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Executives

James Hyland - VP, IR & Corporate Communications

Bob Mariano - Chairman & CEO

Darren Karst - EVP & CFO

Ed Kitz - Group VP, Legal, Risk and Treasury

Mike Turzenski - Group VP & CAO

Analysts

Edward Kelly - Credit Suisse

Ryan Gilligan - BMO Capital Markets

Andrew Wolf - BB&T Capital Markets

Ken Goldman - JPMC

Peter Benedict - Robert W. Baird

Roundy's, Inc. (RNDY) Q4 2012 Earnings Call February 28, 2013 4:30 PM ET

Operator

Good afternoon and welcome to Roundy’s Fourth Quarter and Full Year 2012 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer session. (Operator Instructions). This conference is being recorded at the request of Roundy’s. If anyone has any objections you may disconnect at this time.

I would like to turn the call over to Mr. James Hyland. Thank you. You may begin.

James Hyland

Thank you, Sherin. Good afternoon, ladies and gentlemen, and welcome to Roundy’s fourth quarter earnings conference call. With me today are Bob Mariano, Chairman and Chief Executive Officer; Darren Karst, Executive Vice President and Chief Financial Officer; Ed Kitz, Group Vice President, Legal, Risk and Treasury; and Mike Turzenski, Group Vice President and Chief Accounting Officer.

By now everyone should have been accessed to the fourth quarter and full year 2012 earnings release, which went out today at approximately 4:00 P.M. Eastern Time. If you have not received the release it is available on the Investor Relations portion of Roundy’s website at www.roundys.com. This call is being webcast and the replay will be available on the company’s website as well. Before we begin we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions.

These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer all of you to the Risk Factors contained in Roundy’s press release issued today and the company’s annual report on Form 10-K as well as other filings with the Securities and Exchange Commission for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

Roundy’s assumes no obligation to revise any forward-looking projections that may be made in today’s release or call. Also in the company’s earnings release and in today’s prepared remarks we include adjusted net income, adjusted EPS and adjusted EBITDA which are non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of adjusted net income, adjusted EPS and adjusted EBITDA to the most directly comparable GAAP financial measures and the other information required by Regulation G are included in the company’s press release issued earlier today which has been posted on the Investor Relations page of our corporate website at www.roundys.com.

At this point I’d now like to turn the call over to Bob Mariano. Bob?

Bob Mariano

Thanks, Jim. Good afternoon everyone and thank you for joining us today as we discuss the results for the fourth quarter and year ended December 29, 2012. Today, I’ll briefly review those results and spend a few minutes updating you on our key strategic initiatives as well as the current trends. Darren will then review the financial results for the quarter and the year. And then we will discuss – he will also discuss guidance for 2013. At the end of our remarks, we will open up the call for questions.

While the economic and competitive environment remains challenging particularly in our core markets, we are encouraged by the progress we are making with the customer-centric business strategies that we previously outlined. As a reminder, these are to drive greater sales of higher margin perishables through our focus on healthy eating and fresh foods. Secondly, to create a higher penetration rate of our own brand products by selling more of our own product. And finally, to expand and enhance our store base particularly in our growth banners. We continue to see tangible results from these initiatives, which I’ll discuss in more detail in a few moments.

Meeting our expectations from a financial perspective, we achieved a sequential improvement in overall sales and EBITDA compared to the third quarter. For the fourth quarter, sales increased 1.4% to $982 million largely due to strength of our new stores in the Chicago market and our ongoing initiative drive sales of perishables and own brand products. These gains were partially offset by a 2.1% decline in same-store sales, from the ongoing effects of a challenging competitive and economic environment.

Also same-store sales were negatively impacted by the New Years holiday calendar shift, which accounted for approximately 80 basis points and the shift to greater generic drug sales, which took approximately 40 basis points of sales in the fourth quarter.

For the quarter, we experienced a 3.5% decrease in the number of customer transactions, while the average transaction size increased 1.5%. The higher transaction size is due in part to minor inflation as our average retail price was up slightly from the same period last year. It also reflects in part the increasing portion of our sales that are coming out of our Mariano’s stores, which have a higher basket size as well as our plan to increase basket size to greater sales of family and club pack size and products. While our overall retail unit price was modestly positive, we continue to experience flat or lower levels of inflation in most categories and deflation in a few categories.

