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Spartan Stores (NASDAQ:SPTN)

Q3 2014 Earnings Call

March 06, 2014 9:00 am ET

Executives

Katie M. Turner - Managing Director

Dennis Eidson - Chief Executive Officer, President and Director

David M. Staples - Chief Financial Officer and Executive Vice President

Analysts

Charles Edward Cerankosky - Northcoast Research

Scott Andrew Mushkin - Wolfe Research, LLC

Karen F. Short - Deutsche Bank AG, Research Division

Operator

Good morning, and welcome to the SpartanNash Company's Third Quarter and Fiscal Year Transition Year Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Katie Turner. Please, go ahead.

Katie M. Turner

Thank you. Good morning, and welcome to SpartanNash Company's Third Quarter and Fiscal 2013 Transition Year Earnings Conference Call. By now, everyone should have access to the earnings release for the 15-week, third quarter and 39-week period ended December 28, 2013, which we refer to as the transition period. The transition period reflects the previously announced change in SpartanNash's fiscal year end from the last Saturday in March to the Saturday closest to December 31. For a copy of the release, please visit SpartanNash website at www.spartannash.com under For Investors. The call is being recorded and a replay will be available on the company's website for approximately 10 days.

Before we begin, we'd like to remind everyone, comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external 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 risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the company's third quarter and fiscal 2013 transition period earnings release, fiscal and annual report on Form 10-K and in the company's other filings with the SEC.

Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention, obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP metrics and comparable period measures, including or excluding the extra week last year, to provide investors with useful information about the company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and the other information required by Regulation G is included in the company's earnings release, which was issued after market closed yesterday.

And it's now my pleasure to introduce Mr. Dennis Eidson, President and CEO of SpartanNash Company, for opening remarks.

Dennis Eidson

Thanks, Katie. Good morning, and thank you for joining our Third Quarter and Fiscal '13 Transition Year Earnings Conference Call. With me this morning are Dave Staples, our EVP and Chief Financial Officer; as well as other members of our executive team. Today, I'll begin by providing you with a brief overview of our business and highlights of our financial performance for the third quarter, and then Dave will share some additional detail about the third quarter financial results and give our outlook for fiscal '14. Finally, I'll provide some closing remarks and we'll open up the call and take some questions.

Our third quarter results reflect a significant increase in sales and adjusted earnings driven by a recent combination with Nash Finch, which closed on November 19, and strong results in our Spartan Stores legacy business. We achieved top line growth in both our retail and distribution legacy operations when excluding the extra week in last year's third quarter. We believe our favorable results are a testament to the strength of our management team and associates and our ability to deliver continued value and quality to our customers while in the midst of a tremendous transformation for our company. We're excited to begin the next phase of SpartanNash's development, which I'll talk about in a few more minutes. But first, I'd like to review or segment results.

Net sales in our distribution segment show significant growth on a comparable 15-week basis, due mainly to the sales contributions from Nash Finch and a 4.3% increase in our legacy operations due primarily to new business gains.

We continue to focus on improving efficiency and accuracy in our distribution business, and by the end of the year we completed the implementation of 6 automated guided vehicles. These vehicles are focused on product storage, and we've been encouraged by the initial results. Additionally, in February, we consolidated the operations of our Cincinnati, Ohio warehouse into the Lima, Ohio facility. We expect this to result in improved service to our customer base as we increase the product assortment and churns, as well as efficiency improvement for the operations. As a large, more efficient organization, we look forward to maximizing our efficiencies and providing our distribution customers with market-leading products and best-in-class services.

Net sales in our retail segment on a comparable 15-week basis increased nicely due to the merger and our legacy retail operations posted a 3.5% increase in sales due in part to the previously disclosed acquisition of a grocery store and fuel center in the prior year's third quarter and positive comp store sales of 0.7%. These benefits were partially offset by $2.7 million and fewer sales due to the closure of certain stores.

