Nash Finch Slowly Ups Turnaround Investment

JON SPRINGER

MINNEAPOLIS — Nash Finch has gained its footing faster than it expected, but a longer journey toward prosperity lies ahead.

In an update last week of the wholesaler's Operation Fresh Start strategic plan, first outlined a year ago, Alec Covington, chief executive officer, said he delayed making investments in that program while the company focused on creating a solid foundation from which to grow. However, he said that aspect of the turnaround — involving hiring the right people and making sure systems and processes were ready to handle the new workload — has been completed ahead of schedule and was reflected in improved financial results in the fiscal third quarter.

“I call it a good news, bad news story to where we're at today,” Covington said in a conference call. While the “blocking and tackling” of getting the organization prepared for change took 12 months instead of the planned 18, implementation of Operation Fresh Start would take closer to 24 months than the 18 months first envisioned, he explained.

“It just simply took longer to get the specialized talent in place in the organization so that Bob [Diamond, the chief financial officer] and I could feel confident about making the capital investments necessary as part of the strategic plan,” Covington said.

Karen Howland, an analyst with Lehman Brothers, New York, said delaying investment was a “prudent move,” given the challenges facing Nash Finch.

“If your existing business is deteriorating or not at a stable level, you're not going to have something to grow from,” Howland told SN. “They are only now getting to the point where they can start investing in the future.”

In 2008, Covington said, Nash Finch will invest a modest $25 million in strategic growth programs, which include the continued rollout of its Avanza corporate banner targeting Hispanic shoppers; an efficiency program at warehouses; and systems to support a Center Store program. Nash Finch also intends to devote some of its $50 million in planned capital spending toward a newly announced stock buyback program and, perhaps, toward acquisitions.

“It's not a lot of money, it's not a huge start, it's not a huge bet,” Covington said of Nash Finch's capital spending program, which, although modest, would represent around twice what the company spent in fiscal 2007.

Acquisitions — which Nash Finch is looking for specifically to improve competency in areas such as fresh merchandising — will be “at the forefront of our mind” in fiscal 2008, he said, although he added that he would be cautious.

“When you get too dependent upon acquisitions to complete a strategic plan, you tend to get a little tendency to overpay and get overzealous,” he said. “We don't want to do that.”

Howland said she expects Nash will pursue small deals for companies that distribute specialty foods or perishables as a means of improving its overall margin mix. A merger with a regional wholesaler is probably farther along the line for Nash Finch.

With new personnel in place and investments in Operation Fresh Start scheduled to begin, Covington said the company will introduce an internal program to reinforce employees' participation in the turnaround. A new logo depicts an apple being formed by hands and the tag line, “I have a hand in this.”

“This is a communication tool that is going out right now, and it really focuses on the culture, the values, the way that we work together, the way that we'll work with our customers and the expectations of our people — how we should conduct ourselves on a daily basis,” he said. “Those things are necessary to support the strategic plan.”

Covington said Nash Finch will likely refinance its debt in 2008 with an eye toward more cost-efficient borrowings and additional flexibility to pursue strategies like stock buybacks. He said the company's debt-to-equity ratio will likely rise to about 3:1, from its current level of 2.5:1. This change is supported by stronger trends in EBITDA.

“A year ago, we established 2.5 as being the right debt ratio for Nash Finch, and I think that was appropriate. We didn't have the right EBITDA trend; we had had a very difficult year; we had a great deal of debt that we incurred as a result of making the [acquisition of two Roundy's warehouses]. So it was the right thing to focus on deleveraging the company,” he said. “Today is a different day. We have a much stronger company, a more vibrant company.”

Covington also said that beginning in 2008, the company will declassify its board of directors, requiring all board members to stand for re-election each year. “This is a decision that demonstrates that our directors are holding themselves accountable,” he said.

Improvements to the foundation of the business — particularly more efficient warehouse practices and overall cost reductions — helped to push Nash's earnings ahead of analyst expectations. Combined with the announcement of the share buyback, its stock regained some momentum last week.

For the fiscal third quarter ended Oct. 6, Nash Finch reported $15.4 million in earnings, vs. a $4.6 million loss in the same period a year ago. Sales declined 4.2% to $1.37 billion, mainly due to the loss of its Martin's account. EBITDA improved to $40.1 million from $27.5 million in the same period a year ago, due to leverage from improved inventory management systems and reduced costs, Covington said.

For the 40-week, year-to-date span, earnings improved to $30.3 million from $3.4 million on a 2% decline in sales, to $3.46 billion.