Roundy's' (RNDY) CEO Robert Mariano on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Roundy's Supermarkets, (RNDY)

Roundy's (NYSE:RNDY)

Q2 2014 Earnings Call

August 06, 2014 4:30 pm ET

Executives

James J. Hyland - Vice President of Investor Relations, Corporate Communications and Public Affairs

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

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

Michael P. Turzenski - Chief Financial Officer, Chief Accounting Officer and Group Vice President

Analysts

Judah Frommer

Ryan J. Gilligan - Deutsche Bank AG, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Kelly A. Bania - BMO Capital Markets Canada

Scott Andrew Mushkin - Wolfe Research, LLC

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

Mark Wiltamuth - Jefferies LLC, Research Division

Adam Bruce Plissner - Crédit Suisse AG, Research Division

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

Operator

Good afternoon, and welcome to Roundy's Second Quarter 2014 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 like to turn the call over to Mr. James Hyland. Thank you, sir. You may begin.

James J. Hyland

Thank you, Gabrielle. Good afternoon, ladies and gentlemen, and welcome to Roundy's second quarter 2014 earnings conference call. With me today are Bob Mariano, Chairman and Chief Executive Officer; and Darren Karst, Executive Vice President and Chief Financial Officer. Also joining us for Q&A will be Mike Turzenski, Group Vice President and Chief Accounting Officer, newly appointed CFO for Roundy's effective August 10, 2014.

Our second quarter 2014 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, roundys.com. This call is being webcast, and a replay will be available on the company's website. A transcript of the call will be on the website within 48 hours.

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 results for the second quarter of 2014. I will briefly review these results and discuss certain key metrics for the quarter. Darren will then review the financial results for the quarter. At the end of our remarks, we'll open the call for questions.

The second quarter can best be described as a building block quarter. It was a bit of a noisy quarter financially from all the activity that took place, but we feel we executed well on the things we needed to do. It is important to remember that 2014 is an investment year for us, as well as a transition year for our business.

During the second quarter, we opened 6 additional Mariano's stores, 4 being former Dominick's locations and to 2 newly built 80,000-square-foot stores in Chicago's Ravenswood and Bucktown neighborhoods. As we anticipated, with the large number of store openings in the second quarter, we experienced significant start-up costs, particularly for the acquired stores. We have opened 2 more stores in the third quarter to date, with the most recent being the opening of the Shorewood store, which is in the far southwest suburbs. Our team has opened 10 of 11 former Dominick's locations that we acquired in December of last year, and we currently have a total of 26 Mariano's locations in the Chicagoland area.

The acquired stores continue to receive an enthusiastic reception within their respective communities. The sales performance of the acquired stores are, on average, exceeding their pro forma sales target by approximately 20%. This bodes well for the future profitability once these stores mature.

Average weekly sales for Mariano's stores for the second quarter of 2014 were approximately $1 million per week. Comps sales for the Mariano's banner was in the mid-single digits for the 11 stores that were opened for 1 year or more at the end of the second quarter. This is down modestly from the prior quarter as we experienced some shifting of customer traffic as a result of additional organic and acquired store openings, which we had anticipated. Our 4-wall EBITDA objectives for our Mariano's mature stores continue to be met. However, nothing remains static and we continue to tweak all the levers of our operation to improve profitability. Mariano's finished the quarter with an estimated run rate of approximately $1.1 billion in sales, and we anticipate a $1.3 billion run rate by the end of 2014.

We continue to grow -- gain share in the Chicagoland market. And if we look at the latest Nielsen data on Mariano's, our share of the food market has grown 5x over the last 2 years, from the mid-2% mark to over 11% today. As we have previously stated, we believe Mariano's concept will travel and travel well. Based on the success of our Mariano's stores in both urban and suburban locations throughout the Chicagoland area, we believe there are several other markets that have comparability. We intend to focus our research for expansion in these markets.

In terms of the core business, we were very proactive on a number of fronts. We announced the sale of 18 Rainbow stores, and we closed on the sale of those stores on July 9, divesting an underperforming core asset. On July 22, we closed the remaining 9 Rainbow locations not included in the sale agreement, and we now have completely exited the Twin Cities market.

We announced the closing of the Stevens Point distribution center by the end of the third quarter, helping to right-size our supply chain, which makes us more efficient, given our exit from the Twin Cities market. We eliminated a number of field and corporate positions that were related to our Rainbow business. We rolled out the renewal efforts that we spoke about last quarter to all Milwaukee area stores.

We have engaged AlixPartners, a leading global business advisory firm, to conduct an extensive review of our business with the goal of performance improvement. And finally, we right-sized our corporate staffing, which we expect to reduce annual G&A cost by over $6 million. We should start to realize some of those benefits in the third quarter.

