SpartanNash Company
Q2 2009 Earnings Call Transcript

Published: 16 Oct 2008

[Operator:]

Welcome to the Spartan Stores, Inc. fiscal 2009 second quarter earnings conference call. (Operator Instructions) I must remind you the 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 in general economic and market conditions. Additional information about risk factors and the uncertainties associated with our forward-looking statements can be found in the companies earnings announcement annual report on Form 10-K and the companies 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. At this time I would like to turn the call over to your Executive Chairman of the Board, Craig Sturken; please go ahead.

[Craig Sturken:]

With me this afternoon are members of our team, including President and newly appointed Chief Executive Officer, Dennis Eidson; EVP and CFO Dave Staples; EVP of Retail Operations, Ted Adornato; and EVP of Merchandizing, Alan Hartline, EVP of Supply Chain, Derek Jones; and Executive VP and General Counsel, Alex DeYonker. As you may have read from our recent press announcement effective yesterday, Dennis Eidson is our new Chief Executive Officer. Dennis and I had worked together for over 10 years and I believe he is classically trained to be a successful CEO. The long journey of our relationship and more importantly his contribution and helping to develop and implement our successful business strategy during the past five and a half years is the confidence that he is the right individual to lead our organization going forward. He possesses an exceptional understanding of the industry and our markets and I reiterate my full and enthusiastic support of Dennis. I also want to note that he has the full support of our Board, executive management team and our associates. I will now turn the call over to Dennis, for an overview of our second quarter financial and operational performance. Dennis.

[Dennis Eidson:]

I’d like to begin by thanking Craig, for his assistants in ensuring a smooth leadership transition. I’m distinctly honored to be in a position to lead Spartan Stores as long its future growth path. We have an exceptional organization filled with the very talented, knowledgeable and hardworking group of executive managers and associates, which given the great confidence in our future. On today’s call, I will begin by providing you with a brief overview of our second quarter financial results and business progress. Dave will then give you a more detailed view of our second quarter financial results as well as our financial outlook for the second half of the fiscal year. I will rejoin the call later to provide an overview of our business plans for the remainder of fiscal 2009. Before I begin discussing our second quarter financial and operating results, I want to express my enthusiasm for our recently announced pending acquisition of VG's Food and Pharmacy operations. I am enthuse because this acquisition provides us with a foot hold in Eastern Michigan, a market where we have no retail presence and gives us an excellent growth platform in that marketplace. VG is an exceptional retail supermarket operator, with very keen inside into their markets. They run a great business as evidenced by the more than $30 million in capital investments that they’ve made in their stores during the past five years. I also want to sincerely thank VG’s for their many loyal years as a distribution customer. This transaction will unite two strong retail supermarket operators with long standing and successful histories in the grocery industry, while providing future growth and operational improvement opportunities. Turning to our second quarter financial results, our strong performance continued into the second quarter, despite the current economic headwinds. We are very pleased to report solid sales and profit growth this quarter, marking our 10th consecutive quarter of sales growth and are our 11th consecutive quarter of double-digit operating earnings growth. As we anticipated, retail comparable store sales rebounded strongly from our first quarter results driven by favorable weather conditions for the last two-thirds of the quarter in Northern Michigan and the benefits of our capital program. We firmly believe that our consistent and sustainable performance demonstrates the effectiveness of our business strategy, capital investment program and the commitment of our management team and associates. Our hybrid business model provides us with strategic flexibility that has allowed us to respond effectively and adapt to changing market and competitive conditions brought on by economic cycles. During the quarter, we continued executing our capital improvement program by directing investments to stores that have excellent market growth potential. We finished remodeling two additional stores in the second quarter. One, under our Glen’s Fresh Marketplace banner in Northern Michigan and one Felpausch Food Center was converted to a D&W Fresh Market. We have now completed five major store remodels so far this year. We are very pleased with the sales trends at these recently remodeled stores and at stores that were remodeled last year. I want to point out the major remodel projects at are Glen’s Fresh Market place store in particular. This store represents a dramatic improvement in the total shopping experience for consumers in that geographic market and provides a unique shopping experience for this Northern Michigan area. The store includes a significant expansion of products and services including expanded produce, meat, deli, bakery offerings, fresh sushi, wine specialists, starbuck's coffee kiosk, imported specialty cheeses, a wide variety of crusty breads and an abundance of fresh see food while maintaining the same strong center store offering and the value that Glen’s is know for. Our distribution business continues to perform very well. During the quarter we fully cycled the Martin’s new business and a majority of new business dollars generated from former Farmer Jack stores purchased by our customers last year. As mentioned during our last conference call we are currently in the middle of a grocery warehouse re-ranking project. This effort will help improve productivity in our grocery warehouse facility and we expect to be substantially complete with this initiative during our third quarter. With that overview I’ll turn the call back over to Dave for a detailed review of our second quarter financial results; Dave.

