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Roundy’s Inc. (NYSE:RNDY)

Q2 2012 Earnings Call

August 9, 2012 4:30 PM ET

Executives

Ed Kitz – IR

Bob Mariano – Chairman and CEO

Darren Karst – CFO

Analysts

Scott Mushkin – Jefferies

Edward Kelly – Credit Suisse

Andrew Wolf – BB&T

Jason – Robert Baird

Karen Short – BMO Capital

Operator

Good afternoon, and welcome to the Roundy’s Second Quarter Fiscal 2012 Earnings Call. All participants are in a listen-only until the question-and-answer session. (Operator Instructions) This conference is being recorded at the request of Roundy’s, and if anyone have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Ed Kitz. Thank you. You may begin.

Ed Kitz

Thank you, Kim, and good afternoon, everyone. Welcome to Roundy’s second quarter earnings conference call. On the call with me today are Bob Mariano, our Chairman, and CEO, and Darren Karst, our CFO.

By now everyone should have had access to our second quarter fiscal earnings release, which went out at about four o’clock Eastern Time today. If you have not received the release, it’s available on our website in the Investor Relations section at www.www.roundys.com. The call is being webcast, and a 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 on 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 for fiscal 2011, our quarterly report on Form 10-Q for the first quarter of 2012, and any other filings with the Securities and Exchange Commission.

For a more detailed discussion 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 release and the today’s prepared remarks, we included adjusted net income and adjusted EBITDA, which are non-GAAP financial measures within the meaning of SEC Regulation G.

The reconciliation of adjusted net income and adjusted EBITDA to the most directly comparable GAAP financial measures and other information required by the Regulation G are included in the company’s press release issued earlier today, which has been posted to the Investor Relations page of our corporate website at www.roundys.com.

With that, I’d like to turn the call over to Bob Mariano. Bob?

Bob Mariano

Thanks, Ed, good afternoon, everyone, and thank you for joining us today. As we discussed, the results for the second quarter ended June 30, 2012.

Today, I’ll briefly review those results and then spend a few minutes updating you on our key strategic initiatives and current trends. Then Darren will review the financial results for the quarter in more detail, and provide updated guidance for 2012. At the end of our remarks, we will open up the call for additional questions.

Our results for the second quarter reflect the ongoing macroeconomic headwinds, which stiffened over the course of the quarter as many of our customers came increasingly price conscious and we experienced greater than anticipated pricing and promotional activity in several of our major markets.

For the second quarter, sales increased 1.7% to $997 billion largely due to the strength of our new stores in the Chicago market, and a growing traction of our perishable organic and own brand offerings.

Both of which I’ll talk more about in a moment.

These gains were partially offset by a decline in comparable store sales, a 3.3% due to the increased softness in consumer discretionary spending, the increase cut effect of competitive store openings and more aggressive competitive pricing and promotional activity in certain markets. All of which have had affected our customer traffic.

As anticipated, sales were also negatively impacted by the timing of the July 4 holiday, which fell on Wednesday this year versus falling on the Monday following the end of the second quarter in 2011.

Consequently, certain holiday related sales moved from the second quarter to the third quarter. We estimate that this negatively affected comp store sales by about 40 to 50 basis points, which was roughly in line with our expectations.

For the quarter, we experienced a 3.2% decrease in the number of customer transactions and an average transaction size was roughly equal to last year.

In the majority of our markets, our customer have been very cautious with their budgets. We think the current economic recovery is somewhat bifurcated based on customer income levels. Customers who feel good about their economic situation are spending more freely and in our stores where we have more higher income customers, we’re seeing good results.

However, for the vast majority of our customers, the economy was heavily undermined and has affected their spending patterns more negatively than we expected.

The overwriting fact and (inaudible) is the top economy and the budget challenged customer, there is also strong competition for the customers dollar. The majority of competitive activity was driven by supercentre or discount operator opening.

Minneapolis and Milwaukee continue to be most competitive markets. In Milwaukee, we’re feeling the effect of several Wal-Mart market stores and to a lesser extent Target PFresh conversions that have occurred over the last 12 months.

In the Minnesota market, the primary new competitive square footage comes from Wal-Mart, which has heightened competitive activity from all the existing players from that market.

