Nash Finch Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.25.13 | About: Nash-Finch Company (NAFC)

Nash Finch (NASDAQ:NAFC)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET


Alec C. Covington - Chief Executive Officer, President and Director

Robert B. Dimond - Chief Financial Officer, Executive Vice President and Treasurer


Charles Edward Cerankosky - Northcoast Research


Good morning, ladies and gentlemen, and welcome to the Nash Finch First Quarter 2013 Conference Call. The company has asked me to advise you that this call will include forward-looking statements, which involve risk and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Factors that could cause such differences are described in the Nash Finch press release and in the company's filings with the SEC, including its Form 10-K for fiscal 2012. The company also notes that the call may include references to certain non-GAAP financial measures as the term is used in SEC Regulation G, such as consolidated EBITDA.

Reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures are provided on the Investor Relations portion of the company's website under the captions Presentations and Supplemental Financial Information and in the schedules to the company's earnings release, which can also be found in the same portion of the company's website under the caption Press Releases.

It is now my pleasure to turn the conference over to the company's Chief Executive Officer, Mr. Alec Covington. Please go ahead, sir.

Alec C. Covington

Thank you, Mary, and good morning, everyone. I'm joined here this morning with Kathy Mahoney, our Executive Vice President and Corporate Counsel; and also Bob Dimond, our Executive Vice President and Chief Financial Officer. As we've done in the past, I'm going to turn the call over to Bob, and he'll review the historical numbers of the quarter, and then I'll be back a little bit later to talk a little bit more about the business. Bob?

Robert B. Dimond

Thanks, Alec, and good morning, everyone. Total company sales for the first quarter 2013 were $1.09 billion compared to $1.07 billion in the prior year quarter, an increase of 2.3%. The acquisition of 18 No Frills stores during the third quarter of 2012 and 12 Bag 'N Save stores during the second quarter of 2012, contributed to a net increase in total company sales of $35 million. Consolidated EBITDA and net earnings were affected by several significant items, which are presented in the table on Page 2 of the earnings release for the current and prior year periods. Adjusted and consolidated EBITDA was $18.6 million, or 1.7% of sales, in the first quarter of 2013 as compared to $23.9 million, or 2.2% of sales, in the first quarter of 2012. Consolidated EBITDA was adjusted to exclude the impact of significant items totaling $0.9 million and $1.1 million in the first quarter of 2013 and 2012, respectively.

Including the impact of significant items, consolidated EBITDA for the first quarter of 2013 was $17.7 million, or 1.6% of sales, as compared to $22.8 million, or 2.1% of sales, in the prior year quarter. Adjusted net earnings were $2.7 million, or $0.20 per diluted share, in the first quarter of 2013, compared to $6.2 million, or $0.47 per diluted share, in the first quarter of 2012. Net earnings were adjusted to exclude the impact of significant items totaling $0.6 million, or $0.04 per diluted share, in 2013 and $0.7 million, or $0.05 per diluted share, in the 2012 quarter.

Including the impact of significant items, our reported net earnings for the first quarter of 2012 were $2.1 million, or $0.16 per diluted share, as compared to net earnings of $5.5 million, or $0.42 per diluted share, in the prior year quarter.

The Military segment net sales were $532 million, a decrease of 0.4% in the first quarter of 2013 compared to the first quarter of 2012. However, a larger portion of Military sales during the current year have been on consignment, which are excluded in our reported sales on a net basis. Including the impact of consignment sales, comparable Military sales decreased 0.2% in the first quarter. Military segment EBITDA was $7.9 million, or 1.5% of sales, in the first quarter of 2013, as compared to $13.4 million, or 2.5% of sales, in the first quarter of 2012. The decrease in Military EBITDA was primarily due to declines in gross margin related to reduced contractual margin rates and lower inflation as well as higher transportation costs compared to the prior year.

