SpartanNash Company
Q4 2008 Earnings Call Transcript

Published: 15 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to today's teleconference. (Operator Instructions) 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, the uncertainties inherent 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 10-K, 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 intention or obligation to update or revise any forward-looking statements. I will know turn the call over to Craig Sturken. Please go ahead, sir.

[Craig Sturken:]

Thank you. Good morning, everyone, and thank you for joining our fiscal 2008 fourth quarter and year end earnings conference call. With me this morning are members of our team, including President and Chief Operating Officer Dennis Eidson, Executive VP and COO, Dave Staples, Executive VP of Retail Operations, Ted Adornato, EVP of Supply Chain, Derek Jones, and EVP and General Counsel, Alex DeYonker. I will provide you with a brief overview of the fourth quarter, and then Dave will give you more details on our fourth quarter financial results and outlook. I will rejoin the call to provide you with an overview of our business initiatives for fiscal 2009. At the beginning of fiscal 2008 we established goals of expanding our Distribution business outside of our core Michigan market while improving its efficiency, investing in our physical retail store base, expanding our fuel center operations, and expanding our market share. We are pleased to report that we met each of these objectives during the past fiscal year. We are also happy to report our ninth consecutive quarter of double-digit operating earnings growth and eighth consecutive quarter of sales growth. Reported fourth quarter consolidated net sales improved 10% while operating earnings increased 19% even though last year included an extra week of sales. Adjusting for the extra week last year, fourth quarter net sales improved 19% while operating income increased 51%. We reported solid sales and profit growth in both business segments during the fourth quarter, demonstrating our ability to perform despite a slowing economic cycles and pressures on consumer spending. Adjusting for the extra week of sales last year, fourth quarter Retail sales increased more than 30% and Distribution sales increased nearly 10%, while Retail operating profit more than doubled and Distribution operating profit increased 35%. During the quarter and this past fiscal year, we continued to successfully execute the growth phase of our business strategy, which is clearly evident in the consistency of our financial performance and record earnings reported for fiscal 2008. Our progress this past year has positioned us even better to capitalize on both Retail and Distribution growth opportunities and to continue enhancing long-term shareholder value. During the past fiscal year, we gained market share in both our core Retail and Distribution operations while solidifying our position as the largest grocery distributor in Michigan and the leading independent supermarket operator in the markets that we serve. During the quarter, we continued our retail capital investment program and made additional progress integrating our acquired retail stores. We began major remodel work on an additional four retail stores in the fourth quarter and remain very pleased with the early results of this program. From a distribution perspective, we continued to benefit from the successful integration of significant new business added during the past year which allowed us to realize product volume growth and improved working capital efficiency. We also continued to make progress with our distribution efficiency initiatives and expect to realize the benefits of these initiatives during fiscal 2009. We are very proud of these achievements, and they would not have been possible without the continuing hard work and dedication of our people. I have witnessed a remarkable transformation in our corporate culture and in the attitudes of our associates, customers and suppliers during the past five years. Today, Spartan operates with a single-minded sense of purpose that is squarely focused on the consumer, and our associates have a vibrant sense of confidence with a strong desire to compete and succeed. Associates at every level within our organization are well engaged in making meaningful contributions toward our ongoing success each and every day. We are very proud to recognize and sincerely thank all of our associates for their contributions toward our success. With that overview, I will turn the call over to Dave for a detailed review of our fourth quarter financial results. Dave?

[Dave Staples:]