As I said, the lion share of our new competitive square footage continues to be in Minnesota, Milwaukee although this is more new script for this time we saw last year, it is generally consistent with what we expected for the year. We estimate the dollars impact to our comparable store sales in the quarter due to the footage competition we’re approximately 200 basis points, which is more than we expected. If you factor all the impact of the competitive openings, the timing effective July 4, we estimate that’s comparable store sales would have been down less than 1%, which gives you a better sense of all the generally soft economies affecting our core business.

As I mentioned earlier, pricing of promotional activity in some of our markets has increased recently. In part, as the market players react a new square footage, this sort of activity is largely directed toward and appeals to the price sensitive customer. In addition, we mentioned last quarter that Wal-Mart is rolling out their price comparison advertising. Just like there are many of the markets across the country, they first roll this out in Minnesota where they’re comparing prices, the SUPERVALU club stores, which caused club to become far more promotional. They now have a rolled the price come periods (inaudible) where they are comparing to our second sales stores.

We have responded equally aggressively with the new series of events designed to change the discussion from price only two more about total value, which includes factors like product quality, selection, and service. The overall focus is on freshness and experience, which is a big differentiator between our and the supercentres. While our ad campaign only recently launched, we think it will be effective in communicating our message to our customers. Let me take you now on where we stand with our major business initiatives. One of the major ongoing initiatives continues to be growing up perishable business. As a percentage of total sales, perishables were 34.9% for the quarter, which are about 80 basis points higher than a year ago and consistent with our plan for this year.

Our Chicago operation continues to lead the way in perishable excellence as our perishable mix in stores is over 50% of sales. We are always looking on how to provide great values to our customers and additional ways to help their food budgets. Expanding our offering of own brand products not only improves our overall customer value proposition, but it’s also a margin on answer. We are pleased with the strong customer acceptance of our own brand and we now have over 5500 own brand products in our stores. In addition, our own-brand penetration now stands at 20.5% of sales. So we’re well on our way to reach our goal of 21% by the end of the year.

We’re also focused on controlling our operating costs, particularly in light of our software topline, for example, we were working for some time on reducing transportation cost by better managing our inbound freight costs, which is a significant expense line for us. We have started to see the pull through and expect more improvements as the year progresses.

In the area of priced investments, we recently adjusted our pricing in certain markets for select key product categories to better compete against supercenter pricing. In those markets, we’re going to market with a lower everyday price and fewer deep promotional offers. This is more efficient and ultimately helps our overall price image. Our actions appeared to be resonating with the customer as these categories are already showing improved unit sales and we expect to gain more traction as more consumers recognize this value over time.

In addition, we have also taken more aggressive pricing actions in select markets to promote a number of high penetration items with more competitive pricing. The initial customer response is being positive with a meaningful unit sales for those items.

Finally, after the Labor Day holiday, we will begin to take advantage of the work we started a number of months ago with (inaudible) to more effectively use our shopper data.

Just to give you a sense of the scope of our knowledge, our shopper data for the Milwaukee market accounts for approximately 90% of our sales in that market. The insights about how to influence customer behavior that we have gained from this work is unlike anything we have done in the past and we are excited to take the next step with what we have learned.

We expect to be able to make pricing and promotional adjustments with greater precision and speed, as we better understand and predict how customer growth will respond to price and promotional efforts, leading us to make much more informed customer driven sales.

Our strong belief is that, this will ultimately translate to improve sales and margins.

Now I would like to spend a few minutes updating you on our growth banner in Chicago. We continue to be very pleased with the strength of our five Mariano’s Fresh Market stores in the Chicago area. The customer response to these stores has been overwhelmingly positive, and that is translating to financial performance well beyond our expectations. Our overall same-store sales for this group of stores at this point only includes two of those stores are opened in the low double-digits range year-over-year, and our new store that opened earlier this year is also already generating positive EBITDA.

Since we opened our first store in Arlington, Heights, two years ago, we’ve worked to find tune the Chicago operation. We have enabled to manage our labor expenses, supply expense shrink and other controllable expenses more effectively, and for each store that learning curve has shortened.

As a result, the second quarter was a record quarter in terms of profitability. We remain very encouraged by the expansion opportunities in the Chicago market as we look to the remainder of 2012 and beyond. I think we have said this before, but we have certainly see enough stores site potential to provide us with the ability to open four to five stores per year for the foreseeable future. When we think about capacity in that market, we are becoming even more confident that the Chicago area can support at least 25 to 30 Mariano stores.

