SpartanNash Company
Q3 2008 Earnings Call Transcript

Published: 7 Feb 2008

[Operator:]

Greetings ladies and gentlemen and welcome to the Spartan Stores, Inc. fiscal 2008 third quarter earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Ladies and gentlemen I must remind you 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 involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward looking statements. Internal and external factors that might cause such a difference include, among others, competitive pressures among food retail and distribution companies, uncertainties inherit in implementing strategic plans and general economic and market conditions. Additional information about risk factors and the uncertainties associated with our forward looking statements can be found in the company’s earnings announcement, annual report on form 10K and our other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward looking statements. Spartan Stores disclaims any intentional obligation to update or revise any forward looking statements. It is now my pleasure to introduce your host Mr. Craig Sturken, Chairman and Chief Executive Officer for Spartan Stores, Inc. Thank you Mr. Sturken, you may begin.

[Craig Sturken:]

Thank you. Good morning everyone and thank you for joining our fiscal 2008 third quarter earnings conference call. With me this morning are members of our team, including EVP, our CFO, Dave Staples, President and Chief Operating Officer Dennis Eidson, our Executive VP of retail operations Ted Adornato, EVP of supply chain Derek Jones and EVP and general counsel, Alex DeYonker. We are very pleased with our consistent record of generating double digit operating earnings growth. Our third quarter financial results mark the eighth consecutive quarter of double digit operating earnings growth and our seventh consecutive quarter of strong sales growth. We believe this performance validates our balanced growth philosophy and hybrid business model which allows us to capitalize on the best growth opportunities available in either the distribution or retail segment. These sustained results would not be possible without the hard work and dedication of our entire employee base and I would like to thank them for their efforts. Simply stated, we have a cohesive group of exceptionally talented individuals who are making meaningful contributions towards our success every day at all levels within our organization. Our people and culture, along with a steadfast focus on the customer, combined with continuous performance improvement are the cornerstones of our consistent and ongoing success. Again this quarter, we reported solid sales growth in both business segments demonstrating our strong fundamentals and ability to perform despite the economic climate we have faced for the past two years. During the quarter, retail sales improved nearly 27% while distribution sales grew more than 6%. In a minute, Dave will explain the mix changes that affect our distribution sales as in fact those sales are very strong. Also during the quarter, we continued executing on our retail [apple] investment program and made additional progress integrating our distributions business and acquired retail stores. We remained very pleased with the early results of this program. During the quarter we held grand reopenings of four remodeled stores and the grand opening of one brand new prototype replacement store. As previously discussed, we make significant marketing, merchandising and labor investments in strong store grand reopenings. While we expect these investments to impact our short term results, they are critical to our success in bringing the additional customers and building a long term loyal customer base. These in essence are already producing favorable business trends and enhancing our position as the regional leader among traditional supermarket operators. We expect to begin realizing the benefits of these remodels during our fourth quarter. The ongoing integration of our Felpausch retail store acquisition is progressing as planned. Two of the recent remodels were Felpausch stores which have been re-bannered as Family Fair. Also during the quarter we were able to take advantage of consolidation opportunities in two very important markets. Conventional supermarket operators that we supplied decided to exit these markets which will provide an opportunity to add approximately $5-$10 million of retail sales in fiscal 09. From a distribution perspective, we reported both strong sales and profit growth as we benefited from the successful integration of significant new business. Our business relationship with new and existing customers continues to strengthen, allowing us to realize continued sales volume gains despite the elimination of sales related to the acquired Felpausch stores. Our continued focus on efficient buying practices and fixed cost leverage are also keys to our consistent and continued profitability. With that overview, I will turn the call over to Dave Staples for a detailed review of our third quarter financial results. I will rejoin the call following Dave’s comments to provide an update of our business outlook. Dave.

[Dave Staples:]