With respect to store -- competitive store activity, we have 1 conventional opening in our core market during the second quarter of 2014, and we anticipate a total of 7 openings in our core Wisconsin market for all of 2014, 2 supercenters and 5 conventional. 4 of those openings have already occurred, 1 supercenter and 3 conventional. We estimate the dollar impact to our same-store sales in the quarter from new and competitive -- from new competitive square footage added over the last 12 months was approximately 135 basis points. Darren will get into more specific details of the financials, but let me give some insight into 2 key metrics for the quarter: same-store sales and EBITDA, and also give you an update on our ongoing initiatives.

Our same-store sales, excluding all Rainbow stores, decreased 2.2%. This was slightly off the high end of our guidance of negative 2% we gave last quarter. We can attribute this sales decline primarily to the state of the consumer in our core market, a cautious consumer whose food and home dollars are stretched thin, and the effect of competitive impacts for the quarter.

Total EBITDA from continuing operations for the third quarter decreased $17.6 million to $26.9 million for -- from $44.5 million in the prior year period. The quarter was burned by start-up costs related to the acquired stores, which is higher than we planned, but we expect the profitability of those stores to ramp up nicely over the next several quarters, given the sales productivity is better than we expected.

Additionally, the remaining 9 Rainbow stores we did not sell were classified in our continuing operations, and they generated negative EBITDA as the performance of those stores deteriorated, given what was happening in that market. The remaining decrease can be attributed to our core Wisconsin business and is primarily related to de-leveraging as a result of sales declines and margin pressure.

Our ongoing initiatives for growing our perishable business and our Own Brand product sales continued to do well in this quarter. Our perishables business accounted for 39.2% of total sales, approximately 280 basis points higher than a year ago.

Our Own Brand products ended the second quarter at 24.2%, 110-basis-point improvement over the last year's second quarter.

We now carry approximately 7,000 products in our Own Brand line.

As I stated in the beginning of my comments, we considered 2014 to be an investment year and a transition year for all of us. Our second quarter was another building block we added to our foundation. We executed on a number of key initiatives during the quarter, and we continue on a target with the expansion of our growth banner, Mariano's. Certainly, we're not pleased with the performance of the core business during the quarter. We will continue to examine ways to optimize our performance, and we'll continue to implement and execute cost-control measures within our core business.

Before I turn the call over to Darren, most of you are aware that we issued a press release on July 24, announcing that Darren has accepted a position with Rite Aid Corporation, one of the nation's largest drugstore chains, as its Executive Vice President and Chief Financial Officer. I've had the privilege of working with Darren for close to 2 decades, and I will personally miss his contributions, as will the board and his fellow employees. We all wish Darren well in his future. Mike Turzenski, currently Roundy's Group VP and Chief Accounting Officer, has accepted the appointment of the board to become Roundy's Chief Financial Officer. Mike's appointment as CFO was a unanimous decision for the board. We have worked closely with Mike through the years, and the transition from Darren to Mike will be seamless. DK?

Darren W. Karst

Thanks, Bob, and good afternoon, everyone. Net sales from continuing operations for the second quarter of 2014 were $972 million, an increase of $104 million or 11.9% from $868 million for the second quarter of 2013.

Net sales, excluding the company's 9 Rainbow stores that were included in continuing operations, were $943 million. Same-store sales, excluding all of the company's Rainbow stores, declined 2.2%, which was due to a 3.4% decrease in the number of customer transactions, partially offset by a 1.2% increase in average transaction size.

Same-store sales, excluding the company's Rainbow stores, continue to be negatively impacted by competitive store openings and the weak economic environment in the company's core markets. We did have a positive impact in the quarter from an Easter holiday shift, and that was about 150 basis points.

Gross profit for the second quarter of 2014 increased 10% to $256 million from $233 million in the same period last year. Gross profit, as a percentage of net sales, was 26.4% for the second quarter of 2014 compared to 26.8% in the same period last year. The decrease in gross profit, as a percentage of net sales, primarily reflects increased shrink, including the effect of the higher perishable mix of Illinois stores and the start-up impact of new or acquired Illinois stores. And that was partially offset by an increased perishable sales mix overall.

Operating and administrative expenses for the second quarter of 2014 increased to $249 million from $204 million in the same period last year. Operating and administrative expenses, as a percentage of net sales, increased to 25.6% in the second quarter of 2014 from 23.5% in the same period last year. This increase was primarily due to increased start-up labor costs and higher occupancy costs in our new and acquired Illinois stores relative to our chain average. Additionally, we experienced reduced fixed cost leverage in the company's core business resulting from lower sales. The company also incurred a $1.2 million charge related to corporate employee severance.