Thank you, Craig, and good morning everyone. I want to begin by reminding you that the operating results discussed today exclude the Pharm stores due to the pending Rite Aid transaction. The results of the Pharm stores are included in discontinued operations and, as such, are only included in net earnings. I will give you an update on the status of the transaction in a few minutes. Consolidated net sales for the 12-week fourth quarter reached a six-year high, increasing 9.7% to $570.7 million from $520.1 million in the 13-week period last year, which included an additional $39.3 million in sales related to the extra week. On an adjusted basis, consolidated sales improved 18.7%. The increase was due primarily to the acquired retail stores, strong comparable store sales growth of 5.2%, which includes the Easter holiday sales but excludes fuel sales and the extra week last year, and higher Distribution sales to new and existing customers. It's important to note that the Easter holiday, which occurred in both our first and fourth quarters of this fiscal year, will not take place in fiscal 2009. The Easter holiday sales benefit included in this year's fourth quarter was approximately $4 million on a consolidated basis. When Easter falls in April instead of March, as happened this year, we expect to have a $1 million to $2 million incremental sales benefit due to the seasonality and timing within the month. Gross margin for the fourth quarter increased 60 basis points to 20.9% compared with 20.3% in the fourth quarter last year. The improvement was due mainly to the sales mix shift between Distribution and Retail, but was partially offset by sales growth in the lower margin fuel category. As a percent of sales, fourth quarter operating expenses increased to 18.3% from 17.8% in the same period last year, reflecting the additional operating costs associated with the higher number of retail stores that we are operating and the absence of the fixed cost leverage created by the extra week of sales last year. Fourth quarter operating earnings increased 18.7% to $15.2 million from $12.8 million in the same period last year, which included operating earnings of $2.8 million related to the extra week of sales. On an adjusted basis, operating earnings improved 51.2%. The improvement was the result of strong overall sales growth in both business segments as well as improved gross margin rates in the Distribution segment. The fourth quarter also includes the LIFO inventory valuation charge mentioned in the press release. Fourth quarter earnings from continuing operations increased 14.7% to $7.8 million, or $0.36 per diluted share, from $6.8 million or $0.32 per diluted share in the same period last year. Last year included a pre-tax gain of $500,000 related to the sale of real estate. Net earnings for the 12-week fourth quarter reached $8.1 million or $0.37 per diluted share compared with $7.2 million or $0.34 per diluted share in the 13-week period last year. As mentioned in our press release, the results of our Pharm operations were reclassified to discontinued operations for all periods presented due to its pending sale. Fourth quarter earnings from discontinued operations attributable to the Pharm stores were $400,000, or $0.02 per diluted share, on sales of $27.9 million compared with $700,000, or $0.03 per diluted share, on sales of $39.4 million in the same period last year. For fiscal 2008, earnings from discontinued operations attributable to the Pharm operations were $1.5 million, or $0.07 per diluted share, on sales of $138.7 million compared with $1.4 million, or $0.07 per diluted share, on sales of $164.2 million last year. Turning to the Pharm transaction, to date we have completed the sale of one Pharm store, are currently in the inventory sell down stages of the 12-store Rite Aid transaction, and remain in negotiations to sell the one remaining store. We expect the transaction with Rite Aid to close the week of May 19. Total proceeds from these transactions are expected to be approximately $14 million plus inventory. Proceeds net of inventory liquidation costs, store closing expenses, settlements of liabilities and other related costs are expected to be approximately $7 to $10 million and should result in a pre-tax gain of between $250,000 and $1.5 million, which will be included in discontinued operations. Turning to our business segments, fourth quarter Distribution sales increased 1.2% to $297.4 million from $293.8 million in the same period last year, which included $22.9 million related to the extra week. On an adjusted basis, Distribution sales increased 9.8%. This is the highest fourth quarter Distribution sales level we've reported in seven years despite the reclassification of $23 million of sales to the acquired Felpausch stores to our Retail segment and the absence of the 53rd week. The sales improvement was due primarily to the higher volumes from new business added during the year, higher sales to existing customers, and the impact of the Easter holiday this year. Distribution operating earnings improved 17.6% to $10.9 million from $9.3 million in the same period last year, which is also the highest fourth quarter operating profit reported in this segment since we became public. The extra week of sales last year contributed $1.2 million to operating earnings. On an adjusted basis, excluding the extra week last year, operating earnings improved 34.9%. The improvement was due to higher sales volumes from new business added during the year and higher gross margin rates due to the reclassification of sales to the acquired Felpausch stores, better purchasing opportunities and more efficient promotion management, which were partially offset by the previously mentioned LIFO inventory charge. The fourth quarter included a pre-tax non-cash LIFO inventory valuation charge of $1.4 million compared to a LIFO credit of $0.9 million last year. The fourth quarter LIFO charge was due to commodity cost increases. Fourth quarter Retail sales increased 20.8% to $273.4 million from $226.3 million in the same period last year. The sales improvement was due to the contribution from acquired stores, strong supermarket comparable stores sales growth of 5.2% excluding fuel and the extra week last year, and higher fuel sales. The extra week contributed $16.4 million in sales to last year's fourth quarter. Sales improved as a result of our capital program, better performance at the acquired D&W stores as well as remodeled and relocated stores that were completed during the third quarter and the early Easter holiday season this year. Fourth quarter Retail operating earnings increased 21.7% to $4.3 million from $3.5 million in the same period last year, which included $1.6 million in operating earnings related to the extra week of sales. On an adjusted basis, fourth quarter operating earnings improved more than 117%. The improvement was primarily the result of higher sales volumes. Outstanding long-term debt at March 29, including current maturities, was $154.4 million compared with $108.8 million at March 31, 2007. We paid down $29.2 million of long-term debt from the $183.6 million balance outstanding at the end of the third quarter due to our improving profitability, higher cash generated from operations, and seasonality. I will now cover our preliminary outlook for fiscal 2009. We expected comparable retail store sales to increase in the low to mid single digits during fiscal 2009, excluding the effect of Easter holiday sales which, again, was included in both the first and fourth quarters of fiscal 2008 but will not occur in either quarter during fiscal 2009. As mentioned in our press release, we expect to complete major remodels on three stores in our fiscal 2009 first quarter followed by two additional stores in the second quarter and two more stores in the third quarter. We also expect to incur additional relaunch costs associated with each store in order to obtain the full benefit from the capital investments. In addition, we expect to build two or three new fill in or replacement stores during the fiscal year. The relaunch costs associated with these projects will be comparable on a per store basis to what we incurred for the five store remodels and relocations completed during the third quarter of fiscal 2008. As part of our overall strategic growth plan, we will continue to fine-tune our existing store base in order to optimize its collective performance. As part of each acquisition, we diligently evaluate the acquired store base to determine the best long-term fit for each store. Given our hybrid business model, each store has multiple ways to benefit our organization. First, a store can remain as a corporate-owned location due to its fit with our existing retail format and consumer offer. Second, it can be sold to one of our Distribution customers to allow them to meet their growth objectives as it can provide a better fit with their operations. Or finally, it can be consolidated with our other stores in an overall market. As a result of our plan, we anticipate additional transactions related to our acquired stores this year. On the Distribution side, we expect to generate additional revenue and sales volume from our new business, but not at the same rate as in fiscal 2008 because this business was fully ramped up during the third and fourth quarters. We anticipate capital expenditures for fiscal 2009 to range between $60 and $65 million. These expenditures will allow us to continue our successful capital investment program, including rolling out our Family Fare and D&W offerings at certain Felpausch locations and further optimizing the performance of our entire retail store network. Depreciation and amortization expense should range from $26 to $29 million, and interest expense should be approximately $11 million. In addition, I want to point out the change in the Michigan tax law this year will cause our state income tax expense to increase on a pre-tax basis by approximately $1.2 million annually. I will now turn the call back to Craig. Craig?

