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Executives

Ed Kitz – IR

Bob Mariano – Chairman, CEO

Darren Karst - CFO

Analysts

Edward Kelly – Credit Suisse

Ken Goldman – JPMC

Karen Short – BMO Capital

Peter Benedict – Robert W Baird

Scott Mushkin – Jefferies & Co

Andrew Wolf – BB&T Capital Markets

Roundy's Supermarkets, Inc (RNDY) Q3 2012 Earnings Call November 8, 2012 4:30 PM ET

Operator

Good afternoon and welcome to Roundy's third quarter fiscal 2012 earnings call. All participants will be able to listen only until the question-and-answer session. (Operator Instructions) This conference is being recorded at the request of Roundy's. If anyone has any objections, you may disconnect at this time.

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

Ed Kitz

Thanks, (Holly). Good afternoon, everyone, and welcome to Roundy's third quarter earnings conference call. On the call with me today are Bob Mariano, our CEO, and Darren Karst, our CFO.

By now, everyone should have had access to the third quarter fiscal 2012 earnings release which went out today at approximately 4:00 pm Eastern time. If you have not received the release, it's available on the investor relations portion of our website at www.roundys.com.

This call is being webcast and the replay will be available on the company's website as well.

Before we begin, we'd 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 third quarter of fiscal 2012 and other filings with the SEC 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 the adjusted net income and adjusted EBITDA, which are non-GAAP financial measures within the meanings of SEC Regulation G.

A reconciliation of adjusted net income and adjusted EBITDA to the most directly comparable GAAP financial measures and the other information required by Reg G are included the company's press release issued earlier today which has been posted on the investor relations page to our 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 thanks for joining us today as we discuss the results for the third quarter ended September 29, 2012. Today I'll briefly review those results and then spend a few minutes updating you on our key strategic initiatives and current trends. Darren will then review the financial results for the quarter and will discuss guidance for 2012. At the end of our remarks we'll open up the call for questions.

We continue to see generally weak economic conditions which are clearly weighing heavily on our customers and how they shop for their grocery needs. In addition, we faced a very difficult year-over-year comparison to the third quarter of 2011 when we generated positive same-store sales of 1.8% and recorded the strongest EBITDA performance for any quarter in the last five years.

The competitive environment remains intense as we have seen an unusual amount of new competitive square footage added to our core markets during the year. This has led to a very high level of promotional activity largely initiated by certain conventional grocery operators in the markets that we serve.

As a result, during the third quarter, we stepped up our price investments and promotional activity to stimulate sales and volumes and, while the customer response in terms of sale and unit volume was very encouraging, it did have a greater impact on our gross margins than we had intended.

While we are experiencing these headwinds in our core market, we continue to be pleased with the performance of our Chicago area stores which are tracking above our expectations.

With eight Mariano stores now open in the Chicago area, we are consistently gaining more confidence that this business will be a strong part of our organic growth story in the coming years.

For the third quarter, sales decreased slightly to $974 million, largely due to a 3.6% decline in comparable store sales from the negative impact of competitive store openings and related pricing and promotional activities in our major markets.

Deflationary trends which we began to see last quarter became more pronounced this quarter and impacted our sales comparisons. We saw deflation or lower levels of inflation occur in a number of key categories which include dairy, produce and meat and we even experienced slight deflation in dry grocery.

Some of that deflationary pressure was a result of our price investment and promotional activity, which, as I said earlier, was somewhat deeper than we had intended.

Overall, our average retail price was down 1.3% from the same period last year, which accounted for about one-third of our same-store sales dollar decline.

We also faced difficult year-over-year comparisons, as I mentioned earlier, due in part to the success of our monopoly promotion third quarter of 2011. Although we ran the campaign again this quarter, the customer did not respond as enthusiastically as they did last year. We estimate that this had a 150 basis point negative impact to same-store sales.

The number of customer transactions fell 3% while the average transaction size was down seven-tenths of 1%. Partially offsetting the decrease in sales was a growing lament of our new stores in the Chicago market and the timing of the July 4th holiday, which shifted holiday related sales into quarter three this year.

We estimate the calendar shift benefitted same-store sales by about 40 basis points in the third quarter. I think it's an important point – it's important to point out that our two year stacked same-store sales for the third quarter as compared to the second quarter after adjusting for all the Easter and 4th of July calendar shifts improved approximately 160 basis points and units improved by approximately 370 basis points.

So while we recognize that our same-store sales declined sequentially from second quarter, it was largely due to the much tougher year-over-year comparisons which we had in the third quarter versus the second quarter. In fact, while our pricing and promotional efforts impacted our gross margins more than we'd like, they did have a favorable impact on sales and volume.

We view this as a very encouraging sign that our efforts are resonating with our customers.

Also on the positive side, the cadence of sales improved over the course of the quarter and sales in September were the strongest of the quarter. Those trends have continued into the early part of the fourth quarter.