During the second quarter of 2014, the company recorded a noncash impairment charge of $11.1 million related to the assets of the Rainbow stores that were closed in the third quarter of 2014. The company also recorded a noncash impairment charge of $5.1 million related to the assets at the Stevens Point distributions facility, which we expect to close during the third quarter of 2014. As a result of the Rainbow store sale and the exit from the Minneapolis-St. Paul market, the company expects to incur withdrawal liability related to the multi-employer pension plans in which the affected employees participate. The company recorded a pretax charge of $25.8 million during the second quarter of 2014 for the portion of the estimated multi-employer pension withdrawal liability that was not assumed by the buyers of the 18 Rainbow stores that were sold. Demand letters from the impacted multi-employer pension plans may be received in 2015 or later. The company expects the liability will be paid out in quarterly installments, which vary by plan, over a period of up to 20 years.

During the third quarter of 2014, the company expects to record an additional pretax charge of $22 million to $26 million for the estimated withdrawal liability related to the remaining 9 Rainbow stores that were closed in the third quarter.

For the second quarter of 2014, net loss from continuing operations was $13.5 million or $0.28 net loss per diluted share compared to net income from continuing operations of $11.6 million or $0.26 diluted net earnings per share for the second quarter of 2013.

Adjusted net loss from continuing operations for the second quarter of 2014 was $2.9 million or $0.06 adjusted net loss per diluted share compared to adjusted net income from continuing operations of $11.6 million or $0.26 adjusted diluted net earnings per share for the second quarter of 2013.

Adjusted net loss for the second quarter of 2014 excludes a $9.8 million after-tax charge or $0.20 per diluted share for noncash asset impairment charges related to the 9 Rainbow stores and the Stevens Point distribution facility, and a $0.7 million after-tax charge or $0.01 per diluted share for employee severance costs recognized during the second quarter of 2014.

The second quarter was burdened by the acquired store start-up costs, which had a negative EBITDA impact of approximately $5 million, and the remaining 9 Rainbow stores that were not sold, which generated negative EBITDA of about $2 million. The remaining shortfall in EBITDA compared to the prior year, as Bob mentioned, was attributable to the core Wisconsin business. Therefore, the adjusted EBITDA from continuing operations for the second quarter of 2014 was $26.9 million compared to $44.5 million in the second quarter of 2013.

Capital expenditures for the second quarter of 2014 were $26 million compared to $11 million in the second quarter of 2013. The change year-over-year was primarily attributable to the timing of new store openings and the investments in our acquired stores. The effective income tax rate from continuing operations was a tax benefit of 40.2% for the second quarter of 2014 versus tax expense of 34.5% in the prior year quarter.

Our total debt at the end of the second quarter was $710 million versus $738 million at the end of fiscal 2013. The reduction was largely related to the debt refinancing transactions and equity offering we completed in the first quarter. As of June 28, 2014, we had $36 million in cash and cash equivalents; and $138 million of availability under our revolving credit facility, providing us with liquidity to operate our business.

As Bob stated, Q2 was a noisy quarter from a financial perspective, with the sale of the Rainbow stores, the opening of 6 additional Mariano's stores and other contributing factors. Our third quarter financials will also have heightened transitional activity as we have the 9 remaining Rainbow stores we physically closed in July moving into discontinued operations; the closing of the 18 Rainbow store sale transaction, which occurred; and then the Stevens Point shutdown activity, which we expect by the end of the quarter. We've consider these things and are presenting continuing operations guidance that excludes all Rainbow-related activity since that will be classified as discontinued operations in its entirety and excludes the effect of severance and onetime charges related to the closure of the Stevens Point warehouse.

We expect total third quarter sales to be in a range of $970 million to $980 million, with same-store sales in the range of negative 2.25% to negative 3.25%. For the full year, we expect 2014 total sales to be in a range of $3.84 billion to $3.87 billion, with same-store sales in the range of negative 2.75% to negative 3.5%.

Adjusted EBITDA for our third quarter is expected to be in a range of $23 million to $28 million, and adjusted EBITDA for 2014 is currently expected to be in the range of $115 million to $125 million. It's important to note that the acquired stores' start-up costs and Stevens Point inefficiencies are embedded in the year-to-date EBITDA numbers. Also, these numbers do not reflect the full year effect of G&A cost reductions, which we completed in the third -- in the second quarter, towards the end of the second quarter. We expect adjusted diluted earnings per share for our third quarter to be in the range of negative $0.05 to negative $0.11 per share. We expect adjusted diluted earnings per share for 2014 to be in the range of negative $0.04 to negative $0.16 per share.

Our guidance for interest expense is $13.5 million to $14 million for the third quarter and $55 million to $56 million for 2014. Income tax rate for both the third quarter and the full year is expected to be approximately 40%.

Capital expenditures for the third quarter are expected to be $25 million to $30 million; and for the full year, $90 million to $95 million.

