Executives
Alec C. Covington - President, Chief Executive Officer, Director
Robert B. Dimond - Chief Financial Officer, Executive Vice President, Treasurer
Kathleen M. Mahoney - Senior Vice President, General Counsel, Secretary
Analyst
Karen Howland - Lehman Brothers
Lauren Brinkman - Standard & Poor’s
[Keith Curtis - Rent Point Capital]
Presentation
Nash Finch Company (NAFC) Q2 2008 Earnings Call July 17, 2008 11:00 AM ET
Operator
Welcome to the Nash Finch second quarter 2008 conference call. (Operator Instructions) The company has asked me to advise you that this call will include forward-looking statements, which involves risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Factors that could cause such differences are described in the Nash Finch press release and in the company's filings with the SEC, including its 10-K and fiscal 2007.
The company also notes that the call may include references to certain non-GAAP financial measures as the term is used in SEC Regulation G, such as consolidated EBITDA. Reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures are provided in the Investor Relations portion of the company's website, under the caption, Presentations and Supplemental Financial Information and in the schedules to the company's earnings release, which can also be found in the same portion of the company's website, under the caption Press Releases.
It is now my pleasure to turn the conference over to the company's Chief Executive Officer, Alec Covington.
Alec Covington
Joining me today our Bob Dimond, the company's Chief Financial Officer and Kathy Mahoney, the company's General Counsel as we've done in the past, I’ll turn the meeting over to Bob Dimond, to go through our financial review and then I’ll be back a little bit later to talk about the quarter, and a little bit of an update on our strategic actions. Bob
Robert Dimond
As an overall comment; we’re pleased with the results of our second quarter, which were on track with our expectations. As we communicated previously the quarter results included some incremental conversion costs related to a couple a couple of the major remodels that were well underway during the quarter and also included some startup cost related to the two new stores that we acquired at the beginning of the quarter.
Our total sales in the second quarter 2008 were $1.042 billion compared to the prior year sales of $1.064 billion. Year-to-date sales were $2.064 billion as compared to $2.096 billion last year. The declines in the second quarter and year-to-date sales comparisons were primarily due to the transition of a large customer to another supplier in mid 2007.
Excluding the sales attributable to this customer of $34.3 million in the second quarter, total company sales were positive 1.2% with the second quarter results so negatively affected by the shift of Easter to the first quarter in 2008, as compared to the second quarter in 2007 by approximately $8.7 million or 0.9%.
After adjusting for both of these items the second quarter of 2008 sales increased by 2.1% as compared to the second quarter 2007. Likewise excluding the year-to-date sales attributable to this customer of $70.5 million, total company sales were positive 1.9% compared to the year-to-date sales in 2007. Please note that we have just passed that one year anniversary of the loss of this customer, with the beginning of our third quarter and have such beginning with our next quarter report. We will have apples-to-apples compression going forward.
Net earnings for the second quarter 2008 were $10.1 million or $0.77 per diluted share. This compares to net earnings of $9.6 million or $0.70 per diluted share last year. Net earnings for year-to-date 2008 were $21.4 million or $1.62 per diluted share as compared to net earnings $14.9 million or $1.10 per diluted share last year. Please note that net earnings for the second quarter and year-to-date periods of both years were favorably impacted slightly by several significant items detailed in the table included on the second page of the earnings release.
I would like to remind you that we provide a supplementary schedule at the end of our earnings release, which details our quarterly EBITDA results in terms of consolidated EBITDA. We recall that one of the key financial targets identified by our new strategic plan is to drive improvements in our EBITDA margin. With this remind EBITDA for the second quarter of 2008 increased to $33.6 million or 3.2 % of sales as compared to $33.3 million or 3.1% of sales for the prior year quarter.
EBITDA for the year-to-date period in 2008 were $64.2 million or 3.1% of sales compared to $58.5 million or 2.8% of sales in the year-to-date 2007 period. We are pleased with the year-to-date increases realized in EBITDA, which is benefited from improvements in both gross margin and SG&A expenses.
I would ask you to refer to the table on page two in the earnings release, which detail several significant items. The affected net earnings and EBITDA, net earnings for the second quarter and year-to-date periods of 2008 included several significant items that sum to net credit of $0.3 million and $3.2 million respectively. 2008 EBITDA for the second quarter included items totaling $8.4 million charge and year-to-date period netted to zero.