[Craig Sturken:]

Thanks, Dave. I want to reiterate that we are very pleased with the excellent fiscal 2008 results, which makes our fifth consecutive year of strong and steady business progress. In addition to our excellent financial performance, we also increased our market share and further solidified our position as the leading grocery distributor in Michigan and as the leading independent grocery retailer in the markets that we serve. Our progress is the result of our market knowledge and ability to take advantage of available growth opportunities as well as the execution of our overall business plan. We have developed comprehensive business strategies that have allowed us to prosper in both a challenging economic and intensely competitive grocery environment. In the coming year we will continue to focus on developing growth opportunities within our existing and adjacent markets and continue to execute our expanded capital investment program by prudently allocating capital to include both our Retail and Distribution operations. With the announced divestiture of our Pharm retail operation, we will now be able to dedicate management's full attention to further improve our core supermarket and distribution businesses. Although the bulk of our retail capital investments will be devoted to the Felpausch stores, we have also identified excellent market growth opportunities for select Family Fare, D&W and Glen's Market stores, and we'll be allocating capital to these stores accordingly. We believe that the opportunity to significantly enhance our offer to the customer continues to exist in several of the key markets served by these stores. There is still much work left to bring the Felpausch stores up to their full performance and potential, but we expect to continue making progress and improving their sales and profit performance during fiscal '09. As discussed, we will be working on the highest number of store remodels, new or relocated stores, and the opening of additional fuel centers since I joined the company in 2003. We now have a pipeline of projects that will provide approximately two or three new or relocated stores each year for the next several years. As Dave noted, we began remodels at three Felpausch stores and one Glen's Market during fiscal '08 and expect to complete these remodels during the upcoming first and second quarters. One of the Felpausch stores will be converted into a D&W Fresh Market banner, and the Glen's remodel will provide customers in one of our best northern Michigan markets with a much-improved shopping experience. This remodeled Glen's store will contain the best aspects of both our D&W Fresh Market and Glen's Market formats. The remodels include larger product selections, new marketing and merchandising programs, and store layout and equipment improvements. We have realized overall sales gains in line with expectation from stores that were remodeled last year, and we expect to achieve similar results from stores that will be remodeled in fiscal '09. We remain very enthused about the opportunity to improve the performance of these stores and their long-term performance potential. We are very pleased with the sales performance of our D&W Fresh Market stores, but realize that additional opportunities exist to improve their profit-generating potential. During fiscal '09 we will continue to fine-tune the marketing, merchandising and product mix of these stores and expect to gradually drive additional profit improvements. We also expect one of our new stores this year to be a D&W Fresh Market located in an area of Grand Rapids that is currently underserved with respect to upscale consumer offerings. In our Distribution division, we realized a significant benefit from the addition of new business during this past year and expect these benefits to continue accruing through the first quarter and, to a less extent, the second quarter of fiscal '09. We will continue to prudently invest in our distribution network and technology while focusing on productivity enhancement programs that will further improve warehouse input and customer service. Our goal is to develop our wholesale business into a world class distribution operation. We will 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 closing, I will state that we are stronger and better positioned today than we have been since becoming a public company nearly eight years ago. We remain confident about our long-term business prospects because we continue to see favorable near and long-term growth opportunities and believe that fiscal 2009 will be another exceptional year for Spartan Stores. We will now open the call for your questions.

