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Roundy's (NYSE:RNDY)

Q2 2013 Earnings Call

August 08, 2013 4:30 pm ET

Executives

James Hyland

Robert A. Mariano - Chairman, Chief Executive Officer and President

Darren W. Karst - Chief Financial Officer, Executive Vice President and Assistant Secretary, Chief Financial Officer of Rac-Holding and Executive Vice President of Rac-Holding

Analysts

Scott Andrew Mushkin - Wolfe Research, LLC

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Judah Frommer

Andrew P. Wolf - BB&T Capital Markets, Research Division

Karen F. Short - BMO Capital Markets U.S.

Operator

Good afternoon, and welcome to Roundy's Second Quarter 2013 Earnings Conference Call. [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 now like to turn the call over to your host, Mr. James Hyland. Thank you. You may begin.

James Hyland

Thank you, Holly. Good afternoon, ladies and gentlemen, and welcome to the Roundy's Second Quarter 2013 Earnings Conference Call. With me today are Bob Mariano, Chairman and Chief Executive Officer; and Darren Karst, Executive Vice President and Chief Financial Officer.

Our second quarter 2013 earnings release crossed the wire at approximately 4:00 p.m. Eastern Time today. If you have not received the release, it is available on the Investor Relations section 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 and other filings with the Securities and Exchange Commission for more detailed discussions 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.

I will now turn the call over to Bob Mariano. Bob?

Robert A. Mariano

Thanks, Jim. Good afternoon, everyone, and thank you for joining us today as we discuss the results for the second quarter of 2013. I will briefly review these results and discuss certain key metrics for the quarter. Darren will then review the financial results for the quarter. And at the end of our remarks, we'll open up the call for questions.

Second quarter results were a study in contrast. While our Mariano's banner continues to greatly exceed our expectations, we encountered something along the lines of a perfect storm in our core markets. While we continue to excel on our 2 key consumer-centric initiatives, perishables and Own Brand, our efforts were not enough to offset the many factors negatively affecting our results in our core markets.

For the second quarter, sales decreased 1.7% to $980.3 million. The decrease was primarily driven by a 5.8% decrease in same-store sales. Same-store sales were negatively impacted by a number of factors including the following: a fairly significant quarterly calendar shift as the result of the timing of Easter and of July 4 holidays; the continuing effect of competitive store openings; the continuing shift toward generic prescriptions in our pharmacy business; a price-conscious customer that continues to carefully manage their own spending levels, which has held demand back; and our reluctance to promote as heavy as we did last year, given the fairly weak consumer demand. Additionally, we experienced wet and cold weather this year compared to a relatively favorable springtime weather last year, which we believe also had a negative effect on sales.

For the quarter, we experienced a 6.3% decrease in the number of customer transactions, which was partially offset by a 60 basis point increase in average transaction size. The decrease in customer count is primarily a factor to the continuing effect of competitive store openings. This is consistent with prior quarter trends. The increase in transaction size was driven largely by the sales coming from Mariano's, which has a higher transaction size than our core markets.

Additionally, our second quarter sales did not receive the benefit of the Easter or July 4 holidays. Easter holiday sales were recognized in the first quarter, and we experienced a shift in the 4th of July sales into the quarter 3. We also continue to see a shift towards generic drugs in our pharmacy business, which also had a negative impact on same-store sales for the quarter. However, as we've said in the past, this has not been negative to our business as the net margin contribution on generic is more than branded drugs. Adjusted for the effect of holiday calendar shift and increased generic drug sales, same-store sales declined 3.9% for the second quarter.

Regarding competitive activity in the second quarter, we had 2 Walmart supercenter openings in the greater Milwaukee area, a Woodman's supercenter opening in Milwaukee and a conventional store opening in Madison. We still anticipate a total of 21 competitive openings during the entire year of 2013.

We estimate that the dollar impact to our same-store sales in the quarter from new competitive square footage at over the last -- added over the last 12 months was approximately 260 basis points, up 30 basis points from the first quarter of 2013.