We continue to refine our YES Rewards program and leverage our pharmacy and fuel offerings as value-added rewards for our consumers in the legacy retail operations. As a result of these efforts, our Spartan Stores legacy pharmacies posted a 2.5% increase in comps script count for the quarter. We're also excited about the opportunity to introduce our loyalty, pharmacy and fuel programs at our new store locations over the next several years as we complete remodel and re-merchandising efforts, and we'll share more about these plans on our next call.

Currently, none of our new 77 retail locations cover rewards program, and we believe there is meaningful potential to further engage the consumer and encourage brand loyalty. In order to continue the evolution of our consumer-centric business model, we recently entered into an agreement with a loyalty management company to help leverage and further develop our analytic capabilities and provide customers with an even more relevant and personalized shopping experience.

On the product side, we continue to expand our private brand program for both our distribution and our retail customers. During the third quarter, we launched approximately 100 new legacy private brand items for a total of more than 370 new items year-to-date.

We also added approximately 3,900 private brand items to our portfolio through the merger with Nash Finch. For fiscal '14, we expect to continue to build on our premier private brand program and introduced approximately 500 new items.

Before I discuss our capital plan for '14, I'd like to briefly highlight our new Military segment. For those not familiar with this industry, it's one we're very proud to be a part of, and one we remain fully committed to as we cannot think of a better purpose than serving our nation's military heroes and their families.

Through this business, we distribute supermarket products to commissaries here and abroad, as well as exchanges across the nation on behalf of consumer product manufacturing partners. In order to further enhance the performance of these operations during fiscal '14, we plan to complete a major expansion of one of our military distribution centers, which will increase our geographic reach and product assortment while improving operational efficiencies.

Moving onto our capital plan. During the third quarter, we completed 5 minor remodels and store re-banners of Glen's Locations to our Family Fare brand. We also acquired 2 stores in North Dakota and closed 7 underperforming supermarkets, ending the fiscal 2000 transition year with 172 stores and 30 fuel centers.

During fiscal '14, we plan to complete 10 major remodels and 5 minor remodels. We also plan to complete 16 store re-banners, build 2 fuel centers, begin construction on 2 new stores in markets with attractive growth profiles and expand one of our military distribution centers.

Going forward, we'll continue to evaluate our entire store base to ensure that our locations move up to the brand promise to the consumer and deliver the profitability that we require. As a result, we believe it is possible that up to 10 stores may be closed over the course of the year. As we look forward, we're energized about what the combined SpartanNash can achieve. Our management team is in good place and our integration activities are well underway. We are making excellent progress in combining our retail, food distribution and military distribution businesses. We continue to expect synergies of approximately $20 million, $35 million and $52 million in fiscal years 2014, '15 and '16, respectively.

And integration and transaction costs -- transaction closing related costs of approximately $12 million, $5 million and $2 million in fiscal years '14, '15, and '16, respectively. Additionally, we expect to incur $10 million annually in depreciation and amortization expense related to the step up in Nash Finch assets and merger-related changes to our stock compensation plan.

And with that overview, I'm going to turn the call over for Dave -- to Dave for more details on our financial results and the outlook for '14.

David M. Staples

Thank you, Dennis. And good morning, everyone. As you are aware, we are reporting the current year third quarter and transition period ended December 28, 2013, which reflects the change in our fiscal year from the last Saturday in March to the Saturday closest to December 31.

As a result, the third quarter included 15 weeks and the transition period included 39 weeks, compared to 16 weeks and 40 weeks, respectively, in the prior year.

To provide a better measure of our business trends, I'll be discussing our third quarter and fiscal 2013 transition year financial results on an adjusted and comparable 15-week and 39-week basis, except where noted. Thus, adjusted results will not include the extra week from last year, which accounted for $46.1 million in sales, $27.3 million of those at retail and $18.9 million at food distribution; $800,000 in operating profit, $300,000 of which was of retail $500,000 of which was distribution; and $800,000 in EBITDA, $300,000 of that was at retail and $500,000 at distribution.