[Dave Staples:]

I will now review more details of our second quarter financial results and provide you with our performance outlook for the reminder of the fiscal year. Consolidated net sales for the 12-week second quarter reached $626.8 million, an increase of 4.8% from the $598.1 million reported in the year ago quarter. As Dennis mentioned, this is our 10th consecutive quarter of net sales growth. The increase was due primarily to higher fuel sales, strong retail comparable store sales growth of 4.1% excluding fuel and incremental sale of new and existing distribution customers. Gross margin for the second quarter decreased 20 basis points to 20.3% from 20.5% from last year’s quarter. The decline was due mainly to a higher mix of sales from our lower margin fuel operations, partially offset by an improvement in distribution margins. As a percentage of sales, second quarter operating expenses decreased to 16.7% from 17.2% in the same period last year. The decrease was attributable to the sales mix change just mentioned along with better operating leverage from the increase in sales volume and the absence of Michigan single business tax expense, which as we previously disclosed was legislatively change to an income tax. The SBT expense totaled 600,000 in last years second quarter. The decline however was partially offset by higher compensation utilities and fuel costs as well as higher credit fees. Second quarter operating earnings reached a quarterly record of $22.5 million, increasing 16.9% from the $19.3 million reported in the same period last year. The improvement was a result of higher retail and distribution sales, better distribution margins and operating leverage, store level efficiency gains in the absence of the SBT expense that was partially offset by a higher LIFO inventory charge. Second quarter earnings from continuing operations reached $12 million or $0.55 per share, increasing 45.6% from the $8.3 million or $0.38 per diluted share we reported in the same period last year. Last years earnings included a $2.7 million non-cash charge related to the change in Michigan business tax structure. You may have notice that our effective income tax rate is running slightly higher than in the past. This is due to the change in Michigan tax structure from the single business tax to a combination of gross receipts and an income based tax. Going forward we expect our effective tax rate to be approximately 40.5%. Net earnings for the second quarter increased 21.6% to $11.1 million to $0.51 per diluted share compared with $9.1 million or $0.42 per diluted share in the year ago period. Net earnings included a loss from discontinued operations of $1 million or $0.04 per diluted share related primarily to the Pharm operation wind down and exit cost. This brings our year-to-date net after tax gain on the Pharm transaction to $1.6 million. In the year ago quarter we reported earnings from discontinued operations of $800,000 or $0.04 per diluted share, was included again on the sale of assets relating to the closing of five Pharm stores and one convenient store. Turning to our business segments, second quarter distribution sales increased 3.2% to $303 million which is the highest second quarter sales in the past eight years, from $293.8 million in the same period last year. The sales improvement was due primarily to increase sales to new and existing customers and product cost inflation. Distribution operating earnings improved 30.8% to $10 million which is also a second quarter record from $7.6 million in the same period last year. The improvement was due to higher sales volumes, better fixed cost leverage, improved gross margins rate, favorable procurement and programming initiatives and the SBT expand single business tax being replaced by an income tax which is partially offset by a higher LIFO inventory charge. Second quarter retail sales increased 6.3% to $323.5 million from $304.2 million in the same period last year. The improvement was due to higher fuel and comparable store-sales driven by a favorable summer season at stores in our Northern Michigan market and sales gains due to our capital program. Excluding fuel sales comparable store-sale increased 4.1% for the quarter. Our acquisitions and expanding capital program has contributed to retail net sales growth that has averaged over 20% on year-over-year basis, each quarter for the past 10 quarters. Second quarter operating earnings in the segment increased 7.8%, $12.5 million from $11.6 million in the same period last year. The improvement was primarily the result of higher sales and better efficiency at the store level, but it was partially offset by the start-up cost associated with remodel activity and a higher LIFO inventory charge. Total long-term debt, including current maturities declined slightly to $149.9 million as of September 13, 2008, from $154.4 million in March 29, 2008. Improved earnings and working capital management led to a significant increase in year-to-date cash generated from operating activities to $23.3 million from $4.3 million in the same period last year. The working capital improvement resulted primarily from our continued focus on working capital efficiency, timing of new business in the prior year and the collection of customer advances related to the new distribution business gain last year. In addition, our cash balance improved to $28.5 million primarily because of the proceed gain from the sale of our Pharm stores and the continued improvement in our business operations. We currently do not have any borrowings outstanding on our revolving credit facility and are using our cash balance and cash flow to fund operating activities. I will now cover our outlook for the remainder of fiscal 2009. Excluding the effect of our recently announced acquisition, we expect comparable retail store sales to increase in the low single-digits during the remainder of fiscal 2009, due to our capital investment program and as our marketing and merchandising programs are further refined to meet the current economic conditions and consumer purchase trend. The comparable store-sales growth rate achieved in our second quarter will be tampered by the cycling of the benefit of fiscal 2008, second half capital investment and single store acquisitions as well as the absence of the Easter holiday in this years fourth quarter. For the remainder of fiscal 2009, we expect to invest capital and complete two or three additional store remodels, a major store relocation project and begin construction of a new D&W store. In addition, we expect to open one additional fuel center in fiscal 2009. Additional start-up costs for grand reopening, promotions and store repositioning are expected to be approximately $1 million during the second-half of fiscal 2009. On the distribution side of our business, we expect sales volumes growth to taper off during the remainder of fiscal 2009, as we fully cycled our Martin’s business and a majority of the business from customer purchases of Farmer Jack stores during the second quarter. From a profitability perspective during the second-half of 2009, we will cycle substantial year-over-year increases that occurred in fiscal 2008 and consequently expect profitability growth in the second-half of the fiscal year to be at a more normalized level. We anticipate that total capital expenditures for fiscal 2009 will range between $55 million and $60 million. Deprecation and amortization expense should range from $26 million to $29 million and interest expense should be approximately $11 million. We expect the VG’s acquisition to close late in our third quarter. The acquisition should add approximately $310 million to our annual retail sales, but add approximately $160 million in total net annual sales, because VG is currently a distribution customer and the distribution sales will be eliminated following completion of the transaction. This transaction will be slightly dilutive in this year’s fourth quarter due to transaction costs and the elimination of VG’s related distribution segment profits in this year’s fourth quarter for the base inventory shipped to these once they are corporately owned. We then expect the transaction to be modestly accretive in fiscal 2010 growing thereafter the synergies are realized. I will now turn the call back to Dennis for his closing remarks; Dennis.