Thank you Craig and good morning everyone. Consolidated net sales for the third quarter reached a five year high, increasing 15.6% to $826.1 million from $714.4 million in the same period last year. The increase was due primarily to the acquired retail stores, strong comparable store sales growth and higher distribution sales from new and existing customers. Gross margin for the third quarter increased 70 basis points to 19.7%, compared with 19% in the third quarter last year. The improvement was due mainly to an increase in the sales mix of higher margin retail sales and an improvement in distribution gross profit margin rates. The improvement was partially offset by sales growth in the lower margin fuel and pharmacy category and the additional promotional activity related to the store grand reopenings during the quarter. As a percent of sales, third quarter operating expenses increased to 17.8%, from 17.1% in the same period last year reflecting the higher retail operating cost structure of recent store acquisitions and the additional costs related to the store grand reopenings just mentioned. Third quarter operating earnings increased 17.1% to $15.6 million from $13.4 million in the same period last year. The improvement was a result of strong overall sales growth in both business segments as well as improved gross margin rates in the distribution segment. Third quarter earnings from continuing operations, including the reversal of the onetime non cash state income tax charge disclosed in our press announcement increased 68.8% to $10.5 million or $0.48 per diluted share, from $6.2 million or $0.28 per diluted share in the same period last year. Excluding the state income tax charge reversal, earnings from continuing operations increased 24.5% to $7.7 million or $0.36 per diluted share. Net earnings for the quarter including the non cash state income tax charge reversal reached $10.6 million or $0.49 per diluted share, compared with $5.9 million or $0.27 per diluted share last year. Excluding the non cash charge reversal, adjusted net earnings increased 33.3% to $7.9 million or $0.36 per diluted share. Turning to our business segments, third quarter distribution sales increased 6.1% to $410.7 million from $387 million in the same period last year, representing the highest third quarter distribution sales since fiscal 2001. Sales increased despite the elimination of 34.4 million of distribution business for the acquired Felpausch stores. Excluding this adjustment, distribution sales would have increased 15%. The sales improvement was due to new distribution customers and higher sales to our existing customers. Our customer base has continued to benefit from market consolidation as well as the continued focus on operational improvement. Distribution operating earnings improved 48.9% to $11.6 million from $7.8 million in the same period last year, which marks a quarterly record since becoming a publicly traded company. The improvement was due to higher sales volumes and higher gross margin rates as well as gains in network efficiency and continued cost containment. Third quarter retail sales increased 26.9% to $415.4 million from $327.4 million in the same period last year. The sales improvement was due to the acquired stores and strong comparable store sales gains across our retail supermarkets. Comparable store sales, excluding fuel, rose 3.4% as a result of our capital program, the acquired pharmacies and continued sales growth at the acquired D&W stores, partially offset by farm sales trends and lower sales from our non-acquired in store pharmacy. Third quarter retail operating earnings were $4 million compared with $5.6 million in the same period last year. The decline was primarily the result of the additional promotional and operating expenses related to the store grand reopenings and lower pharmacy sales. The grand reopening activity lowered our operating profit trend by approximately $1.3 million in the quarter. Outstanding long term debt at January 5, including current maturities was $183.6 million which approximated the amount outstanding at the end of the second quarter. We expect the outstanding balance of long term debt to decline by $5-$10 million during the fourth quarter because of seasonal cash flows and as we realize improvements in our working capital. I will now cover our outlook for the remainder of fiscal 2008. Excluding the extra week of sales in fiscal 2007, we expect comparable retail store sales to increase in the low single digits in the fourth quarter and the Felpausch stores to add approximately $85 million to consolidated sales for the fiscal year. We do not expect any significant costs related to store grand reopenings for the remainder of the year because the four remodels currently underway are not expected to be finished until the first quarter of fiscal 2009. On the distribution side, we expect to generate additional revenue and sales volumes from our new business. This business is fully ramped up during the third quarter and we are now at the sales run rate which will continue into fiscal 2009. We now anticipate capital expenditures for fiscal 2008 to range between $47-$52 million. These expenditures will allows us to take advantage of the opportunities to consolidated the business of an independent operator in the Felpausch market as mentioned by Craig and to fully deploy our Family Fair and D&W offerings at certain Felpausch locations. [A]ppreciation and amortization expense should range from $23-$26 million and interest expense should be approximately $12 million. We are currently finalizing our fiscal 2009 operating plans and will share additional details about our 2009 capital program during our year end conference call. I will now turn the call back to Craig. Craig.

[Craig Sturken:]

Thanks Dave. We continue to successfully execute each element of our strategic business plan. Our ongoing focus will be on integrating our new business and at acquired retail stores and moving forward with our retail store capital program. Our hybrid business model along with our retail store banner segmentation strategy has positioned us well for the current and future economic climates. During the fourth quarter of this fiscal year we expect to commence remodels at four Felpausch stores as well at a Glen’s Market store. The Felpausch remodels will allow us to consolidate a market competitor into a prototype Family Fair offering, allowing us to convert one store to the D&W format and allow us to upgrade the two other stores to better reflect our offering. Our Glen’s remodel will position the store to provide its customers with an even better shopping experience in one of our best Northern Michigan markets. The remodel work will encompass expanded product selections, new marketing and merchandising programs and store layout and equipment improvements. Although significant work remains to complete these remodels, we are very pleased with the early sales and traffic trends in stores where investments have been made and we remain confident about their long term performance potential. We forecast these remodeling efforts to be completed during the first quarter of fiscal 2009. In our distribution division, we realized a significant benefit from the addition of new distribution business during this quarter and expect the benefits to continue accruing during the remainder of this year and into fiscal 2009. We will begin a productivity enhancement program at our distribution segment during the fourth quarter. The program will involve [through puts] improvement initiatives as well as service and quality enhancements. We expect to begin realizing the benefits of these initiatives during fiscal 2009’s first quarter. As you know, continuing our successful growth is a key element of our strategic business plan. We have been putting forth great effort to improve organic growth and I believe we are now just beginning to see the results of this effort. We currently have several new sites or store relocation opportunities in our pipeline and expect two or three of them to materialize during fiscal 2009. We also continue to look for expansion and consolidation opportunities for both our distribution and retail divisions in contiguous Midwestern states as well as the current markets we serve. In addition, we will continually evaluate our business performance to identify opportunities to enhance long term shareholder value. We remain confident about our long term business fundamentals and continue to recognize favorable near and long term growth opportunities. We will now open the call for your questions.

