SpartanNash Transition Brings Growing Pains

Ongoing efforts to build distribution capabilities and store environments to serve the changing shopper are coming at a near-term cost to SpartanNash.

Company officials maintained optimism that the changes—including the ramp-up of the newly acquired Caito fresh food processing business and a new approach to its retail stores—would begin making a difference later this year. But stock in the Grand Rapids, Mich.-based distributor and retailer was down sharply to levels not seen in five years, after the company in an earnings review said gross profits were down despite a 5.3% increase in revenues in Q4.

For its most recent earnings period ended Dec. 30, SpartanNash's profits were 13.2% of sales in the quarter, down from 14.2% in the same period a year ago. Officials attributed lower gross profits to the impact that modest inflation had on LIFO, which resulted in a Q4 expense of $400,000 compared to a $4 million benefit in the same quarter last year. A greater mix of lower-margin distribution sales, price investments at retail and industry-wide transportation challenges also led to lower profits, officials said. Operating profit was $18.9 million vs. $24.6 million a year ago.

Sales for the period totaled $1.9 billion and were led by increases in distribution ($111.6 million, 13.3%) and military segment sales ($524 million 2.7%), offset by a 6.1% decrease in retail sales (to $450 million) including a 3.2% comparable-store sales decline.

CEO Dave Staples in a conference call said he was confident that Caito would provide benefits for SpartanNash’s retail and distribution customers in expanding availability of popular convenience items such as prepared meals, fresh sandwiches and cut fruit, but acknowledged getting the effort off the ground has been more expensive than legacy distribution.

Staples also made a case for “rethinking” its retail units to create environments better suited for changes in how consumers want to shop. That effort will be supported in part by devoting about half the benefits of lower tax rate toward employee wages and retail initiatives, including communicating its points of difference in stores to consumers.

“We’ve been retailers for a long time. Our store quality is high and we have consistently invested in them,” Staples said. “But the world is changing and demands of customers are changing, and we want to bring [retail] forward. Family Fare is a great banner, but we can take it to be much more experiential—much more focused on health and wellness.”

Renovations in a handful of SpartanNash’s retail stores—with another three on the way—feature some of those elements, such as a produce butcher, new prepared-food offerings, and an expanded variety of fresh and organic fruits and vegetables.

These offerings, Staples said, would differentiate SpartanNash from competitors battling primarily on price. He described price competition in Q4 as intense and “somewhat irrational,” particularly in Michigan, where Walmart and Aldi have been leading the way.

“I think the Lidl threat has those two battling it out for low-price leadership, and I think they’re trying to set a new bar,” Staples said. “But we’ve got to compete on what our strengths are. We stand for affordable wellness. We stand for value beyond price.”

The company forecast that retail comp declines would moderate to a range of slightly negative to flat this year as its initiatives take hold.

Earnings over the first half of the year will be flat to modestly below the last year, driven primarily by sequential improvements in Caito operations and cycling certain vendor programs. These items are expected to be partially offset by the overall sales growth and the benefits of tax reform.

Spartan expects capital expenditures for the year to be in the range of $60 million to $70 million.