As Bob stated, I will be leaving Roundy's at the end of this week. I'm excited about the tremendous opportunity at Rite Aid, and I look forward to joining their team. I would like to thank Bob and all the Roundy's employees for their support through my many years here. It is certainly bittersweet for me to be leaving Roundy's, but I leave knowing the CFO role is in great hands. Mike Turzenski has been with the company since 2007, serving first in the role of comptroller and then as Chief Accounting Officer. Mike has been my right-hand man, and I have the utmost confidence in him. Mike is a key player in the long-term strategic direction of Roundy's, and Bob, the board and I, all believe this will be a seamless transition.

That concludes my comments, and let me now turn it back to Bob for some final comments before Q&A.

Robert A. Mariano

Thanks, Darren. As you heard from Darren, we have another building-block quarter ahead of us in the third quarter as we continue to invest in and transition the company. We will have 29 Mariano's stores at the end of the year, and we have announced 5 new store locations for 2015. As I said earlier, the acquired stores are exceeding their pro forma sales targets by approximately 20%. Our pipeline remains full in the Chicagoland area, and we believe there's significant white space in other geographic areas for the Mariano's to expand. We continue to move forward working to optimize the performance of the company. With the divesture of our Rainbow stores and our exit from the Twin Cities, we can sharpen our focus on our core Wisconsin banners. We remain committed to improving the performance of our banners -- core banners, and we are leaving no stone unturned. As I stated earlier, we are enlisting the help of AlixPartners to help us continue to make meaningful and cost-effective improvement in the business that will show up on the bottom line.

This concludes our comments. And at this time, we'd like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Edward Kelly with Crédit Suisse.

Judah Frommer

It's actually Judah on for Ed. On the negative EBITDA impact from Wisconsin, can you give us an idea whether that was in line with your expectations or a little bit worse? And maybe what the contributing factors were there?

Robert A. Mariano

Well, I would tell you it's probably a bit worse than we expected. On the one side, some of it is attributed to greater shrink than we had anticipated. And I would tell you it was a bit of a more competitive market.

Judah Frommer

Okay. And then, the -- you mentioned AlixPartners coming in. Are you bringing them in specifically to help with the core stores? Or are they going to help you with Mariano's? Maybe other markets? Can you give us an idea of what you're bringing them in to do exactly?

Robert A. Mariano

They will look at the entire ongoing operations. So it will include not only the core, but Mariano's as well.

Operator

Our next question will come from Karen Short with Deutsche Bank.

Ryan J. Gilligan - Deutsche Bank AG, Research Division

It's actually Ryan Gilligan on for Karen. My first question is, can you break out the EBITDA performance between Mariano's and the core business?

Robert A. Mariano

Well, we don't break out the EBITDA of the 2 businesses.

Ryan J. Gilligan - Deutsche Bank AG, Research Division

Okay. What are the comp and EBITDA trends at the Milwaukee 14 and the other renewal stores? How are they performing?

Michael P. Turzenski

Ryan, this is Mike Turzenski. For the Milwaukee renewal for the quarter, the comps were negative, but they were about 100 basis points better than the core. And then, I think in the past, we've talked about the Milwaukee 14 as well. They were also slightly negative, but they were about 200 basis points better than the overall core comps.

Ryan J. Gilligan - Deutsche Bank AG, Research Division

Why do you think they turned negative? Is that a function of the competitive activity? Or is there something else going on? They were positive in the fourth quarter -- or last quarter, I think, right?

Robert A. Mariano

I would tell you the same as I answered the earlier question, the -- more competitiveness in the marketplace in the last quarter.

Ryan J. Gilligan - Deutsche Bank AG, Research Division

And do you think your initiatives are getting traction as it relates to the Fresh Perks card?

Robert A. Mariano

We do, we do. I think you got to -- I think, from our perspective, we're seeing some settling in what's now -- because we said we have since rolled out the initiatives to the now what we refer to as Milwaukee 71, which is all of the Milwaukee area. And we are seeing some slight stabilization. So we got to see stabilization before we see it improving.

Ryan J. Gilligan - Deutsche Bank AG, Research Division

Okay. And just a last question on the multiemployer plan. Do you have a go-forward estimate for the annual pension expense? And maybe what you think the liability will be after all of these changes?

Michael P. Turzenski

Well -- this is Mike, again. As far as the actual charges go, quarter 2, we took about a $26 million charge. In quarter 3, we're going to take about another $25 million charge. And then, as far as payments go, going forward, it'll be about $8 million a year for a couple of years. And then, about $3 million, thereafter, through about 20 years or so. So we do -- we did have a significant charge in quarter 2 and we'll have another significant charge in quarter 3.

Ryan J. Gilligan - Deutsche Bank AG, Research Division

I meant for the remaining store base.

Michael P. Turzenski

Yes, the remaining stores -- yes, I'm not exactly sure what that number is, off the top of my head, given the changes with Stevens Point and with Rainbow at this point.

Darren W. Karst

I mean, the total, Mike, I think pension expense was about $12 million, if I remember correctly. And that's pretty significant...