We also continue to make headway on driving additional unit volume. In the fourth quarter, units improved by approximately 60 basis points from the third quarter. Even with the negative drag in Q4 from the New Year’s holiday shift and that represents our second sequential quarter of expansion.

With regard to two of our customer centric initiatives, perishables and own brand, we continue to enhance the breadth and selection in both of these categories. Our perishable business now accounts for approximately 33% of total sales, which was approximately a 120 basis points higher than a year ago. The highest ever for a fourth quarter.

We also expanded our own brand product assortment, as we continue to build loyalty with our customers and enhance our value proposition. At the end of 2012, we had approximately 5700 items and on under own brand representing approximately 21.6% of sales or 240 basis points over last year’s fourth quarter. Furthermore, own brand penetration was the highest ever.

As the competitive activity in the market, the majority of the activity continues to be super center, a discount operator openings that are primarily impacting our Milwaukee and Minnesota markets, as we discussed on previous calls.

For the full year, we faced a total of 24 competitive openings of which eight were super centers with the remainder being conventional or Target PFresh openings. We estimate that the dollar impact to our same-store sales in the quarter due to the new competitive square footage was approximately 270 basis points, which is roughly in line and what we experienced in recent quarters.

Looking forward to 2013, we are projecting a similar rate of competitive openings and anticipate that the overall impact will be comparable to 2012. We expect the majority of the new competition to open in the second and third quarters.

In the Milwaukee market, we have been testing pricing and consumer service initiatives on a group of 14 stores. We began this work in the third quarter and we continue to work on and develop these initiatives to identify the right levers that will ensure that we are delivering the best overall value of experience to our customers.

As we previously discussed, we are shifting toward more everyday low pricing through our price investment on key items and categories while remaining mindful of the impact on our margins. We also continue to wok with our vendors to achieve the best possible cost of goods. Last quarter, we said we over invested in price and in the fourth quarter, we made adjustments and we are able to reduce our margin spend.

We also seek to compete on quality rather than necessarily head-to-head on price with every price competitor. We are focused on reinforcing the value that we offer by delivering unique and higher quality items that appeal to our customers. In our test stores we are making changes in product and merchandizing that are more comparable to what we are doing with Mariano in Chicago.

The preliminary feedback has been positive and we are pleased with our overall results to-date. We are in the very early stages of analyzing the data and we will roll out these initiatives to additional stores when we are fully satisfied with the performance of the test stores.

It is important to keep in mind that this will be an ongoing multiyear process as great service and fair pricing is perpetual not finite. We also are continuing to pursue expense reduction efforts across our operations. We began the transition of outsourcing our inbound transportation in January and expect it will be completed by mid-2013. We are also looking at other opportunities to reduce our distribution cost and look forward to reporting that progress as it develops in future quarters.

In the Chicago market, our Mariano's banner continues to exceed our expectations with low double-digit same-store sales. In addition, we are pleased with the progression these stores are making towards profitability and can report we have had four consecutive quarters of solid EBITDA performance out of our mature stores. We now have eight Mariano stores opened. The Mariano's model is resonating with customers across a wide spectrum of demographics and customer profiles.

In fact, this store almost has a viral word-of-mouth mild quality to it. When we entered new market we rarely even need to advertise as a new customer basis already very familiar with our store brand. We remain confident about expansion opportunities in the Chicago market and continue to believe that it can support a minimum of 25 to 30 Mariano stores.

In 2013, we planned to open five new Mariano’s stores in the Chicago area and relocate one ticket day store in our Wisconsin market. All five of the Mariano’s locations are currently under construction and we anticipate the openings will be spaced fairly evenly throughout the year. With the first opening for 2013 coming next week Tuesday, March 5 in Frankfort, Illinois.

And at this time, I would like to -- at this time Darren will provide you some additional financial details on the quarter and the year. DK?

Darren Karst

Thanks, Bob. I will now provide you with more details about the fourth quarter and full year financial results as well as our guidance for 2013. Net sales for the fourth quarter increased 1.4% to $982 million from $969 million in the same period last year. Primarily reflecting sales from new stores partially offset by a 2.1% decrease in same-store sales.

Adjusted for the shift in the New Year’s holiday and generic drug sales affect same-store sales would have declined 0.9%. Gross profit dollars for the fourth quarter increased $5 million to $260 million and our gross profit margin rate was 26.4% up from 26.2% in the fourth quarter of 2011.