[Dennis Eidson:]

We performed remarkably well during the first half of fiscal 2009. We have recognized that more opportunities exist to improve sales and profitability. We have an exceptionally talented and very dedicated team of associates, which is a great foundation on which to continue to build upon our success. As we work through the current economic cycle, we will remain steadfast in our focus on a consumer centric business strategy that provides exceptional service and delivers good value to our customers. The near-term economic cycle is expected to become even more challenging with many variables impacting the consumer in ways that are both favorable and unfavorable to our business. However, we are confident that we can maintain our success, because of our hybrid business model, the diversification in our retail store banners and our portfolio of corporate brands. To take advantage of favorable consumer trends we will continue to emphasize programs related to pharmacy, fuel, healthy lifestyles, food at home and value offerings including our premier portfolio of private label products. In addition, our capital investment program is very visible and evident to consumers, which has helped strength our market position during this week economic cycle. During the remainder of the year we will continue integrating the Felpausch acquisition and make targeted capital investments to stores and markets with the best growth potential. In addition, following the completion of our VG’s acquisition, we will begin working on the integration of those operations and refining our market strategy in order to optimize the performance of these stores and ultimately realize the expected operational synergies. We will also work to further refine and adjust our marketing merchandising and promotional activities in order to realize the full profit potential of select retail stores and to keep aligned with any change in the economic conditions in consumer purchasing behavior. The full performance potential of our Felpausch retail stores has yet to be realized. We expect to continue making good progress with the sales and profit performance of these stores during the remainder of fiscal 2009 and store relocation and remodel activity, improve the store image and as we adjust the marketing and merchandising programs to better match the demographics in their individual markets. Our focus for the remainder of the fiscal year will be on delivering value to our existing customer base executing our existing capital plan and completing and integrating the VG’s acquisition. Let me spend a couple of additional minutes on the VG’s acquisition opportunity. VG’s is a wonderful operation and has successfully competed with national and regional chains for many years. It has an outstanding fresh product offering and differentiates itself on service and quality at a good value. This opportunity provides us not only with quality facilities, but also great associates and it will be a strong foundation for our future. In our distribution segment, we are continually engaged in seeking new customers and then exploring opportunities to expand sales with our existing customers. In addition, we constantly evaluate our supply chain to determine where the service capabilities and operating efficiencies can be improved. There are a number of distribution improvement opportunities available and we are currently working at warehouse throughput inventory management and grocery warehouse re-racking initiatives that will gradually improve our service quality and operating efficiencies overtime. We will now open the call for your questions.