As in upper Midwest retail, the unusually wet and cool weather we experienced in the spring and early summer was a contributing factor in the second quarter as well. This seems particularly impacted for the holiday weeks during the quarter. Spring and summer seasonal spending was late this year versus the prior year, and we saw its effect in a number of key categories during the quarter. Although we have seen some gains in economic indicators nationwide over the last quarter, the economy in our core market has tended to lag the rest of the country in recovery.

As I stated earlier, this has led to a price-conscious consumer in our core market, where there is strong competition for the customer dollar.

During the second and third quarters of 2012, we were highly promotional, partly in response to the competitive activity taking place at that time. In general, the goal of our pricing and promotional strategy is to strike a fair balance between sales and its effect on margin.

During the second quarter, we consciously made the decision not to overpromote into a market where consumer demand had been soft since we think spending in that type of environment is not particularly sustaining in the long run. This resulted in higher gross margin for the quarter, but had a negative impact on sales.

Over the last few quarters, we have highlighted 2 of our key customer-centric initiatives, namely growing our perishable business and Own Brand product sales. I'm happy to report that, once again, we had higher comps in those 2 categories. Our perishable business now accounts for 36.4% of total sales, approximately 160 basis points higher than a year ago over the highest and the highest ever for quarter -- second quarter.

Our Own Brand products ended the second quarter at 23.1%, our highest rate ever, and a 260 basis point improvement over last year's second quarter. Our Own Brand portfolio now consists of over 6,300 products. I am pleased with how the team continues to execute with these 2 critical business initiatives.

Now let me spend a few minutes discussing the status of our Milwaukee market renewal project, which is so important to providing long-term stability in our core markets. To update those who may not -- maybe new to our story, our objective is to position our Pick 'n Save stores as the best conventional grocery operator in our market. We intend to accomplish that by providing a superior shopping experience for our customers built around a service-oriented culture. We're making investments in our perishable departments and other changes in product, merchandising and service that are similar to the strategies we used at our Mariano's stores in the Chicago market. We have invested in service to improve the in-store experience by focusing on the front-end checkout, in-stock positions and variety and freshness in our perishable departments. We are also testing different pricing and merchandising approaches to provide our customers with better value, while being mindful of our margins.

We have a total of 69 Pick 'n Save stores in the greater Milwaukee area. We started the project during the latter portion of 2012 with a group of 14 Milwaukee area test stores. We have measured key financial and operational results at the test group against the control group of stores since the project's inception. And we have seen a meaningful increase in sales, unit count, customer count, perishable sales and EBITDA in the Milwaukee 14 versus the control group. But what has been most important has been the consumer reaction. We continue to receive very positive feedback from our customers on our renewal efforts. So we are confident the changes we are making are resonating with them.

During the last quarter's earnings call, we announced the rollout of our market renewal strategy to the remainder of our Milwaukee area Pick 'n Save stores.

During the second quarter, we rolled out that renewal strategy to another 19 stores, and we will roll out to the remaining 36 stores in the third quarter. I'm convinced more than ever that this is the right thing to do. We can't entirely control all the competitive changes that are occurring in our core markets, but this is something we can control and we believe will, in the long run, be critical to stabilizing our core business.

We are excited about the energy our team members are creating around the renewal effort, and we expect this to positively impact our operations in 2014 in terms of sales and EBITDA.

In the Chicago market, during the second quarter, we opened our 10th and 11th Mariano's stores in Harwood Heights and Elmhurst. We have 2 more openings scheduled for 2013, which will bring us to 13 stores at end of year.

Over the last few quarters, we have talked about how pleased we are with the progress we've made towards achieving our sales and EBITDA goals at our Mariano's stores. Let me provide some color to that. Average weekly net sales per store for the second quarter and for the year-to-date period were slightly over $1 million, with our mature stores being even higher. That makes Mariano's business today over $550 million in sales on a run rate basis. And we've consistently said before, our targeted four-wall store EBITDA for our Mariano's stores has been 5%. Today, we are seeing our mature stores developing at a level well in excess of that, as we have been able to leverage our expense structure better than we originally expected, and our strong perishable business has allowed us to mix out with a higher gross margin than our original pro forma.