Net earnings for the 2007 comparable periods included significant items that sum to net credit of $0.5 million for the second quarter and $0.6 million for the year-to-date period. Finally, EBITDA for the second quarter and year-to-date periods included one significant item for a credit of $0.7 million. Our consolidated gross profit margin improved to 9.1% of sales for the second quarter of 2008 as compared to 9% in the second quarter last year. Our gross margin actually increased by 0.4% of sales due to improvements achieved from better management of inventories and vendor relationships.
However, these gains were partially offset during the second quarter by incremental non-cash year-over-year LIFO charges of $1.6 million or 0.2% of sales to the high level of inventory costs increases that have occurred, and that accounts for approximately $0.7 per diluted share. Our year-to-date gross margin was also 9.1% of sales compared to 8.9% of sales during the same period last year. The 2008 year-to-date period was negatively affected by incremental non-cash LIFO charges as well of $1.9 million or 0.1% of sales, which represents a $0.9 per share impact.
Our consolidated SG&A expenses as a percent of sales for the second quarter 2008 were 6.2% and were flat to the 6.2% realized last year. SG&A expenses as a percent of sales for year-to-date 2008 period were 6.1% as compare to 6.3% last year.
Now I would like drill down into each for our business segments. Following this breakdown of sales for each segment for the quarter, sales in our Food Distribution segment were $600.1 million in the second quarter this year down 5.2% compared to $633.1 million last year. Excluding the decline in sales of $34.3 million relating to the customer who transitioned the Food Distribution segment sales increased 5.2%.
The second quarter was negatively effected by the shift of Easter to the first quarter in 2008 versus the second quarter in 2007, by approximately $6.4 million or 1.1%, and after adjusting for both of these items the second quarter of 2008 sales for Food Distribution increased by 1.3% over last year. Likewise excluding the year-to-date sales attributable to those customers of $70.5 million, Food Distribution sales were positive 1.4% compared to last year.
The sales momentum in our military segment continue to be strong in the second quarter, with sales of $304.6 million in this years quarter, up from 4.9% versus $290.5 million last year. Our retail segment sales were $137.7 million in the second quarter of 2008 as compared to $140.5 million last year, which primarily reflects the closer of four stores since the end of the second quarter 2007.
Retail same-store sale decreased 3.9% in the second quarter of 2008, but after excluding the unfavorable impact of the Easter of shift of $2.3 million or 1.7% of sales in the quarter same-store sales were down 2.2% for the second quarter which matches the year-to-date same-store sales decline of 2.2% as well.
The following is a breakdown of EBITDA by business segment for the second quarter, our Food Distribution segment EBITDA was $25 million or 4.2% of sales in the second quarter of 2008, a 5.3% increase as compared to $23.7 million or 3.8% of sales in the second quarter of 2007. EBITDA and in our military segment was $11.6 million or 3.8% of sales in the second quarter this year, an increase of 9% versus $10.6 million or 3.7% last year.
In our retail segment EBITDA for the second quarter 2008 was $7 million or 5.1% of sales compared to $8.9 million or 6.3% of sales from in the second quarter of last year. The decrease in retail EBITDA for the second quarter resulted primarily due to the conversion and start-up cost associated with several strategic initiatives during the quarter.
In summary our total company EBITDA margin as a percentage of sales in the second quarter of 2008 of 3.2% was on track to our plan, which called for a very slight improvement in EBITDA margin rate over the prior year period, which was 3.1% in the second quarter of 2007.
I would like to comment regarding our progress towards our long-term key financial targets identified in our strategic plan. As you recall one of key targets is to achieved an improvement in our total company EBITDA margin to 4% of sales, just as important we have also targeted to achieve free cash flow returns on net assets of 10%, a 2% sales growth rate and to deliver our balance sheet to a debt-to-EBITDA ratio of 2.5 to 3 times. Since announcing these targets in November of 2006, we have realized significant improvements on several of these metrics.
Our EBITDA margin has improved from 2.2% in 2006 to 3.2% of sales in the most recent quarter, and our leverage ratio of total debt-to-EBITDA has improved, by a full turn of EBITDA, from 3.4 two times to 2.4 three times Our ratio of free cash flow to net assets took a dip to 6% during the quarter, like we had discussed that it would on our last call, due to having a higher level of inventory during the quarter. Please note the new line item added in 2008 to the financial targets table in the earnings release, which shows the ratio of free cash flow to net assets excluding the impact of strategic projects of 6.8%.
