SpartanNash Company
Q2 2014 Earnings Call Transcript

Published: 14 Aug 2014

[Operator:]

Good day and welcome to the SpartanNash Company's Second Quarter 2014 Earnings Conference Call and webcast. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Ms. Katie Turner. Please, go ahead.

[Katie M. Turner:]

Thank you. Good morning, and welcome to the SpartanNash Company's second quarter fiscal 2014 earnings conference call. By now, everyone should have access to the earnings release for the second quarter ended July 12, 2014. For a copy of the release please visit the SpartanNash website at www.spartannash.com under For Investors. This call is being recorded and a replay will be available on the company's website for approximately 10 days. Before we begin we would like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include, among others

[Dennis Eidson:]

Thanks, Katie. Good morning and thank you for joining our second quarter fiscal 2014 earnings conference call. With me this morning are Dave Staples, our EVP and CFO; as well as other members of our executive team. Today, I'll begin by providing you with a brief overview of our business and highlights of our financial performance for Q2, and then Dave will share some additional detail about the second quarter financial results and our outlook for the remainder of fiscal 2014. Finally, I'll provide some closing remarks and we'll open up the call and we will take some questions. We did hard work implementing our merger integration thing with Nash Finch and delivered a better than expected performance in the second quarter despite a challenging landscape. As a result of the significant efforts by our associates we are beginning to realize merger synergies slightly earlier than expected in many areas and remain confident that we will exceed our current year synergy target of $20 million and are likely to exceed our total $52 million target by 2015 as previously communicated. I continue to be pleased with how the two companies are coming together and I am proud of what our team has been able to accomplish while continuing to operate the day-to-day business. Now reviewing our distribution segment results, we posted another quarter of significant growth over the prior year period as a result of the sales contributions from the merger. These gains were partially offset by the change in timing of Easter holiday which resulted in the post Easter week of low volume sales moving out of the first quarter and into Q2 this year and the reduction into the Supplemental Nutrition Assistance Program or SNAP. As we look to the second half of the year in Food Distribution, we are continuing our focus on enhancing the efficiencies of our extensive distribution network. These efforts include leveraging our geographic scope and combined product and logistic competencies to reduce network cost and increased business with existing customers while taking advantage of our larger platform to pursue additional wholesale grocery accounts in our regional as well as national level. We also continued to enhance our programs and services, offered to the independent retailer and are developing new plans to roll out more of our unique programs across the entire distribution network. We believe that this is a meaningful opportunity to grow our business as we help our independent customers stay competitive, productive, and profitable. Net sales in our retail segment were also up significantly due to the merger in new and remodeled stores. Comp store sales in our Michigan retail operations excluding fuel ended up even with the prior year primarily as a result of two factors that negatively impacted retail sales in the second quarter. These factors were the change in timing of the Easter holiday this year and the impact of the curtailment of the SNAP benefits. We estimate that this should be the post Easter week of sales in to the second quarter having approximately 80 basis point negative impact on our comp store sales. We continue to move forward with our loyalty analytics and are slightly engaged in testing our new processing system in select categories and are encouraged by our progress today. We are also beginning to introduce to our rest of the stores some of the merchandising and promotional programs that have served us well in our Michigan retail operations. We are excited to connect with our consumers and to provide them with a value and a shopping experience that they desire. On the product side, we continue to drive both retail and food distribution sales through the expansion of our private brand program. During the second quarter we added approximately a 100 new products and we continue to expect to add approximately 300 new items for the full year. Sales in our military segment remained challenged due to the ongoing softness in commissary sales. Despite these top line pressures we are focused on the significant efficiency opportunities that exist to improve our operations. We also continue to believe that our worldwide network gives us a distinct competitive advantage like providing niche efficiencies to the commissary system. As we previously discussed in March, we completed a major expansion of our military DC in Landover, Maryland. We are pleased that the facility is progressing nicely and is beginning to deliver some of the operational efficiencies and increased revenues that we anticipated. Moving on to our capital plan, during the second quarter we completed three major remodels and began construction of two new stores. Additional two supermarkets were sold to distribution customers and one underperforming supermarket was closed as part of our plan to ensure that all locations meet our brand and profitability requirements. This brings our store count to 166 supermarkets and 32 old centers at the end of the quarter. During the third quarter we plan to complete two major remodels and re-banners and also one new store in West Lafayette, Indiana. Additionally, we are continuing construction on one new store that is scheduled to open in North Dakota in early 2015. So for all of fiscal 2014 our plans are to complete 10 major remodels, open one new store, and beginning construction of another, and expand the previously noted military DC. As a result of the remerged, re-banners in the grocery (ph) market we will have completed our conversion of all of the Glen's Market stores to Family Fare. With that overview I will turn the call over to Dave, who will give more details on the financial results and an outlook for the remainder of fiscal 2014. Dave.