As to our other major business initiatives, our perishable business grew to 33.9% of total sales for the quarter, which was approximately 30 basis points higher than a year ago. Our own brand penetration continues to gain momentum as we reached our year-end goal of 21% of sales in quarter three.

With regard to competitive activity in the market, the majority of the activity continues to be supercenter or discount operator openings. In the Milwaukee market, we continue to feel the effect of several Walmart stores including one Walmart supercenter conversion and one new Walmart grocery neighborhood store that opened during the third quarter.

In the Twin Cities, new competition includes one Walmart supercenter conversion that opened during the third quarter and one target (pre-fresh) conversion. We estimate the dollar impact to our same-store sales in the quarter due to competitive square footage that has been added over the past 12 months was approximately 230 basis points.

This is slightly greater than the impact we had in quarter 2, which was approximately 200 basis points.

As we discussed last quarter, Walmart has rolled out their price comparison advertising walkie while they are comparing themselves to our pick and save banner in Minneapolis, they're comparing themselves to Super Value's cub banner.

In Minneapolis, the promotional environment remains intense as Cub continues to be highly promotional and we have stepped up our own promotional activity as a consequence.

Given these trends, we believe this elevated promotional environment is likely to continue for a while. Now while we can't control the macroeconomic environment or the competition, we are carefully examining our business to identify changes we can make to improve sales and earnings.

We are also focused on a number of marketing, merchandise and consumer service initiatives designed to deliver the best overall value and experience to our customers. Those efforts are largely focused on our southeaster Wisconsin markets, which include Milwaukee.

In Milwaukee, we continue to take actions to neutralize the impact of Walmart's advertising while optimizing margins to the extent possible.

We are running a series of ads that wrap around local newspapers and highlight our best offers for the week at the same time emphasizing all the things that differentiate our store from Walmart, which is in contrast to their focus which is solely on price.

These ads convey the key elements of our value strategy: quality, service and good prices. We believe that this is a cost-effective way to increase visibility to the customer and demonstrate our value proposition. The preliminary response has been very encouraging to date.

As we said on our last earnings call, we have been in the market in select stores after Labor Day with our customer-centric pricing initiatives. At these stores, we have also introduced a service initiative aimed at improving check out times which we believe will enhance the customer experience.

We are still in the early stages of this work but are quite pleased at what we are seeing so far. As I mentioned earlier, we also continue to fine tune our price points on key items in categories such as milk, bananas and ground beef as well as processed meat as our objective is to be fair priced in all of our markets.

In quarter three, we found that some of our price (inaudible) were too deep and we have made and will continue to make adjustments to renew the margin impact of some of our current pricing actions.

We are also working with our trading partners to improve our cost of goods dynamics in these categories. We are making a solid shift toward our more every day low pricing through our price investments but haven't entirely readjusted our mix between every day cost of goods and promotion allowance and, therefore, haven't achieved optimal net cost of goods for some of these categories.

We believe that over time our fine tuning will help mitigate the margin effect of some of these investments and we are encouraged by the progress we have made in narrowing the price gaps with the supercenters and how our customers are responding to our pricing and promotional efforts.

We recently announced a change in our marketing and human resource leadership with the appointment of two new hires that I'm very excited about. (Don Hamlin) joined our organization as our new Chief Marketing Officer and (Jess Terry) joined as our new Chief Human Resource Officer.

The addition of (Don) and (Jess) gives us fresh ideas in two critical areas of the business and they are already bringing new perspective that I think is very healthy for our business.

(Don)'s background is in marketing for consumer goods and specialty retail, so he is providing a different and creative perspective for ways to go to market that best resonate with our customers.

(Jess) came to us after a long career at Kraft Foods and will work with our operating team to energize our employees which are truly our most important assets as they are our in touch point with our customers and help to create a very positive shopping experience.

Turning to our store openings, we opened two new Mariano stores in Chicago area and one replacement store in Wisconsin during the third quarter. Last week, we opened another new Marianos making our eighth location in the Chicago market.

While we have completed our new and remodeled store plans for 2012, we continue to develop new and replacement locations for next year and have five more Marianos planned or under construction currently.

Going forward, when we think about capacity, we are becoming ever more confident that the Chicago area can support at least 25 to 30 Mariano stores and, in all likelihood, even more than that.

Our Chicago strategy continues to be to provide an all-in-one shopping experience that appeals to foodies, value conscious customers and every one in between. We offer a significant assortment of organic and natural products and restaurant quality prepared foods that equals or exceeds any grocery or specialty retailer in the market.

We also have full service delis, bakeries, meat markets and (shi shops) with a broad and interesting product selection. Our product department is the gateway to the stores, evidenced by the extremely high produce sales per stores that we have in the Chicago area.

Lastly, we provide a full shopping experience by offering a complete center of stores, so we truly provide an all-in-one shopping experience with the customer. And because the Mariano's store model is one that has very high sales volumes, we are able to write fair pricing to the customer and still make our desired investment return.

