Roundy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Roundy's Supermarkets, (RNDY)
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Roundy's, Inc. (NYSE:RNDY) Q4 2013 Earnings Conference Call February 26, 2014 4:30 PM ET

Executives

James Hyland - Investor Relations

Bob Mariano - Chairman and Chief Executive Officer

Darren Karst - Executive Vice President and Chief Financial Officer

Analysts

Peter Benedict - Robert Baird

Edward Kelly - Credit Suisse

Ken Goldman - JPMC

Scott Mushkin - Wolfe Research

Karen Short - Deutsche Bank

Andrew Wolf - BB&T Capital Markets

Kelly Bania - BMO Capital

Operator

Good afternoon, and welcome to Roundy’s Fourth Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode 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 like to turn the call over to Mr. James Hyland. Thank you. You may begin.

James Hyland

Thank you, Sharon. Good afternoon, ladies and gentlemen and welcome to Roundy’s fourth quarter 2013 earnings conference call. With me today are Bob Mariano, Chairman and Chief Executive Officer; and Darren Karst, Executive Vice President and Chief Financial Officer.

Our fourth quarter 2013 earnings release crossed the wire approximately 4:00 PM Eastern Time today. If you have not received the release, it is available on the Investor Relations section of Roundy’s website at www.roundys.com. This call is being webcast and a replay will be available on the company’s website. Also a transcript of the call will be available in the website within 48 hours.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements. The management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer all of you to the risk factors contained in Roundy’s press release issued today and the company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission for more detailed discussions of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Roundy’s assumes no obligation to revise any forward-looking projections that may be made in today’s release or call.

Also in the company’s earnings release and in today’s prepared remarks, we include adjusted net income, adjusted EPS and adjusted EBITDA, which are non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of adjusted net income, adjusted EPS, and adjusted EBITDA to the most directly comparable GAAP financial measures and the other information required by Regulation G are included in the company’s press release issued earlier today.

I will now turn the call over the Bob Mariano. Bob?

Bob Mariano

Thanks, Jim. Good afternoon, everyone and thank you for joining us today as we discuss the results for the fourth quarter of 2013. I will briefly review these results and discuss certain key metrics for the quarter. Darren will then review the financial results for the quarter. At the end of our remarks, we will open up the call for questions.

Our fourth quarter results showed an improvement in sales and gross profit from the third quarter of 2013. That was due in part to the marketing and advertising investments we made in the core business, along with our continued focus on Milwaukee market renewal. We continue to see a highly competitive promotional environment on our core markets, where our cautious consumer is keeping a tight rein over discretionary spending and we are cycling through the effects of competitive openings over the last 12 months.

Our growth plan at Mariano’s contributed strong results during the fourth quarter with improvement in a number of key metrics, which I will speak to shortly. Also, our two cornerstone initiatives, Perishables and Own Brand, continued to show strong year-over-year results. For the fourth quarter, net sales increased 2% to $1 billion. The increase in sales was primarily due to new Mariano stores coming online. However, the increase in total sales was offset by a 2.4% decrease and same-store sales largely driven by a 4.2% decrease in the number of consumer transactions. The decrease in the number of customer transaction was partially offset by a 1.9% increase in average transaction size, which was also a 90 basis point sequential improvement from the third quarter of 2013.

The increase in transaction size was driven by a combination of a larger portion of our sales coming from the Mariano’s banner, which has a higher basket size as well as our core business being up 1.6% from the prior year. We had a total of six competitive openings in our core markets during the fourth quarter. In Wisconsin, we had one supercenter opening and four conventional openings. In Minnesota, we had one supercenter opening. We estimate the dollar impact to our same-store sales in the quarter from new competitive square footage added over the last 12 months was approximately 200 basis points.

For the full year of 2013, we experienced 14 competitive openings in our core markets, including seven supercenter openings and seven conventional openings. The outlook for 2014 at this time is for 10 competitive openings in our core markets down from 14 in 2013. This number includes five supercenter openings, which is down from eight in 2013 and five conventional openings, which is down from six in 2013. In Wisconsin, our major core market, we anticipate three supercenter openings down from five in 2013 and three conventional openings down from five in the prior year. It is our belief that the Wisconsin market is becoming more built out with regard to supercenter operators which we believe is reflected by the slightly lower expected new store count anticipated for 2014. We believe for 2014 the dollar impact to same-store sales to be approximately 50% to 60% of the 2013 impact.

Now, let me talk about things we are focused on to stabilize and grow our core business. Our Milwaukee market renewal project is well underway and targets our 69 Milwaukee metro area Pick 'n Save stores. We now have a full year data on the original group of test stores which we refer to as the Milwaukee 14. Quarterly comps for the original 14 stores were up 1.1% for the quarter and were up 1% for the full year of 2013. The remaining 55 stores rolled out during the second and third quarters are not yet in positive comps territory, in part because it’s too early, but also due to some specific competitive openings to a number of those stores. However, feedback thus far from customers continues to be positive, confirmation that we believe our service improvement initiatives are working. Since these stores have launched, the sales trends have improved by approximately 200 basis points. We continue to execute our operational initiatives at these 55 stores and we anticipate improved financial results for these stores over the course of 2014.

