SpartanNash Company
Q1 2017 Earnings Call Transcript

Published: 25 May 2017

[Operator:]

Good morning and welcome to the SpartanNash Company First Quarter Fiscal 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turner for opening remarks. Please go ahead.

[Katie Turner:]

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 which was announced yesterday at approximately 4

[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 Edison 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] [ph]. So, I think that relationship will continue flawlessly. And now, back to the quarter. We are very pleased with our first quarter results which reflect a successful implementation and execution of our strategy. 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 success into these programs across our independent customer values. 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 who are 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 of category managers to explain why the various programs have been put into place and the types of results we are getting from them. Turnout to the event was fantastic as we had over 70 independent customers and prospective customers independents. As I reflect on this event, there can be no greater honor for our company than have one of our outstanding independent operators chose to host this event. Additionally, we continue to make improvements to our supply chain and further optimize our network, again, 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 Food Services and Blue Ribbon Transport and began integrating them into operation. Although, the integration is proceeding slower than anticipated, I'm extremely encouraged by the demand that appear to exist for our new process and 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 opportunity. 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 sets. 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 product in the second quarter. We expect a full private brand rollout will take a couple of years, we will have a meaningful positive effect on DeCA’s consumer offering well before that completion. We continue to build our new business and look for additional avenues to better serve our military heroes. In the retail segment, we are 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 an 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 five quarters in the west despite economic pressures in certain of those markets. We have been particularly pleased with the Omaha region, where we are seeing a continued positive result following our store improvements and rebranding the family fair. 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 rollout 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 brand unit penetration in our retail operations was 22.6% which exceed 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 to 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 has 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 relationship 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 are 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 with Wal-Mart. Tom has incredible experience in all aspects of the supply chain. He is extremely customer focused and will bring a very strategic mindset to the team. I'm credibly proud of what our management team has accomplished over the years and these moves only make it stronger. With that, I will turn the call over to Chris.

[Chris Meyers:]

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 full start to the year with the shift of New Year's Day into the first quarter and then seasonably warm weather on our Northern geography, we delivered adjusted EPS of $0.55, which is better than last year and above our expectation to flat and making to 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 healthcare expenses from which were anticipated based on the timing of certain healthcare funding requirements. The higher healthcare 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 $0.03 per share benefit as we adopted the newly required accounting standard for taxes [indiscernible] in the share based compensation. We expect the new accounting treatment which is impacted by fluctuations in our share price, predominantly benefit the first quarter and not materially affecting the remaining quarters of 2017. In terms of operating performance, we had a solid quarter, grew adjusted EBITDA by over $2 million over the prior year based on many factors that we discussed in our review of the operating segment. Our food distribution segment which generated our fifth consecutive quarter of sales and adjusted earnings growth over the prior year quarters. Sales were up $172 million, 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 continued to be impacted by deflation mainly in meat, dairy and protein. Food distribution equation for the quarter was 171 basis points which was lower than the 275 basis points of deflation in the previous quarter. Deflation continued to improve during the course of the quarter and is particularly impacted by the proteins for the first part of the year. First quarter adjusted food distribution operating earnings increased 15.1%, a $33.1 million of organic sales growth quite an improvement were partially offset by the negative impact of the New Year's Day shift on food deflation. In our military segment, sales were down 4.6% or $31.2 million due to sales decline into DeCA's operating commissary who shifted New Year's Day to the first quarter partially offset by growth in the new fresh business. Adjusted first quarter operating earnings for the military segment were $1 million down from $3.7 million due to lower sales volumes in the holiday shift and while higher healthcare cost in the large insurance coming in the quarter. In our retail segment, net sales were down about 2.8% or $16.9 million for the same period last year due to a combination of factors including the decrease in comparable store sales $11.5 million in lower sales and the 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 one other in the Northern geography as well as ongoing food deflation. When adjusting for the holiday shift, the impact of new competitive opening, our comp store sales slightly improved in the fourth quarter of last year which demonstrates sequential improvement. Deflation in retail was 88 basis point for the quarter compared to 129 basis points to the fourth quarter of 2016. First quarter adjusted retail operating earnings decreased 26.7%, $4.5 million versus $6.1 million in the prior year due to higher healthcare cost, over comp store sales and the shift of New Year's Day partially offset by the improved margin rate from 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 timing of working capital payments which we believe is temporary. For the first quarter, we also paid a quarterly cash dividend of $0.155 per share which was 10% increase from the prior year. We are 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, BRT acquisition but also due to the timing of working capital payment. 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 in fact this ratio will improve over the second half of the year and 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 are excited about our growth opportunities and we 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 a return of a modest level of inflation. Accordingly in consistent with the first quarter results, we anticipate the second quarter will slightly exceed the prior years and continue to work through the integration. As Dave mentioned, the custom results response to improvement that we made in our western stores particularly Omaha has been encouraging. Overall, we are on track to achieve slightly negative to flat comparable retail store sales then improve through the course of the year. And our military business, we expect sales to be impacted by the ongoing challenges at DeCA, but anticipate shipping the private brand products to commissary in the second quarter. We expect limited financial contribution from DeCA private brand program for the year due to its start-up cost 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 cost as well as other adjusted expenses and gains. We expect that the record earnings from continuing operations will now be in the range of $1.99, $2.08 per diluted share compared to $2.07 and $2.19 previously. This is based on expected fresh kitchen start-up cost, the retirement to stock compensation and other anticipated integration restructuring cost. We continue to expect cash expenditures for fiscal year 2017 to be in the range of $70 million to $72 million. Depreciation and amortization $86 million to $88 million due to the addition to Caito. The total interest expense remaining at $25 million to $27 million. That concludes my comments. Back to you, Dave.