[Operator:]

(Operator Instructions) Your first question comes from Charles Cerankosky - FTN Midwest Securities Corporation.

[Charles Cerankosky:]

The first question is around, Craig, convenience. How do you think your store convenience plays right now with gas prices? And I'm asking it in the context of Spartan competing against so many supercenters?

[Craig Sturken:]

Well, Chuck, as you know, we always talk about our stores being, quote, "closer, faster and friendlier." We feel that that is our competitive advantage, and in this market we believe that that's really helping us. You know, one point to note is that Michigan's economy has been difficult for the state of Michigan for several years. And the economic downturn that's occurring throughout the United States today is really not brand new for us. It's something that we've been living with. So we feel that the strategy that we crafted against the supercenters has already been tested and proven, and we believe that our fourth quarter results really indicate that we're in the right spot.

[Charles Cerankosky:]

You talked a little bit about trading down, and I also include into that moving into private label - which to me isn't necessarily trading down - but where you see signs of thrift appearing, is it different between your different banners?

[Craig Sturken:]

I'd like to defer that question to Dennis Eidson, our President.

[Dennis Eidson:]

We continue to look for this quantitative measure that says we can definitively say there's some change in the consumer buying behavior with respect to trading down, but frankly we don't find it. As you know, our private label performance has been very strong and it continues to outpace the industry average, so no change there. And I think the other point Craig was making, the economy here in Michigan, the unemployment rate in Michigan has hovered between 7.1% and 7.2% since 2003. It really hasn't wiggled too much. So I think maybe that's why we're not feeling more of a fundamental shift that others are.

[Charles Cerankosky:]

You guys have been down for awhile, or the state's economy has been down for awhile.

[Dennis Eidson:]

Exactly - 2003 unemployment was 7.1% and in 2007 it was 7.1%.

[Charles Cerankosky:]

Dave, a question for you regarding the operating profit margin difference between the segments. The vast majority of the profit margin in the quarter was in Distribution, only a little in Retail. I some of that has to do with the inter-segment accounting but can you address that, please?

[Dave Staples:]

Yes, I think it's probably twofold, right? I mean, a lot of it has to do with the inter-segment accounting. If you recall, Felpausch was a Distribution customer in the previous years. This year the $26 million or so of sales that in last year's fourth quarter were recorded in the Distribution segment moved over to the Retail segment, however, the billing profit remained. And so that's a big factor in how you look at it. I also think that in the forefront of inflationary times, Distribution will typically, I think, profit more quickly than Retail just because of the way the mix of the business works.

[Charles Cerankosky:]

Do you have what you would say is a pretty good estimate of inflation or is it still kind of a 3% to 4% range, like everybody else has been?

[Dave Staples:]

Yes, I think that's pretty fair. On the input side, right? The output side is totally different.

[Charles Cerankosky:]

Exactly. And then, last question, as you divest these Pharm stores, are there any negatives in terms of reduced volume in purchasing HPC and pharmaceutical products?

[Dave Staples:]

You know, I think overall we have included that in our run rate. So looking forward, we don't see any other impact than you would be able to extrapolate out of the numbers we put out.

[Operator:]

Your next question comes from Cheryl Cortez - Susquehanna Financial Group.

[Cheryl Cortez:]

I was wondering if you were doing anything to try to capture any rebate stimulus dollars that are hopefully still in the marketplace?

[Dennis Eidson:]

Yes, Cheryl, we are. We launched a program several weeks ago allowing the consumer to show proof of their tax rebate and we would give them a 10% premium on that rebate. So if they had a $300 rebate check, we'd give them a $330 gift card, a $600 rebate, a $660 gift card. So I think that is a program that we've seen across the country in a number of retailers, and ours is similar.

[Cheryl Cortez:]

Is there, in terms of inflation, any change in spending patterns from the higher-end banners, D&W, etc.?

