SpartanNash Company
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good morning, and welcome to the SpartanNash Company's Fourth Quarter and Fiscal Year 2015 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Katie Turner. Please go ahead.

[Katie Turner:]

Thank you. Good morning, and welcome to the SpartanNash Company's fourth quarter and fiscal year 2015 earnings conference call. By now everyone should have access to the earnings release for the fourth quarter ended January 2, 2016. For a copy of the release, please visit SpartanNash's Web site at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company's Web site for approximately 10 days. Before we begin, we'd 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 expectations that may cause such differences 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 the risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the company's fourth quarter earnings release, fiscal annual report on Form 10-K and in the company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements. This presentation includes certain non-GAAP metrics and comparable period measures to provide investors with useful information about the company's financial performance. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and the other information as required by Regulation G is included in the company's earnings release, which was issued after market closed yesterday. It's now my pleasure to introduce Mr. Dennis Eidson, President and CEO of SpartanNash Company, for opening remarks.

[Dennis Eidson:]

Thanks Katie. Good morning and thank you for joining our fourth quarter of fiscal 2015 earnings conference call. With me this morning are Dave Staples, our EVP and Chief Operating Officer, 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 the fourth quarter and fiscal year. And then, Dave will share some additional details about fourth quarter's financial results, as well as our outlook for fiscal 2016. Finally, I'll provide some closing remarks6, and then, we'll open up the call and take some questions. We're pleased to report as we finished the year with fourth quarter earnings results exceeding expectations and guidance driven largely by the net impact, lower inflation at inventory levels, current LIFO as well as lower expenses resulting from our cost reduction efforts. In the fourth quarter, we continued to execute on our strategy to invest in our retail business expand our consumer centric merchandizing and marketing programs and lay the groundwork for new business opportunities in both our food distribution and military segments. We continue to benefit from merger integration as well as improved operational efficiencies in both our distribution network and retail operations. Despite the challenging operating environment, we delivered against many of our key initiatives strengthening our foundation and core competencies and positioning us for continued earnings growth in 2016 and beyond. More specifically in our food distribution segment, the fourth quarter [indiscernible] performance trend was primarily impacted by deflation mainly in proteins and dairy as well as varying seasonal weather conditions in our Northern territories and despite some of the seasonal and economic challenges we faced in the quarter, we are feeling very positive about our current sales pipeline. During the quarter as we previously reported, we entered into a partnership with the largest locally owned and operated grocer in Western Wisconsin, Gordy's Market to become its primary supplier. We began distributing private brand product including our natural and organic Full Circle brand to Gordy's in February and we will be servicing Gordy's as its primary distributor by May of 2016. We are excited about the agreement because Gordy's is a growth oriented retailer and a strategic market for us and they're trusting us, reinforces the value that independent customers in our private brand offering, value-added services and our ability to help them grow and optimize their businesses. In addition to the positive news on Gordy's, we've also began relationship with Amazon, which we are very excited about and we continue to look at several other opportunities to grow sales with other non-traditional customers. We also continued to explore opportunities that will improve the overall customer experience and further optimize their distribution network. By increasing asset utilization and reducing empty miles, we expect to better manage costs and improve efficiency across our food distribution and military channels. We're also focused on reducing inventory shrink within our warehouses, a major efficiency initiative in 2016 that we expect to lead to enhanced product freshness and selection in our facilities as well as improved customer satisfaction and profitability. Finally, I'm pleased to report that the company and the union representing our Lima, Ohio facility ratified a new one-year labor agreement that was set to expire in January. This new agreement will continue to provide our associates with a competitive wage, benefits package while enabling the company to continue to increase operational efficiencies. In our retail segment, the net sales trend was primarily impacted by the same unseasonable weather and low levels of inflation as our distribution operations as well as the continued competitive and lower fuel price environment. We estimated that competitive openings had a negative impact of approximately 200 points on comp store sales and we expect the majority of this impact are recycled by the end of the second quarter of fiscal 2016. Given the current environment, we are even more focused on driving profitable top line growth. To that end, we continue work on building marketing tools and capabilities that enable relevant, personalized content across all of our marketing channels. With these improved capabilities, we look to achieve more effective target marketing, specific brand positioning and campaign execution. We'll also continue to invest on our store base during fiscal 2016 and plan to remodel and rebanner eight stores of Family Fare primarily in the Omaha market. On completion of the remodeling and rebannering efforts, all of our stores in these markets with the exception of these three Supermercado stores will be branded Family Fare. We also have several additional remodels planned across our store base, which I believe will combine with the Omaha effort should have a significant change on our sales trend. Additionally, we continue to leverage our pharmacy and fuel programs as part of our loyalty platform. In the fourth quarter, we completed the expansion of our $4 and $10 generic pharmacy offering to our Western store base. In Michigan, our pharmacies posted a 1.7% increase in the count -- script count for the quarter with a plenty of consecutive quarter of positive script count growth and a 2.7% increase for the full year. Our Michigan fuel centers posted a 3.2% increase in comp gallon sold for the quarter and we continue offering fuel promotions in our Western markets by participating with third-party fuel centers. Finally, on the product side, we continue expand the private brand program for both our distribution and retail customers. We experienced good growth in our natural organic Full Circle brand in 2015 and plan to further emphasize the brand in fiscal 2016 as the consumer appetite for natural organic products continue to increase. We are also gaining traction with our health and beauty category as our increased product offerings were well received. For the fourth quarter of fiscal 2015, private brand unit penetration in our retail operations was 22.8%, which continues to place us above the national average. We ended fiscal 2015 with over 7100 private brand offerings as we continue to fine tune our assortment. Sales for military segment were down 4.5% this quarter when excluding the 53rd week of fiscal 2014 primarily due to lower sales at the DeCA operated commissaries. Although commissaries sales are down, we outperformed industry trends in DeCAs year-over-year sales decline due to our ability to attract additional new business from existing customers. As we previously stated, one of our key strategic initiatives is to become a logistics company that solves customers' distribution needs, and to that end, we continue to see positive momentum in our sales pipeline and are currently piloting the distribution of new fresh products to commissaries. We're encouraged by the initial results of the test phase and the potential to secure what would be significant volume for the ongoing business. Additionally, we're actively pursuing alternative new business opportunities that would even further leverage our military supply chain capabilities. With that, I will turn the call over to Dave for a few details on our financial results and the outlook for 2016. Dave?