Finally, while our year-over-year sales have also improved, we expect to make more significant improvements on the organic revenue growth metric, as we implement initiatives associated with our strategic plan in addition to making further progress on the other metrics in 2008 and beyond.
As previously announced we completed the replacement of our Senior Credit Facility in early April. The new facility is a $300 million asset back loan, which provides the company with a reduced interest rate as well as with much greater flexibility. The new facility includes an accordion feature, which allows the company to increase the aggregate facility size up to $450 million if needed.
At the end of the quarter we have a $142.9 million of debt outstanding on a revolver and had a $141.2 million of availability under that facility. Our leverage ratio of total debt-to-EBITDA was $2.43 at the end of the second quarter, which is flat to the ratio of $2.42 at the beginning of the year. The company was in compliance with all financial covenants at quarter end.
The company announced on Monday that our Board of Directors have declared a regular cash dividend of $0.18 per share, to be paid on September 5, 2008 and this is our 328 consecutive quarterly dividend paid.
I'll now turn the call back to Alec.
Alec Covington
I think the first comment I would make is that, the quarter was really fairly uneventful and really the results were, just almost directly inline with exactly what we had expected here as we planned our year back to the fall of last year.
I think that one of the encouraging things of course is that sales were positive. Once you set aside the impact of the loss of Martin’s and the Easter Holiday, matter of fact if you look at the quarter, the sales increase was actually above our longer-term target. So that was very encouraging.
Our EBITDA improved slightly and that’s what we had planned. I think you will recall at the end of the first quarter as well as going all the back to the third quarter of last year. I indicated that as we begin to reinvest back into our business. That we would see a lot more transition costs and start up costs, but we felt that in light of that that during 2008 we will be able to slightly improve our EBITDA rate and our EBITDA dollars and that’s exactly what happened in the second quarter.
We were able to increase the EBITDA slightly in light of the fact that we had significant change in one-time charges from year-over-year. So, when you look at the reversal and charges year-over-year that was an additional $1.1 million worth of headwind that we had to overcome just to be able to increase the EBITDA. So when you look at it from that standpoint, we were very well pleased with results.
On a pre-tax basis there was a lot more noise in our numbers and I think it’s important to understand what’s in those numbers. If you look at the pre-tax income on our schedule you will see that earnings before income tax actually declined from $17.3 million to $14.9 million a year-over-year.
Inside those numbers are two very big influencing factors. One is the difference between the one-time charges from last year to this year, last year we had the pick-up from the reversal of some charges that have been taken back in 2004 which gave a positive impact a year-ago. This year of course we have the impact of some other charges that we’re taking during the quarter. When you really flip them around, the difference in the charges on a pre-tax basis is $2.4 million.
This year the bulk of the charges are related to the financing. We had to write-off the deferred financing associated with our previous debt estimate, it was all non-cash of course, but it does impact pre-tax earnings, that one-item. Impacted it by $1 million alone to the negative this year as opposed to, the reversal of charges a year-ago, which helps us to deposit. So, the swing between those two years on a pre-tax basis was $2.4 million.
Now, in addition to that as Bob, mentioned, everybody and we’re included are experiencing a lot more inflation and higher cost in their inventories and of course, we book our inventories using the LIFO method. Now, the difference in LIFO charge in this quarter alone, year-over-year was $1.6 million also impacting pre-tax, but again no cash involved.
Those two items, the LIFO charge as well as the reversal from year-over-year and one-time charges equates to $4 million in non-cash items that impacted our pre-tax earnings year-over-year. So, when you look at the difference year-over-year of 2.3 and then you understand that the $4 million in non-cash pre-tax items in those numbers, it helps to make a little bit more sense out of the quarter on a pre-tax basis.
Now, as I look at the various business segments. I am really pleased with what has been occurring in Food Distribution, I’m really particularly pleased with their growth momentum, which is now at 1.3%, when you set aside the impact of Martin’s and of course at Easter, they did showed solid improvement in EBITDA.
Food inflation had some impact on our margin for the quarter, but not nearly to the extent that it did in the first quarter and I think that you will recall, that we indicated that, that would like to be the case. That we would expect to see, some inflationary impact in our inventories for the remainder of the year, but we didn’t feel that we would see that impact at the levels that we saw in the first quarter, so that all came in just as we had thought.
The Food Distribution Group is making excellent progress in adding new customers and that to me is one of the most encouraging thing that we’ve seen in that side of the business, and we’re pretty excited about that. As we look at the third quarter, the primarily focus for the Food Distribution Group, will be to bring onboard these new customer successfully, that will be their number one priority make sure that we get, all of the work done and get them safely into our business segments without causing them any disruption and we do have a number of those initiatives undergoing right now.