[Dennis Eidson:]

D&W, Cheryl, has actually been our best performing banner in the past year. Now we did do some work there with remodels, but just on balance it seems like that consumer has been more resilient than I guess what the balance of the economy is doing. So we're feeling good about that upscale offer.

[Craig Sturken:]

As a matter of fact, we feel, really, that we've enjoyed a benefit in those stores from the restaurant customer. I would guess that the segment of consumerism that's being affected the most at this point in time would be the family restaurants, the sit-down restaurants, or maybe the restaurants on the high end. I think they are probably having great difficulty. And people are moving across the street into our D&W store, and we're very pleased with our sales impact right there.

[Cheryl Cortez:]

And in the current environment have any of your Distribution customers [represented] more private label products during this time or is there a strategy to try to increase it on the Distribution side?

[Craig Sturken:]

Well, the biggest opportunity for growth in our private label business is with our Distribution customers. The business that we own and operate ourselves, our corporate stores, have an exceptionally high concentration in private label. There is an opportunity for the Distribution customers to catch up. And, by the way, we're seeing that. As they follow our lead with the profit opportunity in private label, they are improving their penetration.

[Cheryl Cortez:]

And then finally, I was just curious about capacity at your Distribution centers, especially in the frozen food section. How is that going? Is there any constraint or [inaudible]?

[Craig Sturken:]

Our shelves or profits are not impaired at all by our frozen food situation. We just know that as that category continues to grow - it's one of the fastest-growing categories in food retail - as that continues to grow, we know that we will be needing additional capacity and we are putting together a plan to take care of that. So we won't have a problem.

[Operator:]

Your next question comes from Karen Short - Friedman Billings Ramsey.

[Karen Short:]

Just a couple of housekeeping questions first. Can I just clarify, you gave the benefit of Easter on sales in the fourth quarter of '08 [inaudible] it's also $4 million in the first quarter?

[Dave Staples:]

Well, as we talked through that, Karen, right, it was $4 million on a consolidated basis. And then we talked about an Easter in April having a larger impact typically, so usually we use the $1 to $2 million range. So an Easter in April is usually $1 to $2 million stronger than an Easter in March. That's our analysis.

[Karen Short:]

And then just looking at your non-cash charges in your EBITDA table, in Distribution I guess you had a $2.137 million charge. I'm assuming part of that was LIFO?

[Dave Staples:]

Yeah, a big part of it. About a [billion].

[Karen Short:]

And 1-4, right? What was the rest?

[Dave Staples:]

Really, it relates to the stock compensation that's non-cash. The way you do that is upon issuance. You have to book a noncash charge, and then you amortize that over the life of the vesting. So every year we take a charge for stock compensation that isn't related to cash.

[Karen Short:]

And the component that was allocated to Retail? It was small.

[Dave Staples:]

[Inaudible] because remember how our corporate allocation works. Most of that type of general administrative cost is at the Distribution segment. That's where our corporate overhead resides. It takes the brunt of that kind of a charge.

[Karen Short:]

And then just remind me what the relaunch costs will be per store. I know you gave the timing of the remodels, but so I can have a good sense of the cost.

[Dave Staples:]

Yes, sort of how we frame that, if you remember, in the third quarter we said that the impact was approximately $1.3 million and we had done five remodels with a relaunch. And so I think that's a reasonable proxy for how to look at that going forward.

[Karen Short:]

And then just wondering if you could give us what this fuel benefit was on the comp?

[Dave Staples:]

We don't report fuel in our comp.

[Karen Short:]

Your 5.2%?

[Dave Staples:]

Right. That excludes fuel, Karen.

[Karen Short:]

Oh, sorry. I thought that included fuel. Wow, great comp. Okay. Can you maybe just decompose that a little bit between basket and traffic?

[Craig Sturken:]

Well, you know, I think we're happy overall with our basket and traffic. So we continue, like the industry, to see incremental basket, but unlike the industry we saw some beneficial traffic. So we felt both sides drove it.

[Karen Short:]

Just wondering if you could give a couple updates. I know we've touched on the competitive landscape. I know it's always been tough, but do you have any numbers that you can put around that in terms of a competitive opening for '09?