[Dave Staples:]

Thank you, Dennis, and good morning, everyone. Before I get into the numbers, I want to remind everyone that the fiscal 2015 fourth quarter included 12 weeks and fiscal year 2015 was a 52-week year compared to 13 weeks for the fourth quarter of fiscal 2014 and 53 weeks for fiscal year 2014. With those details out of the way, let's get started. Consolidated net sales for the 12-week fourth quarter of fiscal 2015 were $1.77 billion versus $1.83 billion in the prior year quarter, with excluding of $135.2 million in sales from the extra week last year. Consolidated gross profit margin for the fourth quarter was 14.6% compared to 14.4% in the prior year and primarily reflects the impact, low inflation add-on LIFO spend, net of this impact on other inflation related gain. Adjusted fourth quarter operating expenses were $222.9 million or 12.6% of net sales compared to $232.5 million or 12.7% of net sales of last year's 53rd week was excluded. The adjusted fourth quarter results exclude $1.2 million of merger integration and acquisition cost, $1 million of restructuring charges, $200,000 in other adjusted charge. Prior year fourth quarter excludes $15.5 million in expenses for the extra week $4.5 million of merger integration costs, $6.2 million of asset impairment and restructuring charges, $1.6 million in pension settlement charges and $900,000 in other adjusted charges. Adjusted EBITDA for the fourth quarter was $49.9 million compared to $51.7 million when excluding $3.7 million from the extra week last year, or 2.8% of net sales in both periods. Adjusted earnings from continuing operations for the fourth quarter increased to $19.6 million or $0.52 per diluted share from $16.5 million or $0.44 per diluted share when excluding $2 million or $0.05 per diluted share for the extra week last year. These results exclude net after-tax charges for fiscal 2015 and 2014 of $0.06 and $0.17 per diluted share respectively primarily related to the items discussed previously and a debt extinguishment charge in fiscal 2015's fourth quarter. Turning to operating segment, fourth quarter net sales for the food distribution segment were $773.7 million compared to $796.6 million in the prior year quarter and excluding $56.5 million for the extra week last year. Fourth quarter operating earnings for the food distribution segment when adjusted for $700,000 merger integration and acquisition costs increased 20% to $23.4 million from $19.5 million last year excluding $1.1 million from the extra week and $4.6 million in merger integration expenses, asset impairment restructuring gains and other adjusted non-cash expenses. The increase was primarily due to merger synergies and lower operating costs due to productivity and efficiency initiatives and lower LIFO expense partially offset by lower inflation related gains. In our retail segment, fourth quarter net sales were $489.6 million compared to $502.3 million when excluding $41.8 million of sales from the extra week last year. The decrease is due to a 4.6% decline in comparable store sales excluding fuel, $10.7 million in lower sales due to the closure of retail stores and fuel centers and $9.2 million due to significantly lower retail fuel prices compared to the prior year partially offset by sales of $22 million from the recently acquired Dan Supermarket store. Comparable store sales trends reflect a low inflationary environment, increase competition as well as the impact on seasonably warm weather. Retail segment, operating earnings for the quarter when adjusted to exclude $1.6 million of pre-tax merger integration and acquisition cost, restructuring charges increased to $8.4 million from $5.7 million last year. When adjusting last year to exclude $2 million from the extra week and $8.5 million of the other non-cash expense. The increase was due primarily to lower occupancy costs, improved margins and the impact of store closures in prior periods partially offset by the impact of lower sales. In our military segment, fourth quarter net sales were $504.7 million compared to $528.5 million when excluding $36.9 million for the extra week last year primarily due to lower sales at DeCA operated commissaries. Military operating earnings were $3.7 million adjusted to exclude $100,000 of non-cash cost and expenses compared to $5.3 million last year when