Michael P. Turzenski

Yes, it was $11 million to $12 million, but...

Darren W. Karst

...related to these stores.

Michael P. Turzenski

I don't remember exactly how it splits between Rainbow and Stevens Point.

Darren W. Karst

We can follow up with you on that, Ryan.

Operator

Our next question will come from Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

I have a few questions. I wanted to ask about the deceleration in the Mariano's comps. I mean, obviously, mid-single digit is still a very good figure. But first, mid-single digits can be 3.5% or they can be 6.5%. It's a big range. So I'm just curious if it was closer to the low or high end of that mid-single digit.

Robert A. Mariano

It was near the higher end of your range.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay, good. And second, given that you're continuing to build stores in Chicago, right, I assume it's reasonable to expect there'll be some more cannibalization, if that's not too strong of a word for a while. So looking forward, how are you guys modeling Mariano's comps? Is it closer to that 5%, 6% number? Or is it back to 8% over time?

Robert A. Mariano

I think we've characterized the comps in the mid to low single digits, and there's nothing to change our mind in terms of that view. And that's typically -- we've said in progression, we see a greater increase in the second full year of operations. And then in the third year, we get to about the mid- to single-digit comp growth. So there's nothing that makes us change, and there's nothing in our site selection process that would give us indication that -- that we should change that assumption.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay. Your net debt to trailing 12-month EBITDA, as I calculate it's now over 6x. Can you remind us what your debt covenants are and where we stand in relation to those?

Michael P. Turzenski

Yes, Ken -- this is Mike, again. We do not have any covenants at this point. I think that was back in the first quarter where we did some restructuring of our debt, and we were able to eliminate all of our covenants. So at this point, that is not an issue that we're concerned with.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

All right. One last one. I just want to make sure I understand the guidance. And this may be obvious and I'm just missing it, but it looks to me like guidance for 3Q and 4Q exclude any sales from any Rainbow stores at all. Right?

Michael P. Turzenski

That is correct.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay, but 1Q and 2Q numbers do include the remaining 9 stores that weren't sold? Is that accurate?

Michael P. Turzenski

Yes, it is accurate. So in quarter 3, we will have to restate again quarters 1 and 2 for the remaining 9 stores. And Ken, probably, what we'll be doing is we're going to develop something probably after we give the third quarter numbers, and we'll share it with everybody, and we'll kind of restate quarter 1 and quarter 2, just because there's so many moving parts that it's a little bit confusing to get some comparable numbers.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And just to make sure, have you guys told us -- and forgive me if you had, what were the sales in those stores each of the first couple of quarters? Just so we can kind of back envelope it?

Michael P. Turzenski

I think it's -- if I click -- through the 9 stores, you're asking?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Yes, just so we can better model sales in the third and fourth quarter right, given the knowledge we have. We can follow up off-line, if you don't have it.

Michael P. Turzenski

Yes, I don't have that number off the top of my head, Ken.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

All right. We'll get it later.

Darren W. Karst

Ken, this is Darren. Just to be clear, that full year number does exclude all Rainbow stores. For all stores...

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Correct. Exactly. So that's what I'm -- that's exactly right.

Darren W. Karst

But we understand the difficulty of trying to add together our reported first quarter numbers because they still had the Rainbow stores in continuing ops.

Operator

Our next question comes from Kelly Bania with BMO Capital.

Kelly A. Bania - BMO Capital Markets Canada

Just wanted to circle back with the market, the Milwaukee market renewal stores and what was different there this quarter in terms of pricing and where you're trying to get more competitive? And if that is going to roll out to other stores? Or kind of what -- how you see that strategy going forward over the next couple of years?

Robert A. Mariano

We are -- the things we've instituted in the Milwaukee 71 now have been in place for a total of 7 weeks. So we are in the preliminary -- obviously, these are the early stages of evaluating and looking at what's going on. So the efforts will continue. We additionally changed merchandising as well as what allowed this also to do is to economize on our advertising expense because now we can have a universal circular for that area where before, we had multiple versions which added to cost, complexity and was not as effective as we wanted it to be. So we made those adjustments. Our initial look isn't that clear just yet, but it seems to be positive, and we need to look at more observations in terms of the performance. So far, we like what we see. We need to continue to watch and observe what's happening with the business. So it's really too soon to say what we'll do forward, but rest assured, as we've done this, we will continue to act and tweak it in order to get greater performance out of what we've done.

Kelly A. Bania - BMO Capital Markets Canada

Got it. That's helpful. And then, on your average transaction, it was slightly negative this quarter, it had been kind of running positive. Any color on that? Is that price investments? Is there...