Our same-store sales for the Mariano (banner) continues to remain in the low double digit range year-over-year. We also continue to be pleased with the way the store economics of the more mature stores are progressing towards our longer-term goals.

It's worth noting that during the third quarter we had an unusual amount of pre-opening and new store startup costs for any single quarter due to the recent openings of three Chicago stores, which represents more stores than we normally open in such a short time period.

We would not expect this pattern to be typical as we move forward since we try to space our openings more evenly throughout the year.

While we are pleased with the positive reception in the marketplace, we continue to refine the concept based on customer feedback. Our newest location that opened last week in Greek Town area of Chicago will cater to a diverse array of shoppers in age and demographic, so we trained some new and exciting ideas, including an oyster bar, wine bar, classroom kitchen offering special events and cooking classes with visiting chefs.

We also continue to refine our prepared foods area including our sushi bar, (Vera) coffee and gelato shop as well as our lunch and dinner offering.

As we look to the fourth quarter, we expect that the economy and competition will continue to challenge us. In this environment, we continue to focus on developing our pricing and promotional strategies while striking the right balance between driving sales and earning a fair margin.

We believe that enhancing the execution of our overall business model and continuing focus on our growing – on growing our Mariano's banner in the Chicago market will position us to deliver greater overall profitability over the long term.

And now I'd like to turn it over to Darren who will provide you some additional financial details on the quarter. DK

Darren Karst

Thanks, Bob. I'll now provide you with a few more details about the third quarter performance, our balance sheet, cash flow statements and then discuss 2012 guidance.

Net sales for the third quarter decreased 0.3% to $974 million from $977 million in the same period last year, primarily reflecting a 3.6% decrease in same-store sales. Gross profit dollars for the third quarter decreased $12 million to $251 million. Our gross profit margin rate was 25.8% down from 26.9% in the third quarter of 2011.

The decrease in gross profit margin rate was primarily driven by greater promotional and price investments primarily in the Minneapolis and Milwaukee markets and increased strength resulting from warm weather conditions.

Our operating and administrative expenses for the third quarter increased $1.4 million to $226 million. Operating and administrative expenses, as a percentage of net sales, increased 20 basis points to 23.2% versus 23% in the third quarter last year.

The increase was primarily due to higher operating costs related to new and replacement stores, one-time employee costs related to management changes, incremental costs related to being a new public company and reduced fixed cost leverage resulting from lower same-store sales.

The third quarter included $1.4 million of one-time recruiting, relocation and severance charges related to the management changes that Bob discussed earlier.

Interest expense for the third quarter was $12.2 million, a decrease of $6 million or 33% from the prior year primarily due to the favorable impact of our debt refinancing in February of 2012 which lowered our debt levels and reduced our interest rates.

Our effective tax rate for the third quarter was 39.4% compared to 40% last year. Our expected income tax rate for the full year is 39% to 40%.

Adjusted net income for the third quarter was $8.8 million or $0.20 per share excluding an $800,000 after-tax charge or $0.02 per diluted common share for one-time employee-related expenses. This compares to net income of $12.4 million or $0.41 per share last year.

Our adjusted EBITDA for the third quarter of 2012 was $43.1 million compared to $56.7 million last year. The decrease was due to the more challenging economic and competitive environment which resulted in lower same-store sales, lower gross margins and reduced fixed cost leverage.

In addition, we incurred incremental costs associated with being a public company, as we expected. As a reminder, last year's third quarter EBITDA performance was also particularly strong as it benefitted from a combination of higher inflation, a highly successful monopoly promotion in that year and a relatively stable market from a promotional perspective. That presented a difficult comparison both for sales and profitability for us this year.

Now briefly reviewing our results for the first nine months of 2012, sales increased 1.2% to $2,909,000 from $2,873,000for the first nine months of 2011. Same-stores ales decreased 3% versus the comparable period last year.

Looking at earnings for the first nine months of the year, adjusted net income was $38.3 million or $0.89 per diluted share compared to net income of $38.9 million or $1.28 per diluted share for the same period last year.

Capital expenditures for the first nine months of 2012 totaled $40.4 million primarily reflecting expenditures to complete three new stores, two replacement stores and for existing store maintenance.

We now expect the total CapEx in 2012 to be approximately $60 million to $65 million which will fund a total of four new stores, two replacement stores, remodel expenditure 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 $48 million for the first nine months of 2012 compared to $127 million last year. As we discussed in earlier quarters, the change was due in large part to changes in working capital, including the timing of payments for inventory and accounts payable.

The unusual payables timing occurred at the end of our fiscal 2010 year and that caused the cash flow for the first two quarters of 2011 to appear higher than what is normal.

Our cash flow from operations in the third quarter alone was $16 million versus $5 million last year which reflects typical third quarter cash flow.