excluding $600,000 for the extra week and $100,000 of non-cash costs and expenses last year. The decrease is primarily due to the lower sales volume and inflation related gains partially offset by lower transportation cost. From a cash flow perspective, fiscal 2015 operating cash flow was $219.5 million compared to $139.1 million for the comparable period last year primarily due to improvements in working capital, which were largely the result of current year inventory management initiatives and the timing of payments in the prior year. Total net long-term debt decreased $91.5 million to $472.3 million as of January 2, 2016, versus $563.8 million at the end of last year. During the fourth quarter, we redeemed the outstanding $50 million principal amount of our senior notes. As a result of the prepayment, we incurred a loss of $1.2 million for the redemption premium and write-off of unamortized debt issuance costs. However, we expect to reduce ongoing annual interest expense by approximately $2 million assuming no further interest rate increase. We ended the quarter with leverage at 2.06x EBITDA, which is very close to our target of 2x. Now to briefly review the fiscal 2015 annual results. Consolidated net sales were $7.65 billion compared to $7.78 billion last year when excluding the 53rd week. Comparable store sales excluding fuel decreased 2.9% in fiscal 2015. Adjusted EPS from continuing operations improved to $1.98 per diluted share compared to $1.80 per diluted share last year when excluding the 53rd week. I will now provide further detail on our outlook for 2016. We're encouraged by our start to the year as we see exciting opportunities in our distribution and military channel and some improvement in our retail segment sales trend. But, we face continuing headwinds from low inflation; we anticipate a competitive pressure will ease by mid-year as we cycle several fiscal 2015 opening. For fiscal 2016, we expect to see growth in year-over-year sales in the food distribution segment and comparable retail store sales being in the range of slightly negative to flat as our second half trend show continued improvement due to our capital investments, merchandizing initiatives and cycling of competitive opening. From a profitability perspective, we expect stronger year-over-year performance during the first three quarters of fiscal 2016 and certain favorable remade programs and contributions from the recently acquired Dan stores will not be cycled until the beginning of the third quarter. Additionally, we anticipate that the fourth quarter 2016 will fall short of fiscal 2015 as we do not expect similar inflation related impact on LIFO to occur in 2016. As a result, we expect adjusted earnings per share from continuing operations for fiscal 2016 to approximate $2.07 to $2.18 excluding merger integration costs and other adjusted expenses and gains. We expect capital expenditures for fiscal 2016 to be in the range of $72 million to $75 million with depreciation and amortization of approximately $76 million to $78 million and total interest expense were approximately $20 million to $22 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. One conclusion, we are pleased with the foundation that we laid by the sales pipeline, we were able to develop in fiscal 2015 and are optimistic regarding our prospects for 2016. We continue to execute our strategy to drive sales and improve operational efficiencies and believe that our efforts are beginning to resonate with our customers and bring benefits to the company. We have some exciting potential, new business opportunities in both our food distribution and military channels that will come from our team -- that have come from our team innovative and can do attitude. We plan to further invest in our store base and develop our marketing systems and programs to improve personalization of the shopping experience and customer segmentation as we seek to improve the overall customer experience. While we expect continuing headwinds due to the challenging sales environment and low levels of inflation, we believe that the strong foundation we have already built supplemented by our ongoing initiatives and potential acquisitions will deliver long-term sustainable growth and value for our shareholders. With that, we will now open the call and take some questions.