Our two major cornerstone initiatives which are growing our perishable business and our own brand sales had strong performances during the quarter. Our perishable business accounted for 34.6% of total sales, approximately 150 basis points higher than a year ago. Our own brand products ended the fourth quarter at 23.2%, 160 basis points improvement over last year’s fourth quarter. Our own brand portfolio now consists of over 6600 products.

During the fourth quarter we opened two additional Mariano’s stores bringing the total to 13 at the end of 2013 with a mix of five in the City of Chicago and eight suburban locations. Average weekly sales at Mariano’s for the fourth quarter and for the full year of 2013 were approximately $1 million per week per store. At the end of 2013 the 14 stores opened we had an estimated run rate of over $615 million in sales for our Mariano’s business. We continued to meet our EBITDA goals for Mariano’s during quarter four and our mature stores – excuse me, in our mature stores that had been open for two to three years continued to exceed our goals. We are now three years and counting as an operator in the Chicago marketplace. And our store teams have used that experience to create a more efficient operating and cost structure which has benefited Mariano’s EBITDA margins.

As most of you are aware we made an acquisition of 11 Dominick’s stores during the fourth quarter. I can’t stress enough how important these locations are to us strategically. The acquired stores are irreplaceable locations that add critical mass to our expansion strategy for the banner. The 11 stores are being delivered to us in two groups. We took possession of the first group of five in late January and those stores have either been reopened or are under a major remodel – are under remodel now. The first two stores have already opened. Park Ridge opened on February 18 and the one in Northfield opened yesterday. I am pleased to report that in both cases these stores have met with an enthusiastic reception within their respective communities.

We will take delivery of the second group of stores in early March and we are planning to open most of those stores during the second quarter. The Westchester store where we will be expanding and adding square footage will be completely remodeled and is expected to reopen late around this year. To give you a send of the size of Mariano’s business at this point, at the end of 2013 the 13 organically build stores plus 11 acquired Dominick’s stores had a pro forma sales run rate of approximately $1 billion.

During the first quarter of 2014, the Board of Directors approved a follow-on equity offering consisting of both a primary and secondary offering. I will let Darren go into the details of the offering. We consider the cash inflow from the sale of equity to be strategic as we will use the proceed to accelerate the major remodel spending on the 11 acquired Dominick’s stores which we view as positive for the long-term goals of the company and its shareholders.

In addition to the 11 acquired stores, we are also building five new Mariano’s in 2014. The first of these in Lake Zurich opened earlier this month on February 4. Of the five newly built stores that will be opening in ’14, three will be in suburban Chicago and two will be in the city. Therefore at the end of this year we expect to have 29 locations spread throughout the City of Chicago metropolitan area with 10 being in the City of Chicago and the rest being in suburban locations.

As we have stated earlier, our current target is to build 45 to 50 Mariano stores over the next four to five years adding about five stores per year. We are often asked that we will Mariano’s banner outside the Chicago marketplace. While we do not believe that the Mariano’s – while we do believe that the Mariano’s brand can travel and travel well, at this point in time, our emphasis is on building out our Chicago area network of stores. We remain focused on bringing our Chicago customers the unique shopping experience that as Mariano’s.

To summarize, we made progress in the core business during the fourth quarter. We still face a number of challenges in these markets, but we also have a number of opportunities in front of us that we think will prove successful if we execute on our strategies. We believe the marketing investments we made during ‘13 are starting to payoff and will continue to do so throughout the balance of this year. In terms of 2014, we expect to continue to see the positive effects of competitive cycling, a reduction in the number of new competitive store openings and improving metrics from our second and third wave of Milwaukee renewal stores. Momentum is strong at Mariano’s as we add critical mass with 16 store openings slated for this year. The addition of the 11 acquired stores was transformational in terms of our expansion strategy for Mariano’s and we anticipate a breakout year for our growth pattern. We have a long runway for growth with double-digit pipeline of future committed Mariano’s locations for 2015 and 2016 as our dedicated store teams continue to exceed our goals.

Let me now turn the call over to Darren and he will provide additional financial details on the quarter. DK?

Darren Karst

Thanks Bob. Good afternoon everyone. As Bob noted earlier, net sales for the fourth quarter of 2013 were $1 billion, an increase of $20 million or 2% from $982 million for the fourth quarter of 2012. Gross profit for the third quarter of 2013 increased 4.2% to $270 million from $260 million in the same period last year. Gross profit as a percentage of net sales was 27% for the fourth quarter of 2013 compared to 26.4% in the same period last year. The increase in gross profit as a percentage of sales primarily reflects an increased Perishable sales mix, increased margin contribution from our new stores as they mature and a more efficient promotional spend during the fourth quarter as compared to earlier quarters.