Turning to store openings during the second quarter. We did not open or remodel any stores, although construction activity on our new and replacement stores in our remodel projects continues.

We remain on track with plans to open three more Mariano stores in the Chicago area, and just completed a relocation of one more store in our Wisconsin market early in the third quarter. We currently anticipate opening two of the Mariano stores in the third quarter, but given the late quarter timing one of those may slip into the fourth quarter. As to inflation, it continues to moderate related to the back half of 2011, but it’s still up on a year-over-year basis. Similar to the first quarter, some categories continued to exhibit inflationary trend, while others, such as dairy are deflationary.

Early in the year, our topline was benefiting from prior inflation of about 4.5% to 5% year-over-year, but that has flattened to approximately 3% year-over-year in the second quarter. On a sequential basis, when comparing quarter two to the first quarter of 2012, we’re now seeing the inflationary trends in several categories. But overall, for the entire store, our average price is flat. This inflation area environment is also obviously impacting our sales comparisons.

Turning briefly to the third quarter trends, like most grocery stores. We continue to fray strong headwinds in the current environment and the economic health of our consumer remains very weak. What we’ve experienced over the past several years are then fairly similar to what we experienced in the second quarter. The economic backdrop continues to be pretty feeble, and the competitive environment still intends. We anticipate that this will be the case until we cycle through the all the latest competitive openings and the operating initiatives that I talked about earlier begin to take hold.

We cannot really control the economic environment, so in the meantime we remain focused on working on our business initiatives, we will defend our market leadership and ensure that our stores offer the best balance of both value and convenience for our customers and sales and marketing margin growth for our business. We will continually work to create promotions that drive unit growth and customer transactions as well as supporting our brand, which we expected we’ll drive business into our stores. We will continually evaluate our pricing strategy, and investing everyday pricing as well as our own rent to optimize both sales and margins.

Finally, we will continue to maintain a tight hold on our controllable expenses as we work to improve operating efficiencies. At this time, Darren will provide additional financial details on the quarter as well as the speak to our balance sheet cash flows and provide updated guidance. Darren?

Darren Karst

Thanks, Bob. I will now provide you with a few more details about the second quarter results as well as our revised guidance for 2012. Net sales for the second quarter increased 1.7% to $997 million from 980 million in the same period last year primarily reflecting sales from new stores offset by a 3.3% decrease in same-store sales.

As Bob mentioned, the softness in sales was due to a combination of factors, including the tough economy, greater than anticipated pricing and promotional activity associated with competitive store openings in certain markets and the timing of the July 4 holiday, which shifted more sales into the third quarter this year.

Our gross profit margin rate was 26.9% for the second quarter, a slight decrease from 27% in the second quarter of 2011. On an absolute basis, gross profit dollars increased $3 million to $268 million. The decrease in gross profit margin rate was primarily driven by increased promotional and price investments in certain of our markets and increased shrink resulting from managing a softer topline. This were partially offset by improved efficiencies in our supply chain operations as we continue to look for ways to take costs out of the system.

Our operating and administrative expenses as a percentage of net sales increased 40 basis points in the second quarter to 22.5% versus 22.1% in the second quarter last year. The increase was primarily due to higher operating costs related to new placement stores, incremental cost related to being a public company, and reduced fixed cost leveraged resulting from lower same-store sales.

On an absolute basis, operating and administrative expenses increased 7 million year-over-year, which reflects these factors. Interest expense for the second quarter was 12.2 million, the decrease of 6 million or 33% from prior year, primarily due to the favorable impact of our debt refinancing in February 2012, which lower our debt levels and reduced interest rates.

Our effective tax rate for the second quarter was 40%, which was flat with last year. Net income for the second quarter was 18.9 million or $0.42 per share, compared to net income of $70.7 million or $0.58 per share last year.

Our adjusted EBITDA for the second quarter of 2012 was 60.3 million, down 7.5% from $65.2 million last year. The decrease was due to the more challenging economic and competitive environment, which resulted in lower same-store sales and a more promotional market that reduced our gross margin rate.