[Craig Sturken:]

Well, we actually looked at that stuff this morning because we are - we look at this all the time, but we refreshed our memory this morning on this because we thought maybe that question would come up. And this is sort of an amazing thing. Currently, in the trade area in which we operate stores, WalMart has no stores under construction, either enlargements with a supercenter or Greenfield sites to become a supercenter. And that's the first time in five years that we've had that situation. So that's really good news for us, okay? Meyer, on the other hand, has two stores under construction in our trade area, one of which is a replacement on site of an older store, so the impact of that will be de minimus. And the other store is one of their smaller footprints; it's the smallest of all of their formats. So we are headed for a pretty good year as far as competitive activity against the stores that we own and operate ourselves. Within the state of Michigan, we cannot find a Wal-Mart under construction. Now they have stores planned but, you know, they've slowed down their process. So the state of Michigan is going to have sort of a little rest period visàvis the WalMart supercenter rollout. On the other hand, there are three Meyers under construction in other parts of the state of Michigan that will affect either maybe some of our independent retailers or primarily Kroger, because they're on the east side of the state. So we are faced with probably the least amount of square footage development against us that we've seen in five years.

[Karen Short:]

What about actually in neighboring states, given that you have a goal of expanding your distribution in Indiana and things. What are you seeing from a competitive perspective in those markets?

[Craig Sturken:]

Our view is and our research is that it's also reduced, but we don't have the finite details of Indiana, Ohio or Illinois that we have here in Michigan. But I've read that a lot of Meyer's capital investment is going to be in the Illinois area, in the Chicago suburbs.

[Karen Short:]

And any updates on new customer additions kind of in neighboring states?

[Craig Sturken:]

If we had something going, we couldn't tell you. So no, there's no updates.

[Karen Short:]

And then I guess the last question, I had read somewhere about food stamps changing to two times a month in Michigan. Is that happening and I guess do you have any comments on how it affects you?

[Craig Sturken:]

Well, we're not sure that it's going to happen, and would it affect us? Oh, yes, probably positively. It would make life a lot easier to have to deal with a twice-a-month impact of food stamps because right now I know that our retailers in the Detroit market have to deal with a 30%, 40% increase on the first 10 days of the month. And by the way, as more and more people qualify for food stamps it's going to become more and more of an issue. So we would be pleased if in fact the state were to convert. But, you know, at this moment in time it's more talk than reality.

[Karen Short:]

Is there any sense of timing on when that might be resolved?

[Craig Sturken:]

No.

[Dennis Eidson:]

I think there's some federal inhibitor to that. I think the state signed off. The federal government's got a say in this so it's a little bit convoluted at the moment.

[Karen Short:]

And I guess just a last question. Can you just maybe elaborate a little bit on some of your new marketing initiatives? You kind of mentioned them briefly.

[Dennis Eidson:]

I think what we talked about is really trying to further embellish on the D&W Fresh Market offer going forward. And as Craig pointed out, in one of the Glen's stores in northern Michigan we are really going to put together a store there that has the best of both offers and allow us for the first time in northern Michigan to have a program in place and an offer and a marketing plan that will cater to the upscale consumer. We're also focused, as we have been, on improving our home meal replacement offering at D&W. And again, as the restaurant segment is really suffering - and statistically they are, I mean, the growth numbers we're seeing are significantly softer, as you would know, from where they've been - we're getting some traction with that home meal replacement offer at D&W. This week, for example, for the first time in our core Glen's Family Fare programming we did a section on meals at home where you can feed your family for under $10 and bundled the items together. We're trying to be more of a meal solution, and trying to explain to the consumer that we're helping them derive even more value from their shopping experience with us. And that combined with, you know, 16 fuel centers we're now operating are really helping us derive value, and we're marketing that pretty aggressively as well with discounts. We've got a lot of things, I think, working pretty good for us from that perspective.

[Karen Short:]

I know I've said this three times, but this is my last question. On the LIFO charge, is the run rate that we saw in the fourth quarter, is that something that we should expect going forward? And I guess same thing for the stock compensation component.

[Dave Staples:]

Stock comp is a pretty consistent program. I think there's probably another year of those kinds of moves. But on the inflation, I'd say no, that it wouldn't be at that type of a run rate. I mean, I think what we saw in the fourth quarter was a tremendous number of price changes. I mean, a number that we don't typically experience or haven't typically experienced. You'd think that that would, if inflation continues at that rate, you'd maybe expect that to spread out a little bit more over the year as opposed to being such a concentrated event. I can't answer that exactly right because I don't know what the manufacturers are going to do, but that clearly was a significant impact in the quarter. So to take that rate and just run that out, that would be excessive, I think.

[Operator:]

Your next question comes from [Sean Tesoro] - BlackRock.

[Sean Tesoro:]

You mentioned the stimulus bonus program. Just any early read on your customers' response to that? Are they embracing that? Are they running with that?

[Dennis Eidson:]

The early read is it's been rather modest in terms of redemptions, but it is pretty early.

[Sean Tesoro:]

And then given your traffic comments, it doesn't sound like you're seeing any less frequency with maybe a consumer consolidating trips or whatnot. Is that correct?