Operating and administrative expenses for the fourth quarter of 2013 increased to $246 million from $232 million in the same period last year. Operating and administrative expenses as a percentage of net sales increased to 24.5% in the fourth quarter of 2013 from 23.7% in the same period last year. The increase was primarily due to increased occupancy and labor costs related to new stores as well as reduced fixed cost leverage in our core business resulting from lower sales.

Interest expense for the fourth quarter was $16 million compared to $12.1 million last year. The increase was primarily due to the write-off of both deferred financing costs of $2 million and original issue discount of $1.5 million, which related to the prepayment of approximately $148 million of our term loan in the fourth quarter. For the fourth quarter of 2013, net income was $8.7 million or $0.19 diluted earnings per share compared to a net loss of $98.4 million or $2.19 loss per diluted common share for the fourth quarter of 2012.

Adjusted net income for the fourth quarter of 2013 was $11.4 million or $0.25 adjusted diluted earnings per share compared to $8.6 million or $0.19 adjusted diluted earnings per share for the fourth quarter of 2012. Adjusted net income for the fourth quarter of 2013 excludes a $2.1 million after-tax charge or $0.05 per diluted share related to the write-off of unamortized loan costs related to the $148 million term loan prepayment during the fourth quarter of 2013 and a $600,000 after-tax expense or $0.01 per diluted share related to acquisition costs and term loan amendment fees incurred during the fourth quarter of 2013. Adjusted net income for the fourth quarter of 2012 excluded $106 million after tax goodwill impairment charge or $2.37 per diluted share and $600,000 after tax expense or $0.01 per diluted share for a non-recurring pension withdrawal expense last year.

Adjusted EBITDA for the fourth quarter of 2013 was $42.8 million compared to $46.6 million in the fourth quarter of 2012. The decrease was primarily due to the effect of competitive store openings over the last four quarters and the challenging economic environment in our core markets.

Our effective income tax rate was 1% for the fourth quarter 2013. The rate was lower than our typical 40% rate due to a favorable tax audit settlement that resulted in a reduction of tax expense of approximately $3 million.

Capital expenditures for the fourth quarter of 2013 were $33 million compared to $22 million in the fourth quarter of 2012. The change year-over-year was primarily attributable to the timing of new store openings. For the full year we spent $67 million of capital expenditures which was right on plan.

Reviewing our 2013 results for the full year, net sales were $3.950 billion for fiscal 2013, an increase of $59 million or 1.5% from $3.891 billion for fiscal 2012. The increase primarily reflects the benefit of new stores partially offset by a 2.7% increase in same-store sales and the effect of three stores closed during 2013. The decline in same-store sales was due to a 4.7% decrease in the number of customer transactions partially offset by 2.2% increase in average transaction size. Same-store sales comparisons were negatively impacted by competitive store openings and the soft economic environment that continues to impact customer demand in our core markets versus the same period last year.

Adjusted EBITDA for the 52 weeks ended December 28, 2013 was $172.2 million compared to $198.7 million in the comparable 2012 period. The decrease was primarily due to the effect of competitive store openings over the last four quarters and the challenging economic environment in our core markets offset somewhat by improved performance of our Mariano’s stores.

Our total long-term debt at the end of the fourth quarter of 2013 was $738 million, up from $686 million at the end of fiscal 2012. The increase reflects the additional borrowings we completed in December 2013 to fund the acquisition of the 11 Dominick’s stores. 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 consolidated senior secured leverage ratio was 2.9 times and our consolidated interest coverage ratio was 3.67 times.

As of December 28, 2013, we had $82 million in cash and cash equivalents and $97 million of availability under our revolving credit facility, which provides us with significant liquidity. On December 2, 2013 in conjunction with our announcement of the acquisition of 11 Dominick’s stores we announced that we would be suspending our dividend. We believe allocating additional capital, in this case of savings of $22 million annually to our growth opportunities is the best use of cash from a long-term shareholder return perspective.

We believe these acquired Dominick’s stores are in prime locations that Bob, me, our team were very familiar with from our days at Dominick’s. Our purchase price of $36 million represents approximately three times the LCM historical EBITDA these stores generated as Dominick’s stores. We will commit a total of approximately $45 million to the remodeling of these stores, so combined with the purchase price of $36 million that is approximately $7 million of total investment cost per store. The purchase price multiple is also approximately three times when measured with this total investment spend against our projected longer term EBITDA for these stores.

We expect the revenue at these stores upon reaching maturity to be relatively consistent with our targeted objectives for organically built stores and in a range of $850,000 to $950,000 per week. With an EBITDA contribution margin of approximately 6%, which again is relatively consistent with the average performance we have experienced at our existing mature stores. Also noteworthy is the annual rent for these stores is on average about $10 per square foot less than the market rents we are paying for our ground-up Mariano’s stores today.

