SpartanNash reports higher sales, lower earnings

SpartanNash Company yesterday reported sales of $1.92 billion for its fourth quarter ended Dec. 30, 2017, an increase of $96 million, or 5.3%, over the $1.83 billion reported in the prior year’s fourth quarter. Company officials attributed the increase to growth in its food distribution segment, primarily due to contributions from its acquisition of Caito Foods Service, along with organic growth of 3.2%, and a continuation of improved sales trends in its military commissary business. These gains, however, were partially offset by lower sales at its retail stores.

For fiscal 2017, net sales reached $8.13 billion, an increase of $393.5 million, or 5.1%, which the company attributed to contributions for Caito, organic growth of 3.7%, along with new military commissary business in the Southwest in the second half of the year. SpartanNash completed its acquisition of Caito’s produce distribution business, fresh-cut fruits and vegetables business and a newly constructed Fresh Kitchen prepared-foods processing plant in early January 2017.

“Our fourth quarter capped a year of continued progress against our key strategic initiatives,” said David Staples, president and CEO of Grand Rapids, Mich.-based SpartanNash. “Our strong sales growth in food distribution demonstrates our ability to both expand our relationships with existing independent customers and drive new business. We achieved sales growth in our military segment in the second half of the year, consistent with our expectations, and experienced a strong sequential quarterly improvement as we continued to partner with DeCA (Defense Commissary Agency) on its key initiatives.” 

He added, “During the four quarter, we remodeled several retail locations under our refreshed Family Fare brand positioning, which provides customers with a more experiential and unique shopping experience. We continue to pilot and test numerous innovative concepts and incorporate these learnings into our retail operations and distribution customer offerings. We are confident that these strategies and investments will serve to strengthen our competitive positioning in 2018.”

During an earnings call this morning with securities analysts who follow the firm, Staples noted that SpartanNash has been converting select stores to its Family Fare banner, while remodeling others.

“We remain pleased with the return on these investments and our locations in South Dakota continue to deliver better than expected results,” he said. “This new format presents a significant improvement in our produce offerings from vested market organics and value to an expanded overall variety. Additionally, local products have been expanded throughout the store, as well as the more enhanced selection of prepared foods. Our Fresh Device Station lets customers select their produce and have a chop, dice or slice on-site.”

While such improvements are pushing up sales at SpartanNash, gross profit during the fourth quarter declined to $254.8 million, or 13.2% of net sales, compared to $259.3 million, or 14.2% of net sales, in the prior year quarter. Company officials attributed that to several factors, most notably the impact minor inflation had on LIFO (Last In First Out), which resulted in fourth-quarter LIFO of $0.4 million, compared to a $4.0 million benefit in the prior-year quarter. 

The margin rate was also impacted by the increased mix of food distribution sales as a percentage of total sales, margin investments at retail and industry-wide transportation cost challenges, particularly as they pertain to in-bound freight costs.

“From a department perspective, the primary driver that increases inflation range occurred in meat and general merchandise, while inflation in dairy eased. The remaining departments remained flat,” said Mark E. Shamber, CFO and executive vice president, during the earnings call.

“We currently expect to see inflation continue to increase sequentially headed towards normalized historical levels,” Shamber said.

The less-than-stellar earnings prompted a sell-off of SpartanNash stock, driving it to a year low, before rebounding slightly.

Ajay Jain, senior research analyst–supermarkets, drugstores & food distribution, at Pivotal Research Group, headquartered in New York, was one of the analysts lowering SpartanNash’s 2018 fiscal year estimates and stock price target, and recommending it as a “sell.”

“The revenue and gross margin weakness in the 2017 fourth quarter point to a challenging outlook for the first half of fiscal 2018,” he wrote in a summary of the company’s earnings, noting that the company is seeing stepped-up competitive pressures.

“Consistent with our recent analysis of market-share trends for a variety of regional and national operators, it’s increasingly clear that Walmart and Aldi are having a major impact on incumbents. SpartanNash is obviously not immune from these competitive threats,” Jain said. 

Burt P. Flickinger III, managing director at New York-based Strategic Resource Group, is taking a more bullish approach to the company.

“SpartanNash is uniquely successful in making money at retail,” Flickinger said, comparing it against peer competitor Supervalu. Its stores are also being helped by problems and bankruptcies at retail competitors, such as Marsh supermarkets in Indiana.  

Flickinger gives SpartanNash high marks for its corporate stores in Minnesota and North Dakota, where he expects them to greatly benefit from energy workers flooding in to work the Bakken Formation shale oil fields. “SpartanNash has those stores really well-merchandised and supplied, particularly for the oil workers who work six or seven days straight and have two or three days off and live in camps. They bring their trucks and buy a week’s worth of groceries at one time.”

SpartanNash is also doing well with its military stores. “While other suppliers seem to be struggling with military, SpartanNash is doing well,” he said.

Flickinger sees SpartanNash as the perfect candidate to possibly take over Supervalu, which has been struggling and is under pressure from an activist investor to restructure or sell.

“We’ve looked at the overlap of all the distribution centers and there is almost no meaningful overlap between Supervalu corporate retail and SpartanNash, including in Minnesota and North Dakota, so it would seem to make sense that SpartanNash could run Supervalu a lot better than its current management and board of directors is running Supervalu,” Flickinger said.

The fifth largest food distributor in the U.S., SpartanNash supplies more than 2,100 independents across the country from 10 distribution centers. It also operates more than 140 corporate-owned supermarkets in eight states under the Dan’s Supermarket, D&W Fresh Market, Econofoods, Forest Hills Foods, Fresh City Market, No Frills, Sun Mart, Supermarcado Nuestra Familia, ValuLand and VG’s banners. Spartan Nash also operates seven military distribution centers, serving the District of Columbia, Cuba, Puerto Rico, Italy, Bahrain, Djibouti and Egypt. 

Wholesale distribution is the largest segment of SpartanNash’s business, accounting for 40%, with retail and military operations representing approximately 30% each.