Sales for the combined Food Distribution and Retail segment were $562.2 million, an increase of 5% in the first quarter of 2013 as compared to the prior year quarter. The increase in Retail sales was primarily attributable to the Bag 'N Save and No Frills acquisitions, which were responsible for a $77.3 million increase in sales as compared to the prior year quarter. Because these were acquisitions of Food Distribution customers, these transactions were also responsible for a $42.3 million decrease in Food Distribution segment sales as compared to the prior year quarter.

Retail same-store sales declined 0.5% as compared to the prior year quarter. The Food Distribution and Retail segment EBITDA was $9.8 million, or 1.7% of sales, in the first quarter 2013, as compared to $9.4 million, or 1.8% of sales, in the first quarter 2012.

As previously announced, the company completed the redemption of our senior subordinated convertible notes due 2035 on March 15, 2013. The convertible notes were redeemed at a price equal to $466.11 per 1,000 in principal amount at maturity, which represents a total payment of $150.1 million. Total debt at the end of the first quarter 2013 increased to $397.5 million compared to $373.3 million at the end of the fourth quarter 2012, primarily due to an increase in working capital to support new business. The company is currently in compliance with all of its debt covenants.

Debt leverage ratio at the end of the first quarter 2013 was 3.74x and availability on the company's revolving credit facility at the end of the first quarter was $212.9 million. We announced on April 24, that our Board of Directors had declared a regular cash dividend of $0.18 per share to be paid on May 31, 2013. This is our 347th consecutive quarterly dividend pay. I will now turn the call back over to Alec.

Alec C. Covington

All right. Thank you, Bob. I think the first comment that I would have regarding the first quarter is that, obviously, we came in a little better than we had expected for the quarter. When we were together at the end of the fourth quarter, I'd indicated that I felt we might be below prior year by as much as $7 million. We came in below prior year to the tune of $5.1 million. And I think that represents just some fundamental strength in the core of our business and we're glad to see it. We did bring on some new business in the first quarter, but, frankly, that didn't have as much impact in the quarter as just the strengthening of our overall core business. We did have a lot of moving parts in the quarter, and I'll sift through that. Of course we had a movement of revenue and EBITDA from distribution to Retail, with the acquisition of the Bag 'N Save and No Frills. Of course, we had the impact of a decline in year-over-year inflation in our inventories. We still have some operational inefficiencies that are going on in the Southwest as well as the Northeast as a result of opening 2 new facilities. And we will continue to cycle through the impacts of the Military bids that we went through here in the last 18 months that lowered the day [ph] rates and we'll cycle that impact here later in the year. And then were we're still cycling through her impact of the new private label program. In the second quarter, we'll cycle that impact. And then, of course, we have the continued impact of the competitive store opening in Rapid City with the new Wal-Mart Supercenter that impacting us a bit in that particular market.

So if you look at the overall quarter and we see that the external EBITDA variance is $5.1 million to prior year, we do have a small impact from some onetime items, but, frankly, it makes that variance actually a little bit worse instead of better. So the real variance that we need to account for after we take into account the one-time items is actually $5.3 million instead of $5.1 million. And so if I step through more of a bit of a roll-forward discussion on that $5.3 million connecting it and then trying to explain and dissect the $5.3 million, going the opposite direction or going in the positive direction is the impact of the incremental EBITDA that we have gained as a result of acquiring No Frills and Bag 'N Save down in Omaha. That added positively about $3 million to the quarter.

Going the other direction, negatively, we had the continual impact from the day [ph] rate decreases that came about from the bids that we saw in the last 18 months. That created a negative impact on EBITDA to the tune of $1.7 million. We also have the ongoing operational inefficiencies that we're experiencing right now as we're establishing more of a Northeast presence. That is really primarily being driven because we're actually distributing dry groceries up to New England. But we don't yet have the refrigerated areas and the frozen areas constructed yet at our new Landover facility, so we have some duplicate miles and some inefficient miles there along with just the general lower productivity that you see when you open a new facility. It's getting better and then will get better throughout the year, but that cost us about $1.2 million in the quarter. Now that will begin to get better throughout the rest of this year and then to next year, primarily, it will get better once we complete the new freezer and the new refrigerated section of that warehouse later in the year.