Additionally, these results will exclude charges related to the merger, asset impairment and restructuring, debt extinguishment and other nonrecurring and noncash expenses, as well as a gain on asset sales in the current year.

The prior-year adjusted earnings exclude a debt extinguishment charge and acquisition-related professional fees. The third quarter earnings press release includes a table that provides more detail on these items. In addition, our financial results include approximately 6 weeks of contributions from Nash Finch following the merger and I will call out these contributions as I discuss our results.

It is important to note that the 6 weeks do not represent a true run rate, as they include the traditional year end for Nash Finch, as well as both the Thanksgiving and Christmas holidays, which provide incremental volume and higher profitability levels than the normal 6-week period.

On a comparable 15-week basis, consolidated net sales increased 79.5% to $1.3 billion, compared to $743.7 million in the year-ago quarter. The increase was due to $563.2 million in sales from Nash Finch, a comparable store sales increase of 0.7% in our legacy stores, and sales to new distribution customers. Excluding the impact of the extra week last year and contributions from the merger, consolidated net sales in our legacy Spartan Stores business would have increased approximately 3.8%. Food distribution and fuel sales represented 44.2%, and 7.1%, respectively, at consolidated net sales in our legacy Spartan Stores business, compared to 44% and 7.3%, respectively, last year. With the addition of Nash Finch, distribution fuel and military sales represented 42.4%, 4.2% and 18.6% of consolidated net sales, respectively.

On a comparable 15-week basis, consolidated gross profit margin for the third quarter was 16.9% compared to 20.4% in the prior year due to the shift in the sales mix between divisions as a result of the merger and the impact of continued low inflation. On a comparable 15-week basis, third quarter adjusted operating expenses were $202.6 million or 15.2% of net sales, compared to $140.3 million or 18.9% of net sales last year. The decrease in rate was primarily due to the shift in the sales mix between divisions and improved expense leverage on increased sales, partially offset by higher incentive compensation and depreciation and amortization expense. These results exclude $15.5 million in expenses related to the merger with Nash Finch, $14.7 million in asset impairment and restructuring charges, $4.8 million in expenses related to modifications to our stock compensation plan and pension settlement accounting and a $1 million gain on asset sales in the current year's third quarter, and $0.4 million in acquisition-related professional fees in the prior-year third quarter.

On a comparable 15-week basis, adjusted EBITDA for the third quarter was $41.6 million or 3.1% of net sales compared to $24.3 million or 3.3% of net sales last year. Excluding the impact of the extra week last year and $15.8 million in contributions from the merger, adjusted EBITDA in our legacy Spartan Stores business would have increased approximately 6.2%.

On a comparable 15-week basis, adjusted earnings from continuing operations for the third quarter were $11.1 million or $0.40 per diluted share, compared to $4.9 million or $0.22 per diluted share last year. These results excluded a number of onetime and unusual expenses including expenses related to the merger of $0.42 per diluted share, asset impairment restructuring charges for underperforming and closed stores, and land held future development of $0.33 per diluted share, debt extinguishment charges due to merger-related financing of $0.12 per diluted share, an after-tax charge for modification is in the company's stock compensation plan of $0.09 per diluted share, pension settlement charges of $0.01 per diluted share. These were partially offset by a gain on sales of assets of $0.02 per diluted share and certain nonrecurring tax benefits of $0.06 per diluted share.

For the prior-year third quarter, adjusted earnings from continuing operations exclude the debt extinguishment charge of $0.07 per diluted share and acquisition-related professional fees of $0.01 per diluted share.

Turning to our operating segments. In our Distribution segment, on a comparable 15-week basis, third quarter adjusted net sales for the distribution segment were $565.8 million compared to $327.2 million in the year-ago quarter. The increase in sales was due to $224.6 million in sales from Nash Finch and new business gains. Excluding the impact of the extra week last year and contributions from Nash Finch, net sales for our legacy distribution operations increased approximately 4.3%.