[Operator:]

Thank you, Mr. Eidson. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Scott Mushkin of Wolfe Research. Please go ahead.

[Scott Mushkin:]

Hey, guys. I'm going to have a series of questions and nice job with the tough environment out there. So current trends Dave, I think you said that you think same-store sales improved just a little bit, I didn't quite hear that. I just want to get, what you said about current trend?

[Dave Staples:]

Yes. I think as we look into the quarter, we are seeing some improvement in those trends and that's really without a significant weather improvement, I mean a little bit obviously, we went from zero snow and 15 degrees over normal, some snow and maybe 10 degrees over normal into the first quarter. So, that we feel good about that. And we really haven't kicked in any of our capital improvements in the like at this point. So --

[Scott Mushkin:]

So your thought process as you can go flat on those retail sales, same-store sales?

[Dave Staples:]

Yes. I think as we said, we will be slightly negative to flat. And I think what you're going to see, as you know, you have to make it through the first part of the year, and then, we begin to cycle the competitive environment. And we are putting some significant power into the Omaha market through our capital program and a few other key remodels. And we continue to get smarter and better with our customer segmentation and personalization and we really expect to see more of that take hold as we move through the second half of the year.

[Scott Mushkin:]

Okay. So it's kind of a tougher first half, better second half is kind of your thought process?

[Dave Staples:]

Exactly.

[Scott Mushkin:]

So then, it kind of led to my second question on -- just retail in general and it seems that if you kind of look at the company the distribution side of the business seems to have some momentum in the sense of competitive landscapes clearly improved, I think you mentioned the deal with Amazon, and then, also some experiments with the military and fresh. And obviously, also a good client win lately. I mean is it time to deemphasize retail and emphasize the other part and kind of where you guys has broadly on retail versus the other part of the business? Then I have one more follow-up.

[Dennis Eidson:]

I don't think that's our perspective at the moment and retail continues to be, I think 28% of the revenue stream. And its core to what we do. All markets are created equal, so obviously, the Western markets have been more of a challenge than what we've experienced in Michigan. So there is a bit of bifurcation in that. Omaha is the tough marketplace with a lot of the competitive impacts that come over the last couple of years. We are working hard to upgrade the facilities there that was very under capitalized marketplace for the company probably got a little bit unlucky in North Dakota with regard to what's happened with oil prices. The other thing is, we use our retail not only as a delivery sales and profit, but we also use it to help us be better distributors and wholesalers. And I think maybe unlike some of the competitive set, we use that as a -- it's a bit of a test tube; we aggressively invite our independent customers to come our retail stores. We'd like to show them what we are doing, show them things that are working, show them things that don't work. We really believe having hands on kind of walk in your shoes kind of experience really adds to our value. And as a distributor, I think it resonates with certain customers very strongly. I can tell you the Gordy's team is -- has been very pleased with the kind of insight we've been able to deliver, they've been through multiple stores that we operate also competitive stores that we tour them with a retail team as well as our distribution team. So there is certain synergy in that that I think we very much like.

[Scott Mushkin:]

That's perfect. And then my final question as to do with -- I think guys are now under 2x leverage obviously an acquisited company, I mean should we expect a deal this year. I mean I don't want to be that blunt, but I mean it's been a while now and should we expect; is that your anticipation that you might get something done this year?

[Dennis Eidson:]

Scott that's almost impossible question to answer, right? So we've discussed -- we are going to be acquisitive. We think that we are positioned to potentially roll up what is a pretty fragmented distribution business right now. And in today's environment, I would say to you maybe the environment is even better today than it has been in the last couple of years just generally speaking as they -- the low growth kind of environment we are in, I mean if you look at grocery store sales across the country tonnage is flat maybe slightly negative. The people are looking for ways to improve bottom line performance; I think M&A is potentially one of those areas where you can do that. So [cognizant] [ph] for being interested, but I don't think we can give you much of a target in terms of time.

[Scott Mushkin:]

That's perfect. That's a great answer. And thanks so much for taking my questions.