I would say that, we have planned to open our upstream warehouse which we have spoken about as part of our strategic plan, late in the third quarter. There is a chance that we may delay that because of the new business activity that’s occurring in our Lima, Ohio facility, because again I don’t want that strategy project to influence our ability to bring these new customers onboard and get that job done right, so we’ll make that decision later.
I think I had mentioned that we planned to open that warehouse at the end of the third quarter, that’s still our plans, but that could change according to how well that we are able to get the job done of getting the stores tagged and bringing on the new business and how quickly we can get people hired, because we’re actually adding labor back into several warehouses around the country right now as a result of some of the new businesses being brought onboard.
Year-over-year sales will turn positive of course in the third quarter, that goes without saying, because we cycle through the Martin’s business, but more importantly we have growth that’s occurring in that business segment. So, we’ll see that more visible in the third quarter without having to always explain whether it’s this or that in our numbers.
We do expect to see higher than normal inventories in the third quarter and that we will put pressure on our free cash flow to net asset ratio, so I think we could see that maintained at its current level going into the third quarter and I think the other thing that’s quite fairly obvious to everybody in any type of business today, one of our big initiatives is to manage fuel consumption, because it’s a huge cost to us.
I would tell you as important as that is, I worry a lot about the impact it has on our customers, because that gets passed on in the form of fuel surcharges and then there is the fees that we charge and that’s okay, but at some point of time, it becomes a burden for them to be able to handle in their business and that causes all of us to feel some pressure. So, we’re trying our best to manage it, it is difficult for everybody and there’s not a thing in the world we can do about it, but it is something that we have to manage daily.
On the corporate retail side of our business, our comparable store sales remained negative at about 3.9 for the quarter of course that was influenced by Easter and it’s also influenced by an increase that we’re seeing in generic prescription drugs and when do the math and swap from brand cost to generic across obviously that’s a tremendous difference in the pharmacy units within our retail stores as well, so both really are the big influencing factors that for the quarter.
If you set aside Easter the stores would have still being negative, but it would have been about 2.2% instead of 3.9%. We had a strong Easter holiday last year that occurred in the second quarter, so that is a difficult impact to overcome for that group.
The AVANZA units, I would say that is our Hispanic format and as you know we have been expanding that format this year. If you single just those stores out of course there’s not many of them, but if you look at just those units they actually had comparable store sales that was in excess of 13% and that is in light of a new WalMart opening in Denver, near one of our AVANZA stores there in Denver. So, we are just couldn’t be more pleased with the results that we are seeing in AVANZA and in the areas where we are investing a strategic capital.
Now, speaking of strategic capital that obviously had a negative impact on our EBITDA for the quarter and we knew that would happened as we began to make investments back into some of our formats in this side of the business and if you look at where that pressure came from, about $1 million of it was associated with acquisitions that we made, that we discussed earlier and remodeled that we did during the quarter.
If you think about it I mean look at each one of those individually. I mean the bad news is, we acquired two stores in Rapid City and Scottsbluff. Anytime you acquire new stores you have an enormous amount of inventory change, because the private level doesn’t match and you have to discount all those things that now you don’t sell any longer and reset the stores and there’s a huge amount of labor cost. So, the bad new is all of that hit the P&L for us, for those stores in the second quarter.
The good news is that today Nash Finch has the number one market share position in Rapid City, South Dakota and that’s something that we are proud of it and unfortunately something that we can’t say too many places around the country, but we are very proud of that and I will also say that the pre-existing stores that we had in Rapid City are also seeing substantial sales increases in that market as a result of the repositioning that we’ve done there. So, we’ll take some pressure in this quarter to achieve those longer-term results to just make sense. So, we are very pleased with that and unfortunately we knew we would have the cost in the quarter.
Also, we opened our first new format of a larger box type. It is our Family Fresh Market. It opened in Hudson, Wisconsin. The store is about 57,000 square feet. We incurred an enormous amount of cost in this quarter to get that done, that’s the bad news, that’s part of the million dollars I am talking about.
This was a profitable store. We actually remodeled it while it was opened and a little like a doing a complete construction job while the store is opened and therefore we incurred a lot more labor cost and a lot of cost associated with that transition and that of course is further million that influenced our retail EBITDA numbers.