[Dave Staples:]

Thank you Dennis and good morning everyone. Consolidated net sales for the second quarter increased 178% to $1.8 billion compared to $651.1 million in the year ago quarter. The increase was due to $1.2 billion in sales from Nash Finch partially offset by the later timing of the Easter holidays this year and the impact of cutbacks to SNAP benefits. Consolidated gross profit margin for the second quarter was 14.7% compared to 20.5% in the prior year and primarily reflects the change in segment mix due to the merger and the impact of continued low inflation in the non-perishable department. Second quarter adjusted operating expenses was $229.1 million or 12.7% in net sales compared to $114.9 million or 17.6% of net sales last year. On a national basis the increase was due to the inclusion of the Nash Finch operations while the decrease in rate was due primarily to the shift in the segment sales mix as a result of the merger. These results exclude $2.6 million in expenses related to merger integration and $1.1 million in restructuring charges in the current year's second quarter. And $2.4 million in expenses related to the merger and $1 million in asset impairment charges in the prior year's second quarter. Adjusted EBITDA for the second quarter increased 97.8% to $58.3 million or 3.2% of net sales compared to $29.5 million or 4.5% of net sales last year. Adjusted earnings from continuing operations for the second quarter were $19.1 million or $0.50 per diluted share and approximately 37.8 million shares outstanding compared to $10.2 million or $0.46 per diluted share on approximately 21.9 million shares outstanding last year. These results exclude expenses related to the merger of $0.04 per diluted share and restructuring charges for store closure of $0.02 per diluted share partially offset by a cash benefit of $0.02 per diluted share related to the favorable settlement of an unrecognized tax liability established in the prior year. For the prior year second quarter, adjusted earnings from continuing operations exclude expenses related to the merger of $0.06 per diluted share and an asset impairment charge of $0.03 per diluted share. These better than anticipated results were driven by our continued favorable synergy realizations and $2.3 million in favorable insurance adjustments due to the latest actuarial evaluation partially offset by incremental LIFO expense of $900,000 and $500,000 in pension settlement charges. Turning to our operating segment, second quarter net sales for the food distribution segment was $767.9 million compared to $271.9 million in the year ago quarter. The increase in sales was due to $501.4 million in sales from Nash Finch, partially offset by the factors Dennis mentioned earlier. Second quarter operating earnings for the food distribution segment increased 53% to $14 million when adjusted to exclude $2.9 million in expenses related to the merger integration and restructuring (technical difficulty) in the prior year second quarter versus $9.1 million last year excluding $2.4 million of merger expenses. The gains from the sales volume of Nash Finch food distribution operations were partially offset by the step up in depreciation expense resulting from the revaluation of assets acquired in the merger of $2 million, $500,000 in higher LIFO and lower inflation rate gains. In our retail segment, second quarter net sales were $539.8 million compared to $379.2 million last year. The increase in sales was due to $184.9 million in sales from Nash Finch partially offset by $17.1 million in fewer sales due to store closures. Comparable store sales excluding fuel were flat for our Michigan retail operations. As Dennis mentioned we estimate that the negative impact of the shift of the Easter holiday accounted for approximately 80 basis points in comparable sales. Retail segment operating earnings for the quarter increased 65.8% to $15.6 million when adjusted to exclude $800,000 in restructuring charges versus $9.4 million last year when excluding an asset impairment charge of $1 million. The improvement in adjusted operating earnings was primarily due to the merger. In our military segment, second quarter net sales was $502.4 million and operating earnings was $6.7 million including $400,000 in LIFO expense. From a cash flow perspective our current year-to-date operating cash flow was $64 million compared to $47.4 million for the comparable period last year. The increase was the result of contributions from the merger. Total net long-term debt was $577.2 million as of July 12, 2014 versus $142.2 million at the end of the second quarter last year due to the incurrence of $436.1 million in debt as a result of the merger and the acquisition of two supermarkets offset by the positive cash flow from operations. Net long-term debt decreased $19.2 million from $596.4 million at December 28, 2013. So I will now provide further detail on our outlook for the remainder of fiscal 2014. As we looked to the second half of the year we continue to believe that we are in a position to deliver our sales and earnings outlook for fiscal 2014. Although we expected the consumer will remain challenged particularly those that received SNAP benefits and sales will be affected by store closures, we will continue to benefit meaningfully from the merger. While we are encouraged by the improving sales trend in the second quarter, two additional competitive openings will impact the run rate in the second half of the year. On the expense side we expect to continue to see some pressure associated with the increase in the minimum wage that affected Minnesota in August and will take effect in Michigan in September, however, we expect those to be offset by continued favorable merger synergies. For the third quarter we expect an adjusted net earnings from continuing operation of per diluted share will be at or slightly below last year's comparable adjusted third quarter results of $0.43 per diluted share excluding merger integration cost and any other one-time expenses. On a full year basis, we continue to expect fiscal 2014 consolidated net sales to increase to between $7.9 billion to $8.04 billion. Adjusted EBITDA to be in the range of $230 million to $239 million and we are narrowing the range of adjusted earnings per share from continuing operations to approximately $1.70 to $1.75 excluding integration cost of approximately $7.4 million in after tax and other one-time expenses which is a $0.05 per share increase at the low-end of our previously disclosed range. We expect the capital expenditures for fiscal year 2014 will now be in the range of $77 million to $82 million. The depreciation and amortization in the range of $87 million to $91 million and total interest expense in the range of $24 million to $25 million. This concludes our financial discussion and I will now turn the call back to Dennis for his closing remarks. Dennis.