The increase was primarily driven by reduced LIFO expense compared to the prior year as well as the impact of an increased perishable sales mix. These were partially offset by greater promotional and price investments primarily in the Milwaukee and Minneapolis markets and increase shrink resulting in part from the higher percentage of perishables.

Our operating and administrative expenses for the fourth quarter increased $9 million to $232 million. Operating and administrative expenses of the percentage of net sales increased 70 basis points to 23.7% versus 23.0% in the fourth quarter last year. The increase was primarily due to higher operating cost related to new and replacement stores. Incremental cost related to being a public company and reduced fixed costs leverage resulting from lower same-store sales.

In addition, during the fourth quarter we recorded a non-recurring pension withdrawal charge of $1 million. During the fourth quarter our market capitalization experienced a significant decline and valuation multiples for other comparable publicly traded companies in the retail grocery sector as well as the overall economy continue to be weak.

As a result, we updated our goodwill impairment testing and concluded that the carrying amount of goodwill exceeded its estimated far value resulting in an after-tax impairment charge of a $106 million related to prior acquisition activity. The impairment charge is non-cash and will not in anyway affect our liquidity, operating cash flows or compliance with debt covenants.

Interest expense for the fourth quarter was a $11.6 million, a decrease of over $5 million is 32% from the prior year, primarily due to the favorable impact of our debt refinancing in February 2012 which lowered our debt levels and reduced our interest rates.

Adjusted net income for the fourth quarter was $8.6 million or $0.19 per share excluding the after-tax, goodwill, impairment charge of $106 million, and the after-tax non-recurring pension withdrawal charge of $600,000. That compares to net income of $9.2 million last year.

Our adjusted EBITDA for the fourth quarter of 2012 was $46.6 million compared to $51.4 million last year. The decrease was due to the effect of the continued challenging economic and competitive environment on our same-store sales, gross margins and fixed cost leverage as well as incremental costs associated with being a public company.

Now, briefly reviewing the full year 2012 results. Net sales increased 1.3% to $3.89 billion from $3.84 billion in 2011. Same-store sales for 2012 decreased 2.8% versus the prior year reflecting a 2.6% decrease in the number of customer transactions and 0.1% decrease in the average customer transaction.

Looking at our 2012 earnings, adjusted net income was $47 million, or $1.8 per share excluding the after-tax, goodwill, impairment charge of $106 million, the after-tax charge for the early extinguishment of debt in one-time IPO expenses of $8.4 million and other after tax non-recurring charges of $800,000. Reported net loss for 2012 was $69.2 million or $1.61 loss per share. This compares to net income of $48 million for the same period last year.

Adjusted EBITDA for 2012 was $198.7 million compared to $224.2 million in the 2011. Our effective tax rate for 2012 was unusual due primarily to the after-tax effect of the goodwill impairment charge which is only partially deductible for tax purposes.

On an adjusted net income basis our effective tax rate for 2012 was approximately 40% compared to 38.5% in 2011. The increase versus last year was due primarily to adjustments for various state tax exposure items.

Capital expenditures for 2012 totaled $62 million primarily reflecting expenditures to complete four new stores, two replacement stores and for existing store maintenance. In 2013, we expect total capital expenditures of approximately $63 million to $68 million including expenditures related to the opening of five new stores, one replacement store and maintenance CapEx for our stores and infrastructure.

From a cash flow perspective our operating cash flow was a $106 million for 2012 compared to $182 million in 2011. The decrease was primarily due to working capital changes driven by the unusual timing of vendor payments that were made in late 2010 rather than early 2011 which caused the full year of operating cash flow for 2011 to look abnormally high.

In the fourth quarter, we also used cash to pay a quarterly dividend of $0.12 per share as well as pay down debt. Our total long-term debt at the end of fiscal 2012 was $697 million, down from $820 million at the end of fiscal 2011. We had no borrowings outstanding under our revolving credit facility and we were in compliance with all covenants under our credit agreement.

At quarter end our total debt, EBITDA ratio under our credit agreement was 3.3 times while our interest coverage ratio was 4.1 times. As of December, 29, 2012 we had $73 million in cash and cash equivalents and $97 million of availability under our revolving credit facility.