During the fourth quarter, we completed a refinancing transaction in conjunction with the acquisition of the Dominick’s stores. We issued $200 million in senior secured or senior secured second lien notes. The net proceeds of which were used to finance the acquisition and repay existing debt. We look at a number of options in terms of financing the acquisition, but some of those options were limited due to the very tight closing timetable for this transaction and the added limitations that come with getting a transaction completed during the holiday season. Subsequent to the deal closing, we continue to look at our options for constructing a more effective capital structure and strengthening our balance sheet. We are currently in the process of refinancing our existing first lien term loan and cash flow revolving facilities with a $220 million ABL revolver and a $460 million covenant-light term loan, which will eliminate any financial maintenance covenants. This debt structure allows us to increase our financial flexibility and provide us with modest annualized interest expense savings.

As Bob mentioned in his presentation, we also completed a 10.2 million share follow-on equity offering that consisted of both a primary offering and a non-dilutive secondary offering. Willis Stein, our private equity partner for the last 12 years was a selling shareholder in the secondary offering. The secondary offering reduced their ownership in the company from approximately 32.5% to approximately 19%. In terms of the primary offering, the company sold approximately 3 million shares in the offering and will use the proceeds to accelerate the major remodels of the acquired Dominick’s stores, as Bob mentioned earlier.

Now, for our 2014 guidance. We anticipate a similar economic and inflationary environment in our core markets to what we experienced in 2013 although we expect a decrease in competitive unit growth as compared to the pace of the last couple of years. We expect 2014 sales to grow in the range of 13% to 14% over the prior year with same-store sales in the range of negative 1% to negative 2%. Adjusted EBITDA for 2014 is currently expected to be in the range of $162 million to $172 million and adjusted EBITDA margin in the range of 3.6% to 3.8%. We expect adjusted diluted earnings per share for 2014 to be in the range of $0.27 to $0.40 per share. Our guidance for adjusted EBITDA and adjusted earnings reflect the add-back for any charges or expenses incurred related to our debt or equity financing activity during 2014.

In prior years, we provided annual guidance and updated that guidance every quarter. For 2014, in addition of that, we intend to also give next quarter only guidance in an effort to provide better information about our near-term outlook. For our first quarter, we expect total sales to grow in the range of 3% to 3.5% over the prior year with same-store sales in the range of negative 3.25% to negative 3.75%. We will experience a shift in sales as compared to last year from Q1 to Q2 related to the timing of Easter and we presently expect that shift to be 125 to 150 basis points of effect.

Adjusted EBITDA for our first quarter is expected to be in the range of $34 million to $37 million and adjusted EBITDA margin in the range of 3.4% to 3.6%. We expect adjusted diluted earnings per share for our first quarter to be in the range of $0.01 to $0.05 per share. Our first quarter EBITDA and earnings will be impacted by the shift in Easter and also the burden of start-up and ramp-up cost related to the newly acquired Dominick’s stores. The effect on EBITDA of the Easter shift is estimated to be $2 million to $2.5 million while the newly acquired store start-up and ramp-up burden is expected to be approximately $3 million to $4 million.

That concludes my comments. And let me now turn the call back over to Bob for some final comments before Q&A.

Bob Mariano

Thanks, Darren. In summary, we experienced improving trends in the fourth quarter, which we think is a result of the investments we made earlier in the year through our Milwaukee renewal effort and our marketing activity. As we look to quarter one of 2014 we recognize that we will incur start-up cost for the Dominick’s store acquisition and we also have the Easter shift from quarter one to quarter two as Darren mentioned earlier.

Our Own Brand Perishable business continued to show strong growth. Milwaukee 14 stores ended the fourth quarter and the year with positive comps and we continue to focus our renewal efforts on bringing the remaining 55 stores up to the targeted levels of operational and financial performance during the year. Sales and profitability trends continue to exceed expectations in the Chicago market. These stores are ramping up higher than originally budgeted and with a strengthened balance sheet, we expect to accelerate remodeling of our acquired stores and continue to roll-off of our organically built stores as planned. Our runway is long with 14 more locations in the pipeline and our store teams continue to deliver operational excellence.

That concludes our comments. And at this time, I’d like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Peter Benedict of Robert Baird. Go ahead sir. Your line is open.

Peter Benedict - Robert Baird

Yes, thanks, hey guys. First, a couple of housekeeping questions. Do you guys factor in non-cash comp expense into your adjusted EPS calculation? And then what share count are you assuming for your – in the 2014 guidance? That’s the first two.

Darren Karst

Sure, Peter. This is Darren. That’s a good question on the comp. We do not include an add-back adjustment in our EPS for the non-cash stock comp expense. We do include that expense in SG&A and actually find it broken out in our EBITDA, adjusted EBITDA reconciliation that we provide and we provided that in the - I think it’s on Page 9 of the current release. So for 2013 that was actually $2.8 million, for 2014 we’re estimating that number to be $4.5 million. So as you model that out you’ve got to certainly consider that. In terms of the share count yes for the full year it’s about, it’s a little bit less than 49 million shares, it’s a little different Peter in each quarter.

Peter Benedict - Robert Baird

Okay.

Darren Karst

It kind of ramps up over the year because of the weighted average calculation but full year numbers little less than $49 million.