[Dave Staples:]

Scott, I think just let me add one just quick comment on that. I mean we talk a lot about the deals and they are important to our strategy. But, we are not going to just do deals to do deals, right? They still need to fit. And what we said were more proactive, we still are going to be selective.

[Scott Mushkin:]

I would expect that Dave. Thanks.

[Dave Staples:]

Yes.

[Operator:]

Our next question will come from Chuck Cerankosky of Northcoast Research. Please go ahead.

[Chuck Cerankosky:]

Good morning, everyone. I was wondering if you could get into the comps a little bit from the quarter and maybe split it between how you did in Michigan and how did in your Western stores? And then, we could go from there.

[Dennis Eidson:]

Yes. I think, we don't want to get too granular on all of that detail Chuck, obviously, it's not like we are operating thousands of stores, right, 160 plus locations. I will tell you that the biggest driver of the negative was the West stores and Michigan was negative in the quarter. We had probably the biggest challenge in the Northern geography where we just had no snow and warm weather. You and I've actually traveled some of those Northern stores as you become more familiar with our company. And you know they're in resort areas in -- it's important in the summer, it's also important in the winter, there are ski slopes up there in resorts and there is a lot of snow mobile. We did not have one resort at Northern Michigan open in December because there simply was no snow and the temperatures were too warm for them to make snow. So that's kind of bifurcation that we have we are as Dave indicated earlier performing better as we start early in Q1 on our comps and hence, we've described we probably have the first half of the year where we got some pretty significant competitive impacts that will maybe get through and then see a brighter second half of the year.

[Chuck Cerankosky:]

Refresh my memory please. Are the fresh fares that were converted buildings in the Western market, are they in the comps?

[Dennis Eidson:]

All of the Western retail is in the comp. Other I think we have [indiscernible] in the store, we built this now. I think everything is in [indiscernible] right now, Chuck.

[Chuck Cerankosky:]

Okay. How would you describe the stores that, or say in -- have been converted in and will be converted sort of your keeper stores, how are they looking versus the rest of the Western stores in terms of same-store sales growth?

[Dennis Eidson:]

Yes. Again, I think it's a pretty granular slice you're asking me to describe to you, right?

[Chuck Cerankosky:]

Yes. And if you could, as best you can answer that.

[Dennis Eidson:]

Yes. So I would just say to you that the stores that we refreshed in Omaha last year, which was big initiative. We are continuing to run double-digit comp from the run rate before the transition to the Family Fare brand. So they are performing. We're looking for even more there. And we have confidence in the marketplace. We are going to do eight more remodels. We are going to convert that marketplace to Family Fare entirely with the exception of the three Supermercado stores which are very ethnic, Hispanic format and are doing very well. So we've got more work to do there. And we're rolling up our sleeves to get that work done.

[Chuck Cerankosky:]

Dennis is that to suggest then when you look at the Western stores where the comps is a reported number are worst than the 4.6% decrease we saw in the press release that it's more or like capital dollars injection versus simply lowering price and increasing promotion?

[Dennis Eidson:]

Well, I think it's -- the big part of it is capital. I think the West stores, largely we were under capitalized. So I think there is a big part of it that is capital. And then, we just talked about the competitive impacts pretty significant there as well. So we don't want to leave those out of the equation. And then, for the North Dakota marketplace was absolutely booming, right? And now that's not. It isn't going to boom for a while. So we are leaving that. I probably should correct something as I think about the retail sales, everything in comp, but the end stores that we bought at Bismarck; I think we closed that transaction last June would not be in comp, yes.

[Chuck Cerankosky:]

All right. Thank you very much.

[Dennis Eidson:]

You're welcome.

[Operator:]

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

[Ryan Gilligan:]

Hi, good morning. It's actually Ryan Gilligan on for Karen. Can you walk us through what gets you to the high end and low end of your comp guidance range and what has guided let's assume for competitive openings and for inflation?

