GRAND RAPIDS, Mich. -- Market conditions are ripe for acquisitions -- but the one Spartan Stores here was contemplating was simply too risky, the company's chairman and chief executive officer said last week.
Speaking with analysts and investors during the company's conference call discussing second-quarter results, Craig Sturken said Spartan remained open to the possibility of making acquisitions in the future, even though the company walked away from the potential purchase of an unnamed chain -- widely presumed to be Farmer Jack -- adjacent to its operating area.
"You have to look at the risk-and-reward relationship whenever you go into an acquisition, and we just felt that in this particular case that the risk was still a little bit greater than what we thought we should take, and we determined to back out," he said.
Sturken once ran the Farmer Jack chain for Montvale, N.J.-based A&P, which is now seeking to sell it. Last month, Spartan said it had evaluated several strategic alternatives, including both the acquisition in question and putting itself up for sale, and determined not to pursue either course for the time being.
That won't necessarily prevent the company from pursuing other acquisitions, however, Sturken said during the conference call last week.
"[Our] strategies will include evaluating acquisitions of both customer and non-customer stores that fit our strategic acquisition criteria and help solidify or expand our market-share position," he said. "These acquisitions must have the strong potential to improve sales growth and profitability. I will say that due to the dynamic and competitive grocery industry market conditions, our opportunities in this regard have never been more favorable."
Under pressure from its largest shareholder, Loeb Partners, to sell itself, Spartan will continue on its current strategic course, Sturken said, repeating several times during the call his intention to pursue "long-term value" for Spartan shareholders.
Part of that strategic direction could include the opening of new stores for the first time in several years, the company said during the call. After spending the last couple of years refurbishing existing stores, Spartan will explore the possibility of channeling some of its projected $25 million to $30 million in capital expenditures toward opening replacement and fill-in sites.
In the meantime, it is also continuing to add fuel centers and pharmacies to its stores. In response to a question about returns on investment in those augmentations, Sturken noted that fuel centers cost between $850,000 and $900,000 to install, and pharmacies require an investment of about $200,000 to $250,000. Although he did not detail the returns, he did note that both drive sales of other products.
In the 12-week second quarter ended Sept. 10, Spartan said the company faced several competitive openings, which contributed to the 2% decline in comparable-store sales for the period. Comparable-store sales at supermarkets were down 2.3%, while comps at The Pharm drug chain fell 0.4%.
Retail sales declined about 4.4% in the second quarter, to $221.9 million, after the closure of two Pharm stores and the sale of a joint venture store. Operating earnings in the retail segment fell about 3.7%, to $6.6 million.
Distribution sales grew 3.6%, to $263.7 million, which the company attributed both to increased sales to existing customers and to the addition of 10 new distribution accounts operating a total of 27 stores. Operating earnings in distribution fell 11.6%, to $5.7 million.
The company said it was implementing an activity-based costing initiative with vendors as part of an effort to cut costs.
"We are going to be validating that model with some of our large suppliers here in the next 60 days, and we expect to come out of that planning session with some very strong and meaningful changes to those supply chains," said Dennis Eidson, executive vice president, merchandising.
Earnings from continuing operations for the company as a whole were basically flat with year-ago levels at $7.1 million. Total sales fell less than 1%, to $485.5 million, vs. year-ago results.
The company said it expected retail sales trends "to improve significantly" for the rest of the fiscal year, especially as no new supercenters are expected to open, although comps are still projected to be "slightly negative" for the second half.