In the third quarter, we also used cash to pay a quarterly dividend of $0.23 per share and paid down borrowings. We evaluate the best use of our free cash flow on an ongoing basis and after careful consideration of the current challenging operating and economic environment, our board of directors determined it was prudent to reduce our dividend so that we can continue to invest in the business and grow our successful Mariano's banner in Chicago as well as continue to reduce debt in a way that is consistent with our original expectations.

This decision, while difficult, is consistent with our objective to maintain a strong balance sheet and operating flexibility. Accordingly, we are reducing our dividend per share to $0.12 per quarter from $0.23 per quarter starting in the fourth quarter.

Our board has already approved the current quarterly dividend and it will be paid on November 26, 2012 to shareholders of record as of November 19, 2012. At the new level of payout, we believe our dividend policy will continue to provide for a dividend payout ratio that makes sense for the company and a yield that is very attractive relative to our peers.

Our long-term debt at the end of the third quarter was $688 million, down from $690 million at the end of the second quarter and $809 million at the end of fiscal 2011.

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 3.37 times while our interest coverage ratio was about 4.15 times.

As of September 29, 2012, we had $43 million in cash and cash equivalents.

Now I will spend a minute on our 2012 guidance. In the fourth quarter, we expect the economic and competitive environment to be fairly similar to what we have experienced over the last couple of quarters.

However, we also expect the year-over-year comparison for sales and profitability to be easier than what we had in the third quarter. Sales trends did improve as the third quarter progressed and so far that improvement has continued into the fourth quarter but we are still early in the quarter and expect to have some headwinds at the end of the quarter when a calendar shift will move some New Years related sales into 2013.

We've also made operating adjustments to mitigate the gross margin impact that we experienced in the third quarter but expect the promotional and pricing activity will still be elevated relative to last year.

Based on our current expectations, we now expect 2012 sales growth of approximately 1%, to 1.5% over the prior year and same-store sales in the negative 2.5% to negative 3%.

Adjusted EBITDA for 2012 is currently expected to be in the range of $195 million to $200 million and adjusted EBITDA margin in the range of 5.0% to 5.2%.

And finally, we now expect adjusted diluted earnings for 2012, excluding one-time expenses, to be in the range of $1.05 to $1.12 per share on approximately 43.4 million weighted average diluted shares outstanding.

That concludes my financial comments and at this time I will turn the discussion back to Bob.

Bob Mariano

Thanks, Darren. In conclusion, we expect that the economy and competition will continue to challenge us and affect our customer shopping behavior. This environment we continue to focus on delivering the best overall value and experience to our customers.

While we recognize that pricing and promotion is very important in today's budget-conscious shopper, we also realize that quality, service and selection truly set us apart from our competition.

We have a number of initiatives underway that are and will continue to resonate with our customers in today's tough economic climate and position us as the go-to grocery store in our markets.

At the same time, we continue to fine tune our pricing and promotional strategies while aiming to strike the right balance between driving sales and earning of fair margin. We remain confident in our strategy and believe that enhancing the execution of our overall business model and continue to expand our successful Mariano's growth banner in the Chicago (land) market will position us to deliver greater overall profitability.

With that, I'd like to open up the call for questions. (Holly), could you start us off, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Edward Kelly – Credit Suisse.

Edward Kelly – Credit Suisse

Bob, could you maybe just talk a little bit about the cadence of comps throughout the quarter and what you're seeing so far in Q3? I know you talked about things improving. I was hoping that maybe somehow you could give us a little bit more color on that and talk about why you think it's getting better and what's going on underlying with both volume and price.

Bob Mariano

I think a couple of things, Ed. First, when we look at volume quarter-over-quarter the last several quarters, we've consistently made headway in reducing the shortfall on units. If you recall back earlier this year, I said we were totally focused on driving additional units.

And that activity has continued to move through the last several quarters and we have improved each and every quarter.

With respect to the same-store sales, same-store sales in September were much better than the earlier part of the quarter and I would tell you to the first quarter we're doing about slightly – just slightly less than a negative 1%.

Edward Kelly – Credit Suisse

Then from a pricing standpoint, how does pricing look currently relative to what you were seeing in Q3?

Bob Mariano

Well, I would tell you in terms of promotional, probably we're about the same as two but probably the price investments were a little heavier. And as I said, our sense of it was we went a little too far in certain areas and so we've already begun to dial that back.

But at the end of the day, the initial investment was wise when we look at the unit movement. And so we began – we have tailored the pricing investments we make and we'll continue to do that over the next several weeks to maximize our sales and improve our profitability.

Edward Kelly – Credit Suisse

I guess what I was trying to get at, is there any inflation in your current to-date comp or is it still deflationary?

Darren Karst

I think it's basically they're flat or a little deflationary. Our average retail price is off about 130 basis points but I think some of that is due to the price investments and the promotional activity which is a part of that. I don't think we're effectively seeing much inflation all.