[Dave Staples:]

Thank you, Chris. In summary, our momentum is strong and we are 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 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 commitments 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 contribution of our talented and dedicated associates including our newest Caito and BRT team members to make it all possible. Thank you. And we look forward to another successful year and will update you on our progress throughout 2017. With that, I would like to turn the call back to our operator and open it up for questions.

[Operator:]

Thank you, Mr. Staples. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question will come from Chuck Cerankosky of Northcoast Research. Please go ahead. Mr. Cerankosky, your line is open on this side and it maybe muted on your side.

[Chuck Cerankosky:]

Good morning, everyone. When we look at the quarter, you talked about the warmer weather up north, was that largely Northern Michigan or does Dakota's enter into that at all?

[Dave Staples:]

Predominantly be Northern Michigan, it was a unique winter, I think somewhat everywhere but I think Michigan from a weather perspective was the most.

[Chuck Cerankosky:]

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

[Dave Staples:]

Yes. I mean as we look across, our chain will have remodeling activities throughout the chain. They will be in Michigan, they will be in the west. We continuously look at our core markets and we are 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 where it make sense where stores maybe don't fit the profile we are looking for. We will continue to look for the best way to maximize the use of those stores, whether that be with the customer or whether that be in another format.

[Chuck Cerankosky:]

How about new construction Dave?

[Dave Staples:]

We don't do a lot in 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.

[Chuck Cerankosky:]

All right. Thank you.

[Operator:]

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

[Shane Higgins:]

Yes. Good morning and thanks for taking the questions. Just wanted to know if you guys had any updates on kind of the level of accretion that you expect Caito this year? And then, maybe how we should think about how that's going to flow to 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.

[Chris Meyers:]

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 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 have start-up phase associated with the fresh kitchen in the first quarter from which we had a lot of cost 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.

[Shane Higgins:]

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.

[Chris Meyers:]

Yes. I would say -- in terms of the $550 million, the first quarter -- there was three produce deflation that hit us and that impacted the Caito business stronger than it would have impacted some other businesses that we have, that it's all produce. So, it says 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 are properly able to service customers as we do open the kitchen. But, there is a strong backlog and strong demand for those products.