On a comparable 15-week basis, third quarter operating earnings for the distribution segment were $16.1 million, when adjusted to exclude $20.5 million in expenses related to the merger, asset impairment and restructuring and stock compensation and pension settlement accounting versus $9 million last year. Excluding the impact of the extra week last year and contributions from Nash Finch, adjusted operating earnings for our legacy distribution operations increased approximately 20%.

In our retail segment on a comparable 15-week basis, third quarter net sales were $520.9 million compared to $416.5 million last year. The increase in sales was due to $90 million in sales from Nash Finch, as well as last year's acquisition of a grocery store and fuel center, and positive comparable store sales, partially offset by $2.7 million in fewer sales due to the closure of certain stores.

Comparable store sales excluding fuel increased 0.7% for our legacy Spartan Stores retail operations. Excluding the impact of the extra week last year and contributions from the merger, net sales for our legacy retail operations increased approximately 3.5%. On a comparable 15-week basis, Retail segment operating earnings for the quarter were $3.4 million. When adjusted to exclude $13.4 million in expenses related to merger, asset impairment, restructuring, stock compensation, modification, pension settlement accounting and a gain on asset sales versus $2.2 million last year in excluding the professional fees of $0.4 million.

The improvement in adjusted operating earnings was due to our merged retail operations.

In our Military segment, third quarter net sales were $248.6 million, and operating earnings were $3.2 million. As a reminder, this represents 6 weeks of operation. From a cash flow perspective, our current year-to-date period operating cash flow was $64.8 million compared to $27.3 million for comparable period last year. Increase was primarily due to the impact of the merger, which added $22 million in cash flow. Total net long-term debt was $595.7 million as of December 28, 2013, versus $162 million at the end of the third quarter last year, due to the incurrence of $436.1 million in debt as a result of the merger and the acquisition of 2 supermarkets, offset by the positive cash flow from operations.

As previously announced, in conjunction with the merger, we entered into a $1 billion amended and restated senior secured credit facility. We use part of the proceeds to repay our and Nash Finch's existing credit facilities, and the remainder will provide working capital and funds for general corporate purposes.

Now, to briefly review the fiscal 2013 transition period results. On a comparable 39-week basis, consolidated net sales increased 31.9% to $2.6 billion compared to $2 billion last year. Comparable store sales for our legacy retail operations, excluding fuel, decreased 0.6%. Adjusted EBITDA for the transition period was $97.3 million compared to $75.9 million last year, on a comparable 39-week basis. The merger contributed an additional $563.2 million to sales and $15.8 million to adjusted EBITDA and the extra week last year accounted for an additional $46.1 million in sales and $800,000 of adjusted EBITDA.

Excluding the impact of the extra week last year and contributions from Nash Finch, consolidated net sales increased approximately 3.3% and adjusted EBITDA increased approximately 7.4%. I will now provide further detail on our outlook for the 53-week fiscal 2014.

Given expectations for a modest improvement in the economy and a lack of inflation, we are cautiously optimistic about fiscal 2014. While we will continue to benefit significantly from the merger with Nash Finch, we expect that the reduction in SNAP benefits, to cycling a very favorable LIFO, insurance and employee benefit expense in the prior-year first quarter, and a more challenging, competitive retail environment will create a negative headwind on our results. As Dennis noted earlier, we expect to address these headwinds with our robust capital plan and operational initiatives, which will allow us to create positive momentum for the merged organization.

As a result, for the 16-week first quarter of fiscal 2014, we expect consolidated net sale to increase to between $2.3 billion and $2.34 billion as we benefit from the merger with Nash Finch, partially offset by the impact of store closures. We also expect that retail comparable store sales will be positive in our Legacy Retail segment for the third consecutive quarter. We anticipate adjusted EBITDA for the first quarter of fiscal 2014 will be in the range of $62.5 million to $66.5 million and adjusted earnings per diluted share from continuing operations will be in the range of $0.33 to $0.38 per share, based on approximately 37.7 million shares outstanding.