The good news is that the store has been incredibly well received by consumers and it is way ahead of where we expected the results to be at this point after opening. It open back in June and that’s been sustaining, enormous sales increases since the beginning. So, we are pleased and we will take that kind of results longer-term and both separate through the short-term the consequences of that, it’s understood, it’s planned we understand it, but it’s a great investment when we look at where we’ve ended up there.
Third, we also had one of our other stores under construction to appoint that customers couldn’t really shop there to any big degree; that was in Greeley, Colorado. You remember that I mentioned last quarter that we would convert that over to yet another one of our AVANZA units. That work has been completed, however during the quarter that store was constantly under construction, our sales where actually down during that period of time, therefore our EBITDA was impacted severely there during that period of time and we understood that and we took that hit during the second quarter.
Now what’s the good news with that? Well, the good news is it opened earlier this week and it has averaged between 40% and 50% sales increase over the base that it had. So, again we’ve got another great success story with AVANZA that’s now two between Omaha and Greeley that we’ve done this year and we hope to continue expanding that format with the kind of success that we are having.
Now, in addition to that of course we had the impact a year-ago having sold some scripts in the store that we have that added that $0.5 million on a one-time basis a year-ago that obviously we didn’t have this year, but then we also invested money and market share growth in several markets in an attempt to improve our top-line in our retail comps and I think you will see in the third quarter that that was the wise decision as we move forward.
We’re not investing in every market, we strategically look at the markets we’re in and make decision on which ones we think has, the proper amount of opportunity for market expansion. We did that during the second quarter, we did it intentionally. It’s proving to be a good decision for us, but it cost us several hundred thousand dollars as well in the second quarter.
So, we had a lot of self and do self inflicted movement in the second quarter that held back the results of our retail division, but those are the things that were planned, they were decision we made and so far it looks like those decisions are good ones that will payoff big dividends for us in the future.
In the third quarter we are going to continue to be aggressive in the marketing or conventional stores. We will continue the see some pressure in the third quarter, not to this level perhaps, but we’ll see some pressure in the third quarter.
We expect the top-line will now become at least flat maybe slightly positive in the third quarter as a result of the remodels and the marketing efforts that we’ve made and we’re going to -- again we always are reviewing our stores to see if there are some that are on performing that needs to be looked at for closure or for disposition.
We actually have already disposed and closed one location that we closed I guess a few weeks ago if I recall. So, that will be impacted in the third quarter with the store that was losing money and we were able to sell the script files and move on and that’s what we’ve done. You see a little influence on that in the quarter from some asset write-down that shows up on our one-time list, but we are always looking and we don’t mind investing in good stores such as Hudson and others, when we know we have an opportunity and we’re not shy, to get out of markets and close stores when we see that it doesn’t make any sense to continue on.
In our Military segment, our military continues to be a best performing operations, just as simple as that. We had nice sales increases once again that they continue to do quarter-after-quarter-after-quarter and they had a very nice EBITDA improvement of 9%, which they continued to improve quarter-after-quarter-after-quarter. So, it was an excellent quarter for them, great inventory management practices there, great expense control. They continue in the third quarter, they push for organic growth, so I’m sure they’ll continue that path and they’re really focused on their operating cost reduction initiatives.
Now, as we go back and think about our strategic plan and Operation Fresh Start, first of all as I mentioned earlier we are making tremendous progress with AVANZA. We, obviously launched Omaha earlier this year, Greeley has just opened as I mentioned. Omaha continues to perform extremely well. The entire AVANZA group of course over 13% in comp store sales, all of that looks good. Denver showing good increases and all were doing there as looking for additional locations to expand AVANZA as we can, and we’ll continue to do that carefully. We’re not looking to do anything too dramatic. We are going to move slowly and carefully and make sure we take that solid step.
Again we have had good response in Hudson with our large store Family Fresh Market format. We are looking to expand that in another location. I don’t think we’ll get another one down before the end to this year, but we hope to have another one that will come online in the early part of ’09.
In our Food Distribution group, they continue with their category reviews. As I mentioned last quarter every time they go through the category review process and make changes to the product portfolio and the pricing great things happened in terms of with the sales we see at retail level. That continues, the results are very impressive and the good news about that is its actually influencing some of our customers that are coming to us, are coming to us because of that program or at least influenced by it in one way or another, so that’s adding new business in Lima, Ohio where we have that test pilot going on, so we are really excited about that.