[Craig Sturken:]

You know, in the last year that we're talking about, yes, I think we saw that we continued to be happy with our performance. In the industry, I think you'll see, is a continued typical decline in the transaction count, and we didn't experience that last year.

[Sean Tesoro:]

And then just finally here, any quantification on the lift from remodels? I don't know how you speak to this but just wondering if you can add any more color to that.

[Craig Sturken:]

Well, we typically have said that if it's a major remodel, you know, over $1.5 million, we're looking for high single, low double digit type lifts on average, lifts off current run rate.

[Sean Tesoro:]

And then on something maybe more minor?

[Craig Sturken:]

You know, that gets so subjective based on the actual remodel, so that's hard to give you an average.

[Operator:]

Your next question comes from Wayne Archambo - BlackRock.

[Wayne Archambo:]

On the acquisition side, you've done a good of identifying in-market players. Can you give us some sense over the next 12 months if you see more opportunity in Michigan for in-state acquisitions or are you done in that regard for awhile?

[Craig Sturken:]

It's very hard to project this. This is a process, not necessarily an event. If you look at our Retail business, it's really an aggregation of independent operators that we supply for the most part. And we've also told our retailers that we are their exit strategy if and when they have a desire to do so, and that's a very hard thing to predict. Our retailers, by the way, are doing well. It's not like we have retailers that we supply that are down and out and anxious to sell. However, again, this is a process and it's something that we work on constantly. And as you know, I cannot predict what will happen this year, but we would like to see the next several years to replicate the kind of experience we've had for the past couple years.

[Wayne Archambo:]

So there's still plenty of independents in Michigan that you could potentially take into your fold over the next few years? I just want to get some sense that Michigan isn't - that you're not at a saturation point in terms of the independents.

[Craig Sturken:]

Well, the important word is potentially. You used it, and I agree with that. On a potential basis, it's there for sure. It's just a matter of how do the stars align over the next couple years. But yes, the potential exists, absolutely.

[Operator:]

Your next question comes from Patrick Stowe – Priority Capital. Patrick Stowe – Priority Capital I wondered if maybe you could just give us an update on how many stores have pharmacy and how many fuel centers you have currently.

[Dave Staples:]

I think we have 16 fuel centers operating today, and we have 48 pharmacies that we own that are operating in our supermarkets. We also have, I think, three locations where there's a third party that's operating pharmacies in our retail stores.

[Craig Sturken:]

And we have a couple of remodels and enlargements that we will be adding pharmacies in the next 12 months. Patrick Stowe - Priority Capital And do you still view those as kind of positive additions and part of the longer-term capital plan, to grow those out?

[Craig Sturken:]

Absolutely. Pharmacies are a tough thing. Say you're going to do a Greenfield pharmacy, you know, add a pharmacy from scratch in a store that you operate. We've had success with that, but it's a more longer-term kind of investment. In this day and age, with people like Walgreen or Wal-Mart, the pharmacy business is not an easy thing. But we are totally committed to it, and we're committed to grow it. And we're willing to make the investment because the pharmacy customer is, in fact, your most loyal customer. She's with you day in and day out. And, of course, we are committed to drive-up with all of the pharmacies that we open, and that is a very important element. You'll notice that, for example, Walgreen, Rite Aid, will not build a store today that doesn't have drivethrough. Patrick Stowe - Priority Capital And the fuel centers?

[Craig Sturken:]

Yes, same story. The fuel centers, of course, it's all about driving the business in our supermarkets. The strategy is working very well for us. We're very pleased with our results in the fuel centers, and we have a very aggressive plan to add fuel centers on a continual basis. Patrick Stowe - Priority Capital And I guess the capital plan for '09 is a little over $60 million. And Craig, you said you view there to be an opportunity to do remodels, relocations, for the next couple of years. Do you think that number is kind of a good run rate for the next couple of years? Is the bulk of that spending done in a year or two? How should we look at that?

[Craig Sturken:]

I think that's a good target, to say that we will have that kind of capital expense. Actually, that $65 is a little bit on the high end for us but, you know, if the opportunities are there we'll spend the money. Patrick Stowe - Priority Capital And you touched on this briefly in just talking about kind of being the exit strategy for your independents, and clearly, with the strength in the Distribution business, it doesn't look like there's any real weakness in that network, but as you look across that group of stores, are there any that are having more trouble in this environment or is it kind of like you said, Michigan's had its struggles for a couple of years and those guys are kind of operating along?