For some time, we've been pleased with our sales performance in these stores, and now we're increasingly encouraged by how the stores are maturing. Our early expectations were for these stores to average $750,000 per week. Obviously, we have exceeded that goal.

For the last couple of quarters, we've clearly seen acceleration on our EBITDA performance, both from our more mature stores, and additionally, our new stores are ramping up quicker than we originally expected. The reasons why we continue to exceed expectations are threefold: we've got strong customer and community acceptance at Mariano's banner and its differentiated shopping experience has lead to robust sales volume; our operating team has been able to fine-tune the operation and drive increased sales and profitability, including ramping the stores up faster; and third, and finally, we have a very talented team of 4,000 dedicated, focused, energized and service-oriented Mariano's employees.

I believe 2014 has the potential to be a breakout year for Mariano's as more stores reach maturity, sales and profitability continue to exceed expectations and we continue to add store count. Our growth strategy remains intact and continues to be supported by our capital plan. We will build 5 stores per year, and as we stated last quarter, we believe the Chicago market can support more than 30 Mariano's stores.

In summary, needless to say, we were disappointed with the results in our core markets in the second quarter. While there are factors that we had little control over, there were also areas where we could have done a better job. However, I can assure you that during the second quarter, we did not lose focus. Our team remains committed to the customer-centric initiatives we have in place, and we continue to build for the future.

In terms of Mariano's, we are in a strong growth mode, and we will continue to be so for the foreseeable future.

Now let me turn the call over to Darren to provide some additional financial details on the quarter. Darren?

Darren W. Karst

Thanks, Bob, and good afternoon, everyone. As Bob noted earlier, net sales for the second quarter of 2013 were $980 million, a decrease of $16.5 million or 1.7% from $997 million for the second quarter of 2012. The decrease was primarily driven by a 5.8% decrease in same-store sales, as well as the effect of 3 underperforming stores that we closed during 2013, partially offset by the benefit of new stores.

Gross profit for the second quarter of 2013 decreased 0.9% to $265 million from $268 million in the same period last year. Gross profit as a percentage of net sales was 27% for the second quarter of 2013 compared to 26.9% in the same period last year. The increase in gross profit as a percentage of net sales primarily reflects reduced promotional and pricing investments and an increased perishable sales mix, partially offset by increased strength.

Operating and administrative expenses for the second quarter of 2013 increased to $231 million from $224 million in the same period last year. Operating and administrative expenses as a percentage of net sales increased to 23.6% in the second quarter of 2013 from 22.5% in the same period last year, due to increased occupancy and labor costs related to new and replacement stores, as well as reduced fixed cost leverage in our core business resulting from lower sales.

Interest expense for the second quarter was $11.5 million, relatively flat with the prior year's number of $11.6 million. For the second quarter of 2013, net income was $13.5 million or $0.30 diluted earnings per share compared to net income of $18.9 million or $0.42 diluted earnings per common share for the second quarter of 2012.

Adjusted EBITDA for the second quarter was $51.2 million compared to $60.3 million in the second quarter of 2012. The decrease was primarily due to the effect of competitive openings over the last 12 months, holiday shifts and the soft economic environment in our core markets, which continue to negatively impact consumer demand. This is offset somewhat by the increase in EBITDA in our Mariano's stores. Our effective tax rate for the second quarter of 2013 was 38.2% compared to 40% for the second quarter of 2012.

Capital expenditures for the second quarter of 2013 were $11.2 million compared to $9.5 million in the second quarter of 2012. The increase from the prior year was primarily related to timing of expenditures, mostly associated with new store openings.