[Operator:]

(Operator Instructions) Your first question comes from Karen Short from FBR; please go ahead.

[Megan O’Hara:]

This is Megan O’Hara on for Karen. First, we have some questions on the acquisition, looking at the $85 million purchase price. How should we think about the multiple pay given you already distribute the VG’s, because if we look at the multiple base totally on the retail EBITDA, it doesn’t look cheap, but is there are contribution from the distribution segment included as well.

[Dennis Eidson:]

Yes, Megan I think that’s an important point you made. When we work with our customer base and when you use what I would call historic multiples or industry multiples that determine the valuation, you really have to look at both pieces of a customer of our profitable. For one is the obvious EBITDA as Karen work through her analysis and you work through her analysis of that operation, but then there is also fairly significant component that resides in our warehouse operation because we sell products to them today. If this process would be conducted externally any other potential buyers would be required by the customer’s representative to pay them for that incremental value as well and so a $2 million to $3 million incremental amount of earnings that would be added to however you determined to your EBITDA to really look at a multiple.

[Megan O’Hara:]

Also can you provide some guidance regarding any incremental CapEx requirements going forward following the acquisition?

[Dave Staples:]

For the VG’s operation, there will always be a maintenance level of capital for any retail store, but this has been in a chain that has believed very strongly in investing in their operation. I think as Dennis alluded to earlier; they put over $30 million in capital under this operation over the past five years. So, there will be some maintenance capital, but very minimal and there is probably a couple of stores we would like to do a remodel with, but other than that, boy this is a wonderful chain that has been very well maintained by its current operates.

[Dennis Edison:]

It’s a great fleet of stores Megan and it is very much unlike the condition of the Felpausch and the D&W acquisitions that required significant capital.

[Megan O’Hara:]

Okay and do you anticipate additional opportunity to increase distribution penetration as a result of the acquisition?

[Dennis Eidson:]

Well, certainly if there are categories that VG’s has not procured from Spartan, we will look at adding those to our portfolio, but not at the expense of hurting the customer experience; they run a great business. If you look the average store volume of VG’s is about $100,000 more than our average corporate store volume and we’re going to be very protective of not throwing out the baby with the bath water here.

[Megan O’Hara:]

Okay and then if I could just ask a few quick questions on your ongoing business; I guess first on your updated guidance it looks like last quarter you expected full year same-store sales to increase in the low-to-mid single digits, but yesterday’s press release and as you stated today, is saying that same-store sales are expected to increase in the low single-digits for the second half, is there are change in your outlook?

[Dave Staples:]

The last guidance we gave was for the year, this guidance we gave as for the second half and so it really just reins it in. I think as you listen to our call, we think the second half run rate will be a little bit tampered by the fact that we don’t have Easter and a couple of the other factors we’ve mentioned, but that’s still fairly consistent.

[Megan O’Hara:]

Okay and can you just comment on sales trends and what you’re seeing in the third quarter to-date?

[Dave Staples:]

We still continue to be happy with our sales trends. It’s one four weeks in and at this point, we feel pretty good about the direction we’re going.

[Megan O’Hara:]

Okay. Can you give any numbers that are like inline with what we saw on the second quarter or…?

[Dave Staples:]

No, I mean we don’t give monthly comp guidance. So I don’t think we would start now, but...

[Megan O’Hara:]

Okay and then finally if you could provide some color on both the competitive environment and consumer behavior as a competitive environment intensified at all and do you see any changes in consumer behavior?