[Operator:]

Thank you, ladies and gentlemen at this time we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star four if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Again, press star one if you would like to ask a question. One moment please while we poll for questions. Thank you, our first question comes from the line of Karen Short with Friedman, Billings, please proceed with your question.

[Karen Short:]

Hey everyone, congratulations, good quarter. Just wanted to ask you a couple questions on the expenses, the $1.3 million. Would it be fair to say that like half of that was Felpausch related?

[Craig Sturken:]

Yes.

[Karen Short:]

Okay and so going into the first quarter of 09, also half kind of Felpausch related?

[Craig Sturken:]

Well actually all of the remodels in the first quarter will be Felpausch.

[Karen Short:]

Okay, so probably [overlay].

[Craig Sturken:]

Except for the Glen’s, I mean but, three of the four Felpausch.

[Karen Short:]

Okay, so probably same dollar amount? 1.3-ish? Is that a fair number?

[Dave Staples:]

Yeah I mean that’s an average, that’s reasonable. Then what you’ll get to some degree is you know these ones we’ve just done, we expect to keep improving their performance every quarter so as we begin to build up this pipeline over time, you’re going to have new ones coming in to a quarter but you should have previous ones maturing. You know over time I think you’ll see that kind of rate mitigated.

[Karen Short:]

Okay.

[Dave Staples:]

First quarter, you know, it’s a fair estimation.

[Karen Short:]

Okay and then I guess if I were to back out that $1.3 million out of your operating or add it back to your operating income in the third quarter, it still looks like margins declined year over year, I just wondered if you could comment on that? [Audio interrupt] got more promotional or?

[Dave Staples:]

Well Karen let me just help you on that. You know we manage the total business and we looked at where we were in our third quarter and we really felt very positive about the new distributions business that came on stream and how we were going to be able to strain profits from that business and we determined that we would invest in the total retail business. So I think what you’re seeing in our third quarter is our decision to take advantage of the situation and invest in not just the stores that we launched but throughout the organization.

[Karen Short:]

Okay, that makes sense and are you guys, I mean have you seen any changes in the consumer behavior in going into the fourth quarter to kind of indicate comps in the fourth quarter will be below the third quarter trend? I mean I know you had benefits from the grand reopenings so obviously that was in the third quarter number, but, is there any…

[Craig Sturken:]

Well we’re not forecasting any significant change in the fourth quarter but as far as the consumer goes, first of all we’ve had a pretty tough winter up here. I think this week we achieved our annual snowfall with another, who knows how many weeks to go, you know there’s six weeks maybe of potential snow. So it’s been a tough winter for us. That has its benefits and not benefits. But the benefits have been certainly up north where we have the ski industry and snowmobile industry which is a major event up there. So they’ve been able to reap the benefit of a strong winter sports season up north. I think probably there are some mix changes going on, when you look at how strong our private label program is, our private label program is a very important part of our whole business operation and we’re very pleased with that program. And you know gas pricing being over $3.00, that has probably affected the consumer a little bit, but you know we’re perfectly positioned to take advantage of the gas situation because we are now have 16 gas stations of our own. You know, three years ago we didn’t have a gas station and today we’re in the gasoline business and we’re able to take advantage of that.

[Karen Short:]

Do you actually have an estimate of how many gas fuel centers you might have by the end of 09?

[Craig Sturken:]

Well we would try to open at least five more next year. We could even do more. We have a potentiality for much more than that but it’s a process. Getting new pools, getting our construction people to be able to get to the job, it’s a, I’m jabbing one of the people with us here at this desk, we, it’s a full speed ahead do it as fast as we can program. It’s been very good for us.

[Karen Short:]

Okay and then I guess this last question I’ll get back into queue, if you kind of strip out the benefit of the grand reopenings on traffic and basket, would traffic and basket have been up excluding those stores?

[Craig Sturken:]

Oh yeah, oh yeah.

[Karen Short:]

Both would have been up?

[Craig Sturken:]

Yes.

[Karen Short:]

Okay, great, thank you.

[Craig Sturken:]

Yes, we’re very pleased.

[Karen Short:]

Okay, perfect.

[Operator:]

Thank you, again if you would like to ask a question, please press star one on your telephone keypad, a confirmation tone will indicate your line has been placed in queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Okay Mr. Sturken, there are no further questions at this time.

[Craig Sturken:]

Well, great, if there are no more questions we’ll conclude the call. On behalf of Dave Staples, Dennis Eidson and all of my great supporters on the Spartan team, I thank you for joining our call today and we look forward to discussing our fourth quarter and full year results during our next conference call. Thank you very much.

[Operator:]

This concludes today’s conference, thank you for your participation, you may disconnect your lines at this time.