Deflation Slows Smart & Final Q3 Sales

A surprise bout with deflating prices contributed to lighter sales than expected in the fiscal third quarter for Smart & Final Stores, officials said.

The Commerce, Calif.-based chain of nonmember warehouse stores reported comparable store sales of 0.6% during the period, reflecting a slim 0.2% comp increase at its Smart & Final banner and a 2% comp increase for Smart Foodservice, its restaurant supply unit. CEO Dave Hirz said in a conference call discussing the results that falling prices in key categories were “a bit of a surprise after experiencing inflationary trends in many categories earlier in 2018.”

During the quarter, which ended Oct. 7, the company estimated 0.7% deflation, coming after a second quarter in which prices were up by 0.8%.

Hirz emphasized that the retailer kept its focus on things “we are able to control,” highlighting an 8.7% quarterly margin improvement, progress on initiatives to enhance the shopping experience at stores, including improved wait times and in-stock positions, and earnings results that exceeded estimates even as sales fell short of the company’s estimates.

“As we’ve described before, deflating product prices are especially challenging in an environment where nearly all of our operating costs, including wage rates, continue to inflate,” Hirz said. Deflation has continued into the current period, he added, although was moderating from levels in the third quarter.

Related:Slowing Inflation Trims Sales Growth at Smart & Final

For the quarter, which ended Oct. 7, net sales increased 2.8% to $1.5 billion, and net earnings of $10.2 million doubled from the same period last year thanks in part to more favorable tax rates. Adjusted net income and adjusted diluted earnings per share in the quarter increased by more than 30%.

Hirz said Smart & Final was beginning to see improved traffic at its namesake stores as a result of pricing and promotion strategies gleaned through a new relationship with Nielsen.

Smart & Final ended the third quarter with 324 stores, including 260 Smart & Final stores and 64 Smart Foodservice stores.