[Dave Staples:]

Yes. I will tag on to that. I think as you look at the models too, I believe we lost a week in the first quarter based on -- when the transaction closed. So, there is going to be one 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 and quality and all the things you are going to want to do. Beside that, I think that's probably pushed that number off a little bit. But, I got to tell you, I'm just shocked at the number of enquiries we are getting in the different types of businesses that we are getting enquiries from. I mean, we don't have the sales force. I begin to think we 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 we are on, but I believe it was food manufacturers magazine. We won like facility of the year. And so, we just got a tremendous amount of publicity on this. We are getting wonderful enquiries from all different types of industries whether it would be institutional or whether it would be retail, or whether it would 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 are 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 will be very, very deliberate about that. But, we are very, very excited. And on the fresh cut side, I think we are 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 at the utmost quality but also at the utmost right profitability where it should be. So, all those things we are putting a lot of effort on and our outstanding associates at Caito was everything you go through in a merger and launching a whole new business are just doing a wonderful job and they are incredibly focused on making this -- everything it should be. So, we are very excited.

[Shane Higgins:]

Great. Thanks. 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' 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 are picking up incremental sales or maybe shifting sales to pick up from in-store?

[Dave Staples:]

Yes. We are very pleased. On one-hand somewhat frustrated that it has taken up 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 picked to the extent where we really believed we are going to have the best in class solution when we have that launched here in the second quarter. And so, at this point, we are really still in that, let's get the [bottles] [ph] all ironed out, let's get it working within the next week or so, launch an associate [Indiscernible] because we never wanted to turn anything on to the public and feel, we are really confident that it is working right in. And I think we will 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 as we said in the notes by the end of the year we in fact have the 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 formats operate, they are on your drive to work, they are on your drive home, they are -- we didn't end up going on a weekend. And that's a big part of our differentiation. Now when we make it, so you can just basically swing by let’s know when you’re nearing 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 is some level of trading over. But, I think all in all, this should be an incremental win for us.

[Shane Higgins:]

Great. Thanks so much.

[Operator:]

The next question will be from Ryan Gilligan of Barclays. Please go ahead.

[Ryan Gilligan:]

Hey, good morning. Thanks for taking the questions. So, just to confirm the step-up in D&A guidance that's due to Caito, right?

[Chris Meyers:]

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

[Ryan Gilligan:]

Okay. So then, I guess what are the offsets that are going to allow you to maintain earnings guidance despite $0.11 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?

[Chris Meyers:]

I think we remain comfortable with our guidance range, Ryan. And I don't think there is -- we think the operations are continuing to ramp-up and improve. And we think the Caito transaction is going to be as accretive as what we did in the first part of the year when we initially issued our guidance. So, 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 the profitability, the fresh kitchen brand also adds to the profitability. And we continue to improve our core operations. I think that's how you think of our guidance.

[Ryan Gilligan:]

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

[Chris Meyers:]

Yes. GAAP margins in the quarter, the profitability for fuel was relative 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 one-time pickup in terms of the stock compensation, tax impact. But, we expect the tax rate to be consistent with what it was in the prior years. But, no meaningful difference in terms of our tax rate going forward after that.

[Dave Staples:]

I guess I will 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 are required to adopt. And it will now take price fluctuation in our stock into account when the stock options or the stock shares that. And so, I don't everyone to walk away thinking that it is some one-time tax payment, this is a methodology that will continue when lastly impact us whenever our restricted stock back. And so, just so you know next year first quarter, we will have this event, again, if our stock price goes up, it's a good guy. If our stock price does down, it's a bad guy. There is a little bit of this activity that occurs in the second quarter as well. And so, there will be some minimal impact that we don't expect it to be very significant.

[Chris Meyers:]

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

[Dave Staples:]

Exactly.