Our adjusted earnings guidance includes approximately $3.8 million in after-tax merger synergy benefits and $2.8 million in after-tax incremental depreciation and amortization expense related to the step-up in basis of the Nash Finch assets and stock compensation expense related to amendments to the company stock compensation plan.

Our adjusted earnings guidance excludes approximately $3.4 million in after-tax integration expense, and $1.3 million in after-tax restructuring charges associated with store closures and the closure of the Cincinnati, Ohio distribution center.

On a full year 53-week basis, we expect fiscal 2014 consolidated net sales to increase to between $7.9 billion and $8.04 billion, adjusted EBITDA to be in the range of $230 million to $239 million and adjusted earnings per share from continuing operations to be between $1.65 and $1.75. Excluding integration costs of approximately $7.4 million after-tax and other impairment and onetime expenses, these results will be accretive to the trailing 13 period earnings for Spartan Stores on a standalone basis.

In addition, we expect reported retail comparable store sales will be positive for the year. However, total sales will be negatively impacted by approximately $50 million resulting from the store closures occurring in the third quarter of the transition period. We expect that capital expenditures for fiscal year 2014 will be in the range of $77 million to $82 million with depreciation and amortization in the range of $89 million to $93 million and total interest expense in the range of $26 million to $28 million.

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

Dennis Eidson

Well, in summary, we're really pleased for our third quarter performance, both in our legacy Spartan Stores business and the few short weeks of the Nash Finch's operations. We anticipated some headwinds in fiscal '14. We're excited about what the merger will provide to the organization. We also expect that we'll begin to see meaningful synergies from the merger as the year progresses. Our driving focus will be to leverage our increased skill, geographic reach and complementary business segments, and we look forward to delivering to our customers, shareholders and employees the significant benefits of a larger, stronger company.

And with that, we'll open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chuck Cerankosky from Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

Can you talk about what the lovely winter weather did for you in your Michigan stores, first, and then how it affected the entire SpartanNash operations? And then I have a question after that. Thanks.

Dennis Eidson

You referred to the winter weather as if it's past tense. I'm looking out of the window and that's not the case. It's we're still enjoying winter. I would say that the first part of your question, it probably helped our retail business in Michigan, the storms that came were forecasted and we typically get a bump from that and we're pretty adept in Michigan about clearing the snow. So I'd say on balance, it was a benefit to our business. And the balance of the business, it probably didn't play out exactly that way. Some of those storms made it extremely difficult to move goods. We had roads closed, some in Ohio in the Upper Midwest, we had some difficulty, wreaked some havoc with the MDV business with the snow storms down there in the Southeast. They're not particularly adept at getting the snow off the ground in places like Virginia. So I would say it was a bit of a mixed bag.

Charles Edward Cerankosky - Northcoast Research

How about retail operations, specifically in Michigan's northern tier, where you have the skiing and snowmobiling and all that good stuff?

Dennis Eidson

Clearly, we benefited. That snowmobile customer -- for those who aren't too familiar, what happens in Northern Michigan is really important to our run rate up there. So it was a help, and as Dave pointed to in his remarks, this will be the third consecutive quarter of positive comps as we're forecasting Q1 is going to be positive. So 3 in a row feels good, 4 out of 5 feels good or we feel a little bit better about life in that regard.

Charles Edward Cerankosky - Northcoast Research

Okay. And Dave, I think you usually talk about private label penetration, can you give us an update on that at the legacy Spartan Stores and what it might be for the overall company in comparison?

Dennis Eidson

Let me take a whack at that. We're not totally conformed with getting the legacy Nash numbers bolted onto the Spartan numbers. So I can give you the Spartan performance in Q3 and we're pretty aggressive with private brand in Q3. We have a big private brand sale every third quarter. The unit penetration on our retail stores was 26.2%, and the national average for the quarter was 23.8%. So we were nicely positive. But that typically does happen in Q3 for us because of the promotional schedule. On a year-to-date basis, that penetration in Spartan retail is 24.4% versus a national average of 23.4%; so we still have that about 1% delta versus donation. What we know about the Nash business, is it's a little bit softer and legacy -- or on the Nash retail side than the Spartan retail side. But it's greater than 22% and I'm not sure we're counting it exactly the same way. We are going to get better with that going forward, Chuck. But private brand continues to be a strategic component of our go-to market offer both on the retail and the distribution side of the business.