Edward Kelly – Credit Suisse

Bob, could you maybe just go into a little bit more color on the pricing side and how the investment and the promotion developed into the quarter? What were the areas where you maybe didn't feel like you were getting quite the return you were looking for or the impact on the gross margin was bigger than you thought?

What are some of the adjustments that you're making? Then could you rope this into the big picture for you on price because I know you've been talking about the number of (KBI)s that you're going to be doing and how aggressively should we price on those relative to where you were? If you could just maybe walk us through how you're thinking about that entire issue at this point.

Bob Mariano

Well, we continue to focus on categories that have critical items, traffic drivers in the mix. And trying to determine where are the pricing levels that will drive the maximum volume.

So we have done this in a variety of categories and what we do is we start to then look at what items respond to more of an every day low price activity versus promotional. And then once we've got that categorization figured out, then we – we have to do a couple of things.

Number one, we have to get the pricing right but then secondly we've got to back to our trading partners and remix our cost structure. So this was our plan all along and we are informed now by (Neilson) information and our customer data as we work through this.

So we're seeing far – if I look at the investments that we've made in the last quarter and a half, I would tell you we see more consumer response than if I go back two or three years ago when we first started this than we had in the past.

So we're getting tighter on what the customer's truly looking for, so we just need to continue to work it and get our profitability and our sales where we are optimally performing.

Edward Kelly – Credit Suisse

Another question for you is on the Walgreen's Express Scripts dispute. I know you guys saw some real benefit on the script side and I was just wondering how much of that you think you're keeping at this point and what you're doing to ensure that retention.

Darren Karst

I think we are keeping the majority of it. We've done a fairly effective job at keeping it. It does have – I don't know if you were asking this question but the other thing going on in pharmacy is the whole shift to generic which has a deflating effect on pharmacy comps.

But overall, our pharmacy business is very significantly up because of the Express Scripts issue.

Edward Kelly – Credit Suisse

Then one last question for you, Bob, as it relates to Marianos. How close do you think you are to figuring out that this is a real solid growth opportunity for you going forward and you need to start dedicating more and more time and capital to getting that rolled out?

Bob Mariano

Well, I would tell you I'm very convinced. We already are putting more intellectual capital against in these particular areas to make sure we are solidifying the execution and delivery to our customers.

With respect to capital, I would tell you that, frankly, given the complexity of these units to open up any more than five a year is really – I'm not sure that ever gets done because given the hiring and the training that we must do to – really makes this a winning format.

I have to honestly tell you capital is not the limiting factor here. It really is making sure we have the right human resource profile and the right training going on. So we're – (Jess) and his team are working diligently on that. That was one of his key assignments coming in the door. He's really made a difference in the short term and feel good about where we'll be over the next couple of years.

But there's no question that this is a very strong store in that marketplace. It resonates with the customer extremely well across a wide spectrum of demographics and customer profile. So we're very pleased with it and continue to be prudent about putting additional resources where necessary to make sure we're doing all we can to make it produce the results we believe it can.

Operator

Your next question comes from the line of Ken Goldman – JPMC.

Ken Goldman – JPMC

You talked about having some extra dead rent this quarter because of the number of pending stores that are to be opened. Can you quantify that affect on your margins just to help us understand what margins might have been without that?

Darren Karst

Ken, what are you referring to on the …

Ken Goldman - JPMC

I thought you guys mentioned that you had – others of you had a little bit of an extra cost because you had stores opening in the future that were not opened yet. I call it dead rent. Maybe that's not as common a term as what I thought.

Darren Karst

I understand what you're saying. I think that's not exactly what we were saying. I think when we were talking about – when we were looking at operating expense changes this year versus last year, part of the reason that that is up is because we have more rent from new and replacement stores that have been opened over the last year.

So our relative rent expense went up versus last year because you've got newer (inaudible) which tend to have higher rents than more mature, older stores.

We do not as – I know some retailers tend to have some of the dead rent issues. We typically do not structure a lease where we are paying any rent prior to the store opening. So we do not tend to have that issue.

Ken Goldman - JPMC

And then help me understand. Why didn't we see or why didn't when the company was coming out public, why didn't we see these new competitors coming into your areas earlier? You have visibility into who's building stores where long before a customer starts shopping there, so maybe I'm a little bit confused.

Was it the number of stores that's still catching you by surprise, the aggressiveness of the competitors? I'm just trying to get a better sense specifically of why the competition has been a little more difficult than what you initially expected and, frankly, seems to be more difficult than what you expected a few months ago too.

Bob Mariano

The numbers – let's go through it a little bit. The numbers of competitors by and large are what we expected, so the absolute number might be off by one or two, but not material. So the numbers that we anticipated coming indeed opened.

The piece that was – with respect to those competitors, the piece that was unforeseen was the impact that they had on us. Some of that, as we look at it, some of that we believe is the economic environment and the customer switching to a discount operator and, secondly, our sense of it is the impact on our Milwaukee market because of the density of our market share.

