Spartan Stores Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: SpartanNash Company (SPTN)

Spartan Stores (NASDAQ:SPTN)

Q4 2013 Earnings Call

May 23, 2013 9:00 am ET

Executives

Katie M. Turner - Managing Director of Healthy Living

Dennis Eidson - Chief Executive Officer, President and Director

David M. Staples - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Sam Knezevic - Northcoast Research

Operator

Good morning, and welcome to the Spartan Stores, Inc. Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

Katie M. Turner

Thank you. Good morning, and welcome to Spartan Stores' Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. By now, everyone should have access to the earnings release for the fourth quarter ended March 30, 2013. For a copy of the release, please visit Spartan Stores' website at www.spartanstores.com under For Investors. This call is being webcast, and a replay will be available on the company's website 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 may involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include, among others, 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 risks and uncertainties associated with Spartan Stores' 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 forward-looking statements. Spartan disclaims any intention or obligation to update or revise any forward-looking statement.

This presentation will include non-GAAP measures and comparable period measures including or excluding the 53rd week in fiscal 2012 to provide investors with useful information about the company's financial performance. A reconciliation table on these non-GAAP financial measures to their most closely, directly comparable GAAP financial measures and the other information required by Regulation G is included in the company's earnings release issued after market close yesterday.

It is now my pleasure to introduce Mr. Dennis Eidson, President and CEO of Spartan Stores, for opening remarks.

Dennis Eidson

Thanks, Katie. Good morning, and thank you for joining our fourth quarter and fiscal 2013 earnings conference call.

With me this morning are members of our team, including our CFO, Dave Staples; our EVP of Retail Ops, Derek Jones; EVP of Wholesale Ops, Ted Adornato; EVP, Merchandising and Marketing, Alan Hartline; as well as our General Counsel and Secretary, Alex DeYonker.

Today, I'll begin by providing you with a brief overview of our business and financial performance for the fourth quarter and fiscal year, as well as some comments on our plans for next year. Then Dave will share some more information and specific details about the fourth quarter financial results, as well as our outlook for the first quarter and fiscal year 2014. Then finally, I'll provide some closing remarks, and then we'll open up the call for some questions.

We are pleased to report the fourth quarter earnings that exceeded the guidance we provided on our last call in mid-February. Our encouraging results were driven by improvements in both the distribution and the retail segments, as we gain new customers and continue to refine our promotional and loyalty programs.

In the fourth quarter, we also benefited from the early Easter holiday and our team's continued focus on expense management. As a result, we generated an approximately 5% increase in net sales and an over 14% increase in adjusted earnings from continuing operations, when excluding the 53rd week in last year's fourth quarter and the nonrecurring charges in this year's fourth quarter.

We believe that in the current challenging economic environment, our strong value proposition, featuring a combination of price, promotion, including fuel, selection and convenience, continues to resonate with consumers.

Now reviewing our distribution segment results. Sales increased 3.4% for the quarter on a comparable 12-week basis. It was primarily as a result of new business gains and the calendar shift of the Easter holiday selling week into the fourth quarter.

One of our key growth strategies for the distribution segment has been to add new customers in adjacent markets. And during the fourth quarter, as we previously reported and discussed, we entered into a partnership with a new customer in Ohio to become its primary wholesale grocery supplier and began distribution to its 11 stores late in the quarter. As a result of this and other new accounts obtained over the year, we actually ended fiscal '13 providing service to 390 independent distribution customers, up from 375 at the end of fiscal 2012.

Our value-added services continue to be a differentiator for us in the distribution segment, as evidenced by Spartan continuing to be awarded new business. We believe maintaining a strong partnership with our distribution customers is very important. Such a partnership includes sharing with our customers retail programs and operational initiatives that we have implemented that could help them to grow and optimize their business in the long run. We also believe that it's our responsibility as a partner to share new ideas and strategies to help our customers to enhance their overall operations, which we believe further separates us from other competitors in the industry.

I'm pleased to say that our transparent and trustworthy business practice -- practices were recently recognized by Forbes Magazine when we were included in their list of America's 100 Most Trustworthy Companies. This distinction is particularly meaningful to us, as it certainly validates our commitment to transparency and our core operating principles of honesty and integrity.

Net sales in our retail segment increased 6.1% on a comparable 12-week basis, with the sales contribution of the store we acquired at the end of the third quarter, as well as increased fuel sales and positive comp store sales. Comp store sales, excluding fuel, increased 0.4%. As anticipated, sales benefited from an early Easter holiday but were negatively affected by the continued shift in the pharmacy sales mix for the generic medications.

We estimated that the Easter shift had approximately a 70-point positive impact on the comp store sales and that the shift to generics, from a mix perspective, when you exclude the impact of volume and inflation, had an approximately 70-point negative impact on comp store sales.