[Dave Staples:]

Well, I mean, from the high to the low, which is relatively narrow range. So I'm not sure there is a lot of different drivers. But, I think what really is changing the trajectory of the comp are the things we talk about. We are going to continue a significant investment in capital in the Western market. But, also in some key other markets. We think that has made a difference in the past and will continue to make a difference. We talk about the competitive environment, we certainly going to take out some significant openings as we move through the year and as we get through that second quarter and into the third quarter, we clear most of the prior year activity. There is obviously, going to be new competitive openings every year, right, it's just part of life and part of retail not on the same magnitude go that we experience in the past year across all our markets. So and then, as we said earlier, I think we really continue to focus more and more on our customer analytics and they are -- segment, our ability to reach out through that especially as we spread the loyalty program through the West with our remodels and rebannering the Family Fare. All those things we just see as giving up a lot of momentum as we cycle through that competition in the back half of the year. And then, of course, we are going to cycle no snow in the fourth quarter that will help us as well. So, I think those are really the factors. And then, the range from the low end to the high end of that guidance, I guess you just, weak any one of those factors a little bit and you could have some movement there. But, I think it's a fairly tight range we delivered.

[Ryan Gilligan:]

Got it. That's helpful. Thanks. And then, what are you expecting from inflation, I guess by segment?

[Dave Staples:]

Inflation will be interesting next year. The first half is probably not -- I mean the first half is probably -- it could be slightly deflationary given the trends and proteins that we are seeing. We really expect that the protein part of that to cycle out by the mid-year. And then, you know, I guess, our last day would be probably go inflationary in the back half because we are seeing some levels of inflation in the center store as we speak now and produce. So it's probably going to be pretty modest by the end of the year. I mean, I've seen people projecting flat, the government agencies are still in that 2.5% to 3%, which seems good. But, I wouldn't be shocked to be in that 1% range maybe give or take. I don't know. I mean that's my best guess. Dennis, I mean, you have anything to add?

[Dennis Eidson:]

I think that's right. I mean if you look at the government statistics this year food at home was 1.3% inflation comp, right? Now, as you pointed out proteins really were kind of crazy throughout the year. Even though the government statistics are talking about 2% to 3% for the full year, I see something a little bit more like what we -- what we just experienced and with some lumpiness on the proteins, maybe the -- I think maybe there is a little bit of bad news because the historical average is around 2.5%, 2014 was 2.4%, right? But, I think maybe the other side of that is what we think of those to be used to operating in that environment and so we are not cycling in a negative way. So maybe there is a little bit of lemonades with the lemon.

[Ryan Gilligan:]

That makes sense. So it sounds like excluding protein, you guys are slightly inflationary right now?

[Dennis Eidson:]

No. Excluding proteins we were probably slightly inflationary. Dairy actually early in Q1, we're now seeing dairy flat from deflationary to inflationary. And so, there is a bit of change. Yes, that's probably excluding -- we haven't done the math on that, Ryan, but that maybe right excluding proteins are slightly inflationary.

[Ryan Gilligan:]

Okay. That makes sense. And I guess, just quickly switching gears to fuel margin and the pharmacy department, can you please talk about how they impacted margins this quarter and how should we think about, I guess the pharmacy impact on the comp and margins in 2016?

[Dennis Eidson:]

I will tackle the fuel one. We actually were -- we had a good fuel margin forward. We actually -- we're about $4.03 a gallon better margin than we were a year ago in the same quarter. We don't -- it's not a huge part of our business. So, it contributed profitability incrementally less than a $0.01 in the quarter. But, we were pleased with the fuel margin and hopefully we can see it stay in that more elevated range.

[Ryan Gilligan:]

Got it. And the pharmacy?

[Dennis Eidson:]

And the other question was --

[Ryan Gilligan:]

Just on the pharmacy impacted margins and how are you expecting the pharmacy to impact results of 2016?

[Dave Staples:]

We're a little contrary in there. In that -- we had the benefit of being able to negotiate and get into a new contract for our pharmacy business. And so, we actually got a little bit of help on that frontier in the fourth quarter and we will probably continue to get help on that through the first two quarters of the year, and then, we will kind of cycle the implementation of the program. So we will hold our own in that area. It really won't be an overall negative for us. It will be a little bit of a help.

[Ryan Gilligan:]

That's helpful. Thanks.

[Dave Staples:]

Yes.

[Operator:]

Our next question will come from Mark Wiltamuth of Jefferies. Please go ahead.

[Mark Wiltamuth:]

Hi, good morning. On the distribution side, how does deflation kind of play out there. Does that end up helping you or hurting you? And in the quarter, I guess because deflation kind of accelerated in the meats did that end up helping your [indiscernible] for the quarter. And then, it does seem like you are still seeing continued synergy gains rolling through this segment? And I want to know if some of that kind of continues into 2016? Thanks.

