SAN BERNARDINO, Calif. — Stater Bros. Markets has a 74-year heritage of providing value and service to customers, and it is striving to maintain that heritage in these tough economic times, Jack H. Brown, chairman and chief executive officer, told bondholders last week.
Discussing the chain's financial results for the fiscal third quarter, which ended June 27, Brown said the chain is letting gross profit margins fall to keep a lid on prices while keeping service levels high. “But our customers know we are there for them in the short run, and they will be there for us in the long run,” he said.
Stater Bros. said it is keeping prices down by leveraging its membership in Topco to get better deals on items such as bottled water, bread and ice cream, “and we've also installed a system to reduce shrink and mis-billing at the backdoor” to reduce costs, the company added.
For the 13-week quarter, net income fell 60.3% to $6 million, while sales declined 3.1% to $900 million and same-store sales dropped 1.2%. For the 39-week, year-to-date period, net income was down 37.3% to $18.7 million, with sales dropping 3.9% to $2.7 billion and same-store sales dropping 2.2%.
With the sale during the first quarter of Santee Dairies, whose volume encompassed a wide range of retailers that were included in Stater's sales totals, the company said sales were down $28.6 million in the quarter, of which $23 million resulted from the loss of the dairy business, and down $109.4 million for the year to date, of which $72.6 million was due to the sale of the dairy assets. Excluding those assets, sales were down 0.6% for the quarter and 1.3% for the 39 weeks.
“That drop of 0.6% is better than most other supermarkets' operating results,” Brown pointed out. “And with 54 Wal-Marts and Targets adding or expanding their supermarket offerings in our immediate area, the fact we've held our sales and our market is remarkable.”
Phil Smith, executive vice president, finance, and chief financial and administrative officer, told bondholders, “We continue to face tough economic pressures, but we believe we will be able to navigate this economy by providing customers with the values they need. And by being competitive on price and offering hometown service, we can sacrifice gross profits and profitability in the short term and then, when the economy turns, customers will be there for us.”
Gross margin for the quarter was 27.29% of sales, compared with 27.38% a year ago — “which reflects actions we have taken to hold our market share,” Smith said — and flat at 26.85% for the year to date.
Brown said Stater is allocating between $35 million and $38 million to capital spending in 2011 — about the same as it will spend this year, he noted — “which will cover remodels and up to two replacement stores. And if we could see the economy improving, we have identified sites for additional new stores, though I don't have that confidence in the economy.”
During 2010 Stater expects to complete four major remodels, at a cost of $2 million-plus each, and six minor remodels, plus one or two replacement openings.
Asked about potential acquisitions, Brown said, “We look at everything that's available, but we haven't seen anything we'd like. However, there are some locations we'd like to have that haven't been offered yet, and we've dropped some hints.”
Unemployment in the Inland Empire section of Southern California where Stater operates most of its 167 stores s running at about 14.8% for the third year in a row, Brown said, “because construction is the No. 1 employer here, and that throws a double whammy at us because not only are new homes not being built, but also new families are not moving in.”
He said he sees some “limited signs of economic recovery, including some new housing starts, which is very encouraging.”
Competition has been rational, he added. “After all the whoop-de-do of the price rollbacks at Wal-Mart, which didn't really amount to much, we haven't seen much reaction from the box stores or discount stores. And while we haven't seen any inflation, we've seen less deflation.”