[Ryan Gilligan:]

Got it. That's really helpful. Thanks. And then, just quickly what was the breakdown between ticket and traffic in the quarter and where our comps quarter till date? Thanks.

[Dave Staples:]

Yes. I mean I think if you look at it, overall, you will that that traffic was our biggest driver, but if 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 normal trends we had. As far as we go into second quarter, I think we have seen a really nice improvement from the first quarter overall rate, and I think we are kind of on the run rate as we progress through the quarter. So, Chris alluded to you with that holiday shift and really half weather in January, our trend came much more in line with where we would have expected.

[Ryan Gilligan:]

Great. Thanks.

[Operator:]

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

[Scott Mushkin:]

Hey, guys. Thanks for taking my question. I had couple of housekeeping issues to start with then I wanted to ask you a question. So, the healthcare expense as you called out, is that a one-time thing, or is that pressure going to last?

[Chris Meyers:]

Scott, we are self-insured primarily for healthcare, we do have a stop loss aspect of it on an individual basis. But, unfortunately for us, healthcare 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 healthcare perspective.

[Scott Mushkin:]

So, you look at it more a one-time?

[Chris Meyers:]

We think that this is higher than what's forecasted to be for us. And we think it's a little bit higher by any historical means. And so, we are hoping that it doesn't continue with 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 healthcare and the fact that we accelerated some cost based on some of the contributions for healthcare savings accounts happen. 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 -- is what's planned on our part.

[Scott Mushkin:]

Okay. Second question going back to the last question about guidance, just want to make sure I understood the nuances here and one more housekeeping. So you guys increased your D&A expense for the year expectations --

[Chris Meyers:]

I will take. That was a mistake when we issued our last guidance. Our guidance when we issued it on a EPS basis properly reflected D&A, it was part of the last minute changes 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&A, but it was reflected properly in our EPS guidance.

[Scott Mushkin:]

Okay. That definitely clarifies.

[Chris Meyers:]

It's a mistake on our part, I apologize.

[Scott Mushkin:]

Hey, happens to me all the time. You know, you got a lot going on. So, okay, so those are the housekeeping items. Then my question really goes to couple of things, one is center store trends, I'm not just talking about your retail business, I'm talking about also with your retail partners. There were 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, was your own retail business and with your retail partners?

[Dave Staples:]

Yes. We will break out categories, but I think as you look at what everybody is challenged within 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 more rural areas. We typically operate in more of the suburban rural markets, but it only impact everybody to some extent. So there is 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 put 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 would be a new competitor or whether would be Wal-Mart pricing, whether it would be ecommerce. And I think what we have shown is, our convenience, our full service, our full shop and being excellent on the perimeter and the in the service aspects of that. Keep up the access to an awful a lot of the market where we can continue then to be creative and thoughtful and how we entice people into the categories, as the growing market, that will have an Internet impact. But, it's also an area we can develop further. The paper side, that certainly an internet opportunity where we have been able to introduce some really great programs and we have seen volumes pick up in those areas. So, it's a give and take, hey, there is no question, it's a new world and there is always new pressures. But, it's an area where we are going to continue to battle and be create about. It's also how come we are transforming our business, right? And how we are expanding in our fresh offerings rolling, we are 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. We look to be meaningful in the areas we cover.

[Scott Mushkin:]

All right. I will yield. I have one more. But, I will yield. That's the last question. Thanks guys.

[Operator:]

[Operator Instructions] The next question will come from Chris Mandeville of Jefferies. Please go ahead.

[Chris Mandeville:]

Hey, good morning guys. So, just wanted to start off with the competitive landscape, we have noted and seen couple of bankruptcies out in the Midwest lately, well, there actually been a few specialty format 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 sign from your competition that will lead you to believe that maybe they are on shaky grounds? And how has the retail environment been with respect to shelf pricing and promotion as we have seen may be some more consistent reflation in recent months?

