LOS ANGELES -- Smart & Final here said last week it's still trying to strike a balance between building sales and maintaining gross margins as it seeks to hold onto the sales momentum it built during last year's Southern California labor dispute.
Consequently, a decline in gross margins during the first quarter ended March 27 was appropriate, Etienne Snollaerts, president and chief executive officer, told analysts during a conference call to discuss financial results for the 12-week quarter. Net income in the quarter fell 48.4%, to $3.2 million, after earnings in the prior year benefited from the effects of the Southern California strike-lockout, which also boosted sales in the prior year's first quarter by approximately $40 million.
Sales in the most recent quarter rose 1% to $427.6 million, and comparable-store sales were also up 1%. The company said sales outside Southern California showed steady growth during the quarter, with average transactions up more than 5%, to almost $42 per transaction.
However, heavy rains during the quarter in the company's core Southern California marketing area "presented a challenge to maintaining sales momentum among many of our key customer groups," Snollaerts said. Smart & Final responded with promotional pricing, "which had a modest impact on margins. [But] we believe the promotions achieved our overall sales objectives."
Gross margins during the quarter declined 130 basis points to 17.2%, with half of the decline resulting from increased promotional activity and the other half resulting from increased distribution costs, the company said.
Snollaerts said the customers Smart & Final gained from last year's labor dispute "are still there. But they were coming in once or twice a week during the strike. Now, they use us more as a stocking place for high-volume items. To keep the momentum of those customers, we need attractive pricing, and that requires a certain level of promotional activity."
Rich Phegley, chief financial officer, said Smart & Final reduced its investment in advertising during the rainy period "because customers were not coming to our stores, and we felt that would be a waste of money. Instead, we waited until late in the quarter to introduce aggressive pricing -- for three days or for 10 days -- on a few key items to restart our sales momentum. That proved effective. When the rain stopped, we did much, much better, so we believe the value offering will keep customers coming in."
The increased distribution costs were related to erratic volume levels during the rainy period, and other issues resulting from implementation of new software at two facilities.