Spartan Stores Announces Third Quarter Fiscal 2012 Financial Results

Spartan Stores, Inc. (Nasdaq:SPTN), a leading regional grocery distributor and retailer, today reported financial results for its 16-week third quarter ended December 31, 2011.

Third Quarter Results

Consolidated net sales for the 16-week third quarter increased 1.9 percent to $797.2 million compared to $782.3 million in the same period last year. Both the distribution and retail segments reported increased sales during the quarter.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) for the quarter increased 1.1 percent to $26.0 million, or 3.3 percent of net sales, compared to $25.7 million, or 3.3 percent of net sales last year.

“We are pleased with our ability to generate third quarter earnings in line with our expectations and to consistently increase sales in our Distribution segment for the fifth consecutive quarter, despite a more challenging sales environment than anticipated,” stated Dennis Eidson, Spartan’s President and Chief Executive Officer. “Our Retail team continues to find ways to provide the consumer with value and a quality shopping experience. Our most recent effort, the Yes loyalty program, provides many benefits including free groceries and the best prescription drug program in our markets. In addition, our expanded Speedway fuel rewards partnership allows us to offer fuel rewards to the majority of our consumers in Michigan and provides existing distribution customers an opportunity to offer similar services. We remain confident that our consumer centric focus will continue to resonate well with both existing distribution customers and the end consumer as we position Spartan Stores for increased long-term growth.”

Third quarter gross profit margin decreased 70 basis points to 20.4 percent from 21.1 percent in the same period last year. The decline was primarily due to a higher mix of fuel sales, an increased LIFO expense of approximately $1.8 million, and a slightly lower fuel gross margin rate this year versus last year. The increased LIFO expense was due to higher inflation in this year’s third quarter and the cycling of a $0.7 million LIFO inventory credit provision from lower inventory levels generated in last year’s third quarter as a result of warehouse operational improvements.

Operating expenses, excluding restructuring, asset impairment and other gains or losses totaled $150.5 million, or 18.9 percent of net sales, compared to $150.6 million, or 19.3 percent of sales in the year-ago quarter. The Company’s expense leverage was improved by a shift in mix of sales towards fuel, productivity improvements in each segment, favorable health care expense and general cost containment initiatives, partially offset by two previously expected items; higher incentive compensation associated with the timing of the prior year’s provision and increased labor and marketing expense associated with the launch of the Yes loyalty program to the remaining banners in the quarter.

In connection with the previously announced early termination of the Company’s interest rate swap agreement, the Company recorded a charge of $0.8 million in the quarter which has been included in interest expense. Subsequent to the end of the third quarter, the Company repaid the entire outstanding balance on its revolving credit facility and as a result of the payoff, interest expense related to the facility is expected to be reduced by $1.4 million over the next four quarters.

Earnings from continuing operations, excluding certain items in the third quarters of fiscal 2012 and fiscal 2011, would have been $5.1 million or $0.22 per diluted share for fiscal 2012 compared to $6.0 million or $0.26 per diluted share last year. The excluded items for the third quarter of fiscal 2012 were a $0.4 million after tax gain on the sale of assets and the $0.5 million after tax expense associated with the swap agreement termination and for fiscal 2011 a $1.5 million net after tax benefit primarily associated with lease terminations and pension curtailment income partially offset by asset impairment charges. Third quarter earnings from continuing operations as reported were $5.0 million in fiscal 2012 and $7.5 million in fiscal 2011.

Distribution Segment

Third quarter net sales for the distribution segment increased 2.0 percent to $353.8 million from $346.9 million in the year-ago period due to new customer growth and increased pharmacy related sales. This is the fifth consecutive quarter that distribution sales have increased.

Third quarter fiscal 2012 operating earnings for the distribution segments were $10.9 million compared to $13.2 million, excluding a $2.2 million pretax benefit recorded in the third quarter last year. The operating earnings decrease is principally due to an increase in LIFO expense of $1.5 million as a result of last year’s inventory reduction resulting in a credit provision and this year’s higher inflation, as well as, increased incentive compensation expense due to the timing of the quarterly provision last year.

Retail Segment

Third quarter net sales for the retail segment increased 1.9 percent to $443.5 million compared to $435.4 million in the same period last year. The higher sales were due to increased fuel retail selling prices and increased fuel volume, partially offset by a decline in comparable store sales, excluding fuel, of 1.2 percent. The decrease in comparable store sales reflects the impact of unseasonably warm weather in Michigan and the continuing trend of a cautious consumer spending environment, partially offset by the benefit of the Company’s Yes loyalty program rollout to the remaining banners.

Retail segment operating earnings for the quarter would have increased 77.8 percent to $1.6 million compared to $0.9 million in the third quarter of fiscal 2011, excluding the gain on sale of assets of $0.6 million in fiscal 2012 and the retail segment’s $0.2 million portion of the net pretax benefit recorded in fiscal 2011’s third quarter. The increase in operating earnings was primarily attributable to lower health care expense, an increase in fuel margin cents per gallon, labor productivity improvements and benefits from cost containment initiatives, partially offset by lower comparable store sales, increased expenses associated with the Yes loyalty program rollout to the remaining banners, higher incentive compensation expense due to the timing of the quarterly provision last year and increased LIFO expense. Third quarter operating earnings as reported were $2.1 million in fiscal 2012 and $1.2 million in fiscal 2011.

