a little but it will still benefit.

And the next question is a follow-up from Shane Higgins of Deutsche Bank.

I was just curious and just following back up on Scott's question about the impact to the online guys. And just wondering if you can give us some color around -- I mean, you guys now have obviously really great data from your less -- your YES loyalty card program. Are you guys seeing an indication that some of the basket, probably more center store, is shifting to online? And if so, are -- what -- you alluded to this, I think, earlier, but are you guys actually responding with targeted offers? And are customers -- are you seeing some of that basket come back?

Well, so I guess given that our trends -- if you look at the last 3 quarters -- are fairly stable, I guess it's hard to really say that we're seeing any direct impact from online. We are putting out targeted offers, and I think we are feeling that we're having some success with those. So the first part is just, I guess, it's -- we're not seeing anything that's so clear that I can tell you yes, we're seeing impact. It's -- our trends have been relatively stable for 3 quarters.

And so when you guys analyze a specific household, you don't see really any patterns in any specific markets that could be an indication that some of the basket might be shifting online?

Yes, not really at this point, to be honest with you. And remember, Meijer has launched a online. Amazon and the likes have been around, but I don't think our rural and suburban markets have been their highest focus, to be honest, at this point.

And the next question will be a follow-up from Chris Mandeville of Jefferies.

Just 2 quick ones. Did you guys repurchase any shares in the quarter? And if so how much?

We did not repurchase any shares this quarter.

Okay. And then the second one, it looks like you had a little bit of a working capital issue in the quarter itself. Can you talk a little bit about that? And how do we think about free cash for the full year? And maybe, what are your thoughts on where leverage should be by the end of the year?

Yes, we constantly try to evaluate our working capital requirements and then push those envelopes whenever we can. Really what we had is a little bit of a blip in one of our segments at the end of the first quarter that resulted in some timing issues, and we do anticipate probably going back to more normal course working capital requirements during the course of the year. In terms of our leverage ratios for the year, we do anticipate, barring any M&A activities, to continue to pay down debt and, therefore, decrease our leverage. And we have a target of 2.0x which we still try to get to, again barring any future M&A activity.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Dave Staples for his closing remarks.

Well, thank you all for participating today, and we look forward to speaking with each of you again next quarter. Have a great Memorial weekend.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.