[Dennis Eidson:]

Well, this is Dennis, I’ll speak to that. I would say the competitive environment here has been relatively stable and I know it sounds like a broken record, but the State of Michigan has kind of been in a bit of a doldrums relative to the economy for a while, so I don’t think that we’re experiencing anything that we haven’t experienced in our past. My area and the Super Wal-Mart seem to be behaving as rational competitors in the marketplace. The consumer I will tell you is changing. The last several weeks, two to three weeks what happened with the stock market was pretty interesting as we were watching our business trends. We probably couldn’t have planned any better to have a private-label, a big private-label sale of the year; last week we have spectacular results, not perform much better than our private label sale that the prior year. Our private label penetration continues to grow. If you look at units, total store and our corporate stores, we are about 1% ahead of our penetration from a year ago. We’re running at about a 22.8% of units total store versus a 21.8% a year ago, so continues to be strong. We are just looking at some sale numbers in different categories and growth and the trialing 13 weeks can in supplies; you may not be surprised to know, are up like 45% versus a year ago to give you an idea of what the consumers doing today. I don’t know, there were that many consumers that still knew how to can, but apparently so. Sort of the discretionary categories continue to be a little bit softer and we feel that, but of course we’re driving a lot of that behavior too by promoting value and our circular week in and week out whether that’s with the cuts of meat that we promote more aggressively looking at value brands and private label and so there are a lot of moving pieces as we speak.

[Operator:]

Your next question comes from Bakley Smith of Jefferies & Company.

[Bakley Smith:]

I just want to ask, I didn’t know if you’ve given the number on this VG’s and Megan was asking about this, but what is the penetration you have with VG’s at this point on distribution?

[Dennis Eidson:]

They are one of our better concentrators, Bakley from a wholesale penetration standpoint. They are in the probably top four trial of concentrators.

[Bakley Smith:]

Okay, but it sounds like you’re not advising us to get too excited because maybe there is some stuff that you can bring in-house, but you’re relatively having the operation that have to go on and try and plan things around and change too much?

[Dennis Eidson:]

Because they are the concentrator, number one. Secondly, the stores are terrific by the way. This is just a premier organization, great boxes and we’ve talked before. This is right down the middle of our strategy. We talked about making acquisitions where there it’s an adjacent marketplace. This acquisition as you know our prototype store is 48,000 square feet that we’re building; 47,000 square feet, as I said the average $376,000 a week, it’s fairly $100,000 a week more than our current portfolio stores are profitable, the employee base of spectacular this is really a gem for us. We’ve talk before about growing through acquisition and influencing timing and this was interesting because there were some problems with health of second-generation executive here and they came to us and asked us if we would entertain this opportunity and the cultures are even very similar Bakley, so lots and lots of upside.

[Bakley Smith:]

Okay great and the second is a quick one. What are you see on fuel margins? Are you seeing an improvement? We got some hand from Costco that they had seen an improvement on fuel margin with prices coming down or you’re seeing that as well?

[Dennis Eidson:]

Yes, well that is exactly the trend we see. In a micro senses as cost of goods comes down our margins tend to creep up; as cost of goods ramp up our margins tend to shrink a bit. So, that’s exactly the trend we see.

[Bakley Smith:]

Okay and if I could just take two quick ones more; do you see any opportunity for distribution acquisitions out there? Would you be interested, would you entertain, broaden. I know you’re going to have a lot on your plate, but would you entertain expanding the footprint at all?

[Dennis Eidson:]

We’ve talked focused before; our future growth strategy certainly would include taking a look at distribution opportunities that were right. As we’ve talked it has to be in a adjacent marketplace, we’re not going to hop scotch around, but we want to be prudent with our capital and with timing. So, it’s a future opportunity that we certainly would be implying to look at if it was the right situation.

[Bakley Smith:]

Okay and the last one, we heard some noise and some interesting stuff coming out of both the restaurant side and supermarkets where this notion of the consumer trade down is maybe stronger than at least we had predicted. Are you able to see, are you able to get any visibility in your trade area with what’s happening with away from home trade versus just some recent pickup; are you’re seeing a pickup in prepared foods, anything that would foster that and we’re just trying to continue to feel with what’s going on with the new financial crisis and everything that’s going on if you’re seeing it?