So that would talk to that piece. The part that as the time – early in the part of the year – was the promotional activity in many of these markets, so we at that time did not know that Walmart was going to embark on a fairly aggressive national campaign of price against conventional operators in Minnesota and the Milwaukee market.

And frankly, it's been tough. It's been tough because once they proceeded to do that, there were competitive responses by various other operators that we needed to attend to. So it's been a challenging couple of quarters, I will tell you, and a lot of moving pieces and differing promotional activities going on.

So yes, I wish I could have foreseen it. And the other thing, quite frankly, I never would have thought that monopoly would have performed as poorly as it did this year against last year, honestly.

I thought we would have had no less than a push and clearly it underperformed well beyond our expectations. So I honestly thought that was going to work again this year and it just didn't. So that I would tell you are the things that we didn't know, ever saw clearly earlier part of the year.

Ken Goldman - JPMC

How does the promotion work so well one year and then so not well the next? I know you provided a little color.

Bob Mariano

I wish I had the answer. I don't know. I honestly don't know. I will tell you this. For our budgeting purposes for next year, we're staying very flexible. We're not going to lock ourselves into something for the long term.

So if the customer moves around on us, we're going to have the latitude and the flexibility to be able to be more responsive to where the market is as opposed to getting ourselves involved in some long-term promotional activity.

So yes, I don't have a very precise answer to give you why one year it went quite well and the next year it didn't.

Ken Goldman - JPMC

You cited economic conditions still being very difficult. Do you think they were worse for you than what you expected a year ago? I'm hearing fewer retailers really talk about economic conditions getting worse.

I'm just curious what you're seeing in your economies and maybe a little bit of color there would be helpful.

Bob Mariano

Yes, I will tell you – I don't want to mischaracterize that it's getting worse. I think it's about the same as it has been. And customers run out of money at the end of the month. I don't know that anybody wants to talk about that. But at the end of the day, there are people on fixed income and public assistance that come the last week of the month they're out of money.

And they don't have a lot of money to spend. Now, I don't know how it is in other markets. It might be different. I can tell you in our markets that's the way it is. We clearly see a fall off at the end of the month. We can see it in our business and I can also tell you that there are more customers on public assistance now than there were last year because we see it in the numbers in what we see in the transactions.

So that we know factually. And those people are essentially on fixed income because they don't have disposable income to spend. So whether that softens here, there's nothing to tell us it's going to change. I don’t believe it's going to get worse but there's nothing to tell us it's going to change over the next several months.

Operator

Your next question comes from the line of Karen Short – BMO Capital.

Karen Short – BMO Capital

A couple questions just on cost cutting opportunities or options; I guess I'm wondering looking at your distribution, is outsourcing that an option to cut expenses? And if so, what kind of cost savings could that potentially generate?

Bob Mariano

We're already in the process on transportation. We're working with (Genco) and that – we should start to see – in January we began the moving over of some the work and that should be completed by first half, the end of first half of next year. And so our inbound transportation by that time will be outsourced.

Then all thins going well, we'll move directly to outsourcing the inbound – excuse me, the outbound. So we're in the process of doing that and I would tell you also we're looking at everything in terms of our distribution side of the business. Are there other ways and other opportunities we can do to help ourselves?

So that's an active area of investigation in terms of reducing our expenses.

Karen Short – BMO Capital

Then in terms of this quarter, Darren, you mentioned shrink had an impact on EBITDA, or obviously on EBITDA, but can you quantify that? Are there dollars or basis points or both?

Darren Karst

It's about 20 basis points higher.

Karen Short – BMO Capital

And that was just warm weather shrink related.

Darren Karst

Yes, the shrink is always a little higher in the summer anyway but we did have a particularly dry and hot summer. We do think that had an impact on particularly shrink in the perishable areas.

Karen Short – BMO Capital

And then I guess just looking at your CapEx guidance, you cut that a little bit. Can you just give some color on where that cut's coming from?

Darren Karst

It was primarily in – yes, I think we had some CapEx towards the end of the year budgeted that was for 2013 activities and that's going to fall into 2013. So it was primarily in the either new store or remodel capital.

Karen Short – BMO Capital

Do you think that's a reasonable run rate to use going forward or is there still a little cushion there?

Darren Karst

I think we have generally thought about a run rate of $65 million to $70 million.

Bob Mariano

Just to give you some sense right now, Karen, we've got five stores under construction in Illinois.

Karen Short – BMO Capital

And then I guess turning to Marianos, obviously anyone and everyone who's seen it acknowledges it's a great store format. But I guess it just strikes me it may be hard to achieve the EBITDA margin goal that you stated which I think is in the 5% range.

Bob Mariano

No, no, no, no. We're doing it. No, what overshadows it – I've got three stores I just opened. So I'm encountering on a base of eight three stores out of eight that have pre-opening costs. So no, the mature stores are right – I just looked at them. The year-to-date, they're right around 5%.

