MINNEAPOLIS -- Nash Finch here said last week that its Avanza format targeting Hispanics has been losing a lot of money in Chicago, and the company will not invest further in the concept until it restores the viability of those two stores.
"We are not pleased with their progress," said Ron Marshall, chief executive officer, Nash Finch, during a conference call last week discussing the company's results for the 12-week first quarter ended March 27. "Until we get Chicago squared away, we will not invest any more capital in the concept."
Marshall said the company had been using print advertising to promote the stores to Chicago Hispanics, but has recently switched to Spanish-language TV advertising on the Univision and Telemundo networks. He said he wanted to give the TV spots a chance before making a decision about closing the stores.
The company opened its first Avanza in the Denver market in January 2003, and has since opened several others in Colorado. It opened the two Chicago stores in September and October of last year.
Marshall said the Chicago stores accounted for a significant proportion of the decrease in operating income the company suffered in its retail operations in the first quarter. Retail operating profits fell 61% in the period, to $2.8 million.
"You'd be surprised how much impact two stores can have," he said, responding to an analyst's question about how 2% of the company's retail operations could generate such a significant decline in profitability.
Marshall said the company has been "very pleased" with the results from its Avanzas in Colorado, however.
One analyst, who asked not to be identified, speculated that Nash Finch might have miscalculated the cultural attitudes and preferences of the Hispanic consumers in the Chicago market based on the company's experiences in the Denver market, where the Hispanic population is largely Mexican American and remains close to its roots.
In addition to the poor performance of the Chicago Avanzas, Nash Finch reported that its retail portfolio as a whole had same-store sales declines of 10.9%, continuing a streak of large same-store sales declines that stretches back more than a year.
Asked if the company would consider closing or selling the 40 stores it previously identified as being in markets where it does not have a No. 1 or No. 2 market share, Marshall said he believes the company can turn around their performance through better locally based marketing efforts.
"We are in the process of evaluating those stores," he said. "I'm happy with the store operations we have in the field. The problem we have now is an intellectual challenge and a marketing challenge, and we're working to get that fixed."
The company said it generated $194.7 million in retail sales in the first quarter, a 12.1% decline from the year-ago period. The company closed five stores during the year, operating 106 stores at the end of this year's first quarter, vs. 111 last year. No new stores are planned for the current fiscal year.
The company said it has been facing intense competitive pressures from supercenters and alternative formats, and has been unable to pass along to consumers all of the price inflation in meat and dairy products that it has been encountering on the purchasing side.
Marshall said the company was seeking to capitalize on the growing interest in nontraditional food retailing by offering its services to those types of concepts as a wholesaler.
"We are having a series of conversations with nontraditional retailers about their grocery business," he said.
Nash Finch said its wholesale division posted an 11% gain in first-quarter sales, all of which came from newly acquired customers. Sales in the distribution segment totaled $431 million, and operating profits grew 29.5%, to $14.5 million. In the company's military distribution division, sales grew 2.8%, to $253.7 million, while operating profits grew 22.4%, to $8.2 million.
Marshall said Nash Finch was seeking to boost its wholesale operations by helping its customers grow through acquisition.
"There's a tremendous amount of rationalization going on right now among the national chains," he said, adding that he expected to make announcements soon about independent customers that have acquired stores from larger chains.
Nash Finch reinforced its previous prediction that earnings per share would be in the range of $2.46 and $2.54 for the year. That compares with 2003 earnings from continuing operations of $2.85 per share, which included several one-time events that boosted earnings by 37 cents per share. Included in those events was an expense reduction of $3.8 million for the elimination of post-retirement health benefits for nonunion employees in the fourth quarter of last year.
Nash Finch reported a first-quarter net income of $4.7 million, vs. $3.3 million in the year-ago period, when the company had $2.3 million in charges. Sales in the recent first quarter totaled $879.5 million, a 2.7% increase.
* Year-ago first-quarter results included a one-time charge of $2.3 million after taxes paid to lenders for bond indenture and credit facility waivers.