On the supply chain side, as I mentioned our upstream, downstream facility is slated to come online towards the end of the third quarter. We want to make sure; we get all the transition there done prior to the holidays. If for some reason we are not able to do that because of the new business we’re having in Lima we’ll delay it after the first of the year we definitely won’t try to make that change during the holiday period and our first priority of course is taking care of these new customers and then secondly we will worry about the exact timing of when we open that new facility.
The Military division continues to focus on their perfect order index initiative. They’ve made a tremendous amount of progress in procurement and you already have seen those improvements in our fill rates and they continue their initiatives for recruiting for additional bench strength in preparation for the growth that we know we will come and are confident will come in our Military division.
In summary, I would say we were pleased with the results of the second quarter. It’s right on line of where we thought it would be. We remain very committed to the target that Bob talked about earlier.
When you look at the third quarter, we’ve got our eye focused clearly on several things. First of all the growth in our distribution business and making sure that we bring that business on properly; continuing the improvement that we’ve made in expense control and solid execution of our strategic initiatives and focusing on providing targeted returns on our investments whether its through the share repurchase program, the strategic initiative that we are investing in or strategic acquisitions.
I would keep a few things in mind for the third quarter. Obviously now that we cycled Martin's, we do expect that our sales will become positive of course in the third quarter company wide and as well as both in our Military divisions and in our Food Distribution group. That’s the first time that we’ve been able to say that for a long time in this company, so we look forward to being able to speak to that at the end of the third quarter.
We do anticipate some year-over-year improvements in EBITDA as I mentioned before but we have a lot of transition costs, start up costs, that will flow through the P&L in the third quarter as it has during the second quarter and the inflation that we’re seeing in inventories will continue to provide, some limited improvements that we didn’t forecast but nothing to the extend that we saw in the first quarter.
Again, our free cash flow measurement will be negatively impacted by a temporarily by some of the strategic investments that we’re making but also because of the inflation in our inventories. We could still go up looking at our inventory levels and our inventory level in cases was below prior year but in dollars was substantially above prior year, so that’s just a natural function of the inflation that is putting pressure on that aspect of our metrics, but that is something we’ll just have to work around.
In closing, we look forward to speaking to you again in November at the end of our third quarter. As we’ve done in past years, it’s our current plans will be to come to New York for this call and to subsequently meet where there’s many of our shareholders and analysts as would like to meet with us during the days following the earnings release to discuss our products and plans for the company just as we did a year ago. I find that very helpful to get insights from our shareholders and get insights from our analyst and so we’ll repeat that process again, this year as our attentions are at this time.
Now at this time I would like to ask Dwaine perhaps to help us take whatever questions we might have from those that might be on the phone.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Karen Howland - Lehman Brothers.
Karen Howland - Lehman Brothers
A question about the retail sales and that I mentioned this is for Bob. I just wanted to make sure I’m understanding this right. I noticed that the comp was down 3.9% but your total retail sales were down 2%; are the new stores that you have brought on this quarter just considerably higher volume than the ones that you’ve closed last year or what’s causing kind of that discrepancy there?
Robert Dimond
Yes, they are slightly higher volume than the ones that are coming in, so I think that would be a small piece of that there. As well as one of the things that you may have noticed is the adjustment between the years that we talked about in the first quarter versus the second quarter is the impact of the Easter week. Just two different sets of weeks compared together, maybe accounted for 20 or 30 basis points adjustment as well.
Karen Howland - Lehman Brothers
So, the comp is there on a like-to-like time period where as?
Robert Dimond
That’s correct. To get to the 2.2 we’ve essentially excluded the week that included Easter and then its comparable week in the associated every other year.
Karen Howland - Lehman Brothers
I was wondering if you could talk a little bit about at your retail locations and your customers and what you’re seeing from the ultimate consumer. Obviously we’ve been hearing about people buying more on promotion, being more self conscious, looking for a value, I was wondering if you’re seeing any trends in that.
Alec Covington
I think we are seeing some of the same similar trends that we saw in the first quarter in that regard. I think that it’s very clear that the consumers are struggling with the amount of inflation that they are seeing, the shopping mix has changed a little bit, private label continuous to increase disproportionably to the rest of our business. You are seeing people in certain cases shop down, where they might have bought a steak, they are buying ground beef, you see some trends like that.
Produce and fresh vegetables continues to grow at a fairly accelerated rate. So that might a sign of maybe eating at home a little bit more, I don’t know, but we’re definitely seeing a change in mix, and we’re also seeing, changes that vendors are taking to deal with their own sets of problems and issues in escalating cost.