[Dennis Eidson:]

Sure. I'll the take first couple of parts of that. I just saw tip to the synergy question. So generally speaking, I would say to you, Mark, that deflation in the distribution segment is not helpful. So we end up as I think most wholesalers benefiting a bit from inventory appreciation as we're holding inventory and costs are going up. We value the inventory and that helps our P&L. When it goes the opposite way, you lose that benefit in your run rate, right? So it's not helpful. In the quarter, meat went to 8.7% deflationary and in Q3 it was only 5.5% deflationary. So it was worsening from Q3 to Q4 early in the -- into this first quarter meat actually 9.1% deflationary. So I think that Dave answered that question earlier. I mean, we feel that proteins going to kind of negate us for a bit. It's really all of them. Its beef, pork and poultry are all pretty significantly negative from a inflation, deflation perspective.

[Dave Staples:]

So, I guess if you are talking about the synergy component. Yes, we do continue to benefit. We've said it was a three year integration plan. And it's a three-year integration plan. So our distribution team led by Derek is doing a wonderful job. As we look at the landscape of our warehouses. And then, our vision really is -- the more volume, the more productivity the warehouse is, the fresher the product, better the variety, more we can offer to our customers. And then, in terms can enter -- offer to their customers. And so we are executing that strategy and that continues to provide efficiency and synergy for us. In addition to discontinuing to execute the integration plan, we are happy on all those fronts and we certainly see that being beneficial through recurring it.

[Mark Wiltamuth:]

Okay. So how meaningful is the Gordy's pick-up, is that sizable or is it enough, definitely tip you to the positive in the next year?

[Dave Staples:]

Yes. I mean if you look at our -- as we mentioned, we expect our food distribution volume is to go positive this year. That's a big account. So that's a big win for us in a lot of dimensions. I mean, this merger really has been about creating this platform where we could differentiate this company to the market as to why we're a different type of distributor. Dennis alluded to earlier we use that retail knowledge to make ourselves better in this arena. We use that knowledge to show how we approach distribution from a retailers' perspective and really come at it, I think from a different angle. And I think that really played well with the very significant player in Wisconsin. It's a core market for us. So, yes, that's a big win on several dimensions like that.

[Dennis Eidson:]

I'd just like to add to that. And I think they described it perfectly. I remarked earlier that we are pleased with the pipeline of opportunities that we have. And I think -- the last two years, trust me this team is worked their tail-off. It's kind of get a foundation built and it feels like we got a nice solid foundation beneath us. And our pipeline of potential new customers has never been stronger. So it's more than just for us. And it's also the -- we made around MDV and the test business that we are doing there. We don't have a deal signed, sealed and delivered down there. But, we feel great about it; obviously, we wouldn't have put it into the talking point this morning. That significant volume and that's leveraging our distribution assets in a different way than we've done in the past. And the Amazon opportunity is also another of those areas where the team hasn't just been sitting by. I think it's more than just core grocery distributor that's going to stay inside of this box. We think there are plenty of opportunities upside to the core that we can avail ourselves to and we're feeling about them as well. We obviously can't do the lot of detail about this stuff for plain reasons. But, we are feeling more optimistic about the go forward to be sure.

[Mark Wiltamuth:]

Okay. Just quickly on the nature of the fresh within the military, is that kind of in test mode, or how does that kind of play out to become more permanent.

[Dennis Eidson:]

Yes. We characterized that I think we use the word test here. So, the answer is clearly, yes. We think that there will be some clarity to that probably inside of this quarter. We are very optimistic that's going to end in a good place. I might just add this here as it relates to this. It's a bit of a different kind of business. It could be that this would end up being consignment business, which the profitability won't remain the same, but the sales wouldn't show up on our P&L. So that's kind of undetermined variable at that moment but I wouldn't even be surprised if that's the way manifested itself entire business platform.

[Mark Wiltamuth:]

Okay. Thank you.

[Dennis Eidson:]

You're welcome.

[Operator:]

The next question will come from Ajay Jain of Pivotal Research Group. Please go ahead.

[Ajay Jain:]

Yes. Hi. Good morning. I wanted to ask what's reflected in your EBITDA outlook for this year, are you assuming any EBITDA growth to support the EPS guidance.

[Dave Staples:]

Yes. Certainly, we are. I mean, our focus here is, how do we continue to make this better and stronger and deleverage and reinvest and growing the business. So, yes, we expect EBITDA to increase as well.