In addition, we incurred incremental costs associated with being a public company as we expected. As a reminder, last year second quarter EBITDA performance was also particularly strong. Briefly reviewing our 2012 first six months results, sales increased 2% to $1.935 million from $1.896 million for the first six months of 2011.

Same-store sales decreased 2.7% versus the comparable period last year. Looking at earnings for the first six months of the year, adjusted net income was 29.5 million or $0.71 per diluted share, compared to net income of 26.5 million or $0.87 per diluted share for the same period last year.

Capital expenditures for the first half of 2012 totaled 16.4 million primarily reflecting expenditures to complete one new store, one replacement store, and for existing store maintenance.

We continue to expect total CapEx in 2012 to be approximately 65 million to 70 million reflecting a total of four new stores to replacement stores, remodel expenditures for several stores in our core markets and maintenance CapEx for our stores and infrastructure.

From a cash flow perspective, we generated cash flow from operations of 33 million for the first half of 2012, compared to 121 million last year. As discussed last quarter, the change was due in large part to changes in working capital, including the timing of payments for inventory and accounts payable, which was primarily related to unusual payables’ timing at the end of our fiscal 2010 year that cost the 2011 numbers to look higher than normal.

We also saw increased inventory levels at the end of the quarter due to the timing of the July 4 holiday as well as additional inventory related to new and replacement stores.

As of June 30, 2012, we had about $65 million in cash and cash equivalents, and total debt outstanding of about 701 million, including our near term loan of 675 million.

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 was 3.07 times while our interest coverage ratio was about 4.3 times.

In the second quarter, we initiated and paid our first quarterly dividend of $0.23 per share. The company intends to declare its next dividend of $0.23 per share following our board meeting in mid-August. Now I will spend a minute on our guidance, as Bob mentioned, the macroeconomic and competitive factors were worse than we anticipated in the second quarter. As we look to the remainder of the year, it’s clear that our customers continued be impacted by the challenging economy and our markets will likely be more promotionally focused than we had experience in past quarters. As a result of these conditions, we have updated our previously issued guidance for 2012. We now expect 2012 sales growth of approximately 1% to 2% over the prior year and same-store sales in the range of negative 2% to 3%.

Adjusted EBITDA for 2012 was currently expected be in the range of 200 million to 210 million, and adjusted EBITDA margin in the range of 5.1% to 5.4%. We now expect adjusted diluted earnings for 2012 excluding one-time expenses to be in the range of $1.10 to $1.24 per share on approximately 43.3 million weighted average diluted shares outstanding. These changes do not impact the outlook for our dividend policy in 2012. We continued to believe our long-term business plan as on track and we remain very confident with our growth plans for the Chicago market.

With that said, given the current operating environment and first half of 2012 financial performance, we believe we need to be more conservative with regard to our expectations for the remainder of the year. That concludes my financial comments, and at this time I’ll turn the discussion back to Bob.

Bob Mariano

Thanks, Darren. In summary, the macro environment remains challenging for our business and our customers. We believe that the majority of our customers are trying to stretch their dollars as far as they can. At the same time, our markets are adjusting a number of competitive openings, we have just increased overall pricing and promotional activities. Despite these challenges, we feel good about our continued emphasis on providing customers with a high-quality product that compelling values and actions we’re taking to improve our sales performance and profitability.

We’re making adjustments to our pricing and promotions and intend to better use our expensive shopper data. We continued to grow higher margin perishable own brand business, which are ongoing major long-term initiatives for us. We are also focused on operating as efficiently as possible. Lastly, we continued to focus and realize significant growth opportunities at our Mariano’s banner in Chicago. We will open three more new stores later this year and on track with that 2013 plan to open four to five new stores in Chicago. With that, we would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Scott Mushkin with Jefferies and Company. Sir, your line is open.

Scott Mushkin – Jefferies

Hi, guys. Thanks for taking my questions. So I guess, I had a few, but I just wanted to start off with the dividend, I think you said it stayed for paying the $0.23 to 12, can you remind us where you feel uncomfortable with that level of EBITDA you’re feeling comfortable with paying such a large dividend?

Bob Mariano

Scott, I think at this point, we are comfortable with the $0.23 per share, given our the range of guidance we’ve got out there. Obviously, later in the year, we will develop our ultimate guidance for 2013, and I think as part of that kind in the normal course we will update our dividend policy at that point. I think at this point, we are comfortable at $0.23.