We also have, as I mentioned, the lack of inflation in our inventory, as you can see that with the LIFO credit that we actually saw in the quarter. That actually cost us year-over-year $1.8 million in our gross margin line just simply because we didn't have that inflationary impact year-over-year. And then as I mentioned, we're still cycling through the private label program. We'll now cycle that starting in the second quarter, so these big variances will go away. But for this particular quarter, that negatively impacted EBITDA to the tune of $1.4 million. Again, though, as I mentioned before, our private label program is growing quite substantially and it's having positive impact, not just in our private label program but it's helping also in the ability to grow our overall business and get more captures in the traditional food wholesale business that we have here today.

Also, in the Southwest, we continued to experience some ramp-up cost associated with the opening of our Oklahoma City facility along with some additional miles that we're traveling as a result of some of the attrition that we've experienced in the Southwest. In other words, out of our San Antonio facility, we have less volume because of the competitive impacts there. But we're still going to those commissaries, of course, the same number of times. So our transportation cost is up for each of those loads. Now, that will stay with us a lot longer and that won't go away as quickly as some of the other impacts, but it will get better over time. And that accounted for a negative impact of about $1.1 million. So that explains all but about $1.1 million of the variance to the $5.3 million. The other $1.1 million is across a variety of lines, including an increase in the matching of 401(k) program, the funding of some various incentives this year because of the performance we have. Actually, more of our Retail stores qualifying for incentive this year than we did a year ago. That's a good thing but it adds to some of the expenses. And that explains the $5.3 million variance.

Now on the revenue line, just for a second, I think our revenue trends have improved nicely in the quarter. We saw a positive growth of 2.3% as opposed to a decline of 1.1% in the fourth quarter. Now keep in mind that both the fourth quarter and the first quarter of this year are comparable because they both have the full impact of No Frills and Bag 'N Save. So that improvement is just a real improvement, and we're glad to see it, of course. Now I will say at the time of Easter played a role in that across all 3 business units because Easter fell in the second quarter last year. It fell in the first quarter this year, so we'll get back some of that momentum in the second quarter along with the fact that we've had an unusually cold spring here, and that's impacting sales a little bit currently. But Easter will be the biggest impact between the first and second quarter. So, it was a positive impact in the first, should be negative impact on comparable sales year-over-year in the second.

Our Military business saw a really nice improvement, because in the fourth quarter we were negative 5.3% in revenue. This particular quarter, we were only negative by 40 basis points. And remember, as I'd mentioned before, we have more consignments in our sales this year than we did last year. So if you actually adjust for the consignment sales and the increase in consignment sales year-over-year, we were actually only down by 20 basis points year-over-year.

Now the other thing that is really exciting in our Military business is that our domestic sales, setting aside exports, were actually positive. And that's due to the new accounts that we've added, and of course partially aided by the timing of Easter. But we have added a tremendous number of new accounts in our Military business. We established our Bloomington, Indiana facility, probably, what, less than 2 years ago. And that facility now is well over 3x the level of volume that is started with. We're actually having to expand that facility, which we never dreamed we would do in order to accommodate all the volumes. So those are really good indications of what we're seeing. We're seeing growth in the Southeast. We're seeing growth in the Northeast. So the worldwide network that we put in place there is really beginning to take hold. We did go through some tough times with the overall rebidding of the overall network that occurred as well as some new competition that came into play here a year or so ago. But that business is really gaining some nice momentum that we're glad to see.