Peter Benedict - Robert Baird

Okay, good. Thank you for that. And then I guess I’m not sure how much color you will provide here but just curious of Mariano’s EBITDA contribution to the company last year. And then when we look at the outlook for 2014 the 162 to 172 just trying to understand how that kind of splits between Mariano’s and then the core legacy banners?

Bob Mariano

Well, I think we have said probably about as much we’ll say about the EBITDA, Mariano’s, it has achieved, has overachieved its budget and for the full year did very well. We certainly expect that to continue in this year as the stores mature and the teams mature of the core group of Mariano’s, so that – those stores are performing well and we expect that to continue in the future.

Peter Benedict - Robert Baird

Okay. Thanks Bob. And then last question when we think about the 53rd week in 2014, what type of sales and EBITDA contribution do you guys bake into the model for that extra week? Thank you.

Darren Karst

Sure. I mean, the extra week in sales is about $70 million. I don’t think we necessarily disclose the EBITDA effect, but it’s certainly going to – it contributes a higher EBITDA, incremental EBITDA margin and just our overall company EBITDA margin, because we don’t incur all the normal fixed cost you would incur in that extra week.

Peter Benedict - Robert Baird

Okay. And then just one last one, on the acquisition, do you still think the transition is neutral to EBITDA this year? I mean, I know some stores have started to open, they are doing well, is there a chance that they could actually be accretive?

Bob Mariano

I think our view is still that, that will be flat, their effect will be neutral. I think its way too early to start – to start guessing. I mean, we are certainly pleased with the first two stores, but frankly we don’t have any results yet from the bottom line. So, I think our original view is our continuing view. And as the year goes on if that changes, we will certainly update the shareholder community.

Peter Benedict - Robert Baird

Alright, great. It sounds good. Thanks guys.

Bob Mariano

Thank you.

Operator

Our next question comes from Edward Kelly of Credit Suisse. Go ahead sir. Your line is open.

Edward Kelly - Credit Suisse

Hi guys. Good afternoon.

Bob Mariano

Hi, Ed.

Edward Kelly - Credit Suisse

Hey Bob. So, first question for you, betting on Chicago here, Whole Foods is making a little bit of bigger push into Chicago, what does that mean for Mariano’s, if anything? And maybe you could talk about how Mariano’s competes with Whole Foods, I don’t know to the extent that you have decent overlap there?

Bob Mariano

Yes. Well, certainly with the – if we look back just for the first 13 stores last year, I mean, we pretty much overlap in every single market we do business in, in the Chicago marketplace with Whole Foods. And in fact earlier or excuse me later on in the last year, they reopened, they replaced a store close by to one of our stores and had no impact on the growth of our store at all. So we continued to focus on what our customers are looking for and doing things that we know they appreciate and reward us with higher sales and profitability. And I think it’s instructive too the locations that they took from Dominick’s in some cases were locations that we also were interested in. So from a geographical overlap, there is not a significant overlap in the several of those locations. But let’s make no mistake about it, the perception of Whole Foods still is high-priced and that has not gone away. And I think we have a much stronger overall value proposition for our customers than they do.

Edward Kelly - Credit Suisse

And Bob, when you look at those Dominick’s stores, was the reason that you went with the number that you went with, because that’s all that made sense, sort of like financially from what the stores could be in their location or is there some – there was some sort of capital constraint on year end too? So there was actually good store – other good stores out there.

Bob Mariano

No, there was – I can tell you that there was no capital constraint here. I mean this – I think we have said that there were three stores that we didn’t get that we were outbid for. We got 11 stores that we likely look. We were very disciplined in our approach to the network as well. And when we say network, not only what we had built and open, but everything we had forecasted for the next several years as we looked out over the next several years. So, we kind of look at a totally built-out type of approach and make sure we made the appropriate decisions. And we didn’t sacrifice size of store, we didn’t sacrifice the kind of locations, we stay true to what Mariano’s was and very disciplined. I think we wound up with a great group of stores and I think ultimately we will be very successful with them.

Edward Kelly - Credit Suisse

Okay. And you mentioned on the call opening up a few suburban stores next year as well as sort of like urban Chicago stores, what’s the difference in sort of sales margin returns there? How does the current mix of stores look like on that end?

Darren Karst

Yes, this is Darren. I mean, I would tell you there is not really a material difference. From just an average sales productivity perspective, I would say they are consistent suburban versus urban. In fact I would tell you our highest volume stores actually are suburban stores. So that may surprise some people. The profitability is consistent, we tend to go to market the same way. We tend to be price generally the same way whether it’s a city store or a suburban store. So there isn’t that much difference between the two in terms of the financial message I guess.

Edward Kelly - Credit Suisse

And then just one last question for you here, on the Mariano’s concept in general, I guess sort of bigger picture right, why not test the store in Milwaukee for instance and see how it goes as opposed to just focusing on Chicago? Is there some logistic hurdle to doing that or just curious as to your thought on that?