Scott Mushkin – Jefferies

Okay. So turning to the GAAP, you have a competitor openings, you’re in the process substandard like trying to narrow some debt, the gap on the past turning items. What do you think the GAAP is – where do you think you have to be?

Darren Karst

Well. Depending on what we did a couple of things with pricing, in some cases, we took the GAAP from 1.12 to 1.15, down to 1.04 to 1.06. And then in some cases, we took some categories that were north of 120, 130 down to a 105, 106 and a mix between that to a 115.

Scott Mushkin – Jefferies

Was this part of the –

Darren Karst

There was no absolutely – I guess to be clear, Scott, there was no one way, we looked at each category and how we’re soften and where was price vis-à-vis supercentres and made adjustments that we thought would drive unit sales as well as continue to prove our profitability.

Scott Mushkin – Jefferies

And this is the – I mean, the quarter you just reported was it missed us but not by much, so it’s really a back half reduction here, and so it looks like you guys are thinking things are going to be from a cash generative perspective quite a bit worse in the back half, so can you may be walk through what is it partly soften with the price investments, more competitive opening if you maybe walk through, because it really seems like the consumers getting necessarily where soon not getting better, but can maybe walk through why the back half is looking so soft, and then I’ll get back in the queue. Thanks.

Darren Karst

Sure. I think several of these things we talked about in the prepared documents, the consumer spending is more challenging than we expected in our markets. The Nielsen data we look suggest that total units are down for our entire market, which tells me the market is in growing because the consumer is struggling.

Higher income customers do feel a little bit better, but 75% to 85% of our customers are middle-class people that more than ever are doing what they can to treasure dollars as far as they can plus, we saw some relief in gas prices for the short time, and now we are seeing those prices start to free backup. So I don’t see the consumer improving at all.

Second, the competitive environment in two of our key markets in Minnesota, and Milwaukee has gotten more intense or simply digesting a lot of the new competitive square footage, and frankly, the effect that it’s having us is more than we expected.

While the store counts are above what we thought, the effect that these openings ever having are more impactful than what we thought.

Third, the market is more promotionally active than we expected, and I think that’s a consequence of all the fact that the market is now, and so everybody is competing for additional unit sales. But the new competitive square footage as well as the consumers’ sentiment is causing the existing competition to step things up, and last quarter, we expected some of this and expected it for quarter two, but now our sense of it is that this will continue with us for the backup of the year.

Scott Mushkin – Jefferies

That was a great explanation. Thanks a lot. I will appreciate that.

Operator

Our next question comes from Edward Kelly with Credit Suisse.

Edward Kelly – Credit Suisse

Hi, good afternoon, guys. Bob, I just wanted to ask Scott’s questions on a little bit different way. Last quarter when you brought guidance down, it kind of felt like you were communicating that you felt like it was conservative enough, so I’m just trying to figure out what changed since then and what if you’d recall a few things that different now versus three months ago, what that would be?

Bob Mariano

I think as we talk to you and we kind of head in the Ruby and Mariano quarter one, and as we kind of looked at April things did not look like they were perhaps coming back the other way. But the consumer and then the size of the market continued to get tighter.

The competition really honestly up through and floating through the 4th of July and beyond, it got very, very intense. I would tell you that in my experience in some of the markets, borderline rational in terms of the kind of promotion that I saw. So that clearly – I’m sorry.

Edward Kelly – Credit Suisse

When you say, intense and borderline irrational, is that conventional guys or nonconventional guys?

Bob Mariano

Yeah. It was conventional guys.

Edward Kelly – Credit Suisse

Conventional?

Bob Mariano

So, it’s with that certainly isn’t something we anticipated and certainly not something we planned for. To some extent, we had – reactive to some of that but we tried to be more plan full as we’ve kind of gotten into the spot. There is no question that as the year progresses. My sense of it is the customers far more focused on price, then they were at the beginning of the year.

Edward Kelly – Credit Suisse

But how much of – if you look back very historically, if you had some remarkable consistency through really some tough times. How much of what’s going on right now, do you think is a longer term structural change in your markets from a sort of pricing competition standpoint versus just temporary and cyclical.