Michael P. Turzenski

Kelly, this is Mike. Actually, our transaction size did increase a little bit. Maybe not as much as it increased in the first quarter. But part of that, I think, is due to the renewal stores, which is the Milwaukee market stores, where we did take some actions earlier in the quarter. And so we did have, I think, some decent basket builders. And I also think that part of it is due to the increase in the Mariano's mix as we add more and more Mariano's. And on average, the Mariano's transaction size is larger than the core. And then, we also had a little bit of inflation as well.

Kelly A. Bania - BMO Capital Markets Canada

Got it. That's helpful. And then just another one on Mariano's. With the stores kind of running, I guess, I think, you said 20% ahead of expectations, how are you planning those for next year, given that you have a competitor opening up quite a bit of stores in that region next year? Just curious on thoughts there, if you think that productivity could slow down next year.

Robert A. Mariano

Yes. Well, we haven't gone through the effort of building the budget yet for next year. But I will say this, if you recall, when we talked about the acquired Dominick stores and the stores that we did not get, in most cases, 2 things are clear: one, we already are in competition with Whole Foods; and number two, those stores that they got that we wanted from a locational perspective were already far enough away from our existing network of stores. So in general, there might be some effect, but I don't think it's going to be a significant effect.

Operator

Our next question comes from Scott Mushkin with Wolfe Research.

Scott Andrew Mushkin - Wolfe Research, LLC

Want to talk about -- I think Kelly was just referencing the fact, Bob, you talked about the stores, the revenues, the Mariano's being 20% above projections and I think you said they're doing -- averaging $1 million a week, which is such a fantastic number. How about profitability? Is that also running above expectations? Or is that more in line?

Robert A. Mariano

No. The profitability of our mature stores, we've done this steppage before, are at our expectations and, in some cases, slightly above.

Scott Andrew Mushkin - Wolfe Research, LLC

Now is that dollar profitability? Or is that margin profitability?

Robert A. Mariano

Dollar profitability.

Scott Andrew Mushkin - Wolfe Research, LLC

Dollar profitability. So I guess, what I'm getting at is the stores are running way higher but it seems like maybe margin levels could be lower? Or is that not right?

Robert A. Mariano

No, no. So we're clear, the margin -- the EBITDA margin rate and EBITDA margin dollars are running above their expected level for the age of the store.

Scott Andrew Mushkin - Wolfe Research, LLC

Okay, that's perfect. So then that actually rotates to my second question, was really getting back to Wisconsin and kind of thinking about '15. How do we turn the corner on EBITDA and really kind of go the other direction? It seems like Mariano's is doing what you want it to do, or even better, yet the give-back on the other side seems to be more than offsetting it. When do we finally stop that, I guess? And is there any light at the end of the tunnel? And how do we turn Wisconsin around?

Robert A. Mariano

I -- my view is, I think we've got the pieces in place now. We will additionally work with AlixPartners to hone what we've already got in place. And I guess, I would have to tell you, I'm optimistic for the end of the quarter 3 and into quarter 4.

Scott Andrew Mushkin - Wolfe Research, LLC

So and then the follow-up to that, Bob. Do you -- what if you can't? What if Wisconsin -- the competitive environment remains really tough, maybe you could stabilize it, but it's just really not going to ever turn the corner, is Mariano's enough to turn the corner if it continues to perform the way it's doing? Or do you need a turn Wisconsin to really get EBITDA going the other way?

Robert A. Mariano

I think we need to get it stabilized. I think you'll hear us talk about stabilize. So again, can't continue to drop the way we have been, and that's what we're working on doing, is to stabilize the erosion that's occurring in the business. You stabilize the erosion, we get ourselves -- we get our -- the cost side of our business right-sized. We'll be in very good position at that point. And then, of course, with the maturation of our stores in Illinois.

Scott Andrew Mushkin - Wolfe Research, LLC

And then -- maybe I'll slip one more in, competitive outlook. I know we talked a lot about it, openings, Walmart supercenters. You've had even some, I think, traditional guys open up and Wisconsin private guys. We have Meyer coming in. What's your thought process? Give us a quick update. And maybe you did already, I had to bop off the call for one second.

Michael P. Turzenski

Yes. We've got a little bit of a lull here for probably, I would say, 3 or 4 quarters on competitive openings. But once we get into the middle of 2015, we do have an increase in competitive openings again, in particular, in the Milwaukee market. I think right now, from what we had visibility into, it looks like there's going to be about 13 competitive openings in our core market. And of which, about 10 of those are going to be in the Milwaukee market. And out of the 13, I think there are 6 supercenters, of which, right now Myers is targeted the slot 4 stores in the Milwaukee market for next year. So I think from a competitive impact on sales and what does that mean, I think the overall sales -- or impact on same-store sales is probably going to be about the same as 2014. I think Bob had mentioned in the script earlier, for the quarter, it was about 135 basis points impact. So I think that'll be pretty consistent in '15, at least for the core.

Operator

And our next question here will come from Peter Benedict with Robert Baird.

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

Just following up on that. So 13 core market competitive store openings next year. Remind me, how many do you think you'll have had for all of this year?