Karen Short – BMO Capital

And that's still on a base of that $50 million plus sales number.

Bob Mariano

Yes, ma'am, yes. So we're right where we want to be. The total numbers don't look so good only because you've got three stores that we're in the process of getting off the ground. So when you look at it on a small base, it has an impact.

I'm not trying to make an excuse but that's the reality of it. When I look at the mature stores, they're doing what they – and I will tell you there's still opportunity. When I look at some of the operating metrics, I don't want you to come away thinking they're well fine tuned. We've got more work to do and so there's additional EBITDA opportunities without fussing with the motto too much.

Karen Short – BMO Capital

On your full-year guidance on EBITDA and on the comp, just to paraphrase to make sure I understand, you feel that you are going to dial back on your promotional activity because it hasn't necessarily been as effective as you'd like but you will continue to be promotional and that's why you think that the EBITDA trends will improve in the fourth quarter.

I guess I'm not totally clear because your guidance for EBITDA for the full year definitely implies a fairly meaningful improvement, not up year-over-year EBITDA but less down in the fourth quarter.

Darren Karst

Well, one thing, the fourth quarter last year was not a very good quarter, so it's clearly an easier comp. I think it's not just the promotional activity. I do think promotional activity will be a little less intense in the fourth quarter than the third. But it's also the actions we've taken to adjust some of the price investments, which is – I distinguish that from promotional activity because that's more every day pricing changes where we've gone and fine tuned those things so that they're not as impactful to gross margin.

So it's a combination of those things. I would also say that we're anticipating a little better year-over-year – or not – a little better year-over-year performance on shrink than we did have in the third quarter, so that's part of gross as well.

Karen Short – BMO Capital

Remind me how many competitive openings you had this year and how many you're expecting next year.

Darren Karst

What I can tell you is I think we've got about somewhere in the high 20s in terms of competitive openings that have impacted us over the last 12 months, so almost 30 stores. I've got visibility to what the fourth quarter is and it's going to add another 10 but then there's going to be about 10 or 11 or 12 or I think something like that roll off.

So it's going to be roughly the same level I would say of competitiveness in the fourth quarter.

Karen Short – BMO Capital

Yes, then next year?

Darren Karst

I don’t have the next year's just right off the top of my head but we can look that up for you.

Operator

Your next question comes from the line of Peter Benedict – Robert W Baird.

Peter Benedict – Robert W Baird

First, just wanted to dig down a little bit into the decision on the dividend. What made – what was the thought process in going to $0.12 per share? Is there an EBITDA level for next year we should be thinking about that you guys are contemplating in terms of budgeting that makes you think that that's the right number? And obviously I understand that you guys don't want to do this again.

So just can you help us understand maybe your thought process in terms of next year and why $0.12 per quarter you think is the right number for now?

Darren Karst

Yes, Peter, what we did – you're right, we don't – we haven't given guidance on 2013, so I don't really want to get too deep into that. But we used our best thinking in terms of where we are or where we think we'll be as well as obviously the 2012 expectations.

And we want to try to continue to be able to invest – not cut back on investments because Chicago is working well and we think that would be a mistake for the business to try to tinker with that.

We continue to want to be able to pay down a little bit of debt which is what was in our original plan. And so as we looked at the math, we just felt like this was the right level of adjustment. It probably gives us a little more flexibility than we may have originally had. But we think that given the environment, that's probably sensible. I say we as really the board that ultimately makes that decision.

Peter Benedict – Robert W Baird

Then just on the price gap, I think in the past I recall you guys had spoken to maybe 10% to 12% being the price gap between you and Walmart on some items and I think, Bob, you had mentioned that you found some levels here in the last quarter that the consumer might have responded to, maybe you've narrowed the price gap and you've found that that's worked.

Can you give a sense of maybe what that new index is versus Walmart where you started to see it maybe strike a tone with your consumer?

Bob Mariano

Yes, I haven’t brought it to that level yet in terms of an actual index because we continue to work it and evolve the pricing. I think what we've learned is there's a broader array of things that we can do on pricing and so we haven't – I think the short answer here is we have not brought that back to equal an index just yet because that's still a work in process.

Peter Benedict – Robert W Baird

I apologize if you've already addressed this, but the level of competitive openings that you guys anticipate for next year, you guys have talked about 200 or so basis points of sales impact in competitive openings the last couple of quarters. What's the opening schedule look like in the fourth quarter and then into 2013 from what you can tell?

Darren Karst

Yes, I think that we actually did just talk about that a little bit ago. The number of openings roughly opening in the fourth quarter is about 10 and if you look at the last 12 months openings, the last 12 months is about 30 but we'll have about 10 or 12 roll off. So the fourth quarter is probably more than likely going to be fairly comparable to what we've seen the last couple of quarters. 2013 we were going to look that up.

Operator

Your next question comes from the line of Scott Mushkin – Jefferies & Co.