Bob Mariano

It’s a good question, because I would have to say it’s sum of built in for me to – I don’t know that I can pursue which is which, I would agree though because of the increased competition a piece of it is a structural change in the market, and some of it is customer market – I just wouldn’t have a way of measuring that.

Edward Kelly – Credit Suisse

Okay. As we think about your guidance for the rest of the year, it does sounds like it contemplates some price investments, could you be a little bit more specific in terms of how much investments actually you’re near and then as we look out beyond and I’m not asking for guidance beyond this year, but as we look out beyond the current year, are you now sort of factoring the plan that’s going to include more sustained and aggressive price investments then you maybe would have thought, and got six months ago or so?

Bob Mariano

I would say – it’s probably a little bit more than we anticipated six months ago, other than that alone – I preferred not to be as explicit as we work through this, we try to be very thoughtful and prudent by category, now we’re informed by our work with Accenture and our shopper data now. So an impart of it is – to fit is that we try to do this step wise, so we just don’t take a shot going kind of scatter shoot all over the place, but we tried to take it on a step and measure its impact and take another step and measure its impact. So it will take some time for the customer to respond that the kinds of pricing and changes that we’re making. So it will be something that will be over the longer term that we’ll be working on in clearly will be doing this in the rest of this year.

Edward Kelly – Credit Suisse

Okay, and then related to the Wal-Mart ad campaign, could you just maybe talk a little more about the impact that’s having you know within your markets and why you felt so strongly about reacting to that I guess?

Bob Mariano

Yeah, I think it’s, you just highlighted price even more so. As I look at it now I think Wal-Mart strategy was to bring additional traffic in the summertime with food and my observation is now they’ve shifted those, the content of those hedge now to telephone to cell phones then PDA. So I think this is it looks like part of a longer-term strategy with respect to Wal-Mart to increase food traffic. And one thing I would remind everybody and I mentioned this I know when we were on the road.

Wal-Mart also over the last six months had put the way back in, those of you that Wal-Mart closely know that they went to the more clean look here a couple of years ago and took out all of the product in their ways, raise way. They have now restored that raise way and food product and all those. So effectively what that all means so when customer walk in, they look for more promotion than they have in the past. So the Wal-Mart is very focus as everybody is trying to drive food traffic in order to pick up additional sales in the now in food categories, but the non-food categories that they have.

Edward Kelly – Credit Suisse

Okay. Thank you.

Bob Mariano

Thanks.

Operator

I think our next question comes from Andrew Wolf from BB&T capital market.

Andrew Wolf – BB&T

Hi, good afternoon.

Bob Mariano

Hi, Andrew.

Andrew Wolf – BB&T

Did I understand, did the fundamentals at Mariano’s actually get better even as core of the business become worse?

Darren Karst

Yeah, yes they do.

Andrew Wolf – BB&T

Okay. And you think that’s execution or just its a different customer?

Bob Mariano

Both, I think it’s a different market. It’s clearly I mean it’s part of execution, as I said we are getting better. And secondly it’s a different market and the competitive set in that market is different.

Andrew Wolf – BB&T

Thanks. So the reduction in EBITDA then is it’s a little more in the core than right so the Mariano’s budget went up a little?

Darren Karst

We’re doing quite well in the Mariano’s as I said.

Andrew Wolf – BB&T

Right. And then I think you mentioned the cadence was, it sounds like July worsened from the quarter just got tougher and tougher just trying to manual sales and EBITDA what was that, where you want us to take away?

Bob Mariano

Yes, yes, yeah I did get, we got more competitive as we got into the quarter.

Andrew Wolf – BB&T

Okay, got it. And in Minnesota has Wal-Mart persisted with the price adds or is that I mean away still going market that way in their advertising?

Bob Mariano

You know I think so, I honestly – I don’t have visibility into that media. Definitely, I have to check and get back to you if they’re still running that. My sense of it is, I saw in Wisconsin and Illinois they went to the telephone add, so I’m going to assume and made so they probably also went to that add as well, but (inaudible) still remains quite about as competitive as they were in the past in the Minnesota marketplace.

Darren Karst

And so they’re standing kind of hyper-competitive they would change.

Andrew Wolf – BB&T

All right. Lastly, on the surge of new stores from – nearly from Wal-Mart and target in Woodman’s as far as we can kind have figure out. It looks like you got the Woodman’s coming and Wisconsin in the fall and if that sort of the end of that sort of normal – larger than normal surge of new store openings in terms of how you see the comparative real state openings.