Michael P. Turzenski

There's about 7 this year, but keep in mind that we are cycling through quite a few competitive openings from last year. And that's why I kind of mentioned that going into the third and the fourth quarter and even into the first quarter of next year. There's a little bit of a lull on competitive hits.

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

Okay, that's right. The acquired stores start-up costs, you guys had mentioned that they ran a little bit above-plan. I think it was a $5 million number thrown out. Was that total start-up costs? Or was that how much they ran above plan in the quarter?

Michael P. Turzenski

That was just -- that was total. Total cost -- start-up costs.

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

And can you give us a sense of maybe how -- what you were planning for the quarter, just to get a sense for how much the overrun was?

Michael P. Turzenski

It was probably a couple of times the amount that we had expected.

Robert A. Mariano

One of the things we did was, in terms of the people as we got further into opening these store, we needed to press harder on getting enough people. And we probably erred on the side of having more people. I think you heard me talk about how we're going to make sure because these weren't Mariano's. We wanted to make sure people got the experience and the service that we had grown to be known for. And so we erred on the side of spending a little more labor in the early weeks than we had anticipated.

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

Okay. And what do you think, Bob, maybe for the full year? How much do you think the start-up costs will be for those stores?

Robert A. Mariano

We're in process right now of managing -- I mean, we've gotten a break year in terms of operationally, as we don't have another opening until the beginning of September. And so we're really hunkering down store-by-store and looking where the opportunities are to fine-tune the cost side, as well as to exploit the top line, as well as our shrink. So there's a full-court press by the team that opened all these stores now to go back into them and to refine the operation and make the necessary adjustments to improve the overall profitability of each unit.

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

Okay, that's helpful. On the expense savings side, I think there was a $6 million number you cited for the sort of corporate synergies or corporate expense reductions as an annualized run rate of $6 million. Did you give us a sense of how much of that you expect to save from Stevens Point closing? I apologize if you said that. I may have missed it.

Michael P. Turzenski

First, the Stevens Point closure, we estimate that the savings will be about $2 million.

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

Okay. And then, last question...

Michael P. Turzenski

That's not part of the $6 million, by the way. That's above and beyond the $6 million.

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

Exactly. Right. That's what I was trying to figure out. And then the last question is just, can you give us a sense for maybe what you're planning for D&A over the second half of the year? There's obviously a lot of moving parts, a lot of things coming in and out of the asset base. What -- how should we think about D&A on the P&L for the next couple of quarters?

Michael P. Turzenski

Yes, that's a good question, because with the elimination of Rainbow, it's going to be about $9 million on an annual basis that, that depreciation will be reduced by. And I guess, when you look at it by quarter, I don't have the exact numbers, but it's probably in the low 2s, maybe $2.2 million to $2.3 million or so.

Operator

Our next question will come from Mark Wiltamuth with Jefferies.

Mark Wiltamuth - Jefferies LLC, Research Division

I wanted to get a little more feedback on what -- how far into the analysis of looking at other market opportunities for Mariano's, how far into it are you? And what kind of characteristics would you look for in a market? Would you look adjacent to your Chicago stores? Or are you thinking a whole new metro area?

Robert A. Mariano

Yes, we haven't begun to look at it yet. So we're still actively building our network in Chicago.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And on the competitive environment in Chicago, are you getting any pushback from the organic retail competitors on price in that market?

Robert A. Mariano

I think that's -- it has softened lately, I would tell you. So I mean, they made some initial price changes. I think it was Labor -- not Labor Day, but Fourth of July. They got a little crazy in their ad. But no, their everyday price is about the same as where they were.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And how about -- there was some complaint about meat inflation pass-through and some drag on gross margin for some of the conventional players. Are you feeling that in your core markets?

Robert A. Mariano

We're feeling that across the business. The beef pricing right now is at record highs. It's very tough to pass along everything. And there certainly is some margin compression in meat. And what we hear is that will continue through the end of the year, that there's no indication that that's going to ease up.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And was that a sizeable part of the gross margin issue for the quarter? It sounds like shrink was a bigger issue?

Robert A. Mariano

I would say the shrink was a bit -- I mean, to be sure, meat compression was a piece of the issue. But certainly, shrink was -- would be more of the issue than the margins compression.

Michael P. Turzenski

Yes, Mark. Mark, one other point on that as well, is when you look at -- I know we made the comment about shrink, and part of the increase in shrink is related to the cost increase in meat, as well as dairy. So that did have an impact on the shrink as well.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And just looking longer term, when do you think you'll have enough scale or comfort in the numbers to start breaking out Mariano's? We're modeling it separate line item versus the core Wisconsin market, and I'm curious when you'll feel comfortable in breaking that out so we can kind of model the 2 parts?