Balance Sheet and Cash Flow

The Company continued to report strong levels of net cash provided by operating activities of $51.2 million for the year-to-date period ended December 31, 2011. Total net long-term debt (including current maturities and capital lease obligations and subtracting cash) was $124.2 million versus $149.8 million at the end of the third quarter of fiscal 2011.

Outlook

“The Michigan economy has certainly improved from its lows; however, since the beginning of our fiscal year there are actually fewer individuals employed in the state. As we have previously communicated, employment is a significant driver of our sales performance and, therefore, while the current environment is still challenging we remain confident that as the number of people employed in Michigan begins to grow, Spartan Stores is well positioned for increased sales. That being said, we believe our comparable store sales run rate will be negatively impacted by 1.0 to 2.0 percent in the fourth quarter due to cycling last year’s fourth quarter benefit from the launch of our Yes loyalty program at one of our banners, a slower start to the quarter due to the unseasonably warm weather in Michigan and a shift in the New Year’s holiday calendar,” concluded Mr. Eidson.

The Company anticipates that the fourth quarter of fiscal 2012’s financial performance will approximate the prior year’s fourth quarter earnings from continuing operations, excluding the impact of the 53 rd week and any unusual items that do not reflect the ongoing operating activities of the Company.

The Company expects capital expenditures for fiscal year 2012 to range from $44.0 million to $46.0 million with depreciation and amortization in the range of $37.0 million to $38.0 million and total interest expense to approximate $15.0 million including the swap termination charge.

Conference Call

A telephone conference call to discuss the Company’s third quarter of fiscal 2012 financial results is scheduled for 9:00 a.m. Eastern Time, Thursday, February 9, 2011. A live webcast of this conference call will be available on the Company’s website, www.spartanstores.com. Simply click on “For Investors” and follow the links to the live webcast. The webcast will remain available for replay on the Company’s website for approximately ten days.

About Spartan Stores

Grand Rapids, Michigan-based Spartan Stores, Inc. (Nasdaq:SPTN) is the nation’s eleventh largest grocery distributor with 1.4 million square feet of warehouse, distribution, and office space located in Grand Rapids, Michigan. The Company distributes more than 40,000 corporate and national brand products to approximately 375 independent grocer locations in Michigan, Indiana and Ohio, and to our 96 corporate owned stores located in Michigan, including D&W Fresh Markets, Family Fare Supermarkets, Glen’s Markets and VG’s Food and Pharmacy.

Forward-Looking Statements

This press release contains forward-looking statements. Forward-looking statements are identifiable by words or phrases such as “priority”, “trend”, “remain”, “outlook”, “position”, “strategy”, or “begin”; that an event or trend “will” or “should” occur or “continue” or is “likely” or that Spartan Stores or its management “anticipates”, “believes”, “expects” or “plans” a particular result, “confident” or is “optimistic” that a particular result will occur. Accounting estimates are inherently forward-looking. Our restructuring cost provisions are estimates and actual costs may be more or less than these estimates and differences may be material. These forward-looking statements are subject to a number of factors that could cause actual results to differ materially. Our ability to achieve the results stated in our “Outlook” discussion, successfully realize growth opportunities, expand our customer base, effectively implement and achieve the expected benefits of capital investments, warehouse consolidation and store openings, successfully respond to the weak economic environment and changing consumer behavior, anticipate and successfully respond to openings of competitors’ stores, achieve expected sales, cash flows, operating efficiencies and earnings, implement plans, programs and strategies, reduce debt, and continue to pay dividends is not certain and depends on many factors, not all of which are in our control. Additional information about the risk factors to which Spartan Stores is exposed and other factors that may adversely affect these forward-looking statements is contained in Spartan Stores’ reports and filings with the Securities and Exchange Commission. Other risk factors exist and new risk factors may emerge at any time. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of future results. Spartan Stores undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date of this press release.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)
 
  16 Weeks Ended     40 Weeks Ended
December 31,   January 1, December 31,   January 1,
  2011     2011     2011     2011  
 
Net sales $ 797,242 $ 782,300 $ 2,019,453 $ 1,961,593
Cost of sales   634,292     617,493     1,598,429     1,534,899  
Gross margin 162,950 164,807 421,024 426,694
 
Operating expenses
Selling, general and administrative 149,960 150,643 374,192 374,329
Restructuring, asset impairment and other   (2 )   (2,425 )   (137 )   340  
Total operating expenses 149,958 148,218 374,055 374,669
 
Operating earnings 12,992 16,589 46,969 52,025
 
Other income and expenses
Interest expense 5,274 4,666 11,928 11,599
Other, net   (34 )   1     (146 )   (53 )
Total other income and expenses   5,240     4,667     11,782     11,546  
 

Earnings before income taxes and discontinued operations
7,752 11,922 35,187 40,479
Income taxes   2,764     4,452     13,794     15,589  
Earnings from continuing operations 4,988 7,470 21,393 24,890
 