Darren Karst

And Andy, this is Darren. We have got – I mean, there’s a number of additional openings in the back half of the year, I would say it’s roughly equal to the number of openings that are cycling from last year. So there will still be enough of your competition that we’re dealing with and digesting, but you’re correct Woodman’s is one of the larger ones.

Andrew Wolf – BB&T

So the one we haven’t figured out is those office supercentres?

Bob Mariano

There are some other supercentres, yes.

Andrew Wolf – BB&T

Okay. My last question is a bit of housekeeping, but the DMA was down in a fair amount year-over-year and sequentially. Is that kind of a new run rate or is that something trying to figure that out?

Bob Mariano

That is the run rate. Yes.

Andrew Wolf – BB&T

Thank you.

Operator

Thank you. And our next question comes from Peter Benedict with Robert Baird.

Jason – Robert Baird

Hi, guys. It’s actually Jason, favor on for Pete. Just firstly on the second half comp plan played down by 1% to 3%. Obviously, you guys are going up against your toughest compared here in the third quarter. I mean, we’re month through the quarter. I know you have them enable promotion running again. Are you guys expecting an improvement in comp fair in 3Q versus 2Q or is that something we shouldn’t expect until the fourth quarter as some of your pricing and promotion initiatives rally gain attraction.

Bob Mariano

Now we would not expect quarter 3 to be necessarily positive. I think we got away through the pricing promotional activities to set in.

Jason – Robert Baird

Okay, and then –

Bob Mariano

So I think, I mean the third quarter is gone be probably pretty comparable to the second quarter and you’re right, we’re up against tougher comps from last year. So we expect a little bit better in the fourth quarter.

Jason – Robert Baird

Okay, then on the gross margin, it was down looks about like 30 basis points in the first half, clearly you are going to be – sounds like you are becoming more promotional across second half, so should we expect or I guess that soon that gross margin declines of a greater magnitude across the back half of the year, is that fair?

Bob Mariano

I think it steps up a little bit and that’s what we built in, so our guidance numbers so you should be able to figure out most of the EBITDA reduction is related to margin.

Jason – Robert Baird

Okay, and then last one looks like the CapEx is still $65 million to $70 million, only $60 million to date, I guess so, what’s so back-end waited, I know you have three store openings, it sounds like coming versus one today, but what else is included in the second half CapEx budget, and would you look to trim that target if sales continue to remain softer? Thanks.

Bob Mariano

Well, it is the stores and it just happen to fall that way where they got more back loaded this particular year. Actually for next year, we’ve got it more spread out through the year in terms of our new store activities, so it won’t be as backloaded as it is this year.

Jason – Robert Baird

Okay. Thanks, guys.

Ed Kitz

Thank you.

Operator

Your next question comes from Karen Short with BMO capital.

Karen Short – BMO Capital

Hey, thanks for taking my questions. A couple of things, I guess you commented on the supply chain benefits of the gross margin, can you maybe elaborate a little bit on that and what the timing was and then on the shopper data, maybe a timing on that and when you may be able to leverage using that data?

Bob Mariano

Well, the shoppers will be able to start after Labor Day beginning to operationalize the information, some of the information or using the crawl, walk, run method and then so we’ll start, as I have shared before, those I’ve spoken with about this, it will be a multi-year type of activity, so it’s something that we’ll learn more overtime and get better at as we go, but needless to say, it will allow us to much more effective pricing and promotional decisions than they been able to make in the past.

Karen Short – BMO Capital

Okay, and the supply chain benefit on the gross margin?

Bob Mariano

I think the supply chain benefits were about 10 basis points on benefit to the gross margin, the transportation component as that was an element of it, and it started sometime during the second quarter, so it is more backloaded during the rest of the year, and should be more of the 2013 item as well.

Karen Short – BMO Capital

Okay. And then, I guess just turning to your comments on competitive activity if you said that, I missed that I’m sorry, but I guess who is effecting a more in terms of the competitive activity, is it the conventionals or is it Wal-Mart. I mean, I know you commented on both but –?

Bob Mariano

It’s primarily Wal-Mart as the competitive openings at Wal-Mart, so when you look at competitive openings that caused – the cause of that is Wal-Mart.