Reviewing our 2013 first 6 months results. Sales were $1,964,000,000 for the 26 weeks ended June 29, 2013, an increase of $28.7 million or 1.5% from $1,935,000,000 for the prior year period. The increase primarily reflects the benefit of new stores, partially offset by a 2.3% decrease in same-store sales and the effect of 3 underperforming stores that we closed during 2013 because they were at the end of their leases. The decline in same-store sales was due to a 5.1% decrease in the number of customer transactions, partially offset by a 2.9% increase in average transaction size. Same-store sales comparisons were negatively impacted by competitive store openings, the shift to greater generic drug sales, unusually wet and cool weather conditions and the soft economic environment, which continues to negatively impact customer demand in our core markets.

For the 26 weeks ended June 29, 2013, net income was $22.1 million or $0.49 diluted earnings per share compared to net income of $21.2 million and adjusted net income of $29.5 million or $0.51 diluted earnings per share and $0.71 adjusted diluted earnings per share for the prior year period.

Adjusted net income for the prior year period excluded an $8.4 million after-tax or $0.20 per share for the early extinguishment of debt and onetime IPO expenses.

Adjusted EBITDA for the 26 weeks ended June 29, 2013, was $95.1 million compared to $109 million for the prior year period. The decrease was primarily due to many of the same factors that impacted our quarterly results.

Net cash flows provided by operating activities for the 26 weeks ended June 29, 2013, were $43 million compared to net cash flows provided by operating activities of $33 million during the prior year period. The increase in cash provided by operating activities was due primarily to better management of inventory levels, partially offset by the timing of payments for inventory.

Our total long-term debt at the end of the second quarter was $679 million, down from $686 million at the end of fiscal 2012. 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-to-EBITDA ratio under our credit agreement was 3.49x, while our interest coverage ratio was 4.07x.

As of June 29, 2013, we had $76 million in cash and cash equivalents and $97 million of availability under our revolving credit facility, which provides us with significant liquidity.

Today, we announced that our Board of Directors approved a quarterly cash dividend of $0.12 per share. Our dividend policy remains unchanged. Future declarations are subject to board approval and may be adjusted as business needs or market conditions change.

While we had a tremendous performance in our Mariano's stores this quarter, we continue to struggle in our core markets, driven largely by the additional competitive square footage being added to the market. As such, we were disappointed with our overall company performance for the quarter. Accordingly, we are adjusting our full year guidance to reflect our second quarter underperformance and building more conservative estimates for the second half of 2013.

For our total sales growth, we are now expecting 1.5% to 2%. And for same-store sales, we're expecting negative 2.75% to negative 2.25%. For adjusted EBITDA, we are expecting $175 million to $180 million, and for adjusted EBITDA margin, 4.4% of 4.5%. For diluted earnings per share, we are now expecting $0.77 to $0.83 per share. Interest expense, income tax rate, capital expenditures, all remain the same.

As Bob stated, there were a number of factors contributing to our same-store sales decline for the quarter. However, our customer-centric initiatives remain on track. Perishables and Own Brand continue to set records, the Milwaukee renewal project is gaining traction, and we anticipate an improvement in sales and EBITDA numbers for those 69 stores in 2014. Additionally, our Mariano's banner continues to exceed our sales and profitability expectations as we continue forward with our growth strategy.

That concludes my comments, and at this time, we'd like to open up the call for questions. Holly?

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Scott Mushkin with Wolfe Research.

Scott Andrew Mushkin - Wolfe Research, LLC

So I guess, we got a tale of 2 companies here, Bob, to some degree and Darren. And I was just wondering, as you look out, when is there enough critical mass maybe to do something about that, I suppose? I mean, we've all seen what's going on in the marketplace with formats like Mariano's and so I kind of wanted to inquire about that. And then the second issue is just on Walmart. Some of our research is showing that perhaps you guys are at the pinnacle of what you're going to see from them and I wondered if you had any thoughts around there. And I had maybe one additional follow-up, if I have time.