As I’ve mentioned a couple of different times, not always does inflation translate into a sales increase. If you think about cereal manufacturers, they don’t always raise the price, in many cases they make the box smaller and we’re seeing a lot those tactics used to deal with the inflation and that’s inflation that doesn’t translate into hire sale, so you’re seeing all of those kinds of things occur.
Now in certain parts of our markets, we’re also seeing a reduction in the number of shopping trips, but an increase in the amount purchased. I think that’s particularly the case in some of the commentary that we serve supply. So those are -- I think the bigger trends that we’re seeing Karen and unless you have something more specific you want to ask me about.
Karen Howland - Lehman Brothers
On the distribution side, I know you’d mentioned that you’re going to be putting some additional customer through your centers. Can you talk about that the volumes that that could be adding to your few distribution centers?
Robert Dimond
Yes, these are not big chain type deals, these are a one, two, three store groups and I think right now, we’re in the middle of doing some of those conversions, so it’s a little bit difficult for me right now, because some of these stores are actually being tagged this week. We don’t have a lot of visibility of the aggregate total. I think, we’ll be better prepared to talk about that at the end of the third quarter after we’ve actually seen some of the results, but that’s not going to make a huge difference in aggregate to our total business Karen, it will help to drive obviously our comparable sales.
It gives us a lot of confidence and looking at the third quarter and the fourth quarter that we will turn the corner and have positive sales year-over-year, but it does require a lot of work, so if you’re trying to bring on 15, 20 stores into a division like Lima, it’s not easy quite frankly to hire people, so that takes a good while and so we want to do a good job and we want to be very careful with it. So, it’s more of the work that it creates perhaps more than the magnitude of volume that’s going to add and we will have a little bit more visibility of that in the third quarter of ’08.
Karen Howland - Lehman Brothers
Looking at the corporate expenses, is it kind of $10 million per 12 week quarter seen as a reasonable run rate going forward?
Robert Dimond
Yes, it seems that is generally a good run rate to expect going forward there. We do have, a couple of items that may from a seasonal perspective shifted from one quarter to another but actually for on an annualized rate that’s pretty close to where you have to expect.
Operator
Your next question comes from Lauren Brinkman - Standard & Poor’s.
Lauren Brinkman - Standard & Poor’s
I just wanted to enquire about the tax rate. I think it was sort of less, it was just a little less than in the first quarter, but I think it was less than you had talked about on the last conference call and I wondered what you think it’ll be for the year?
Robert Dimond
Sure, well let me explain that, in our significant kind of one-time item table, you will see that we did have a kind of an extraordinary item in this quarter and one which we didn’t know exactly when it would occur. We did receive a tax refund related to an item that we had file for refund on towards the end of last year and we actually received that in the quarter and hence we are able to take that in into this in particular quarter. So that did bring down our tax rate to about 32.7% or 32.4% for the quarter, but for the year we expect it to be around to 37.6% effective tax.
Lauren Brinkman - Standard & Poor’s
That would be 41% in the back half then approximately.
Robert Dimond
Yes, that’s correct no change from what we’d said on a go forward basis.
Operator
Your next question comes from [[Keith Curtis - Rent Point Capital]].
[Keith Curtis - Rent Point Capital]
Yes, I just wanted some more clarification on these conversion costs and strategic investments. You clarified $1 million I think in conversion costs this quarter or is that the all in number or could you just get our hands around what the kind of some of these one-time costs I mean either this quarter or this year?
Robert Dimond
Yes, it is not uncommon when you are on boarding either a new store or remodeling, doing a significant remodel to have some conversion or one-time costs as that is happening as that occurs to the tune of 200,000 or 300,000 per store. I think that’s pretty common in an average within the industry and that adds up to that $1 million.
Alec Covington
And specifically, really there is a whole bucket of things included in that, but I will give you just a few examples.
First of all when we acquired the two stores, we actually closed this store down for a several days and did nothing but do work inside outside, paint, you name it. So we had an army people in there from other corporate stores to help, so there is a lot of labor in that number, there is inventory markdowns in that numbers so again when you buy somebody else this stores they have their brand of private label, you have your so you have to -- you’d like to not buy, but often time you required to and you wind up taking a markdown to get it and other items that just doesn’t sale, so it’s those kinds of activities.