[Dennis Eidson:]

I think we’re seeing the same numbers you are. I don’t have access nor have we found access to something that’s really regional, as it relates to food away from home, but all the national numbers are showing that food away from home is declining and I think this is the beginning of the third year of that phenomena and I don’t ever remember that happening in my clear up until now. If you look at consumers and research, what they are saying is that they believe that eating at home is more healthy and that they plan on doing more of it because of the economy. When you look at some of the categories where we’re seeing growth like boxed dinners for example, I know you would necessarily call that a home cooking right, but that kind of product is really resonating with the consumer, frozen on trays are going up, so we see signs that the consumer is eating more at home and that was the reference in the dialogue earlier today. There are some things favorable, but some things unfavorable in this climate. One of the favorable as we believe is that shift from food away from home to food at home is working in our favor.

[Operator:]

Your next question comes from Alex Bisson of FTN Midwest; please go ahead.

[Alex Bisson:]

As you look at VG’s, are there any fuel stations there, is that an opportunity?

[Dennis Eidson:]

It’s absolutely an opportunity; there are zero fuel stations currently in the portfolio.

[Alex Bisson:]

How quickly can you move? Can you get them at most locations?

[Dennis Eidson:]

I don’t know about the most, but I would suggest that there is an opportunity to move quickly on at least some locations. They have done some speed work at some locations doing some of the appropriate upfront work that we maybe able to mine those opportunities a little bit quicker, but the fuel experience for us, expanding just a bit has really been terrific. I mean we are enjoying the success of adding fuel to the path. We continue to see comp sales grow and we have begun to use fuel even more as a vehicle to drive value in our overall experience with our customers.

[Alex Bisson:]

I guess, just one question kind of keyed off from the press release. You indicated in the distribution business that you benefited from favorable purchasing opportunities and some merchandising initiatives and going forward you want to optimize that, keep you’re merchandising and marketing programs are retail. So, I guess my question is could you elaborate just a little bit on that? I guess some of it does touch on what you said about the consumer earlier, but could you add a little detail to that?

[Dennis Eidson:]

We are a wholesaler and as it relates to the current environment with cost increases in some maybe more than modest inflation, we do avail ourselves to the opportunity to make some sub money on the inventory appreciation as a wholesaler and we saw that in the Q. As it relates to driving value for the consumer at retail, I think you might see us doing a little bit more as it relates to fuel, as I just kind of alluded to, because we feel like we’re really getting some traction there and also we think there is something to the whole health keys that we haven’t totally mined and health and pharmacy I think is another area where you can expect to see us to even more in the coming months.

[Operator:]

Your next question comes from Bakley Smith; please go ahead.

[Scott Mushkin:]

Hey guys, this is actually Scott here. I think got disconnected by accident. If you look out in ’09, one of the big concerns we’ve had as a team is pricing power and retail could kind of evaporate, clearly offset by maybe falling prices and coming into support you guys. As you look at that what will happen; a bigger impact do you think as we get in’09?

[Dennis Eidson:]

Sorry, I’m not sure that I understand your questions, Scott. Commodity costs declining and is that what yousuggest?

[Scott Mushkin:]

Yes, but we’ve been in an inflationary environment at the retail, so it’s been both on the producer level, but also at the retail level, so the question is, which one will have a bigger impact on your business, but pricing power goes away at retail on the retail side or your cost improves?

[Dennis Eidson:]

I think what history might show us is if we get some cost declines as a result of some commodity adjustments and some deflation, historically, some of that inflated retail pricing has start to the retailers ribs. So, I’m not sure that necessarily that would be a bad thing for us. We may see some benefit on the retail side. So obviously, if there is a reduction in cost of goods conversely on the wholesale side of our business, we would immediately pass on that reduced cost of goods.

[Scott Mushkin:]

And then just to understand the leverage, one of things that happens to sell is when you lose your pricing power sales, you tail off the retail, do you think that it’s still like kind of a good will and you need 2% to 2.5% to leverage your fixed cost or are we in a different situation now where things are actually maybe a little bit easier to leverage just generally across the industry.

[Dennis Eidson:]

I’m not sure that isn’t easier Scott. There’s still plenty of cost pressures in the system anyway outside the cost of goods and so I’m not sure that would make then easier.

[Operator:]

And I’m showing that there are no further questions at this time.

[Dennis Eidson:]

Well, if there are no more questions, we will conclude the call. On behalf of Dave and Craig and everyone here on the Spartan team, I thank you for joining our call today and we look forward to discussing our third quarter results with you during our next conference call. Thank you.