[Dennis Eidson:]

Thanks Dave. Well, in closing we have made significant progress with our merger integration efforts and we remain encouraged by what we are seeing as a combined entity in the realization of merger synergies. We certainly have a lot of work to do yet but I am very pleased with the team spirit of collaboration and enthusiasm. We are beginning to roll out merchandising and promotional sales to all of our retail banners and to leverage our combined distribution competencies in larger platform to increase business for the existing customers and are attracting business. We are also focused on enhancing efficiencies across all segments of the company and are beginning to recognize additional prospects for synergies and sourcing, distribution, and back office functions. We remain confident in the significant opportunities that lie ahead and the benefits to our customers and shareholders as we continue to provide excellent service and value to all of our retail, food distribution, and military customers. So with that we will now open up the call for your questions.

[Operator:]

(Operator Instructions). The first question comes from Chuck Cerankosky of Northcoast Research. Please go ahead.

[Charles Cerankosky:]

Good morning everyone.

[Dennis Eidson:]

Good morning.

[Charles Cerankosky:]

If -- Dennis if we look at the P&L for the quarter, the operating earnings with a few adjustments were about 80 to 85 basis points lower than the year ago operating margin and I am wondering, I know there is a change in the mix of business but I am wondering with enough time and the synergies you get back to that level of margin or is there too much economic headwind to expect that much?

[Dennis Eidson:]

You know Chuck I don’t think it is about economic headwinds. It really is a mixed discussion that you are having there. The segments are totally different in terms of how they contribute to the overall operating profit. So I am not sure that it is realistic that the expectation would be when we go back to the historic legacy Spartan operating margin rates. And they got all fair (inaudible) on it.