Now we did not feel any of the substantial impacts of sequestration in the first quarter because the actual furloughs and the potential commissary closings will come later. And we don't know exactly when. That seems to still be a little bit up in the air, but the impacts of sequestration that are in our numbers is just simply, as I mentioned last quarter, you got a lot of nervous people out there that when, again, when they get on -- come on television every day and they hear their bosses talking about furloughs, it doesn't do well for sales and momentum and the commissaries along with some of the cuts that have already been made relative to the management travel schedules and travel expenses associated with managing those commissaries.

So they're operating with one arm behind their back right now as a result of sequestration, but the actual store closings have not yet occurred. So when you look at domestic versus export, our domestic sales was actually positive year-over-year, even though we were down just a little bit in total. All of that decline came from exports. Our year-over-year export sales are down, and we've always known that the exports would decline because of the base realignment commission work that was done and it was to be implemented back in 2011. But the impacts of BRAC, or the Base realignment commission work, has been somewhat delayed from where we would have projected it. But we're now beginning to see some of those things happen.

The Army base at Mannheim, Germany closed and consequently the commissary closed. We have a commissary at Ramstein Air Force Base that's being remodeled that caused a bit of a decline, that we'll see that come back a little bit. But then there were about 4,500 troops of the 170th Infantry Brigade that were actually deactivated, and we knew that, that would ultimately come. So the declines in exports is not surprising. And we think that, that will continue. But as we had assumed and as we are delighted to see, our domestic side should grow and overcome a lot of those impacts in future quarters.

Now on the Retail front. Retail comparable sales improved from negative 1.41% in the fourth quarter to negative 50 basis points in the first quarter. Now again, that group also benefited from the timing of the Easter holiday. But it is interesting to know that when we exclude the impact of Rapid City, where we have that new Wal-Mart Supercenter that were still cycling, the remaining stores are actually positive by 1.4%. And so that's good news for us. We're seeing some real good momentum there. Our Family Fresh Market stores continue to do well. We're excited about some new development in that area, and our Omaha stores are also performing well in spite of the new competition that we knew would come to Omaha.

Now on the Food Distribution front, they were -- their sales and revenue was actually negative 1.2% after adjusting for closed stores and the conversion of Bag ‘N Save and No Frills to Retail. That is an improvement from the last quarter -- that was negative 2.3% in the fourth quarter. That's a nice improvement to negative 1.2% in the first quarter.

Now again, they benefited from the timing of Easter but they're also benefiting from new customers that are being added in that segment. Our pipeline they're strong, we've had some good momentum and we expect that to continue throughout the rest of the year. So we expect nothing but continued improvement there as we move throughout the year.

Now capital spending and debt for a second. Our original capital plan that we talked about last quarter was $43.8 million for 2013. If you'll recall, that was divided by -- into maintenance capital, which we allocated at $18 million, and strategic capital, which we allocated at $25.8 million, and the bulk of that $25.8 million was and is allocated to the construction of our perishable center in Landover, Maryland. That's where we're building a new freezer right now under construction and a mid temp area under construction. We're doing a major remodeling in St. Peter, Minnesota, where our Econofoods store there is being converted to the Family Fresh format. That's under way now. And then of course, we have a variety of remodels and refreshes that are going on in Omaha, Nebraska, as we reposition the 30 new stores that we acquired there in light of the competitive activity that we have going on in that market. So that was our capital plan as we talked about it last time.

That capital number has actually increased slightly from $43.8 million to $49.8 million. The primary reason for that difference is we have added capital for an additional facility that we need to add to our Bloomington warehouse. That's necessary because of the extraordinary growth that we've had there. We're out of space so we're going to acquire another piece of property there that has a warehouse on it. That would be a really good value for us there and get us out of some congestion and some leased space that we have right now. And the return on that capital would be very nice for us. We also are in the process and have been in the process but will continue to be in the second quarter adding additional mechanized equipment for a new business relationship that we're ramping up. And so that capital will be added -- it's already being added, but we had some capital allocated to that in the first quarter but the bulk of that will hit in the second quarter. And that's just for, again, for some specialized mechanized equipment that we need for a new national relationship that we have.