But recall, we first introduced our YES Rewards program in 2010 through our Glen's banner and subsequently rolled that out to all of our banners. The rollout was completed during the third quarter of fiscal 2012 at our Family Fare in the D&W Fresh Market locations. While we still have a long way to go, we've learned a lot about our consumers and continue to refine our ability to connect with them. We are pleased with the consumers' response to date. And in fiscal '13, approximately 90% of our supermarket sales were generated through the program.

We also continue to leverage our pharmacy, as well as our fuel program. Our pharmacy script counts were up nicely year-over-year, as the consumer took advantage of our rewards programs. Our pharmacies posted a 3.9% increase in comp script count for the quarter and a 5.9% increase for the full year.

As I already mentioned, however, the continued shift from branded to lower-priced generic prescriptions is leading to a mid-single digit decrease in our average script price, negatively affecting our overall comparable store pharmacy sales, while improving our profitability. Our fuel promotions continue to resonate with consumers during these times of high fuel prices and are yet another way for us to connect with them on a consistent basis.

Another key strategy for the company has been the development and expansion of our private brand program for both our distribution and our retail customer segments. While sales of private brand products have declined slightly over the year, as consumers felt a little better about their economic conditions, saving money is still an important requirement for a large percentage of our consumers. We believe that our private brand offering is a great way to deepen our relationship with consumers and distribution customers and gain increased loyalty. As a result, we continue to add new products, define our brand identity and packaging, while continuing to ensure that our assortment remains relevant.

We are committed to providing the best value for our consumers, as well as our distribution customers and the right mix of national and private brands for them to choose from. At the end of the fourth quarter, we had approximately 4,150 private brand products, represents a 6% increase from fiscal 2012. This has helped us to achieve fiscal year 2013 unit penetration in our retail stores of 24.6%, which is approximately 1.3% greater than the national average, as reported by Nielsen.

For fiscal 2014, we expect to continue to build our premier private brand program and introduce approximately 300 new items, as well as to pursue opportunities in the Fresh department. We launched Spartan Fresh Selections in 2011 and now have over 600 product offerings in this program.

Moving on to our capital plan. During the fourth quarter, we had no major remodels, but we opened one Valu Land store in Dearborn, which is a suburb of Detroit. This is the fourth Valu Land location for the fiscal year and brings the total store count to 7. Our store growth plans for fiscal '14 include up to 13 rebanners of Glen's locations to Family Fare brand and the completion of up to 12 minor remodels and 3 major remodels. [indiscernible] the remodels will be associated with the re-bannered locations. We also plan to open up to 3 Valu Land stores in the coming year. We continue to further fine-tune our Valu Land concept, and want to have what we believe is the right mix of product and pricing before pursuing a more aggressive store rollout of this brand.

In fiscal '14, our distribution team will continue to focus its efforts to drive sales growth by increasing existing customer penetration and adding new customers in adjacent markets, as well as enhancing our value-added service offerings.

In addition, during the first and second quarter of fiscal '14, we will be testing warehouse automation that will help improve Spartans' productivity and operational efficiencies. This automation will entail the use of robotic high-lows [ph] to perform certain unloading and storage tasks. Assuming the tests are successful, we could begin to realize benefits from these expenditures during the second half of fiscal '14.

And before I turn the call over to Dave, I'm also pleased to report that we've increased our quarterly dividend by 12.5% to $0.09 per common share for shareholders of record on June 7 and payable on June 21, 2013.

So with that overview, I'll turn the call over to Dave for more detail on the fourth quarter and the full year financial results, as well as an outlook for the first quarter of fiscal '14. Dave?

David M. Staples

Thanks, Dennis, and good morning, everyone. As Dennis mentioned, our fourth quarter last year included a 53rd week. To provide a better measure of our business trends, I will be discussing our fourth quarter and full year financial results on an adjusted and comparable 12-week and 52-week basis, except where noted.

Adjusted results do not include the 53rd week from last year, which accounted for $49.8 million in sales, $26.7 million at retail and $23.1 million at distribution; and $2.4 million in operating profit, $1.5 million at retail and $900,000 at distribution.

This year's adjusted fourth quarter results also exclude charges related to debt extinguishment, restructuring and asset impairment charges. The fourth quarter earnings press release includes a table that provides more detail on these items.

Consolidated net sales for the fourth quarter increased 4.9% to $592.8 million compared to $565 million in the year-ago quarter due to strength in both the distribution and retail segments. Approximately 60 basis points of the consolidated sales improvement for the quarter were due to the calendar shift of the Easter holiday into the fourth quarter.