Bob Mariano

At this point, there is absolutely nothing in our way to doing that. I think it’s just a matter of us deciding that, that makes sense. And I think our current thinking is that given the concentrated network we have in Wisconsin it would have a fairly cannibalistic effect in our existing store base. So, that’s our thinking I mean it’s interesting you asked the question, because it’s not a question that we don’t ask ourselves frequently okay. So I would tell you that that’s our thinking now and we’ll continue to evaluate it as we go into future.

Edward Kelly - Credit Suisse

Okay, thank you.

Bob Mariano

Thanks.

Operator

Our next question comes from Ken Goldman of JPMC. Go ahead sir. Your line is open.

Ken Goldman - JPMC

Hi, thanks for the questions. Gentlemen I don’t know if you mentioned it I may have missed it. Can you talk about your expectations for inflation across the board sort of net-net this year?

Bob Mariano

Right. I think our take is that we would expect to be about the same as last year. And most recently though I have to couch it because the unknowns are currently this, what the effect of the drought in California will be, how severe is the milk shortage going to be, and what then is going to be the impact on cattle? So right now grains are fine, soybeans, corn, they are really not misbehaving. So those three things are kind of wildcards right now and could potentially we could see some intermittent spikes here during the course of the year. It’s tough to predict at this time our buyers talk real-time to California growers, and it’s real – they really don’t know yet, there really isn’t any factual information to say what’s going to happen to price and demand and supply just yet. So we’ll just have to kind of wait and see, but our going into premise was that it would be about the same as last year as we get through the rest of the year.

Ken Goldman - JPMC

And just remind me what that was low single-digit I think?

Bob Mariano

Yes.

Darren Karst

Yes. It was probably half a point to a point.

Bob Mariano

Yes.

Ken Goldman - JPMC

Is that the sweet spot for you in terms of margin I mean it’s used to be in the grocers it was higher and then I remember Steve Byrd saying it’s a new world and sort of 1% is the sweet spot for them. Is that sort of 0% to 2%, is that where you guys would like to be overall or is it too difficult to say?

Bob Mariano

No, 0% to 2% is a good place to be, I think we don’t want is that to become a negative thing and as the prices are up beyond 2%, 2.5%, 3% that tends to squelch consumer confidence. So I think if you are in that 1% to 2% range I think that’s a good place to be.

Ken Goldman - JPMC

Okay. And then a couple more if I can sneak them in. Did you happen to mention – again I came on a little late the weather impact on the quarter at all or is that not a big deal?

Bob Mariano

Well it was – certainly on an expense side it was I mean we had a lot of snow to plow and the heat bills were kind of high. Volume was best we can tell modestly positive on the stores. So it’s kind of softening now but January, February we’re kind of hectic to save the least.

Ken Goldman - JPMC

And then lastly I know it’s not your biggest market but can you talk a little bit about Hy-Vee is talking about getting into Minneapolis a little more aggressively. Is that fully baked into your expectations?

Bob Mariano

Well, it’s tough to say once we get a handle on specific locations I mean we’ll see what they actually do I mean right, what we assess as we find out more information about where they’re going to be and how many stores are opened.

Ken Goldman - JPMC

Alright. Thanks guys.

Bob Mariano

Thank you.

Operator

Our next question comes from Scott Mushkin of Wolfe Research. Go ahead sir. Your line is open.

Scott Mushkin - Wolfe Research

Hey thanks guys. Thanks for taking my questions. So I just wanted to get a little bit more into the EBITDA guidance that was given out and just try to understand what’s going on with the base business a little bit better. So if my math is correct and Darren it seems to me that if I adjust for that 52-week year and I know you don’t give EBITDA guidance, but we’re kind of looking for a down 6% EBITDA type of year. And I guess I was just trying to understand with the Pick 'n Save business maybe seeming to turn the corner with some of the stuff you guys are doing there, why we’re getting down EBITDA in the base business?

Darren Karst

Yes, I mean I think that I mean generally the way we’ve sort of built our guidance is we still do expect the core business to have some deterioration. I would agree with you. I think it’s turning the corner but we still have a decent amount of – while the competitive, new competitive footage is less next year there still is more of it. So I think we built that into our thinking. On the flip side the Mariano’s business it had a good year as Bob alluded to this year and our expectations for that business is a fairly at least on that base of EBITDA for early material increase as that business grows, even though the acquired Dominick’s stores are going to be relatively flat in EBITDA. So I mean I don’t know if that helps you but that’s I mean that is sort of I think the way we look at it.

Scott Mushkin - Wolfe Research

Okay, that’s perfect. And then that actually leads into my next question is obviously Jewel has switched owners here for a while. Our work-shows and being pretty aggressive Darren we’ve talked about this as well. Any thoughts on whether you guys would have to – as they remodel some of those stores next to you, as they cut price particularly in the stores that are close by, do you have to react and is there any – did you build into guidance maybe some flexibility in Mariano’s having to do some things to deal with a more aggressive Jewel?