Darren W. Karst

Sure. With respect to Chicago, as we said, we're very happy with the progress we've been able to make so far. It's been 3 years, and I think the team has done a pretty remarkable job in what we've all been able to accomplish there and certainly much more to do. With that said, we're very focused. We have 2 more stores opened this year, 5 more next year. That's the plan supported by the capital plan. And any decision to do anything with Mariano's structurally would be at the table for the Board of Directors to consider. So I will -- we're very focused on executing our growth plan and delivering the kind of results so far today that we've been able to deliver. With respect to Walmart, I mean, my sense of it is that end of the spectrum is getting a little crowded. With Walmart, Target, Family Dollar, Family Dollar General, ALDI, that everybody chasing that end is getting a little more crowded, and so I think it's going to become tougher over time. And the other thing, my opinion in this marketplace, they've built a fair amount of square foot capacity not supported by population, so I just, when I look at additional square footage and people, I'm hard pressed from a site basis to rationalize it. So it may be, but they still remain formidable, and we take them seriously like we do -- like all other competitors. And we'll have -- time will tell how well they fair.

Scott Andrew Mushkin - Wolfe Research, LLC

Okay. My follow-up question and then I'll yield is, I just don't understand the margin structure, Darren. As I look at it, such -- with the gross margins going up a little bit and then deleveraging. But I guess, I get the deleveraging, but just wondered if you can give us a little bit more there to kind of help me understand a little bit better what was going on inside the operating margin.

Darren W. Karst

Sure. Yes, I mean, you're right. The gross margin was relatively flat, a little bit up from last year. I mean, one thing I think you have to understand is the margin structure at Mariano's is a little bit different. It has a little bit -- it actually has about -- it has comparable margins, gross margins, but that's really driven by the high perishable mix. It has a little bit higher operating expenses because of the rent. But a significant amount of the change in the operating expenses was really in the core markets where we were not able to leverage our fixed expenses as well with the lower sales base.

Operator

The next question comes from Peter Benedict with Robert W. Baird.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

A couple of questions. First, just on the second quarter impact with calendar shift and the generics. Can you split those 2? I think, combined, they're 190 basis points; was the calendar shift, about 150?. I think that's what you thought it would be, but just can you break those out?

Darren W. Karst

Yes, Peter, that's right. It's about 150 and the generics, about 40.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

All right, perfect. And how about, like, as we think of the our third quarter, things are balanced. You said the July 4 stuff slides in. As I think about 3Q and 4Q, are there any calendar shift impacts that we should be aware of?

Darren W. Karst

There isn't other than the 4th of July, which is about 30 basis points of that 150.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Okay, perfect. How was the inflation picture in grocery? I think, if my numbers are right, it was around 1% in the first quarter. Year-over-year, is that -- that was -- did that persist in the second quarter or that did moderate?

Robert A. Mariano

I would tell you it's pretty flat. There hasn't been much inflation in the grocery categories, which has largely been driven over the last several years because CPGs have downsized their packaging, kept cost the same and retails have stayed the same. So rather than keep the same size packaging, increase the retail -- you increase cost, which would lead to increased retail. They've lessened what's in the package.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Got you. Understood. And then last question. I guess in terms of lease terms, you guess that were 3 stores where leases had come up and you decided to close them. How do the lease terms look going forward, balance of this year into next year, can you give us a sense of maybe how many come up? Obviously, that's not a statement. And how many of them are not closed? I'm just curious.

Darren W. Karst

Yes. I mean, we're always of course looking at that whenever there's a store that's not strategically important to us anymore and leases are coming up. It's sort of a decision we make. I would say -- that said, I would say there's a couple of stores like that probably over the next 12 months that we'll continue to evaluate and make those kind of decisions.

Operator

Next question comes from Ken Goldman from JPMC.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Bob, I just wanted to follow up on the line of questioning, and forgive my directness here, but you are the Chairman, right? You're the CEO and you're a front-page shareholder of your company. If a viable attractive deal came along right now for the core assets, right, x Mariano's, one that would allow you to personally stay with the growth side with the one that's your namesake, Mariano's banner, what would be the reason at this point, given some of the ups and downs and unpredictability of the Wisconsin business, not to vote yes?