Distribution and fuel sales represented 43.3% and 7.5%, respectively, of consolidated net sales, compared to 44% and 7.1%, respectively, in last year's fourth quarter. The consolidated adjusted gross profit margin for the fourth quarter increased to 22.4% compared to 22.2% last year, primarily due to the improvement in the retail segment, partially offset by a decrease in the LIFO credit compared to the prior year.

Fourth quarter adjusted operating expenses were $112.7 million or 19% of net sales compared to $108.5 million or 19.2% of net sales last year. The decrease in the rate was due to lower employee benefit-related cost and promotional expenses due to the cycling of the launch of the YES loyalty program in the West Michigan market, partially offset by higher incentive compensation and occupancy cost.

Adjusted EBITDA for the fourth quarter was $29.6 million or 5% of net sales compared to $25.6 million or 4.5% of net sales last year. Adjusted earnings from continuing operations for the fourth quarter were $10.4 million or $0.48 per diluted share compared to $9.1 million or $0.40 per diluted share last year.

Turning to our operating segments. On a comparable 12-week basis, fourth quarter net sales for the distribution segment were $256.9 million compared to $248.5 million in the year-ago quarter. Adjusted fourth quarter operating earnings for the distribution segment were $17.5 million versus $16.3 million in last year. The operating earnings increase was largely due to the higher sales and improved margins, partially offset by a decrease in LIFO credit of $900,000 compared to the prior year.

In our retail segment, on a comparable 12-week basis, adjusted fourth quarter net sales were $335.9 million compared to $316.4 million last year. The over 6% increase in sales was driven by incremental sales from our grocery store acquisition, increased fuel sales and positive comparable store sales. Comparable store sales, excluding fuel, were up 0.4%, due in large part to the calendar shift Dennis mentioned.

Retail segment adjusted operating earnings for the quarter were $2.5 million compared to $800,000 last year. The improvement in adjusted operating earnings was due to the higher sales, improved margin and operating expense leverage due to a decrease in expenses related to employee benefit, decreased promotional expenses associated with the cycling of the YES loyalty program launched at Family Fare and D&W, partially offset by higher incentive compensation and occupancy cost.

From a cash flow perspective, our operating cash flow was $59.3 million for fiscal 2013 compared to $93.7 million at the end of fiscal 2012. The decrease is principally due to the timing of working capital requirements and timing of required tax payments associated with the change in state tax laws, as we've previously discussed.

Total net long-term debt was up $32.3 million to $143.8 million as of March 30, 2013, versus $111.5 million at the end of fiscal 2012, primarily due to share repurchases, timing of working capital requirements, tax payments made earlier in fiscal 2013 and the acquisition of a grocery store and fuel center, including the associated capital leases.

As previously announced, we completed the redemption of the remaining outstanding $57.4 million aggregate principal amount of convertible notes and recorded after-tax charges of $1.7 million related to the redemption. As a reminder, we expect to save approximately $3 million in annual interest expense, as a result of the private exchange completed in the third quarter and the redemption of the remainder of our convertible notes in the fourth quarter.

Now to briefly review the fiscal 2013 annual results. On a comparable 52-week basis, consolidated net sales increased 0.9% to $2.61 billion compared to $2.58 billion last year. Comparable store sales excluding fuel decreased 0.5% in fiscal 2013. Adjusted EBITDA for the year was $106.3 million compared to $107.2 million last year.

I will now provide further detail on our outlook for fiscal 2014. We believe that the Michigan economic recovery is likely to continue on its current gradual pace in fiscal 2014, and we expect fiscal 2014 net consolidated sales and earnings from continuing operations to exceed our fiscal 2013 results due to our investments in the retail and distribution segments, continued efforts to increase the value provided to our customers and continued careful control of expenses. This guidance includes the negative effect of the Easter holiday, which fell in the first and fourth quarters of fiscal 2013 but will not be in either quarter in fiscal 2014.

We expect the retail comparable store sales will turn positive in the second half of the year, as we cycle the grand opening of a relocated store in Grand Rapids, benefit from our capital program and likely experience a higher level of inflation as the year progresses. We expect the capital expenditures for fiscal 2014 will be in the range of $42 million to $44 million, the depreciation and amortization in the range of $41 million to $43 million and total interest expense in the range of $10 million to $11 million.

For the first quarter, we expect consolidated net sales will slightly exceed last year, due to the acquired retail store and net new customer gains in our distribution segment. This guidance reflects the negative impact of the Easter calendar shift, out of the first quarter of fiscal 2014 and into the fourth quarter of fiscal 2013.

The continued negative mix impact related to the pharmacy prescription conversions from branded to generic drugs, the cycling of extremely favorable spring weather last year, the cycling of the launch of the Yes Is More campaign in last year's first quarter, as well as the Grand Rapids store relocation grand opening promotional activity. As a result, we expect comparable store sales in the retail segment to be down 2% or more for the first quarter fiscal 2014.