[Dave Staples:]

No, I think that is fair. I mean you just look at the different businesses and the type of operating margin they run, it is a different mix. And we certainly believe there will be improvement overtime as we continue to pull those companies together but I don’t think the previous benchmark is the right one to look for it.

[Charles Cerankosky:]

If you did by segment, where say the retail segment is down about 50 bibs, to me that might be one of the cleaner ones to compare because of intersegment eliminations, not so much being a factor as it is in distribution. Do you see yourself getting from the roughly 2.9% operating margin in retail more towards 3.5%?

[Dave Staples:]

I mean, I think overtime we will continue to improve that mix but we have work we are doing obviously in the West division as we speak and so I don’t think we are prepared to put any targets out at this point but I think we expect long-term we will be able to improve it.

[Dennis Eidson:]

I think it is also fair as you are treading through your modeling Chuck that as, you know, legacy Spartan has a philosophy, a method of allocating distribution profits to retail that is different than the Nash Finch model. So, I think until we get consistently on one platform those are going to be hard to compare.

[Dave Staples:]

And then we expect to accomplish that over this current third quarter. By the end of the quarter we are reevaluating how we handled distribution profit between the distribution operations, retail operations. As we have noted in the Q we will probably have some more vision to that allocation as we get to the end of the quarter.

[Dennis Eidson:]

And it is a lot about so many of these moving parts from your merging two companies together it does make it -- it makes it difficult for the new model for sure but we will do the best we can and as transparent as we can.

[Charles Cerankosky:]

Alright, thanks.

[Dennis Eidson:]

You are welcome.

[Operator:]

The next question comes from Karen Short of Deutsche Bank. Please go ahead.

[Shane Higgins:]

Hi, good morning. It is Shane Higgins on for Karen. Thanks for taking the question guys. My first question was just about the favorable synergy realization during the quarter. Did you guys, I didn’t hear you guys actually quantify what it was and how far along you are towards I believe you said there was $20 million target for this year?

[Dave Staples:]

Well Shane, we didn’t quantify exactly where we were and we won't. But, I mean I think the key is that we think we are nicely ahead of that target and I think we also mentioned that we thought there was a good likelihood that we would exceed the $52 million target. So, I think at this point we feel very, very pleased with all the efforts that our associates are putting together. I mean, as Dennis alluded to, they still all have full time jobs and so this integration is on top of that full time job and it is just a testament that our cultures, how well they are coming together and how well the team is responding to what we have asked and the fact that we are exceeding our expectations at this point and it feels like we are going to as we move forward is I think a very positive position to be in right now.

[Shane Higgins:]

Okay, great. Thanks for that color. And are you guys able to leverage the military business to build purchasing power or is that -- is the nature of that business just completely different than the retail and distribution segments?

[Dennis Eidson:]

You know it is different but it is related. I think we have a great track record with our vendor partners and have had for some time and I think they respect the way we have gone to market and so I believe that's having some beneficial impacts to the way we are viewed as a player in the military segment. And additionally we just have the best model to supply the military commissary system. Legacy Nash Finch was about developing a network that was strategically and geographically placed to be the most cost effective provider of goods and services to deck up and that's why we have such a large share of their business today.

[Shane Higgins:]

Okay, great, thanks. And what were comps in the Nash Finch stores during the second quarter?

[Dennis Eidson:]

We are not disclosing comps for the legacy Nash retail. They were slightly better than the prior quarter, they were slightly better than a year ago. They could still be in our reported consult time in February, January. January.

[Shane Higgins:]

Okay, great, I will just squeeze one more in, just how are the comp lift on the remodels, are you guys still seeing a nice lift there and good returns?

[Dennis Eidson:]

Yeah, we have consistently been pleased with our remodel activity and the comps we get from them. And we have a pretty robust process before we spend capital on a major remodel in order to make a hurdle return. So more recently we have been spending some capital up in North Dakota. We are re-bannering and remodelling a couple of stores that will be I guess grand opened at the end of this month. I think August 24th or 25th, one in defence (ph) and one in Fargo. We will be doing some re-branding of the stores up in that market at the same time and I think as I mentioned we are excited to be in markets where there is some robust economic activity, population growth. It is a bit of a contrast of what these looked liked for the past five to six years.