Bob Mariano

Yes. I think to answer your question Scott we always stay focused on making sure we’re presenting the right offering and price right to the market. So any competitor that moves or just we constantly assess the current condition to make the appropriate adjustments, I think let’s make sure we’re clear here. Right now they’re zoning our stores so the stores right around and are close by they are lower priced than stores that are not. Now as we open more stores this year that becomes a far more costly event for them to continue to fund. So I think as we see over the longer term things might continue to evolve with respect to cost, with respect to pricing I mean. So we’ll continue to watch it, we watch it every single week, we pay very close attention to them and then the other competitor and we make sure we’re priced appropriately and we’ll do whatever we have to do and continue to be priced appropriately. So that’s just the nature of the business.

Darren Karst

And in terms of 2014 we did factor that what they’re doing from a pricing perspective and to our guidance.

Scott Mushkin - Wolfe Research

Alright, that’s (indiscernible). And then I have just one last one. That’s great. I really appreciate the clarity of those answers. Bob, it sounds like the snowstorms, cold winters kind of been helping sales a little bit out here, but it doesn’t seem like that’ been baked into the guidance even when I adjust for the Easter shift. So it seems like you’re being a little conservative, it seems like businesses maybe weather driven or pretty good or just want to get your thoughts there?

Bob Mariano

I mean, I wouldn’t get starry eyed now. I mean, it’s a little bit better but I think the other side of that is some of the expenses have been a little higher as well. So I just – I think we’re comfortable with what we led the quarter to be and I think that’s our best thinking right now. So I think we tried to guide you right down the middle here.

Scott Mushkin - Wolfe Research

Perfect. Thanks so much for your answers.

Bob Mariano

Okay, thanks.

Operator

Our next question comes from Karen Short of Deutsche Bank. Go ahead. Your line is open.

Karen Short - Deutsche Bank

Hi, just wondering I don’t know if you gave this number if you did I missed it. How many stores are actually in the comp base at Mariano’s at this point and if so – if there are critical math, what are they comping?

Bob Mariano

Nine, there is nine Mariano’s that are now comping.

Karen Short - Deutsche Bank

And what’s the comp?

Bob Mariano

We aren’t disclosing that, Karen.

Karen Short - Deutsche Bank

Okay. Can you maybe talk a little bit of those nine, how many of those competed directly with Dominick’s?

Bob Mariano

Probably all of them. Not all of them. I would say probably three quarters of them.

Darren Karst

Yes.

Karen Short - Deutsche Bank

Okay. So I guess maybe can you talk a little bit about what the benefit to the comp and to the benefit to Mariano’s, in general, might have been from the announcement that Mariano’s is closing, I mean, obviously even though they closed at the end of the year? I am sorry, the Dominick’s was closing, even though they closed at the end of the year, I mean, obviously they must have lost customers out of that?

Bob Mariano

I actually don’t think. I mean, they were running their blowout sales during December. So, yes, I think they were not doing well in the fourth quarter, but I don’t think it was – it really had a material – their closing did not have a material impact on the fourth quarter when you consider the blowing out of their inventory.

Karen Short - Deutsche Bank

Okay.

Bob Mariano

And they kind of did – they kind of sold liquor for 75 off.

Karen Short - Deutsche Bank

Okay.

Bob Mariano

So, I mean, there was nothing on their shelves, but rest assured the customers, I mean, I had never seen their parking lot so busy, it was really extraordinary how they sold out all the inventory.

Karen Short - Deutsche Bank

You guys wouldn’t be willing to get just directional comments on the Mariano’s comps, like high single-digits, low double-digits?

Bob Mariano

No, not right now.

Karen Short - Deutsche Bank

Okay. And then in terms of the 69 Pick ‘n Saves that you have done the renewal on, can you talk a little bit about the traffic and ticket in terms of the comp that you based or comp number that you gave? Can you talk about the mix?

Bob Mariano

I don’t know that I have that handy. I mean I think we can get back to you in the mix on traffic.

Darren Karst

But it was really – generally Karen it was driven by a little of both, I mean it was driven by traffic as well as ticket, but we don’t have the exact numbers handy.

Karen Short - Deutsche Bank

And then within the 55 stores that you said were not yet in positive territory, is one or the other like traffic or basket positive?

Bob Mariano

I think they are both trending positive in terms of where they were before, but they are still both negative, but I don’t know about basket, but the traffic was still negative.

Karen Short - Deutsche Bank

Okay. And then just looking to the stores that you actually closed, I guess in the fourth quarter and into the first, can you maybe just talk about what the benefit might be on your existing stores in the market like any sales that you pick up from the store closures?

Bob Mariano

Yes, those were all in Minnesota. And for the most part, I think there may have been a little bit of benefit, but not a significant top line benefit. The real benefit of closing those stores was they were generally at end of lease and not performing from a EBITDA perspective. And so it made financial sense to move on.

Karen Short - Deutsche Bank

Got it. Okay, thanks. That’s helpful.

Bob Mariano

Thank you.

Operator

Our next question comes from Andrew Wolf of BB&T Capital Markets. Go ahead. Your line is open.

Andrew Wolf - BB&T Capital Markets

Hi, good afternoon.