Today we announced that our Board of Directors approved a quarterly cash dividend of $0.12 per share. Our dividend policy remains intact, future declarations are subject to Board approval and may be adjusted as business needs or market conditions change. Just to be clear because we tend to get a lot of questions about the timing of when we may declare a dividend our Board’s practice in past and in future quarters has been and will be to make their assessment at the timely release of our quarterly earnings and if circumstances are warranted declare dividends at that time.

Now I will spend a minute on our 2013 guidance. We expect the economic and competitive environment in our core markets to be fairly similar to what we experienced in 2012 with increased competitive unit growth and promotional activity. We continue to make operating adjustments and as Bob mentioned have a number of initiatives planned for 2012 that are designed to reenergize our core market stores.

We expect 2013 sales to grow in the range of 3% to 4% over the prior year with same-store sales in the range of negative 1.5% to negative 0.5%. Embedded in our assumptions, is that our markets and customers will continue to be negatively impacted by macroeconomic factors and this will continue to influence customer buying behavior.

During the first quarter we expect a benefit of approximately 200 to 250 basis points from the calendar shift to the New Year’s holiday into the first quarter and the shift at Easter one week earlier.

Adjusted EBITDA for 2013 is currently expected to be in the range of $185 million to $195 million and adjusted EBITDA margin in the range of 4.6% to 4.8% which reflects continued competitive and economic pressures and the impact on operating leverage of negative same-store sales in the core markets.

And finally, we expect adjusted diluted earnings per share for 2013 excluding one-time expenses to be in the range of $0.88 to a $1 per share. Our share count in 2013 reflects a full year shares outstanding that were sold during the IPO which accounts for about $0.04 of the reduction from 2012.

That concludes my financial comments. And at this time, I’ll turn the discussion back to Bob. Bob?

Bob Mariano

Thanks, Darren. In conclusion, we are encouraged by the progress of our customer centric initiatives particularly in light of the broader economic headwinds and believe that our efforts are beginning to resonate with our customers. However, we believe that results in our core markets will continue to be impacted by a cautious consumer as well as increased competitive unit growth and promotional activity.

By focusing our efforts on providing our customers with superior quality service and selection we believe we can better distinguish our stores from the competition and deliver against our operational and financial objectives.

As we think about our growth plan in Chicago we become even more confident about the potential opportunities that are available to us. We are very encouraged with the operating performance of these stores and expect to continue to make good progress on those stores future and further mature. We will continue to use our cash flow to expand the Mariano's banner, pay down debt and deliver an attractive dividend to our shareholders.

With that we’d like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Edward Kelly of Credit Suisse. Go ahead. Your line is open.

Edward Kelly - Credit Suisse

First on your comp, so I was hoping that you could maybe I know you have a lot of moving parts to the quarter because of calendar but could you maybe talk about the cadence of the comp sort of throughout the quarter and then what you’re seeing in Q1 so far but try to adjust or maybe the calendar?

Darren Karst

Sure, Ed. This is Darren. I think in terms of the cadence I have one I think overall I think when we last saw in November we expected maybe we’re seeing better trends in Q4 and Q3 and (inaudible) come to be true. In terms of the quarter itself I would say October was probably a little stronger than November and December but as you said there was a lot of calendar shifting there between particularly between Thanksgiving and New Year so I am not sure I’d read too much into that. As we look into this I mean, and we saw generally volume increases as well particularly when you compare our Q4 to Q3 as we look into Q1 we’re seeing the trends continue there for – there a little better than Q4 and that's true both on sales and volume.

Edward Kelly - Credit Suisse

And are you thinking there is a lot of things out there right there is sort of payroll tax increase, refund delays, gas prices that type of stuff. Do you think any of that is impacting your business at all?

Bob Mariano

Difficult to measure but I would tell you it is in case we said it’s a cautious custom and their tax is going up, the cost price of fuel going up is not going to make them much cautious. So, there we can tell you we've seen and maybe unable to measure an impact just yet and we cannot but psychologically in terms of how they behave they’re going to watch how much they spend.

So, I mean I, a cautious customer in my professional experience is the new normal, anybody that things we’re going back to some better time with the customer I think is quite naïve. There has bee a structural change with the customer and they will watch their nickels and dimes and depending on your social economic level you’ll watch it greater or less depending on your overall economic situation.