And then we're fortunate to be able -- at the same time that we're remodeling our St. Peter store and converting it from Econofoods to Family Fresh, we were able to acquire a piece of property, and we're going to build a free-standing liquor store there, which will have a nice return, complement that market to -- well. We own that property up there so it's really good from a real estate play as well as from an operating play. So those are just really 3 good things that came our way, increased our capital a bit, but all 3 of which we're glad to do because they we have very nice returns.

Now we have only spent about $2.7 million of that capital to date, so the second quarter that will really start ramping up primarily because a lot of the funds required in that Landover construction of the perishable center will be spent in the second quarter.

Now our debt in total came in just a tad higher. I think we had mentioned a number around the $390-million mark at the end of the fourth quarter, is where we thought we end up in the first. We came in at $397.5 million. Now, it's interesting to mention that of that $397.5 million, there was about $21 million in overall additional working capital that was put in play there unexpectedly in the first quarter as a result of some new business, a new relationship that we've added and will be continuing to add during the second quarter. So we were needing to ramp up some inventories in advance of that. So when we back that out, we actually came in a lot better, actually, in debt and working capital and use of working capital in the first quarter than we planned. And that's partly because some of our inventory turns on the Military side is speeding up a bit as now things settled down with the new facility, so we are pleased to see that.

One thing that I want to make everybody aware of that I think it's important to note is that our debt will pop up quite a bit more in the second quarter. We don't know exactly how much because it really is linked to the ramp up and rollout of a national distribution relationship that we have that we're just starting up, and we're doing that right now. And so where the debt ends in the second quarter is directly proportional to where we happen to be at that moment in time in the overall rollout and what our inventory levels are at that particular time. So that number could be, we definitely think that it is going to be over $400 million. It could be in the mid-4s, it could be in the low-4s, it might even be a little higher than that, we just don't know. What I would suggest is, is don't worry about it because it's a temporary ramp-up. We're ramping up a lot of inventory here in order -- it's what I call a high-class problem because we're adding substantial volume into the network. And we're adding that volume in across all categories because our business is growing here quite well.

But one of the categories that we're adding a lot of business to is tobacco and cigarettes. And in that particular category, you're required, in essence, for a good part of that product to pay for it before you receive it. So you don't have the accounts payable terms offset to that. Once we get it -- get the network fully deployed, we'll be turning that inventory so fast that we won't see this in our working capital number nearly as much. In fact, we think it'll level out probably in the $20 million, $25 million range when it's done. So it will be an extremely low proportionate to the overall potential volume, but it will cause a spike in our debt at the end of the second quarter. We just don't know to what degree. We want to make sure everybody's prepared for that, and we don't want anybody to become alarmed with that. That's a temporary working capital build as a result of adding some substantial volume into our national network here in the second quarter, as well as adding some additional volume into our traditional Food Distribution business. So it's really all across our Food Distribution network.

Now in summary, our key area or key focus is for the remainder of 2013 is kind of revenue, revenue, revenue. In Food Distribution, we have a very strong pipeline of new business and we're very pleased with that. We're responding constantly to people that are inquiring about our capabilities. We're pleased with that. We expect that during the second half of 2013 that we'll see a year-over-year improvement, both in terms of sales and EBITDA in the Food Distribution business. We have been working hard in what we refer to as the alternative channel growth areas. That is a capability brought about by the fact that once we rolled out the entire Military network and with our capabilities to go worldwide with distribution, combining our Nash Finch traditional legacy warehouses with our MDV Military warehouses and combining that again with Coastal's capabilities, our partners out on the West Coast. We can move product anywhere in the world. And there's a lot of channels that is seeing that as an incredible capability that's unparalleled. And we're working to use that network to grow in a variety of areas. We've talked about before our relationship with Dollar General. They're a great partner of ours. We don't talk about their plans. We let them talk about their plans. And we've learned to be very quiet and make sure that the Retail leads. And we support that so we will not talk a lot about their -- we won't talk a lot about their plans, but I will say that our relationship with them is extremely strong. They are a wonderful partner, incredible executors of their business. They have great plans to grow their business, and we're just very proud to be a part of that.