[Craig Sturken:]

Well, there you are, quote, "kind of operating along." Let me just tell you a little bit about this. On the east side of the state we supply over 50 independent operators within the city of Detroit confines, okay? And this is an amazing thing. In the city of Detroit there is not one chain operator, okay? It's all independent. Kroger doesn’t have a store, WalMart doesn't have a store, Meyer doesn't have a store. Farmer Jack had stores. With their demise, there is no chain operator in the city of Detroit, so it's really left up to the independents to fight it out. And I'm going to guess on a market share basis in the city of Detroit, on a distribution - Dennis, I would say we, 60%, 70% market share?

[Dennis Eidson:]

I'd say easily that number. It may be higher. Patrick Stowe - Priority Capital And did Kroger not buy a big chunk of those stores?

[Craig Sturken:]

Yes, but they only bought suburbs. They took the Cadillac and caviar. They didn't want to do anything with the city.

[Dave Staples:]

You know, our customers, I think, only ended up with like six or so less stores controlled than Kroger if you boil it all down.

[Dennis Eidson:]

They took 21 and we took, I think, up to 15 with our customer base.

[Craig Sturken:]

I mean, our customers came out very well on the deal. Of course, we were there to assist them. We had a good understanding of the city of Detroit, and it was a very good move for Spartan Stores when that happened. Patrick Stowe - Priority Capital As you talk about the goal of moving into contiguous markets and states, from a distribution perspective can you give us an idea of how big is that opportunity with your current distribution capacity or is that more of a, you know, we might have to add some distribution capacity to really move into, you know, an Indiana or a Wisconsin or whatever market it may be.

[Craig Sturken:]

That's a very good question. First of all, we have additional distribution capacity on both sides of the state, probably more additional capacity on the east side in Plymouth. And, by the way, that's very reachable to the northern Ohio and eastern Indiana marketplace to get from Plymouth. But we would also be pleased if we could acquire something that would be in addition to our distribution capacity in the Indiana, Ohio trade area. We feel that, I mean, we're willing to do this. And we just are more or less waiting for the opportunity to move forward on our Distribution business in that trade area.

[Operator:]

Your next question comes from Charles Cerankosky - FTN Midwest Securities Corporation.

[Charles Cerankosky:]

Craig, got a question about Easter. I recall last year discussing that because the calendar showed a couple Easters falling into the just-completed fiscal year, and I know we discussed how it helps the week going up to Easter than the following week is kind of a drop off. But you guys are discussing that you got a net benefit out of Easter that won't be in fiscal '09. Am I understanding that correctly?

[Craig Sturken:]

Yes, that's exactly right.

[Charles Cerankosky:]

So you'll have a drag this year due to the lack of Easter?

[Craig Sturken:]

Yes, exactly.

[Operator:]

Your last question comes from Karen Short - Friedman Billings Ramsey.

[Karen Short:]

I just had two follow-up questions. I guess I didn't catch this if you said this. Did you comment at all on your ability to pass on inflation, like what you're seeing at your stores and also what you're seeing from WalMart and Meyer? And then I had one other question.

[Craig Sturken:]

Well, Karen, as you know, because we're a hybrid, we're sort of in a pretty good spot, okay? Because as a distributor we operate in a cost-plus environment. So if, for example, Kraft raises the price of Miracle Whip, that goes right through and gets passed right through on a charge basis with our retailers, and we actually charge our own retail stores the same thing. So if it goes up $1 a case, that charge is passed right through immediately in a cost-plus environment. On the Retail side of the business, it's up to us to be very diligent and very careful to watch the market leaders and be sure that we are not leaving anything on the table in the way of retail price increases. And I can tell you this, that the competition is passing it through.

[Karen Short:]

And I'd read that SuperValue, I guess, is closing their Livonia DC. Is that actually happening and, if so, is that an opportunity for you to get some additional customers?

[Craig Sturken:]

Well, that's an unusual situation. That Livonia DC is 100% dedicated to supplying Kroger. So that's a joint venture that SuperValue has had with Kroger for many years.

[Dennis Eidson:]

It goes back to the Food Land that [inaudible] SuperValue.

[Craig Sturken:]

It goes way back. What Kroger has done is determine that they're going to undo that, unravel that agreement and ship groceries from Delaware, Ohio - which is a Columbus suburb - to the marketplace, which amazes us. But that's what they're going to do.

[Karen Short:]

And is that DC potentially an opportunity from an expansion perspective for you?

[Craig Sturken:]

Well, we actually have a better facility in Plymouth than that Livonia DC. It's very old, low overhead, low clearance. It's not anything that we would want to get involved in.

[Operator:]

And it appears at this time we have no further questions.

[Craig Sturken:]

Well, if there are no questions we'll conclude the call. On behalf of Dave and Dennis and everyone on our Spartan team, I thank you for joining our call today and we look forward to discussing our first quarter results with you during our next conference call.