SMART & FINAL ADDRESSES IN-STOCK PERFORMANCE

ELLIOT ZWIEBACH

LOS ANGELES - Smart & Final here said last week it has boosted its inventory levels to improve its store-level image following the implementation of a new supply chain warehouse system.

"But very high on our list of current priorities is bringing our overall distribution cost in better balance and having the luxury of time to more fully utilize the additional functionality in the supply chain software," Etienne Snollaerts, president and chief executive officer, told analysts during a conference call to discuss financial results for the year and fourth quarter ending Jan. 1. "The realistic time frame to achieve these priorities is the middle of this year."

Snollaerts said he believes sales, which were down 3% in the quarter, could have been better, "[but] we fell short in keeping many of our stores as well-stocked as we would have liked in the early part of the quarter," he said.

That situation is improving, he said. "The basic operation of the supply chain system has been greatly improved; our store shipment fulfillment rates from our [city of] Commerce distribution center meet or exceed the levels we had in the former warehouse management system, and our store in-stock condition is currently good."

Smart & Final has also expanded what Snollaerts said was a constrained distribution capacity by opening an additional warehouse, run by a third party, in Rancho Cucamonga, Calif., to supply high-cube, high-velocity items to stores in Southern California, Arizona and Nevada. Since its opening in December, "it has brought a great measure of capacity relief to our Commerce facility," he said.

Net income for the 12-week quarter rose 120.9% to $9.3 million, while sales fell 3% to $456.8 million. Comparable-store sales, adjusted for the extra week, rose 2.9%. Income from continuing operations rose 47.9% to $6.8 million following a favorable adjustment after the company said it took too large a deduction for a litigation charge in the third quarter.

Net income for the year fell 29.2% to $21.4 million, while sales rose 2.4% to $2 billion. Comps, adjusted for the extra week, rose 2.6%. Income from continuing operations fell 2.2% to $30.8 million following the litigation adjustment.

Snollaerts also said it is too early to assess results at the three cash-and-carry test stores the company has opened over the last nine months in Southern California, although he said business-to-business operators seem to be impressed with the assortment and service levels.

4TH-QUARTER RESULTS

Qtr Ended: 1/1/06; 1/2/05

Sales: $456.8 million; $471.2 million

Change: -3%

Comp-store: 2.9%*

Net Income: $9.3 million**; $4.2 million

Change: 120.9%

Inc/Share: 30 cents; 14 cents

12 Weeks: 2005; 2004

Sales: $2 billion; $1.96 billion

Change: 2.4%

Comp-store: * 2.6%

Net Income: $22 million**; $31.5 million

Change: -29.2%

Inc/Share: 69 cents; $1

* Adjusted for an extra week in the prior year.

** Includes a favorable adjustment to a litigation charge recorded in the third quarter of 2005.