Operator

The next question comes from Scott Mushkin with Wolfe Research.

Scott Andrew Mushkin - Wolfe Research, LLC

I had a few questions here. One it's a little bit of housekeeping -- 2 housekeeping items, really. Or a number of items. Extra week, I think we have a 53-week year coming up. What is that adding to EBITDA in the guidance?

David M. Staples

It adds about $3.5 million to $4 million at EBITDA, about $140-ish million in sales, give or take.

Scott Andrew Mushkin - Wolfe Research, LLC

Thank you. And then this is really about the CapEx, I mean your DNA is above your CapEx level. I was just wondering what you guys think you're going to need to spend as you go forward, and obviously give us guidance for this year, is that a good template for what the spending will be like, you're going to need to ramp it up a little bit or how should we look at the CapEx versus kind of the G&A overtime?

Dennis Eidson

I think barring any significant matters that we would need to address, I think this is a reasonable run rate for the next few years. I think what you'll see is a shifting of that expenditure, probably from the Michigan retail market into the Western and Upper Midwestern retail markets as we progress through that timeline. I think we feel that this is a pretty solid level of to spend at and that we can accomplish the majority of the things that we feel need to be done with that.

Scott Andrew Mushkin - Wolfe Research, LLC

And do you think that the D&A actually starts to trend down then, it stars to kind of -- because right now, it's above. And it's kind of a silly question, do you think it does trend down over time?

Dennis Eidson

Yes, it'll trend down over time. And I think what you see -- one of the reason we get a big step, right, Scott? Is that fair value accounting, we had to do with the merger. So even though that's a merger from an accounting perspective, you have to go through acquisition accounting, which requires that all the assets of the Nash Finch energy to be revalued to fair value, and that's a $7.5 million increase.

Scott Andrew Mushkin - Wolfe Research, LLC

All right. So then, out of the weeds a little bit, number one, I think you guys mentioned you closed some stores, and I just wonder as to why? And then I wanted to talk strategies and maybe we can talk about store closures then maybe go, maybe come back with one more quick strategy question and I'll open it back up to other people.

Dennis Eidson

What I mean with store closures, right? We're always evaluating our portfolio stores and we look at numerous, I guess, dynamics, as we do that. How do they represent us with the consumer? What are the incremental investments that would be required to either bring that store to the level to interact with the consumer we want or to continue to interact at how it's working? And then, how profitable is it? And what market is it serving and where do we stand in that market and what's the potential to change all those dynamics? And so it's a process we consistently go through. I think with the merger, it's a process that we took an even harder look possibly than we have in the best. And then we decided there were a number of locations that just didn't warrant, based on those parameters, to continue to be open. And so we took action. Or as we talked in the release, we're also going to continue that focus as we move forward and there could be up to an additional 10 closures in that current year. So that's something we're going to be diligent on, and some we have been in the past diligent on and it's just a normal outcropping of that work.

Scott Andrew Mushkin - Wolfe Research, LLC

And was there any particular area or place, maybe it was in the release and I didn't see it, that the closures are coming from, or is it kind of scattered?

Dennis Eidson

It will be, I think, reasonably scattered.

Operator

Your next question comes from Karen Short with Deutsche Bank.

Karen F. Short - Deutsche Bank AG, Research Division

Just wondering, maybe can you talk a little bit about what you think like the biggest risks going forward on the integration? I mean, I know you're kind of making progress, but any color on what you -- we should look for in terms of areas of concern?