Karen Short – BMO Capital

Well, but you said a rational behavior.

Bob Mariano

It’s promotional and that’s coming from the conventionals.

Karen Short – BMO Capital

Okay. So there are openings at Wal-Mart, and a rational behavior is conventionals?

Darren Karst

There you go.

Karen Short – BMO Capital

Okay. And then on D&A just following up on the question, sorry, why would your D&A run rate be down sequentially, and then I guess down also from the fourth quarter? Is there something that rolls off on the depreciation schedule?

Bob Mariano

Yeah, it’s just, I mean it’s just a function of as asset roll off in terms of depreciation, that’s what’s driving that. We can probably take that offline and –

Karen Short – BMO Capital

Okay. No problem.

Bob Mariano

I’ll show you that a little more clear.

Karen Short – BMO Capital

Okay. And then just last question, I don’t know if you’re willing to provide us that in terms of pricing at Mariano’s, where would you say you were relative to your conventional peers on that scale that you provided in an answer to Scott’s question?

Bob Mariano

Yeah, I don’t think.

Darren Karst

Probably not, something we wanted to talk about, I would say that it’s not changed from where it had been previously. We’re still trying to maintain that same gap.

Karen Short – BMO Capital

Okay. Thanks very much.

Operator

(Operator Instructions) We have additional questions from Scott Mushkin with Jefferies & Co.

Scott Mushkin – Jefferies

Hey, guys I actually had – thanks for letting me ask couple more here. I had two follow-up questions on price, and kind of going a little bit with Karen, just talking about what hopefully, you can answer it this way, can you price the core like you price Mariano’s?

Bob Mariano

Theoretically, yes, but it’s more a way up. We have different hours in Mariano’s, it’s not just the price level you’ve got, quality level and the service level and the shopping atmosphere. So we understand that it’s the strength of that format and we’re not just, I mean we talked a lot about pricing from promotion today in the core and that’s totally that it’s an important part. It would be – it will be less than honest to say that it’s actually only in the core we focused on. But we are focused on the shopping experience and delivery service and as well the quality delivery to the customer. But, I mean directionally, I think there we’d like to go.

Scott Mushkin – Jefferies

So Bob, clearly, you got, spend a lot of time in taking chance, I think, you guys outlined the quality. I think but just core customer simply can in some ways subsidize a better experience or better quality, a parameter by paying some more for the Detroit’s does the pick in inside, can you get those prices and you bake these items to a place where the core middle class shopper will feel and how much EBITDA will cost you, I’m going to that’s the limit. Then the other question is how many stores will long or throw at you, right?

Darren Karst

Yeah. I think that’s part of the work that essentially will help us through in terms of prudent price investments, with the scapulas as opposed to shedding. And so you’re absolutely right in terms of what is that differential that people will opt out of the match channel and back into our store. And then that’s, and we’ve seen, we have seen, as I said in my remarks, we have seen some of the pricing activities that we have already embarked on in a very initial stages, we have seen stickiness with the customer. So and as you know so very well when you start taking pricing, I said, takes it would four to six exposures of the customer that really for them to become aware of what we have done. So I’m confident that we can’t find the right pricing promotion model for the pick in save in corp stores that can deliver good return for us.

Scott Mushkin – Jefferies

As the third stage, our GAAP is just narrowed from where it was 8 or 7. It is that part of the palmier running into?

Darren Karst

Yeah. we got – as they open more stores in areas where we perhaps are not taking price in (inaudible) because we won a competition with them. So now as they open those stores we have to take pricing actions that we had spoken about in past there. Yes. The answer is yes. We do have to take some action and have that.

Scott Mushkin – Jefferies

All right. Thanks. I appreciate that.

Operator

Thank you, and that concludes the question-and-answer portion. I’ll like to turn it back over to Robert Mariano.

Bob Mariano

Thank you. Thank you, operator. I want to thank everybody for your participation today. In closing, I’d just like to thank our employees for their hardwork, our customers, suppliers and shareholders for all their continued support. Let me assure you that we’re focused on continuing to execute, secured our plans despite the tough environment, and look forward to sharing our progress with you in the next quarter. Thank you very much.

Operator

Thank you. That concludes today’s conference, you may disconnect at this time.

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