Unidentified Company Speaker

All right, I mean that's their pockets of our business and where the demographics are better and people are feeling better about themselves that I suspect it won’t have as much impact. Chicago probably won’t have much impact.

Edward Kelly - Credit Suisse

Could you maybe update us on the competitive landscape some color there specifically are you seeing the same impact Wal-Mart and the ad campaign you’ve had before what’s going on with Cub for instance and other local competitors in Wisconsin?

Bob Mariano

In Minnesota I would say Cub hasn’t changed its activity materially so that remains as we have talked about in several quarters before fairly competitive. In Wisconsin in our major markets I can report to you that everybody in terms of promotional activity is the status quo nobody in quarter four kind of – I am thinking through this as I am speaking to you. I got notes on any particular item or advertised in a different fashion in quarter four so. I would tell you from a temperature perspective with the long terms of the promotional sensitivity I would say quarter four was about the same as prior quarters.

Unidentified Company Speaker

And no real change from really kind of what started….

Bob Mariano

Yeah, we haven’t seen a change yet in super value Wal-Mart hasn’t changed what they’re doing.

Unidentified Company Speaker

Yeah.

Bob Mariano

Target PFresh has not so the majors have really haven’t started to do anything drastically different than what they have been doing in the past.

Edward Kelly - Credit Suisse

And the competitive openings you’re going to see in 2013 I don’t recall could you break out super centers versus traditional versus…

Darren Karst

We did, I think a total of 21 and six of which are super centers so that's down on a little bit from 2012 but in a similar zip code.

Edward Kelly - Credit Suisse

Right, and then last question for you is on pricing and in sort of really tied in the gross margin but could you maybe just update us on where you stand in your evaluation of pricing strategy this sort of more targeted KVI approach and encompassing that your gross margin this quarter was actually better than I thought it was it going to be and it was better sequentially. So how does it impact that and how should I think about the gross margin in 2013?

Darren Karst

I think we continue to manage price. I think we've said that on every call and it’s not something that is static it’s something that's fluid and we look at pricing and promotion as well as what we pay for the product and constantly work to balance it. So, I would tell you in terms of the intensity of work being done in pricing it’s probably as much and/or more then we've had in the past. So, we continue to work very diligently and that's not necessarily to fix anything Ed is to get our pricing to be as attractive as we can get it to be to get our customers back in certain categories. So, we are taking a very rifled approach and optimistically sometimes this year I think we’re going to be able to start delivering those pricing messages on a more focused basis than through general market like a (inaudible) order and things like that. So, I think we’ll be able to then in addition manage our spend even better because we won’t have to give general market discounts.

Edward Kelly - Credit Suisse

Darren, how are you thinking about the gross margin in 2013?

Darren Karst

I think we are – we are budgeting it up a little bit, up a little bit but not a lot. We’ve built in, we’ve built in some price investments, we expect that the Mariano’s stores will continue to mature and those would be additive to gross margin because they initially start out lower. And then the perishable initiatives that we’ve got out there as well beyond brand initiatives are additive to gross margin as well.

Operator

Our next question comes from Ryan Gilligan of BMO Capital Markets. Go ahead sir. Your line is open.

Ryan Gilligan - BMO Capital Markets

The 80 basis point impact on comps for the New Year calendar shift seems high to us. Can you provide some more color on that?

Darren Karst

I think that’s about what we had said it was going to be when we talked in November, so it prove to be about what we expected not sure why it sounded, it sounds high, but that’s about what it was.

Ryan Gilligan - BMO Capital Markets

We just thought it sounded like based on what some of the other publicly traded food retailer does that?

Darren Karst

Yeah, I think the only one that I saw that had the same calendar shift was Safeway and I’m not sure if their shift was exactly the same as ours.

Ryan Gilligan - BMO Capital Markets

And do you have a preliminary estimate for what the dollar savings opportunity is attached to the inbound transportation initiative; do you plan on reinvesting that in price?

Bob Mariano

Well, I mean, we are not investing it directly in price. We’ve built generally some pricing investments in our plan but not necessarily to be funded from that. I think we - I think we budgeted about five, roughly five basis points improvement in the transportation area based on what we’ve done so far, we are looking for some other opportunities in the supply chain ultimately but that’s kind of what we have built into 2013.

