DALLAS -- Fleming here said last week the divestiture of conventional stores resulted in a sales decline while ongoing efforts to cut costs and improve productivity enabled net income to increase for the first quarter ended April 21.
The company also said its transition to becoming the sole wholesale supplier for Kmart Corp. is on schedule and, in some instances, ahead of schedule, with the transition on target to be completed by July 1.
Sales for the 16-week quarter fell 0.4% to $4.2 billion, with distribution segment sales up 1.5% to $3.3 billion and retail segment sales down 2.1% to $842.6 million, while comparable store sales at Food 4 Less and Rainbow Foods increased 1.1%.
The company said the increase in distribution sales was attributable to growth in sales to conventional food retailers and new retail channel customers, while the decline in the retail segment was due to the sale or closure of 207 conventional stores since early 1999. Fleming said it has only 31 conventional stores remaining, most of which are under contract to be sold.
The company said net income rose 44% to $17.2 million after adjustments to exclude strategic plan charges and a one-time extraordinary charge for early retirement of debt. Including those charges, net income rose 0.4% to $17.1 million.
According to Mark Hansen, chairman and chief executive officer, "First-quarter results are particularly satisfying because the 44% improvement comes on top of a 56% increase in the prior year's first quarter. We continue to successfully execute on our core strategies of high-volume, low-cost operations backed up with the scale and efficiencies generated by our central procurement program."
During a conference call with industry analysts last week, Bill Marquard, executive vice president, business development and chief knowledge officer, said Fleming will open a 526,000-square-foot distribution center in South Brunswick, N.J., in July to serve the Kmart account in the Northeast. That location replaces facilities in Connecticut and Maryland that Fleming had tentatively agreed to acquire from Supervalu, Minneapolis -- an agreement that was terminated late last month.
"After due diligence, it became clear those facilities couldn't meet our need for low-cost operations, so we went back to our original plan and have now completed negotiations with the landlord for the South Brunswick facility," Marquard explained. "We're extraordinarily excited about that project for Kmart and for the opportunities it will offer all customers for lower acquisition and logistic costs."
Marquard also said Fleming has completed the process of setting up distribution for 1,100 Kmart stores through six warehouses -- in Warsaw, N.C.; Sacramento and Fresno, Calif.; Phoenix, Nashville and Miami -- with three more distribution centers scheduled to be completed over the weekend just concluded (Geneva, Ala.; Salt Lake City; Lincoln, Neb.; and Honolulu) and four more by June 30 (Garland, Texas; Kansas City, Kansas; and Lafayette, La.).
In addition, he said Fleming is ahead of schedule on other Kmart-related projects, including delivery of produce and bakery/deli from Sacramento; produce from Phoenix, Lafayette and Memphis; and bakery/deli from Nashville and Garland.
"The key going forward is to establish distribution facilities in markets we don't presently service," Marquard said. Accordingly, he said Fleming is opening an 845,000-square-foot dry grocery warehouse in Ft. Wayne, Ind., with an annual run rate of $1 billion, which is scheduled to begin operations this week, and a 170,000-square-foot perishables warehouse in Grand Rapids, Mich., which is on schedule to open in July.
Looking beyond the Kmart conversion, Hansen discussed other Fleming initiatives during the conference call, including the following:
Fleming believes it can achieve convenience-store sales of $1 billion over the next three years, with enough opportunities to become the No. 2 national convenience-store supplier behind McLane Co.
The wholesaler is expanding efforts to supply health and beauty products and/or general merchandise to a variety of operators, including food companies (Eagle Food Centers, Minyard's, Bashas', Raley's and the Phoenix division of Safeway) and drug companies (Eckerd's, Phar-Mor and Drug Emporium).
Fleming will continue to grow its corporate store base, with 10 Sentry stores in the Milwaukee area set to be converted to Fresh 4 Less, "the identical twin of Food 4 Less," he noted; plus seven remodels and up to eight new units planned for this year.
It sees long-term opportunities to franchise its Yes! Less limited assortment format. Fleming has 10 Yes! Less stores in operation, with seven more scheduled to open this year, "and we see opportunities to franchise the format beginning later this year."
In other comments, Hansen said Fleming's pricing strategy at its Food 4 Less and Rainbow stores is to operate at parity with supercenters and 1,000 basis points below the supermarket leader in a given area.
He also said Fleming is raising its projected earnings outlook for the year by 4 cents per share to $1.96 per share instead of the $1.92 previously projected, including 2 cents from its acquisition last month of Minter-Weisman, a Plymouth, Minn.-based convenience store distributor.
According to Hansen, volume at Fleming's distribution facilities has risen from $389 million per warehouse to $635 million.