Bob Mariano

Good afternoon Andy.

Andrew Wolf - BB&T Capital Markets

Mostly follow-ups to some of the other questions, but first, on gross margin, at least to me that was a surprisingly strong number. Can you comment – I mean, you have given us a sense it seems like a lot of internal initiatives have come together, so is that something barring something changes drastically competitively or economically from your thinking? Is that kind of a sustainable trend that you think the gross is going to be firm because of the Perishables and private label and things you called out?

Bob Mariano

I think that’s a fair assumption.

Andrew Wolf - BB&T Capital Markets

Okay. Second is a couple of housekeeping questions. First, the acquisition costs $375,000, is that on the operating expense line, if we are looking to adjust that out? And….

Darren Karst

What cost Andy?

Andrew Wolf - BB&T Capital Markets

The acquisition costs that were in the quarter, the add-back to adjusted EBITDA?

Bob Mariano

Okay.

Darren Karst

Yes, that’s in SG&A.

Andrew Wolf - BB&T Capital Markets

Okay, now, is that a one-time event to buy the leases from Safeway or is that actually something we will see recurring?

Darren Karst

It’s one-time.

Andrew Wolf - BB&T Capital Markets

Okay and another housekeeping question was just I think did you guys call a $3 million to $4 million of ramp up costs to get the Mariano’s stores up this quarter?

Darren Karst

For the first quarter, yes.

Andrew Wolf - BB&T Capital Markets

Okay. And is that also a one quarter event or are there going to be more of those in the subsequent quarters?

Darren Karst

I would say generally the way we look at those stores and the way we have built them into our thinking is we will have kind of a negative burden in the first quarter and probably the second quarter as well as those stores are all opening and then they will positively contribute in the third and the fourth quarters. So at the end of the year it sort of nets out to close to breakeven from an EBITDA perspective.

Andrew Wolf - BB&T Capital Markets

Okay, but 3% to 4% might go down whatever 2% or something like that because…?

Darren Karst

Yes, it might go down a little. I would say it’s still going to be in that same ballpark because we will be opening the other six stores during the second quarter for the most part.

Andrew Wolf - BB&T Capital Markets

Got it. And lastly I know you don’t want to talk about specifics, absolute metrics comps or the EBITDA margin or what you have at Mariano’s right now but I mean it’s fair to say that ’13 obviously had a positive swing in EBITDA but I assume it improved over ’12, just the absolute dollars because you have got more stores and had a good year, is that a reasonable for us out here trying to separate the two major business between core and Mariano’s, is that a reasonable way to look at the swing?

Darren Karst

Yes, that is.

Andrew Wolf - BB&T Capital Markets

And in 2014 because you have all these 11 stores breaking even, is that still – but you are adding more – even more Mariano’s on an organic basis is that still the expectation given that the 11 Dominick’s conversions are going to be net zero?

Darren Karst

Is what still the expectation.

Andrew Wolf - BB&T Capital Markets

Will that – that you will have even a greater EBIT – absolute dollar EBITDA swing in ’14 from the Mariano’s business unit versus ’13?

Darren Karst

Yes, it will probably be a comparable dollar swing.

Andrew Wolf - BB&T Capital Markets

Okay, thank you. That’s it for me.

Bob Mariano

Thank you, Andy.

Operator

Our next question comes from Kelly Bania of BMO Capital. Go ahead. Your line is open.

Kelly Bania - BMO Capital

Hi, good evening. Thanks for taking my questions. Just curious as we think about modeling these 11 acquired stores for 2014 is there any different productivity ramp or a margin impact that we should think about keeping in mind that these are going – these stores are going to be remodeled later. And then I think you talked about accelerating the timing of the remodels if you can just maybe give some more details on exactly when those are planned to remodeled versus prior expectations?

Bob Mariano

Sure, I think by and large the ramping of the acquired stores is pretty similar to the organic stores. You raised a good point that when we do go back and do the major remodelings, we certainly would expect them to have an additional lift at that point. But for the most part over the course of the three years you have a similar type of growth projection in terms of how we look at it like an organic store. On your other question in terms of timing and major remodelings, we are currently in the process of working on that we haven’t finalized our scheduling on how many and how soon because we are in the process of working on that right now.

Kelly Bania - BMO Capital

Okay, that’s helpful. And then just as we think about the sales growth guidance for the year of 13% to 14% I think on my math that implies about $600 million in sales growth that should come from Mariano’s from those 16 stores is that the right way to think about it or is there anything else impacting that number?

Darren Karst

That’s the right way to think about it, yes.

Kelly Bania - BMO Capital

Okay, great. Thank you.

Bob Mariano

Thank you.

James Hyland

Operator, that’s it.

Operator

I am showing no further questions at this time.

Bob Mariano

Okay. I would like to thank everybody for your participation today. I would also like to take a moment to thank all of our employees, our trading partners, our shareholders and most importantly our customers for all of their support. We appreciate your interest in our company and look forward to sharing our progress with you next quarter. Thanks a lot. Have a great day. Bye-bye.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect.

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