Dennis Eidson

Karen, as you would well expect, we spent a lot of time and effort putting together what we think is a pretty tight integration plan, more than pretty tight. There are always risks, and I guess when I look at the biggest opportunity for us to have risks, that's probably more on the cultural side and not because I sense that there's a problem there. In fact, it's just the opposite. We had some help with outside resources and they said they were surprised at how similar to the cultures of the company are. But there's a lot of change is going to go on, and we're going to move departments from Minneapolis to Grand Rapids and some from Grand Rapids to Minneapolis and the people piece is always near and dear to my heart. So my antennae is up there and we're really working hard with communication to make sure that our associates feel engaged, distribution customers understand what's going on every step of the way, but the balance of it -- the integrating of the systems, I think, is going great. I think we are probably a little bit ahead of the plan and the milestones that we have in place, and I'm not expecting that we're going to see any slippage whatsoever.

Karen F. Short - Deutsche Bank AG, Research Division

Okay, that's helpful. And then just turning to your comps this quarter, and expectations going forward. If you said this I didn't catch it, but can you maybe talk a little bit about the impact of the reduction in EBT and then also inflation in terms of how it impacted your comps?

Dennis Eidson

Sure. The EBT, as you know, at November 1, is when the Recovery Act expired and there was that $5 billion that came out of the funding nationally, which is 6.6%, 6.7% and because we have the ability to track individual consumers in our retail space, we can see about a 7% reduction in spending from EBT customers. Some of that has been made up with their own money. We can see that as well, but not all. So I know, Karen, you specifically did some work on the subject, and 7% to 8% of our business being EBT, I think your conclusion is we completed 23 to as high as 40 point comp impact. Our job is to keep those customers shopping at our stores whether they have EBT or not. And so from that perspective, I think we feel very good about the 0.7%, especially being in Michigan. And also the fact that we're on a 16-week quarter, we're halfway through and we're clearly confident that we're going to have positive comps in Quarter 1. The other thing that's of note, is there are people falling off the food stamp rolls, as well. The peak for that was March of '11 and the great increase in food stamps across the country is now actually going from growing to flat to now somewhat negative. So we're getting folks fall off the food stamp roll, so that's also impacting the number of food stamps that we're getting. The inflation piece has been interesting as well and we called that out in the third quarter on the distribution side of the house where, again, we try to pretty robustly buy in bulk, we actually went deflationary in Q3. The only category that we experienced inflation in was proteins and meat, and it was pretty significantly inflationary in some categories. Everything else, including center store, we flipped to deflation.

Karen F. Short - Deutsche Bank AG, Research Division

And now that's cost inflation, not retail?

Dennis Eidson

That's cost inflation, that's correct. And early in the new fiscal year, that deflation has actually accelerated for us. Now it's only 4 weeks of data, but the first 4 weeks were even softer than Q3, which was slightly deflationary. On the retail side of the business, our quarter was slightly deflationary as well. And that is where we found ourselves in Q2, really no material change there. And again, we're seeing the proteins having some strength, fresh produce was clearly very deflationary. So it's not, I think, food retailing's trend when there is a lack of inflation. The USDA continues to update their forecast and says, we're going to see 2.5 to 3.5 food at home inflation this year. I just -- I can't get there from here. I don't think we see necessarily in the tea leaves that we're going to be deflationary for the year. But I don't think we're going to get any robust inflation going forward.

Karen F. Short - Deutsche Bank AG, Research Division

Got it. And then just an update on the competitive environment in general?

Dennis Eidson

I think, as I'm looking at our landscape here and then what I'm able to read nationally, watching some of the Nielsen and IRI numbers, nobody's happy with tonnage. Tonnage in the space continues to be negative, all the major CPGs are struggling with tonnage. And when that happens, people stretch a little further to try and get that sale. And so I think we're feeling a little of that, it's harder to even take the proteins, it's harder to pass on the retail increase that when you would maybe historically have been able to see when you're getting that kind of increase. There have been, like dairy has been inflationary in some categories, milk is inflationary. We're basically trading dollars on milk every day. So that's not what has historically happened in the Michigan market. So we're feeling some pressures, I'd say, on margins. And that would be on both sides, the Nash retail and the Spartan retail.