And so as we have developed that relationship and as we have executed well for them, it's caught the attention of others and not the dollar channel but in other channels such as drug and other areas. And so we're meeting and answering requests from other interested parties and looking to expand more into this particular channel given the capabilities that we have through this worldwide network.

On the Military front, the impact of sequestration remains quite uncertain. We really think that the more evident part, and as I mentioned before, I mean, you do see impacts of sequestration now because of the cuts that has been made in travel schedules and reductions in certain promotional activities that's impacting sales at least in our view. But the current plan calls for actually closing commissaries 1 day a week. But we don't know exactly when that might occur. We think that it may -- we had first thought it might be an early second quarter event. Now the more recent things were hearing makes us think that it's probably going to be more of a very late second quarter, early third quarter kind of an event. We just don't know for sure. But right now, best we can tell, it's probably going to impact our third quarter more than it's going to impact our second quarter.

Our export, we believe, will remain weak simply because of troop movements and store remodels enclosures over in Europe, which we have anticipated. I will say that we continue to have a strong pipeline of new domestic business. There is an increased interest in our worldwide solution. That really simplifies the work for manufacturers because with one relationship, with one phone call, with one check they can deploy product to any commissary around the world. And that's quite a capability, and, again, an unparalleled one. So we're seeing increased interest in that particular solution.

We expect to see sales in the Military business to stabilize in the second half of the year. And we're actually expecting to see improvements in both sales and bottom line in the fourth quarter, assuming that sequestration doesn't hit us here unexpectedly and cause us to rethink that.

Now on the Corporate Retail side, obviously, sales and EBITDA will grow once again in 2013. That's primarily a result of the 2 acquisitions that we made in 2012. But also, as I mentioned, we have the remodel of St. Peter and the subsequent conversion to Family Fresh, which is currently under way. That store is under construction now. And then we'll focus on Omaha with several remodels and plans to deal with new competition. And that's under way and going quite nicely.

Now from the second quarter perspective, we actually expect that our second quarter EBITDA should come in somewhere close to flat to last year. Now you will recall that the last year, we achieved EBITDA of $26.2 million in the second quarter. We might have otherwise thought that we might be off more in the second quarter, but now we think that we'll probably come in close to flat in the second quarter. We could be down $1 million or flat. But we will be closer to cycling through bad times than we might have otherwise thought. Now the shift in the Easter holiday will make sales comparisons more difficult in the second quarter, so we know that. That's a little bit of a headwind we've got to overcome. And we expect that our export sales will remain soft, as I mentioned. But we think that our domestic sales will probably remain quite strong until we see the full impact of sequestration probably later in the third quarter. And we expect that our Food Distribution and Retail business will be positive, although we began to cycle the Bag 'N Save acquisition here in the second quarter.

So now, for the full year, we're kind of left with a little bit of uncertainty around what we -- how we should feel about that, primarily because of sequestration. At the end of the first quarter, we said that we thought probably the low watermark for us for the year would be $100 million. And we thought that probably the high watermark for us would be to come in flat to prior year, which, you will recall, was at $111.3 million. So that was kind of the range that we were thinking. Now although we slightly outperformed our expectations during the first quarter, we still have that uncertainty looming over us of what will happen with sequestration. So if we adjust our expectations upward, we could be wrong with that because we could get hit later in the year with sequestration. Now we also have to keep in mind that although we're expecting that we could be as good as flat to prior year, again, flat to prior year is that $26.2 million that we reported in the second quarter, the fact of the matter is in the third quarter, no matter what we do and no matter how stronger our business gets, we're going to be quite unfavorable in the third quarter, and that'll be due to the reversals of bonuses and other incentives that took place last year. So we'll not be able to overcome that, because that was a huge, huge number in the third quarter.