[Ajay Jain:]

Okay. And on retail comps, I just want to confirm, if you're expecting a cycle out of the majority of the competitive store openings by the end of Q2 and let's just assume that there is no deflation in the sales mix by that point. Should we infer that -- you're expecting retail comps to be positive in the back half of the year?

[Dave Staples:]

I mean, I guess, if you look at our trend, you would have to expect it as we move through the third quarter, we begin to fill in that direction. I mean overall for the year, a little blunt as like we said, slightly negative to flat. And so we certainly expect to get some benefits out of our efforts and the cycling and improve the condition.

[Ajay Jain:]

All right. And I also wanted to ask about the situation in Flint as that had any kind of measurable impact on your operations either positive or negative?

[Dennis Eidson:]

No. Direct financial impact on our business and I would tell you that from a social and cultural perspective it has had an impact on the company and our associates. We were very active early on with contributing clear water -- drinking water to the community of Flint as a company initiative. Our customers have also been engaged with us to deliver water there. I think and somebody is going to correct me if I'm wrong, I think we are near, if we haven't reached already sending 2 million bottles of water to Flint from SpartanNash and their customers to support the effort there.

[Ajay Jain:]

All right. And I just wanted to go back to the retailing operations for a second. Can you just talk about customer traffic this last quarter, how much it increased year-over-year and did you see any worsening in traffic sequentially from Q3 to Q4?

[Dennis Eidson:]

Yes. The transaction come traffic actually was in both -- equal to the [FPT mass] [ph]. So we did have challenge with traffic. Frankly, it was a little bit better than Q3. What we have seen early in Q1 is very meaningful change in that statistic and so traffic now is on the flattish side in Q1. And that also has a bifurcation between Michigan and the balance of corporate retail or Michigan is expect to -- or we would be positive in traffic in Q1. So again, and it's softly handled, it's too detailed in -- on these numbers because we aren't a pretty small footprint.

[Ajay Jain:]

Okay. But, very meaningful change positive in the current quarter?

[Dennis Eidson:]

I wouldn't say meaningful change from the trend in Q4 to the first four weeks of the quarter.

[Ajay Jain:]

All right. Just one final question, can you just talk about the new relationship with the Amazon Prime, how much of a revenue opportunity is there, if you can comment?

[Dennis Eidson:]

Yes. I think we can put a little bit of color on that. So the relationship we have is with the segment that's called Amazon Prime now and that's an area where I think -- they're operating in some 29 geographies in the United States today. And they have the government's [indiscernible] in those geographies. We think that's probably going to double as we go throughout the year in a number of fulfillment centers that we have. And then, we are providing product directly to their distribution centers. It's not direct to consumer. And we think, we would find ourselves in a position to be engaged with more than half of those as we fully build this out. And in terms of the volume, I mean we are -- this maybe and would be fair to say we are talking tens of millions as -- without getting too far ahead of myself on a fully baked in annualized basis.

[Ajay Jain:]

Okay. Thank you very much.

[Operator:]

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

[Chuck Cerankosky:]

Dave, I see the asset held for sale are at zero now as you move things off the balance sheet over the course of last year. Any other assets that might be sold if we took a full year look and is it depending on some strategic decisions at the company or buyers coming forward, and I'm just wondering if the balance sheet gets even stronger as a result of that?

[Dave Staples:]

Well, I think the balance sheet will get even stronger borrowing any other kind of activities that require the financing just from our cash flow. We have a lot of assets spread out across the footprints of our operations. There can always be some items per se, I wouldn't rule it out. But, yes, I mean, I wouldn't rule it out. I don't think it will be overly material if any of those happen. But, we always get some headwind from that given our restructuring activities. We tend to free up some assets when we do that. And I would expect we would get some proceeds out of that line.

[Dennis Eidson:]

The balance sheet is -- I'm talking about that but Dave and his team, really the whole operations team taken that down and as you think about what we talked about strategically wanted to accomplish going forward deleveraging that balance sheet, it was - just as important is building the foundation in the business. So I think that's great when a plan kind of comes together and I feel good about where we landed here.

[Chuck Cerankosky:]

All right. Thanks and good luck in 2016.

[Dennis Eidson:]

Thanks Chuck.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Dennis Eidson for any closing remarks.

[Dennis Eidson:]

Thanks Denise. I just want to thank everybody for participating today. And well, that concludes our remarks for Q4 and we look forward to speaking with everybody again at the end of next quarter. Thanks.

[Operator:]

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