We believe earnings per diluted share from continuing operations will slightly exceed last year, when excluding the prior year's after-tax benefit of $600,000 or $0.03 per diluted share due to changes in the Michigan state tax laws.

This concludes our financial discussion, and I will now turn the call back to Dennis for his closing remarks. Dennis?

Dennis Eidson

Thanks, Dave. Well, we are encouraged by our fourth quarter performance and solid end of the year, which reflect improvements across both our distribution and retail segments, as we gain new customers and continue to refine our marketing and loyalty programs.

We believe that the Michigan economy is likely to continue its gradual recovery in fiscal '14, and we believe that we are well positioned to benefit from these modest improvements and plan to continue to build on our customer-centric platform and leverage our strengths in ways that best reward our consumers, independent retailers, associates, suppliers and shareholders.

This time, I'd like to thank each of our constituents for their support over this last year. Our company could not achieve this level of success without you, and I want to say thank you.

In conclusion, we remain focused on balancing sales growth with expense management, as we invest in the value proposition that we offer our retail and distribution customers to best position us for future improvements. We look forward to another rewarding and successful year. And with that, we'll open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Ajay Jain of Cantor Fitzgerald.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

I just had a quick question on the gross margin trends. So I know some of the improvement was attributed, at least partly, to retail, but it looks like the gross margins would have been higher without the -- would have been even higher without the impact of a LIFO comparison. So can you just give any more color on what was behind the increase in gross margins last quarter and if you see that improvement as a little bit of an anomaly? Or do you expect that improvement in the gross margin rate to continue to improve based on what you're seeing in the current quarter?

Dennis Eidson

Yes, Ajay, as we look at that, it was -- it really had a lot to do with cycling of some prior-year activity in that respect. And so we don't think that's going to continue to project out into next year. The margin environment, I think, kind of remains as it has been for the past several years. And so, I guess, I wouldn't project that out going forward.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And in terms of your store development plans, it looks like the major focus is going to be on remodels this year. But in terms of any potential for square footage growth beyond fiscal '14, would you say the main emphasis is going to be on Valu Land?

Dennis Eidson

Yes, it would be on Valu Land for square footage growth. And that's with us -- it's not all that robust, but we haven't had a lot of square footage growth in the State of Michigan by any of the competitive set over the last several years. So once again, the population here has been rather stagnant. There's no shortage of competitors in the square feet and in the marketplace.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And as it relates to Valu Land, I know you're in the very preliminary stages of sort of testing out that format. But what's been the level of customer acceptance so far? And is there any aspect of that rollout that maybe hasn't gone as well as you might have initially expected?

Dennis Eidson

I think the acceptance -- the customers that are trying the store love the store. The most recent 3 stores that we opened were in Metropolitan Detroit. It's a 5 million-person marketplace, and we've got three 20,000 square foot boxes that we're trying to get the message out about. And we knew going in, that wasn't going to be an easy task. It's proven to be even a little bit more difficult than we thought. There's a little lumpiness in the performance of the 3. So we're, I think, more about messaging at the moment, although we are tweaking some of the offer in the store, and we've been consistently experimenting with that. I mean, we still classify it as a test, even though we have 7 stores open. We'll clearly open an eighth one here in the near term and, as I indicated, up to 3 in the full year.

Operator

[Operator Instructions] And we have a question from Chuck Cerankosky of Northcoast Research.

Sam Knezevic - Northcoast Research

This is actually Sam Knezevic on the call today for Chuck. But Dennis, I was just wondering, you had mentioned, I think, in the prepared comments that private label sales were maybe under a little bit of pressure in the quarter. Could you just talk about maybe what categories in private label were performing the strongest? And maybe what is one of the weaker during the period?

Dennis Eidson

We were a little softer than prior year, as was the nation, on private label penetration. We still have a 24.6% penetration versus, like, a 23.2% for the national average on Nielsen. If you look at our brand, Spartan brand is continuing to be 90% of the private brand sales than the enterprise. That was a little bit softer. We did see some strength from the top-tier brands, which is our HBC brand. We also saw some growth from the Full Circle national organic brand. So those 2 showed some strength. But on balance, we were, overall, negative.

Sam Knezevic - Northcoast Research

Got you. And how many new products do you expect to roll out for your private brand this year?

Dennis Eidson

We're anticipating 300 to 350 new items to be rolled out this year.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Dennis Eidson

Thanks, Andrew, and that does conclude the -- our Spartan Stores' Fourth Quarter and Fiscal Year 2013 Conference Call. And thank all of you for joining us today and look forward to talking to you again in, I guess, would be early August. Thank you.

Operator

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

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