Karen F. Short - Deutsche Bank AG, Research Division

Okay.

Operator

[Operator Instructions] Next, we have a follow-up question from Scott Mushkin with Wolfe Research.

Scott Andrew Mushkin - Wolfe Research, LLC

Guys, I want to -- 2 follow-ups. One is a following up on Karen's question on the inflation side. We've written that the wholesale prices are falling a little bit faster than the retail prices, so that's really helping a little bit, even though we're deflationary and I think Costco has talked about this as a little bit of a help. A, do you actually agreed with that it's helping your business? And then B, if we get this California drought, and we flip the producer pricing, particularly in produce and maybe some of the meat complexes, how concerned are you that we actually compress margins as we get into the May, June, and July, August time frame, where this benefit that you've been dealing with the producer price is falling a little faster actually becomes a headwind? Or is that not really a concern?

Dennis Eidson

I don't think that's a major concern at the moment. The produce thing, that's just the way produce works. We get hyperinflation and then you get deflation, and I think the market tends and retail tends to reflect produce pricing more quickly than any other category. And then so I think, what you're discussing is really about fresh produce, if we get that flip in availability. But aside from that, Scott, what I explained to you about our lack of inflation is what you just said, the wholesale side is falling a little faster than the retail and it adds to some margin compression and I think what I've seen -- there's been a little bit of that, yet we've still been able to balance that with productivity and perform pretty well. But I don't think there's anything significant about what we're seeing. That's why I said, I don't think we're going to be deflationary, I don't think we're going to be hyperinflationary. I think this will come back, it will ease back. And remember, the commodity costs tend to be a small percentage of that -- the end cost to the -- of a CPG item when it appears on the shelf, right? Lots of other variables drive that other than the wrong ingredient [ph].

Scott Andrew Mushkin - Wolfe Research, LLC

That's perfect. Then I have this as my strategy question. You guys obviously have your hands full kind of bringing these businesses together, and lots of synergies to mine, and everything like that. But I guess my thought process as we -- do you take it slow or 3 years, and I maybe asked this a little bit before, but you take us forward 3 years, you now have a much bigger footprint. What do you think of as your growth drivers if you're going to take this business from a kind of synergy cost perspective to a, okay, now we're going to grow it? How do you do it, what's your thought process now that you're distributing the driver's seat for a little bit?

Dennis Eidson

Well, the landscape is shifting so much, right? But I think it's actually a fair question. And we looked at the space premerger and everybody could sense there was going to be more consolidation. We're seeing it play out every day. So I think the space is going to continue to consolidate, Scott. I think being an $8 billion player today with a pretty wide geographic reach that we think we're well-positioned to be a consolidator going forward. So I'd say that's answer -- first part of the answer to the question. But beside that, we also think there are opportunities to grow the business organically, as well. And I think the opportunity with the kind of platform we have in place to service other classes of trade is a good example of that. And we enjoy some business like that today. We are actively working at mining other opportunities to do that. I think we talked about, maybe last call, the fact that the 20 DCs that we operate plus our partners at Coastal Pacific, have 4 DCs. We can cover the whole country with temperature state product in a pretty efficient way. It's something that we're very mindful of and we think is an area we can continue to grow the business. So I think there are also growth opportunities. It's also nice to see a marketplace like North Dakota where, as Dave pointed out, we bought 2 stores last quarter. We're going to build another store in North Dakota that's in Dickinson. Here's a marketplace where you've got significant population growth and oh, by the way, the unemployment rate is 2.6%. And it's nice to have in your portfolio, geography where you can actually build ground up and expand square footage because the demand is there. So we see opportunities like that, as well.

Operator

As there are no further questions, this concludes our question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

Dennis Eidson

Thanks, Gary. And that concludes SpartanNash's Third Quarter and Fiscal '13 Transition Year Call. We appreciate everybody's interest and look forward to speaking with all of you again next quarter. Thank you.

Operator

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

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