Robert A. Mariano

I mean, clearly, there's a lot involved in doing that. And at this point, we just have concluded that it's not time to do that. But we do actively look at it, and I suspect, at some point in the future, we're likely to break them out.

Operator

Our next question will come from Adam Plissner with Crédit Suisse.

Adam Bruce Plissner - Crédit Suisse AG, Research Division

I'm just sort of curious, when you think of the acquired stores that have been converted versus the new stores that have been opened, just give us a sense of what they look like and sort of what your ramp-up expectations, what's left to be done to get those to be in the same sort of target profitability as the mature stores?

Robert A. Mariano

Now when you say what they look like, you mean, physically, what they look like?

Adam Bruce Plissner - Crédit Suisse AG, Research Division

Yes, I mean, are they -- are they just a shell of what the full expectation is going to be when there are completed Mariano's conversion? I mean, at what stage are they in to be in a position to kind of achieve the ramp-up of and the ultimate target of the full well profitability of a mature store? Are they behind the step versus a new store at 80,000-square-foot store that opens at any given...

Robert A. Mariano

No, I think that's just characterization we try to give you when we said they were 20% ahead of their pro forma sales. We see great acceptance of the acquired stores in the communities that we've opened in. And we're certainly optimistic in terms of their -- the amount of time that it will take to get to profitability. So I would tell you, the behavior in terms of the model we've always described in our organic stores, these stores are behaving fairly close to the organic in terms of sales and profitability. Now that said, we do have opportunity to go back and add some additional features that are unique to Mariano's that aren't in some of the stores. And as we've said in the past, we will go ahead and do that.

Adam Bruce Plissner - Crédit Suisse AG, Research Division

Okay. I just want to be clear. And I wanted to go back to the 20% figure because it came up across a couple -- in a couple of different questions a little differently versus your plan. Did you say it was 20% above the, sort of, the acquired sales base? I just want to make sure...

Robert A. Mariano

No, no. 20% of overall pro forma for those acquired stores.

Adam Bruce Plissner - Crédit Suisse AG, Research Division

Got it. And versus, let's say, the acquired sales base, is it double, something like that?

Robert A. Mariano

I think it's a fair assessment to make that it's probably 2x what it once was -- I mean, and appreciate we didn't have clear data when we -- clear sales data from them when we acquired the stores.

Adam Bruce Plissner - Crédit Suisse AG, Research Division

Right. And the incremental features is just that -- it's something that couldn't close the gap, but it now you're seeing that base, it sounds like, pretty comparable?

Robert A. Mariano

You got it.

Adam Bruce Plissner - Crédit Suisse AG, Research Division

And then in terms of -- on the Milwaukee side, is the function of the rollout, the renewal of the 71 stores, is the function of the competitive environment it's just -- it's more difficult to kind of keep it under close wrap, what you guys have rolled out in terms of initiatives? And how do you look at the competitive reaction now that they sort of have a full look at what you've been doing for 7 weeks? Is it something that gets you even more competitive? Or you think the reaction has already occurred?

Robert A. Mariano

No, I think -- we haven't seen a dramatic reaction. Because frankly, it's a little more difficult to see for them. So we have not seen any material response by any single one competitor. So I think most of it is our execution and continuing to tweak what we've already done. And we're getting more out of it.

Operator

And our final question will come from Andrew Wolf with BB&T Capital Markets.

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

I just wanted to follow up, Bob, earlier I think you did mention it was getting more competitive or got more competitive in Wisconsin. So could you just describe the nature of that competition? Was it on price and promotions? Or just were you more referencing new entrants?

Robert A. Mariano

No. It's more promotional than anything. Yes, more...

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

But then in reference to the answer you just gave to the prior question, it's not in reaction to your -- what you're doing in Milwaukee, it's more general, it's broad-based?

Robert A. Mariano

Yes. I mean, I -- I mean, this market -- and we've characterized before, this market in general is soft. So I think people are chasing a smaller market. And so people got more promotional. Just like in quarter 3 here, we went ahead and jumped back-to-school. I mean, mid-July, early August, we had back-to-school food, nonperishables on display in a major way in our stores already. So I -- we're all, I think, trying to get more share of what the customers are willing to spend on. Andy, are you there? Hello? He's off?

[Technical Difficulty]

James J. Hyland

We'll close Q&A, operator.

Robert A. Mariano

All right. We'd like to thank everybody for their participation today. I just like to take a moment to thank all of our employees, our trading partners, our shareholders and a special shout out to Darren, and we're going to miss him and most importantly, our customers for all their support. We appreciate your interest in Roundy's and look forward to sharing our progress with you all next quarter. Thank you.

Operator

That will conclude today's conference. Thank you for your participation. You may disconnect at this time.

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Roundy's Supermarkets (NYSE:RNDY): Q2 EPS of -$0.06 misses by $0.16. Revenue of $971.9M (+11.9% Y/Y) beats by $29.14M.