Ryan Gilligan - BMO Capital Markets

Okay. That’s helpful. Thank you. And just looking at your year-over-year decline in EBITDA margin this quarter, it looks better than the decline we saw in the first three quarters of especially last quarter, but it looks like guidance for next year implies instead of an improved or maintained run rate of margin decline, it looks like its worsening, is that fair to say and if it is what’s behind that?

Darren Karst

I think some of it is cycling the stronger EBITDA from the first couple of quarters last year that’s probably what the biggest difference is.

Operator

Our next question comes from Andrew Wolf of BB&T Capital Markets. Go ahead sir. Your line is open.

Andrew Wolf - BB&T Capital Markets

On Mariano’s it looks like you are at plan on the store openings. Could you give us your plan number of stores you plan to open in 2013 and its all business EBITDA neutral roughly now or will it turn that way in 2013?

Darren Karst

Yeah, there is a total of five that we’ll open in 2013 because they are under construction right now. And..

Andrew Wolf - BB&T Capital Markets

And both - do you got five that are already.

Darren Karst

They are coming out of ground now, yeah.

Unidentified Company Speaker

They are all under construction.

Unidentified Company Speaker

They are all.

Andrew Wolf - BB&T Capital Markets

Okay.

Bob Mariano

We’ll open in March and we got them a schedule of coming up here in the earlier part of the year. So, we planned it that way because we started the projects late last year so that we could space them off better this year.

Darren Karst

Right.

Andrew Wolf - BB&T Capital Markets

And any of those stores getting hit with the rent expense so the phantom rent expense because the change in the economy a few years ago where its non-cash rent expense because there is no more longer rent holidays or there aren’t big deals?

Bob Mariano

It does have I mean we do have step rents, so there is a step rent accounting so the cash flow is maybe a little bit less than the book rent.

Andrew Wolf - BB&T Capital Markets

Okay.

Bob Mariano

In some cases but we don’t have not sure exactly Andy what you’re exist specifically what you’re talking about.

Andrew Wolf - BB&T Capital Markets

Well. Maybe it’s not for that few stores. It’s not a big deal.

Unidentified Company Speaker

Yeah.

Andrew Wolf - BB&T Capital Markets

And you had comment at all on the prep overall profitability of Mariano’s or the swing or maybe you are not breaking out of this segment but it’s much that you would tell us I think that would be valuable?

Bob Mariano

Yeah, I don’t think we want to certainly talk about the specific numbers but I think what we’ve said in the past is we ultimately expect these store kind of on a fully matured basis to get up around 5% EBITDA and they are generally tracking towards that target, so

Andrew Wolf - BB&T Capital Markets

And there are all five that are now eight that are now opened how are they doing versus the sales plans. I know the early ones were well above.

Bob Mariano

I think they all continued to be above well they certainly above our early expectations as we get into those more we’ve raised our expectation so.

Andrew Wolf - BB&T Capital Markets

Fair enough. I got you. I wanted to switch just one last thing on the, you call that 2.7% impact from was it 18 competitive store opening last year? And I just want to get a sense of how many stores that effects because it’s got to be more than one store for a new store opening or else the stores that are affected are really affected I mean it’s it would just be a big number it was sort of only a one for one ratio. Could you give us a sense of how may stores you know it kind of impacted those 18 stores and super centers.

Darren Karst

Well, I mean, I am not sure I can place sure but that the first of all number of store openings was about 24

Andrew Wolf - BB&T Capital Markets

24, I am sorry.

Darren Karst

Each eight of which were super centers.

Andrew Wolf - BB&T Capital Markets

Got you.

Darren Karst

And I think you know I can’t probably tell you exactly how many these but probably on average those stores are impacting a couple of stores each.

Unidentified Company Speaker

I would tell you.

Unidentified Company Speaker

So yeah you probably got up at least.

Andrew Wolf - BB&T Capital Markets

Okay.

Unidentified Company Speaker

You know third of the chain that will impact some impact from those competitive opening.

Andrew Wolf - BB&T Capital Markets

Okay. Okay, got it. So when you look at this year and you are saying it’s going to about the same maybe a slight kind have been less. So that’s 2.7 on top of 2.7. So none of these stores had opened two years you got your sales would have been 5.4% better that kind of how you think about that?

Darren Karst

Yeah, yeah, I know I guess that’s right.