Scott Mushkin – Jefferies & Co

So I just wanted to get into I think you said volumes, Bob, have stabilized and you feel pretty good about that. And our data would show similar that the last four or five months have been quite better.

You also said that to do that you've invested money and it's cost you gross profit. I guess what I'm trying to understand is that you – I think I heard that you're getting away from some of that and that perhaps you feel you went overboard. And you've been in the business a long time. I've researched the business a long time.

It seems like we get into a ying-yang sometimes where you run promotions, you get the volume, you realize it cost you a lot of gross profit, so you back off and then you lose the volume. So what gives you the confidence as we move out through the next quarter that your activities won't now, as we look at data and go through the holiday period, won't cost you the volumes you worked hard to get?

Bob Mariano

The difference is we weren't – you're right. You go too far, you come back and it's like a wood saw. But the difference here is the analytics and the customer information we're using to make the decisions. That's the difference.

And we're using a scalpel and that's why it's going to take us some time to get this where we want it to because we don't want to give up that volume. We want to find what is the tipping point where we get the right profitability and we're still getting the volume.

So we're going at this far more patiently. In addition, we're involving our trading partners so that we are learning from them as well how does a customer buy their product and what price matters, what price doesn't matter, what are those behavioral things so that we're synched up.

And then you get a cost structure that is reflective of what your go-to-market strategy is by category. So it's far more in depth and looking much more at what the customer is doing and how they do in a given category.

So I haven't yet. It's because I want to avoid the same that you just said because it is – we've been on this before and I don't want to have it swing so far back the other way and we have to do something about it. So no we're being very deliberate and diligent about what we're doing here.

Scott Mushkin – Jefferies & Co

When did the change – you may have said this and I may have missed it. When did you put most of the changes in place? How long have they been in effect?

Bob Mariano

Probably most – half of the third. We brought them in the beginning of third – in the middle of the third quarter and we actually started some of them in quarter four, so it's been a series of things that we have done on pricing.

Scott Mushkin – Jefferies & Co

And thus far there has been no volume impact. (Inaudible) volumes remain where you – well, you probably like them higher but you haven't seen a pullback.

Bob Mariano

No, no, not materially and I think we like the profitability.

Operator

Your next question comes from the line of Andrew Wolf – BB&T Capital Markets.

Andrew Wolf – BB&T Capital Markets

Have you seen any change in pricing or promotion or any other go-to-market strategies from the two Super Value banners that you compete against either in Chicago or Minneapolis? I'm referring to this in – well, because they're looking at strategic alternatives obviously and just trying to see if it impacted the market there.

Bob Mariano

Yes, as we've said, I think on quarter two's call, with Minneapolis, the Cub market is – they were substantially promotional, continue to be very promotional and they really haven't changed how they go about it. It's just much more of it, I guess that's how I would characterize it.

And then in Chicago with (Jewel), they have taken some prices down. When we look at the comparisons, it looks a little bit dissimilar – or excuse me, it looks like there has been some impact but what they've also done is modified a little bit under promotion.

So I would not characterize what they have done so far because it doesn't seem to be complete like they've changed their complete go-to-market strategy, if that makes sense to you.

Andrew Wolf – BB&T Capital Markets

Sounds like it hasn't changed.

Bob Mariano

I think they had a plan in place but they really – they haven't brought it over the goal line yet.

Darren Karst

They have lowered prices but …

Andrew Wolf – BB&T Capital Markets

That's (Jewel) or Cub you're referring to?

Darren Karst

That's (Jewel). But the impact on us hasn't really been noticeable just given Marianos is a banner that is already very low priced and fair priced and a different mousetrap frankly. So we wouldn't expect it to have much impact.

Andrew Wolf – BB&T Capital Markets

The other question is the same question more blown up is the market. Are you seeing any signs of promotional fatigue or what you guys are doing, which is whatever you want to call it, fine tuning your approach by any of the other – Piggly Wiggly – or any of the other players? Or signs of capacity might come out of the market?

Bob Mariano

Not yet, not yet.

Andrew Wolf – BB&T Capital Markets

Not yet on both?

Bob Mariano

Yes, I don't seen any promotional fatigue yet, not in those markets where people are using promotion. I haven't seen that yet. I haven't seen that yet. I wouldn’t want to mischaracterize that. I think everybody's looking at that next grocery trip and wants to make sure they get it.

Andrew Wolf – BB&T Capital Markets

I guess maybe let's just talk about Milwaukee. Do you have any sense that the stores are going to close or just see if they can get a bid and try to sell leases or something?

Bob Mariano

No, no, I wouldn't want to – no. I haven't heard any of that, Andrew.

Operator

I'll now turn the call back to your speakers for closing remarks.

Bob Mariano

Thank you, (Holly). Want to thank everybody for their attention and time. Thank you very much for your questions and we appreciate your support and we'll talk to you again on next quarter. Thank you very much.

Operator

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

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