Robert A. Mariano

Well, I mean, you painted a wonderful picture but the reality is, that there's no such offer in front of the board to have it considered. So I mean, it's hypothetical. And -- I mean, if it would come to reality, the board would sit down and give it its proper consideration. How I may or may not vote, I'll keep that to myself, but I think that's just isn't something that's been presented to us to this date.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

That is helpful, though. And then one other question. I got the impression on the last couple of calls that maybe visibility was improving into some of your competitive openings and activity. What happened, in your view, that was maybe the biggest difference between what you internally had seen and what maybe happened that was a difference on a competitive level? What was it, pricing? Was it more stores opening? Was it a quicker store pace opening? What did you see, in your mind, that was maybe the biggest driver there?

Robert A. Mariano

Well, first of all, the number was what we expected. So the number of competitive openings were as we anticipated. The type of store that opened was not a surprise. I would say our assessment is the 2 supercenters and the other conventional that was a Hy-Vee opened to less than results that they like. The reason we say that, because we look at their promotional plan and was subsequently more aggressive than typical. For example, the Walmart supercenter is sending out gift cards to people to come in and shop in their new stores. And Hy-Vee in Madison has been very aggressive in their programming with these last several weeks. So I think they're not getting the kind of performance that they would've anticipated in the new stores. So I think that's a piece of it. And then, frankly, we've attacked these new stores a little differently and we have been able to at least initially soften some of the impact on some of the surrounding stores, but this quarter was a particularly hard quarter on a number of our stores with competitive openings.

Operator

Next question comes from Edward Kelly with Crédit Suisse.

Judah Frommer

It's actually Judah on for Ed Kelly. I wanted to ask, you mentioned around the gross margin and you pulled back a little bit on promotions and pricing. I mean, are we wrong in that pricing were going to be -- was going to be an area that you were looking into potentially investing in price maybe over the next few months? And has that changed going forward?

Robert A. Mariano

No. I mean, I've -- no, it hasn't. So to answer you directly, no, it hasn't. And I think we continue to evolve how we choose to invest in price. I would characterize the pullback in more on the promotional side. And we've talked about this on other quarter calls. Sometimes, we get a little over our skis and sometimes we get a little bit behind. And I would tell you, if I kind of look back and said if I -- would I have been a little more aggressive in quarter 2 than we were, I think the answer to that question is yes. But that said, we got to be very mindful of our bottom line and what's the effect on the top line. Now on a go-forward basis, we'll have -- we're starting to get a little better visibility as we look at our customer segmentation. And looking at our segments of platinum, gold, bronze and silver and the products that they buy and how much they do buy, we can be more surgical in how we do our pricing, our assortment, our promotion, et cetera. And I think we have just -- we're just seeing some of that information coming to us where we can start to test it in the marketplace and more to follow on that.

Operator

The next question comes from Andrew Wolf with BB&T Capital Markets.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Can you -- Bob, can you kind of guesstimate maybe what the weather impact might have been on sales? Like, looking at bad weather weeks and...

Robert A. Mariano

Our sense to that, Andy, is 60 basis points.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. That's in addition to the 240 you called out?

Robert A. Mariano

Yes. Because when you look at categories like carbonated beverage, beer, fresh beef, it's -- you can see it when you look over year-on-year comparison in the product.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. And then on pulling back on the promotions as you just described, I guess, I'm not the only one who was a little surprised. But when the weather is bad and the customers aren't coming necessarily and new doors are opening like you described with Hy-Vee and Walmart and they're not getting what they want, I mean, did the merchandisers and did you guys just look and say, "Hey, the customer is just not there?" So was there sort of that reaction to it? Or was it sort of just that's how the plan came out for this quarter?