[Dave Staples:]

Chris, I think take as you side, I think I assume [indiscernible] that company has been in trouble for so long. I mean, I'm not sure the final outcome of that is shock to anyone in the industry over time. You never when, you never how, but that's been a trouble there is for some time. So, I don't know, I would read more into that and that I just said. Central many things happen that's been a business that I think is just maybe not to say it is relevant, it could be, customers who are 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 right down the center of our strategy, right down the center of how we built our strategy that this consolidation would it take place, it will take place. And so, I think from our perspective, this is what we have seen for some time and this is how we built our plan to take advantage of it. So, I think, retail is about competition, we say there is three things that are guaranteed, right? Health, taxes and competition and we dealt with all different forms from the advent of Wal-Mart, when they had no operations in Michigan, and now they have hundreds -- well over a hundred super centers with Myer. It's just not going to be something that goes away. And I think the consolidation will continue and I think we are going to benefit from that.

[Chris Mandeville:]

And then, you actually mentioned some impact from new competitors openings in a market or two, I apologize, I missed where you had mentioned those efforts were taking place, can you repeat that and where those the same types of markets where you would actually seen a few store closures during the quarter?

[Dave Staples:]

They were not where we have 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, if the normal -- it's pretty normal.

[Chris Mandeville:]

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

[Dave Staples:]

Yes. What you see initially I thought, yes, as we got the sing up and running, we were comfortable with -- our ability to put all that quality product, no matter who are aware of that we would add some level of sales force. I would be honest with you. If it keeps going like, it’s going there will 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. We are being contacted. I'm sure we will put some mining in it as we progress, but I don't really expect any kind of substantial expense here.

[Chris Mandeville:]

Okay. Thanks guys.

[Operator:]

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

[Chuck Cerankosky:]

Thanks guys. And looking at your anticipated resurgence, recovery and inflation in the second half of the year. Do you see that impacting your distribution segment more than the retail segment?

[Dave Staples:]

I think Chuck, it leads always in distribution, right? Distribution reacts to those kind of changes fairly quickly, resale 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 in lag. So, I think we will see benefits in both and again our thoughts are for ramping inflation in the second half. I think we are still feeling as the modest inflation in the second half. So, I think impact in both but probably first distribution first and retail lag a little bit, but it will still benefit.

[Chuck Cerankosky:]

Thank you.

[Operator:]

And the next question is a follow up from Shane Higgins of Deutsche Bank. Please go ahead.

[Shane Higgins:]

Hey, guys. Just curious and just following back up on Scott's question about the impact to the online guys and just wondering if you could give us some color around, I mean you guys know how obviously really great data from your less -- loyalty card program. Are you guys seeing an indication that some of the basket probably more center store is shifting to online, and if you so, 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?

[Dave Staples:]

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

[Shane Higgins:]

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

[Dave Staples:]

Yes. Not really at this point to be honest with you. And remember, Myer has launched an online, Amazon like to bet around but I don't think our rural and suburban markets have been that high as focus to be honest at this point.

[Shane Higgins:]

Got it. Thanks for that.

[Operator:]

And the next question will be a follow up from Chris Mandeville of Jefferies. Please go ahead.

[Chris Mandeville:]

Yes. Hey, thanks again. Just two quick ones. Did you guys purchase any shares in the quarter and if so how much?

[Chris Meyers:]

We did not repurchase any shares this quarter.

[Chris Mandeville:]

Okay. And then, the second one, looks like you had a little bit of 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? Thanks.

[Chris Meyers:]

Yes. We absolutely 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 from where -- no more course working capital requirements during the course of the year. In terms of our leverage ratios for the year, we do anticipate borrowing any M&A activities to continue to pay down debt and therefore decrease our leverage and we have our target of 2.0x, which we still try to get to, again borrowing any future M&A activity.

[Operator:]

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.

[Dave Staples:]

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.

[Operator:]

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