When you think about Hudson and Greeley we actually kept those stores opened while they were being remodeled and there’s just no way you can have the same level of productivity and efficiency when you have got restructuring teams all over the store and you have got people constantly cleaning up and trying to keep the path opened to make sure it’s safe and all of those items. So it’s a combination of labor and gross margin that’s really impacted by the acquisitions as well as the remodels.
[Keith Curtis - Rent Point Capital]
And could you say what those store remodels may have cost you on the comp line this quarter?
Alec Covington
That’s a good question, and I know that all of them we’re down, so it would be a fairly significant number but we should get an accurate number on that. I don’t have that number for you here for the call, but we can calculate that.
[Keith Curtis - Rent Point Capital]
Okay and just going forward I mean you mentioned there will be strategic investments but is it going to be materially less than what we saw this quarter. I mean will you get a more normalized picture of things starting in the third quarter or fourth quarter or just comment on that.
Robert Dimond
Yes on the retail side which is where the bulk of this is right now, on the retail side we expect to see some of this continue on into the third quarter but not at this level. So it’s a little difficult for us to pinpoint exactly what that would be but -- so, we can’t factor it out entirely. I don’t believe they will resume back to pretty existing levels but we don’t expected it to be as dramatic as this quarter, because we don’t have as much activity going on in the third quarter as we had in the second.
Operator
You have a follow-up question from Karen Howland - Lehman Brothers.
Karen Howland - Lehman Brothers
I am wondering if you think about going forward in the second half of this year and next year not as much the remodel conversion cost, but how many stores in your plants right now do you expect to actually be remodeling or reformatting next year.
Robert Dimond
Well, that’s a great question and that something that we are reviewing right now. That’s part of what we do during this -- as you know this quarter’s longer quarter for us and during this period of time we actually go through a complete strategic review process which will be ramping up here just in a couple of weeks, specifically for that purpose and then we conclude that with our strategic plan meeting with a board in September and then we come to New York and discuss those plans in details in November. So I don’t really have an accurate number on that just yet Karen, but by the time we’re together in New York we’ll have a very specific and detailed plan behind that and we can explain that you entirely.
Karen Howland - Lehman Brothers
On the retail, I know you’d mentioned that, switch from branded pharmaceutical to generics impacted the comp. I was wondering if you could quantify that.
Robert Dimond
I don’t know that I have any numbers right in front of me that will -- if our pharmacy guy was here, he could probably speak to it generally, but I know weakly during our staff meeting that’s a constant discussion about the -- we actually track scripts by numbers, numbers of script and we know how many of those scripts were filled with plans versus generics and what we know for sure is the percentage of scripts being filled with generic versus brand has grown dramatically year-over-year. So it could be that Bob could get a number back to you Karen, but I don’t have it right off the top of my head here.
Karen Howland - Lehman Brothers
Do you think in the food inflation, I know obviously customer react differently, but I think across the boards food inflation has been higher; you think that could be offsetting some of the I guess the negative impacts from the switch to generic?
Robert Dimond
It could be, it’s always very difficult to know. I’ve been asked a lot over the years about inflations impact on retail sales. I tend to think that the consumer has a X number of dollars to spend at the grocery store and when groceries go up, their dollar and their budget doesn’t and today I suspect that, not only is their budget not going up, it’s going down because of the pressure from fuel and other thing that they are having to share those dollars with.
I have never saw a direct correlation between a 3% inflation rate and the 3% sales increase because of the things I have talked about. I don’t think the consumer gets a 3% raise because the food goes up by 3% and they have to make ends meet a different way and I think the second is manufactures react to inflation differently. Again when cereal boxes get smaller, but the price stays the same there is no impact at the cash register to that. So, I just don’t know that I can pin point very well a direct correlation between inflation and product and inflation at the cash register because of all the changes that goes on in the middle.
Karen Howland - Lehman Brothers
Just using that example if the cereal box gets smaller, don’t people have to go and buy cereal more often or do the bowl they actually fill gets smaller too?
Robert Dimond
You can make that argument, but they still buy one box of cereal when they go to the store, they don’t buy too and does that, 2 ounces less, that gets made up overtime perhaps, but we still only see one cereal box go to the cash register, so I don’t know that I buy into that.
Operator
That was the final question in the queue.
Robert Dimond
I appreciate the opportunity to discuss our second quarter and I look very much toward to joining the group the New York at the end of the third quarter. Remember this is a longer quarter so you won’t to here from us again until November and we look forward to being there in person to talk about our third quarter results. Thank you very much.
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