Andrew Wolf - BB&T Capital Markets

I mean just by understanding the math and what is the normal run rate the, what is before you know you have this on slot of you know super centers and so forth was it more like 10 a year. Just so we can get a sense of how bad is it?

Darren Karst

Yeah, it’s certainly up; I mean, you always have competition. I think the super center activity is certainly up from what it has been.

Andrew Wolf - BB&T Capital Markets

And the last question is, Bob, you’ve kind of alluded to test stores and taking elements in Mariano’s and I think you know it sounds a) like a good idea and b) not easiest thing to execute on that but assuming there are good elements that you know are working is that something that can be meaningful and I heard you say it’s on going and so forth but when could someone, when could these some of these elements really get into the core business could it be this year or is this more year should be thought more of as a testing year if somebody’s ideas are good ideas we’re going to be in’14 were you? Yeah.

Bob Mariano

I think you could see some of it later much later in the year.

Operator

Our next question comes from Ken Goldman of JPMC. Go ahead. Sir your line is open.

Ken Goldman - JPMC

To what extent would Mariano’s store growth be faster if you had perhaps a little more flexibility in your balance sheet? And I guess this is a color to that is there anything you can do with your balance sheet or perhaps adjust your cash flow at some point. Given that you’re very bluish on Mariano’s it sounds like justifiably to accelerate the growth rate of new stores or it’s not maybe that something you’re interest in it at this point.

Bob Mariano

It’s really not the balance sheet that affects our ability to add more Mariano’s what really is the critical item is human resources. We have the higher about 500 people for each of these stores. And we have to train them up, now on a B2B you can do some transfers, but understand we don’t have debentures it’s not like there is 50 of these stores down there that drop from and so you can back fill it rather easily.

So we, there was an enormous amount of effort placed on hiring, recruitment, training, development and then teaching them through the execution at store level. And we have learned when we have opened the stores too close together where we move on to the next new one we typically have to go back to the one and, and, and we nothing I don’t see a kind of reenergized it if you will for a life of the better world.

So, I mean, we’ve learned that they take a fair amount of care and development at the early stages so that they get launched very, very well. So it’s people now at some point when we get a bench of people, might we want to take a look at and we may do that and we’ll adjust our capital plan at that time but right now it would not be an appropriate time to do it.

Ken Goldman - JPMC

Okay. And then I’m just trying to balance couple of your comments today. You talked on the one-hand about the challenges that the consumer faces and that you face going into 2013 and I understand that, but you also talked a little bit about seeing some trends improve a little bit in the first quarter versus the fourth quarter. I’m just trying to get a sense of how to reconcile those two and trying to get a sense of how much of it perhaps is due to comps that are becoming a little bit more favorable or actually seeing trends work in your favorite due to some of the activity that you’re doing? May be you could help me understand at a little bit?

Bob Mariano

Yeah, I think that we’re in the work that we’re doing okay that we talked I talked to you about with the 14 stores. We like what we initially see in a trend. So, week on week how many weeks do they perform at a better length week on week, two weeks about three weeks about four weeks. And as you know and something like that you got to let time kind of go and see how they perform you know that’s the only, the only way you can make the observations before you can start to project it. So that’s what we were in the mode of it and we do like what we see. Can we sit here today and project it for you? No, no.

On the other hand, when we see a little bit Darren talked about that what we’re seeing in Quarter 1 those activities we had started earlier on in last fourth quarter and late third quarter last year so that’s more a continuation of rather a broad stroke things we were already had in place and continued to expand upon as we move forward. We’ve got two parallel types of the activity one more granular than the other that’s working here. Did that, did that make more sense to you or do I am I still missing the mark on it?

Ken Goldman – JPMC

I think so, I mean may be we will follow up offline after.

Bob Mariano

That would be fine.

Operator

Our next question comes from Peter Benedict of Robert W. Baird. Go ahead sir, your line is open.

Peter Benedict - Robert W. Baird

I guess, the first one by just following upon the 14 stores, the 14 store test. Is the -- how do you guys communicating the changes to customers to make them aware for the changes or are you not? And then, has the improvement been traffic or ticket or both?

Bob Mariano

To answer your question we have yet to communicate directly to the customer. We’ve done a fair amount of consumer research and we know the customer sees what we’re doing. Transactions count tell us customer see what we’re doing. So, we have chosen yeah it’s not the appropriate time to start telling the customer you got a forceful way because we have other things we want to get done before we start. We have to make sure you can support the claims you make before you make the claim. That make sense to you?