But in the fourth quarter, we expect, with the additional momentum and setting aside sequestration, that we will see improvements in both sales and EBITDA when we compare to the prior year. So for the reasons that I've talked about and the uncertainty around what really is going to happen with sequestration, we're inclined to leave our overall flavor and guidance as it was. We think that -- we feel more certain about that $100-million mark will probably be as low as we can see out there. It could be a little bit better, according to what happens with sequestration. And if everything fell perfect and we had a little bit of continued positive momentum, we could come in flat to prior year, which is that $111.3 million, but we just don't know. So we're going to leave that general range in place. We feel pretty strong about the second quarter. We don't think there'll be any big surprises there, so I think saying that we'll be directionally flat -- yes, we could be off $1 million, but directionally flat with that $26.2 million, I think is probably pretty sound judgment on our part. It gets a little more cloudy when we get into the third and fourth quarter because we don't know what we don't know about sequestration.

Now our operating plan for 2013 is very straightforward. We're very focused on growth, as you see, and we're executing on that. So our teams are doing a really good job. Our pipelines are quite healthy across all of our segments. We have been very focused on reducing overhead even in our onetime items there in the first quarter. You see a little bit of impact from severance and things. So we're already in that process with reductions in force that is under way to make sure that our overhead is going one direction while our revenue goes another. So we got goals around that. We're executing against those goals. And we've had a continual goal to reduce working capital, and with the exception if you take out the impact of the working capital increase because of the new business that we're adding and the ramp-up we had to do at the end of the first quarter for that, we actually were right on target with that goal as well. So with that, Mary, what I would like to do is see if we have any questions from anybody on the line and we'll be happy to answer those at this time.

Question-and-Answer Session


[Operator Instructions] We'll take your first question from Chuck Cerankosky with Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

Alec, could you talk a little bit more about MDV's global capability? Were you suggesting that it could be getting into entirely new channels using that capability, that would be outside of Military customers? And CPG is using MDV to reach Military depots.

Alec C. Covington

Yes. So when we began building this worldwide network here back a number of years ago -- actually, it goes back to 2007 -- we realized that we had to put approximately where we had roughly 1.5 facilities, we had to have 8 in the final state plus the 3 facilities that Coastal Pacific has out on the West Coast, they have an export capabilities off the West Coast. Us, with export capabilities off the East Coast. We were actually finding that when we -- now that we've completed that, Chuck, our 2 companies are actually moving products within 100 miles of one another on the opposite side of the world. So that's how expansive this overall network is between the work they do in Asia, the work we do in Europe and in the Caribbean, in the Azores, and our exports off the East Coast. So as we laid that out, our original vision with that was that this would be a really good opportunity for manufacturers to not have to fool with 5, 6, 7 different discrete distributors and 7 different relationships, 7 different kinds of metrics that they had to track, writing 7 different checks and trying to reconcile all these invoices. So the way our system works is we provide a one-stop shopping to manufacturers, where they can deploy a product to any commissary around the world with one phone call because of the way that we have this unique platform built between us and Coastal Pacific. We use the same -- in essence, we use the same technology. We have the same touch points to the customer. So we built the network and then, of course, we waited and hope to see that somebody would take advantage of that so we could try it out. And we have saw that happen in a number of CPG companies that have come forward and said, "Hey, we like to give that a whirl." And so far so good. They've all seem to be delighted with the service and the simplicity of that model. But then what happened, Chuck, it was quite interesting. We looked at that, and said, Wow, if we combined Coastal's facilities with our NDB facilities, and then added to that our legacy Nash Finch facilities that are doing traditional wholesale, and if in fact we could put a common IT platform across all of those facilities, we could reach some of these alternative channels on behalf of our packaged-goods companies that they find very difficult to get to. Because some of these alternative channels, whether you're talking about club, whether you're talking about C store, whether you're talking about dollar stores or drugstores, if you look around the country these days, everybody is trying to put in 3 doors of frozen, 5 doors of refrigerated. And while it's a great strategy at retail, it's incredibly difficult to deploy on a national basis for some of these large retailers. So we built a capability just for that. We didn't have to do much because we basically already had the facilities. We just had to work on the technology piece, we had to work on some of the selection patterns in our warehouses, and we had to work a little bit on the transportation models different. And then we begin to deploy that. And so this happened to occur at the same time that Dollar General was expanding their food portfolio and it also happened at a time where they were looking, as they've said publicly, to get into more of the categories in food such -- in consumables, such as tobacco. So we've had the opportunity to work with them and as that took hold it really attracted interest from others. So now we think it's an opportunity for us going forward. We don't know how big it will get or how fast it will happen. All we know is, is that we're growing in that side of the business and we're continuing to have more and more large, national concerns that are contacting us to see what capabilities that we can have on behalf of their desired rollout consumables. So that's kind of the story.