Robert A. Mariano

No, I would tell you, we would -- we certainly go into a quarter with a plan, but we adjust it as we see the reaction to the customer. So I mean, it was just that type of quarter. It wasn't that we said, here's the plan, to hell with it, this is the outcome and that's the way it is. I mean, to the extent possible, we did adjust where we could. But I would tell you, with minimal impact on the overall numbers. So the consumer demand, at least from what we can see in our core markets, is not robust yet. And honestly, you've got more square footage chasing fewer dollars.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Absolutely, you can see that. And you don't -- I mean, I've asked you this every call, but is there any indication of other operators taking capacity up?

Robert A. Mariano

Not -- I think everybody is trying to fight for every dollar they can get right now. So I mean to tell you, if we hear anything about anybody leaving the marketplace, we would know it. You would know it as soon when we knew it.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. And I guess, the last question is more -- probably more for Darren. On the revised guidance, the inflation staying low where it is. You said flat and pretty low, around 1%, I think. Was any other reduction in same-store sales and the EBITDA related to bringing down your assumption in the back half for what you expect inflation to be? Or is it all pretty much sort of on the traffic side -- traffic ticket?

Darren W. Karst

It's a little of both, but certainly, we consider -- I think we were expecting a little more inflation in the numbers in the back half of the year than what I think the way the land looks today. So we made some adjustments for that.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. And just on -- I mean, I'm sure this is -- you've intimated this a lot, but is the -- all EBITDA reduction is in the core business, not at the Mariano's banner?

Darren W. Karst

That is correct.

Operator

Karen Short with Deutsche Bank.

Karen F. Short - BMO Capital Markets U.S.

Just a couple more questions on the comp, I guess. You've -- I mean, you've indicated in the past that the competitive openings this year are going to be much more heavily weighted to the second half. And given what we've already seen so far, that seems to be the case. I guess, I'm wondering if your comp guidance seems a little optimistic, if you're going to be feeling a lot more pressure in the back half. Maybe a little color there.

Darren W. Karst

Yes. It actually is -- yes, I'm not sure what you were referring to in terms of our viewpoint on the back-half guidance before, but in fact, I would say the competitive impacts are a little bit stronger in the first half, a little bit less in the back half. Particularly in the fourth quarter, it's lighter. So that really is, I think, sort of the way we see it in terms of competition.

Karen F. Short - BMO Capital Markets U.S.

Okay. And within your comp guidance for the year, just to clarify, are you using adjusted same-store sales or actual same-store sales for the first and second quarter in your -- within your guidance? So are you using point -- negative 0.8 in the first quarter and 3.9 negative...

Darren W. Karst

You mean, adjusted for the holiday shift?

Karen F. Short - BMO Capital Markets U.S.

Shift, yes.

Darren W. Karst

I think that the annual numbers don't have any adjustments for holiday shifts. It's just the actual number.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then wondering if you could talk -- just give us an update on where you stand, maybe with the outsourcing of the inbound transportation.

Robert A. Mariano

That, we had to cease the relationship with the third party. They were not able to provide the services that we had bargained for. Frankly, the issue was the hauling of produce from the West Coast was far more complex than they had ever thought it would be. So we've wound that relationship down and we're in the process of rebuilding it on our own. We're about halfway where we want to be in terms of the cost savings. So the team is working diligently to deliver the cost savings on our own. That said, do we still look for a third party to help us manage this more effectively? The answer is yes, have not yet found that partner, Karen.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then my last question is just on the test stores in Milwaukee. If you said this, I missed it. Are the comps positive at those stores?

Robert A. Mariano

No, they're better than the core, but they're not positive yet.

Operator

I am showing no further questions.

Robert A. Mariano

Okay, Holly, thank you. I'd like to thank everybody for your participation today. I would just like to take a moment to thank all of our employees, trading partners, our shareholders, and most importantly, our customers for all of their support. We appreciate your interest in Roundy's and look forward to sharing our progress with you next quarter. Thank you, everybody.

Operator

Thank you. This does conclude the conference. You may disconnect at this time.

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Source: Roundy's Management Discusses Q2 2013 Results - Earnings Call Transcript
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