[Shane Higgins:]

Alright guys, thanks so much.

[Operator:]

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

[Scott Mushkin:]

Hey guys, thanks for taking my questions. I think I guess two broad kind of questions, one is just on the consumer, I noticed in your press release you guys said hey you think things are going a little bit better even though you don’t think the consumers still doing all that well. I mean we have had a number of reports out of companies Macy's missed yesterday, Mutalus (ph) wasn’t so hot, but the important thing it is doing a lot better. So I am just wondering your take broadly on the consumer, do you think things could turn up here and maybe give you a tailwind or is it just way harder than maybe some of these headline labor numbers you are seeing?

[Dennis Eidson:]

You know, frankly I don’t think it is going to get a lot better nor do I think it is going to get a lot worse. I still think we are kind of bumping along here a little bit Scott. I noted, -- yesterday for the latest four weeks and they are showing sales that is purging annually, the operations across the country was negative 2.4% for four weeks and negative 2.5% at the end of the quarter. That's a pretty stiff headwinds right. And I think people are feeling -- retailers are feeling the consumer stretching a bit in their budget. So, it doesn’t feel great but it doesn’t feel also -- I don’t think there is going to be any tailwind that propels us forward and you know the whole mix of where the inflation is coming from I don’t think is a friend either. Even though it creates our retail inflation, I think we showed about 1.8 inflation which is thought as kind of normal except the way you got there was anything but normal or you are sitting there looking at 6% to 7% in the proteins and dairy and then certain store of great grocery was actually deflationary. It is also an odd mix of events that are occurring, I think we are seeing so much inflation in proteins as an example that it has affected the takeaway near the shelf. The dollars are coming back because the inflation was so significant but the coverage is negative. So it's probably long winded answering your question.

[Scott Mushkin:]

No, it is actually really good. It kind of sets the stage for my next question. I mean, obviously you are just getting into consolidating these organizations but do you remember kind of bumping along here and this is kind of the environment we are in for the next couple of years. I mean, how do we think about your growth algorithm, once you know we obviously have the synergies of at least $52 million but as we think and you hinted that you have kind of talked about some of the plans to own the stores and at the distribution business, how do we think about the growth on the top line and on the EBIT line as we move forward and I am not looking for next year or the guidance here but just kind of conceptually where is your head?

[Dennis Eidson:]

I think it's actually a fair question. We are operating in three distinct segments now and so I think they have a little bit of similarity and actually trends look similar. Probably on the military side of the business and we alluded to soft, DeCA is soft. We are actually performing better in our military segment than DeCA is in the commissary sales. So I think that’s a bit of a tribute to the way we service the commissaries and as I indicated I truly believe we have the best model. Having said that I think there is opportunities for us to add business on to that military segment. We just completed more expansion. I think there is opportunities up there to better serve commissaries up in the northeast that we put in cost effectively like before. We are also bidding on some additional government contracts for like troop feeding. It is actually probably a bit of -- we are not serving today. So I think there is opportunities for that business to grow even in spite of the softness in DeCA store in terms of commissary sales. I think the retail business we indicated got a little bit of headwind here, West Michigan from early March till now we have digested four Wal-Mart supercenters into the run rate. Two were converted to discount stores and two ground up (ph). I mean, I think we are up for a fight and so far we are somewhat encouraged by what's occurred so it is not like they are going to have zero impact for supercenters in one marketplace. So there is a bit of headwind. I think the Michigan market continues to be a little funky. We are still forking unemployment and I think we are four years in a percent of adults in the workforce and we are 35th in the median income so this is -- we are backed up for accelerated wealth. But I like the things we are doing. I like the things we are doing with regards to the loyalty program. We alluded to that, we are getting far better data out of the system in a very quick way. We are getting very actual insights and I think that's going to bear fruit. I think on the Nash Finch retail side it is probably the portion of the business and the merger that overtime maybe got less attention relative to the other business segments in legacy Nash and we are excited to be able to put some capital in as I move into North Dakota and we are going to do some of that as well in Nebraska. We think there is plenty of upside, so we are excited to be able to experience some growth as we deployed capital both as well as shooting capital into that business segment. Food Distribution, I will just tell you that there is the groups of Spartan, groups of Nash Finch, I think we are an excellent food wholesaler, and I think our track record has kind of spoken for itself. I believe that with the merger of these two companies that we have build the foundation, to continue to grow their business. I do think that's going to come a little bit from -- I mean we are going to head for win that business from the competitive set. We also think opportunistically that there is opportunities with regards to acquisitions on the road and there is going to be another vehicle for more collaborative stream. So, I think there is opportunities in all three segments Scott.