Charles Edward Cerankosky - Northcoast Research

And then if you could talk a little bit about what's working better on the Retail side, especially what's working as you deal with new competition? What's improving operationally within Retail. And also how would you describe the consumer sentiment at this point in time?

Alec C. Covington

Well, our first quarter, actually was pretty good in that regard. And I think, Chuck, from our side, as much as anything, I think it's just a much better execution at store level. We've got some really good merchants in place in that side of our business. Tom Swanson, which runs our Corporate Retail, as the Vice President of that business, is just doing a bang-up job. He's still relatively new but, man, has he left his fingerprints on this company. Our Family Fresh format, every time we go into these stores and roll this thing out, it seems to have remarkable results because we convert the store predominantly over to more of a fresh market approach. We see our perishables go wild. We've got 1 store down in Farmington, Minnesota, that we converted to Family Fresh here back last year, and that store is seeing 40%, 50% sales increases. So in River Falls, we converted that store. That store consistently is up anywhere from 25%, 30%. And that -- all of that increase is coming from around the perimeter, with things like sushi, and our sandwich bar, and our hot foods and all of that. So with those kinds of impacts, and just generally broader, better execution across the overall network, that's part of it. And then the team that we inherited from the No Frills management team, that being Fred Witecy as the CEO there, Lonnie Eggers, Bill Loneman, Kevin Hennessy on the perishable side, that is a really powerful team. And So we had projected what we thought would happen in Omaha as these stores open. And listen, we're seeing impact. It's not just as great as we had thought it would be. So that team is executing extremely well. They've got good ad plans. They've done a really good job of integrating the 2 chains together. And they've got really exciting plans on the remodel side. So I think it's just a combination of better execution. Now as we head into the second quarter, one of the things that we have noticed more recently is just this weather impact. We think there's a couple of things. One is, it is clear that consumers are feeling some -- they're tightening their belts a bit, there's no question. We can see that with the way that our advertise merchandise rolls out. But I will tell you as much as that is an impact and the shift in Easter will be an impact, I think one of the big issues is -- you got to remember, this time last year we had a 70-degree day on St. Paddy's Day. And frankly until just a couple of days ago we still had snow on the ground here. And we just had snow. So maybe we get to 50 or 60 or 70 this weekend, they're saying, but that cool spring is really making a difference right now in terms of what we're selling. Last year we were selling a lot of steaks and a lot of grilling items. This year, not so much. And so the Midwest has just had a really cool spring and I think that's kind of casting a little bit of a cloud over the shopping experience. But that's more into the second quarter than into the first quarter. But I think it's just broadly on our side in the first quarter, I think it's just better execution on behalf of our team.

Mary, do we have any other questions?


We do not have any more questions at this time. I would like to turn it back over to Alec Covington for any closing or additional remarks.

Alec C. Covington

All right. Well, again, thank you very much, and we look forward to speaking with everyone again in July after our second quarter. Thank you.


And that does concludes today's conference. Thank you for your participation.

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