Peter Benedict - Robert W. Baird

Absolutely, so.

Bob Mariano

Okay.

Peter Benedict - Robert W. Baird

That makes a lot of sense.

Bob Mariano

So that’s what we’re heading here.

Peter Benedict - Robert W. Baird

So….

Bob Mariano

That’s, that’s where we’re involved okay.

Peter Benedict - Robert W. Baird

Okay, now that’s helpful thank you. And then just back over to the competitive openings. How many of Wal-Mart’s neighborhood market format did you guys see up in your markets in 2012 and what do you think the outlook as for 2013 and I’m just curious as to if maybe those openings have had a different impact of other traditional grocers opening? Is there anything about the Wal-Mart neighborhood market concept that is - you callout?

Darren Karst

Peter, this is Darren. We’ve had three neighborhood markets open. They are all in the Milwaukee market. And I’ll say generally the impact that we’ve seen from those stores is quite a bit less than the typical Wal-Mart so we continue to watch that but definitely not as impactful. I’m not sure if I can say how much different it is from a conventional and maybe less than what we might typically expect. And I think they have got a couple of plan for next year too I don’t know right off the top of my head but they are in our account for next year.

Peter Benedict - Robert W. Baird

Sure. Okay, that’s helpful. I mean, why do you think they might be sort of being at they are opening up in maybe a tougher outplace where you guys just have stronger stores or I know there is only three stores but any speculation why maybe they are not as impactful?

Darren Karst

That’s hard to say. I do think one thing that at least is an observation on our part is they end up placing them typically between existing markets, where the already have super centers. So I wonder, I think, we sort of wonder whether, if there is a Wal-Mart customer out there why would – why they would necessarily go to a neighborhood store when they have access to a super center. So I wonder how much cannibalization they maybe really incurring. But other than that I don’t know, we necessarily have any other - other views on their opening of those.

Peter Benedict - Robert W. Baird

Okay. Well that’s helpful. Thank you. And then just lastly Darren, what’s the view on LIFO that’s kind of embedded in your 2013 outlook? Thanks.

Darren Karst

What’s the view on what LIFO?

Peter Benedict - Robert W. Baird

LIFO.

Darren Karst

We’re budgeting it up a little bit and I don’t think we’re expert on predicting inflation and deflation but we’re budgeting about $2 million of LIFO. We ended [last year] at $1.3 million 2011 is $4.3 million so it can move around a little bit but that’s what we’re at least budgeting in our numbers.

Operator

Our next question comes from the Ryan Gilligan of BMO Capital Markets. Go ahead sir. Your line is open.

Ryan Gilligan - BMO Capital Markets

Hi, just two quick follow-ups. First, can you talk about why D&A stepped up so much from 3Q this quarter and how should we think about D&A for 2013?

Unidentified Company Speaker

Ryan, I don’t, I’ll have to get back to you on the Q3 to Q4 difference. It did end up the year about where we expected and I think for 2013 we’re budgeting it at about the same level of $66 million correct [John].

Ryan Gilligan - BMO Capital Markets

Okay, that’s helpful. Thanks.

Unidentified Company Speaker

Yeah.

Ryan Gilligan - BMO Capital Markets

And just last question, do you have an update on how healthcare reform in 2014 might impact the company?

Unidentified Company Speaker

Well I mean, we spent sometime looking at this and evaluating it. In fact, we engaged an outside firm to help us navigate through it because it’s a fairly complex - it’s a fairly complex law. I would tell you, we still have some more analytical work to do to kind of fully understand the impact on it. Our preliminary assessment is that, we probably need to make some adjustment in terms of what we’re doing and we’re working towards neutralizing the financial impact of it. So, I mean, at this time I’ll [initially] have a number attach to it but our objective is towards the minimal impact to our business.

Operator

And this concludes the question and-answer portion of today’s conference. I would now like to turn the call back to Mr. Bob Mariano. Go ahead sir.

Bob Mariano

Thank you very much. I would just like to take a moment to thank all of our employees, our trading partners and our shareholders and most importantly our customers for all their support. We appreciate all of your interest in Roundy’s and look forward to sharing our progress with you next quarter. Thank you so much for joining us and have a wonderful day. Bye, bye.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect.

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