[Scott Mushkin:]

That's perfect. I really appreciate the detailed answer. Thank you.

[Operator:]

(Operator Instructions). The next question comes from Ben Brownlow of Raymond James. Please go ahead.

[Benjamin Brownlow:]

Hey, good morning.

[Dennis Eidson:]

Good morning.

[Benjamin Brownlow:]

Thanks for taking my question. Just a follow-up on our earlier question on synergies, I know you don’t want to have a comment on the exact dollar amount that you have realized here today but could you give some color around where you are seeing that weighted towards in terms of SG&A, purchasing, etc.?

[Dave Staples:]

Sure Ben. You know we are really seeing it in a number of fronts. Certainly SG&A has been incredibly strong and that's not just necessarily from a headcount perspective. It is just when you bring two organizations of these size together there just are numerous opportunities where you can become more efficient through all the various service providers you use, all the different types of products you buy. So, certainly SG&A is a major driver. I think we continue to see some operational efficiency in our divisions and I think the procurement angle has been good for us when it comes to some of the ability to buy better, buy smarter and use the size of the combined organizations to work better with our partners and to get more win, win solutions for both sides. So, it has been pretty spread across the board but I think it would certainly be primarily G&A.

[Benjamin Brownlow:]

Okay, that's helpful. And on the retail, you know, you have been commenting about how the consumers have been stretching their budgets and treading down, are you seeing a difference between the concepts. I am sure you are but are you seeing more evident trade-down in the value concepts like Family Fare and just give some I guess color around sort of the transaction and tonnage that you are seeing at the more on scale concepts, thanks?

[Dennis Eidson:]

Well, you know we offered the D&W Fresh Market plan which is -- that's upscale banner and it is the best performing retail segment or brand that we have. Again premium, super premium consumer seems to have shrugged off a little bit of the malaise and they are spending and seemingly spending freely. So we are seeing that. Therefore at the end it continued to be an area where we are seeing growth. If you look at some of the larger category of goods, like organic salads, it is a big category today, we are up 14% in that category. Gluten free we are up nearly 30% and we have a full circle brand that is natural organic, while the taco brands to other store products and that's up 20%. So I think you can see that consumers are shifting a little bit in what they buy and depending on where they are and the socio-economic kind of spread on where we are feeling that.

[Benjamin Brownlow:]

Okay, just one last one from me. On the EBITDA cutouts that you gave Dave, what's for a stock compensation and LIFO you are assuming in there?

[Dennis Eidson:]

Stock compensation and LIFO for the -- EBITDA guidance we gave for full year?

[Benjamin Brownlow:]

Yes.

[Dave Staples:]

Well, you are asking about what's full year LIFO and stock comp?

[Benjamin Brownlow:]

Yes.

[Dave Staples:]

I believe the full year LIFO will be around an $8 million increase over the prior year. And the stock comp is somewhere around $6 million to $7 million.

[Benjamin Brownlow:]

Okay, great. Thanks.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Dennis Eidson, President and Chief Executive Officer for any closing remarks.

[Dennis Eidson:]

Thanks. I would like to conclude our prepared remarks by thanking all of our associates for their hard work and our valued consumers, independent retailers, suppliers, and shareholders for their continued support. And that concludes the SpartanNash second quarter fiscal 2014 conference call. And we look forward to speaking with you again next quarter. Thanks.

[Operator:]

The conference is now concluded. Thank you, for attending today's presentation. You may now disconnect.