Loss from discontinued operations, net of taxes   (11 )   (162 )   (135 )   (356 )
Net earnings $ 4,977   $ 7,308   $ 21,258   $ 24,534  
 
Basic earnings per share:
Earnings from continuing operations $ 0.22 $ 0.33 $ 0.94 $ 1.10
Loss from discontinued operations   -     (0.01 )   (0.01 )   (0.01 )
Net earnings $ 0.22   $ 0.32   $ 0.93   $ 1.09  
 
Diluted earnings per share:
Earnings from continuing operations $ 0.22 $ 0.33 $ 0.93 $ 1.10
Loss from discontinued operations   -     (0.01 )   (0.01 )  

(0.02

)*
Net earnings $ 0.22   $ 0.32   $ 0.92   $ 1.08  
 
Weighted average shares outstanding:
Basic 22,866 22,631 22,812 22,599
Diluted 23,080 22,710 22,995 22,674
 
* includes rounding
 
SPARTAN STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)
 
  December 31,     January 1,

Assets
  2011     2011  
 
Current assets
Cash and cash equivalents $ 55,059 $ 25,267
Accounts receivable, net 56,764 48,941
Inventories, net 120,908 134,588
Prepaid expenses and other current assets 11,820 8,720
Deferred taxes on income - 1,688
Property held for sale   1,708     -  
Total current assets 246,259 219,204
 
Goodwill 240,589 247,165
 
Property and equipment, net 245,265 238,285
 
Other, net   56,375     58,844  
 
Total assets $ 788,488   $ 763,498  
 

Liabilities and Shareholders’ Equity
 
Current liabilities
Accounts payable $ 111,273 $ 122,377
Accrued payroll and benefits 35,312 32,585
Other accrued expenses 16,377 16,469
Current portion of restructuring costs 3,596 5,556
Current maturities of long-term debt and capital lease obligations   49,313     4,161  
Total current liabilities 215,871 181,148
 
Long-term liabilities
Deferred taxes on income 78,739 62,202
Postretirement benefits 12,446 15,532
Other long-term liabilities 16,257 19,861
Restructuring costs 8,359 17,362
Long-term debt and capital lease obligations   129,916     170,886  
Total long-term liabilities 245,717 285,843
 
Commitments and contingencies
 
Shareholders’ equity

Common stock, voting, no par value; 50,000 shares authorized; 22,868 and 22,619 shares outstanding
166,015 160,701

Preferred stock, no par value, 10,000 shares authorized; no shares outstanding
- -
Accumulated other comprehensive loss (12,351 ) (13,987 )
Retained earnings   173,236     149,793  
Total shareholders’ equity   326,900     296,507  
 
Total liabilities and shareholders’ equity $ 788,488   $ 763,498  
 
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)
 
  40 Weeks Ended
December 31,     January 1,
  2011     2011  
Cash flows from operating activities
Net cash provided by operating activities $ 51,181 $ 62,450
 
Net cash used in investing activities (32,978 ) (26,475 )
 
Net cash used in financing activities (6,684 ) (17,436 )
 
Net cash used in discontinued operations   (284 )   (2,442 )
 
Net increase in cash and cash equivalents 11,235 16,097
Cash and cash equivalents at beginning of period   43,824     9,170  
Cash and cash equivalents at end of period $ 55,059   $ 25,267  
 
SPARTAN STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA

(In thousands)

(Unaudited)
 
  16 Weeks Ended     40 Weeks Ended
December 31,   January 1, December 31,   January 1,
2011 2011 2011 2011
Retail Segment:
 
Net Sales $ 443,487 $ 435,410 $ 1,152,343 $ 1,120,824
Operating Earnings $ 2,129 $ 1,178 $ 19,940 $ 17,906
 
Distribution Segment:
 
Net Sales $ 353,755 $ 346,890 $ 867,110 $ 840,769
Operating Earnings $ 10,863 $ 15,411 $ 27,029 $ 34,119
 
SPARTAN STORES, INC. AND SUBSIDIARIES
RECONCILIATION OF NET EARNINGS TO ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (Adjusted EBITDA)
(A NON-GAAP FINANCIAL MEASURE)

(Unaudited)
 
  Third Quarter     Year-to-Date
(In thousands)    
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
  2011     2011     2011     2011  
Net earnings $ 4,977 $ 7,308 $ 21,258 $ 24,534
Add:
Discontinued operations 11 162 135 356
Income taxes 2,764 4,452 13,794 15,589
Interest expense 5,274 4,666 11,928 11,599
Non-operating (income) expense   (34 )   1     (146 )   (53 )
Operating earnings 12,992 16,589 46,969 52,025
Add:
Depreciation and amortization 11,416 11,044 28,191 26,950
LIFO (income) expense 1,134 (695 ) 2,661 (3,903 )
Restructuring, asset impairment and other (2 ) (2,425 ) (137 ) 340
Other unusual items - - 1,194 -
Non-cash stock compensation and other charges   448     1,204     2,808     3,327  
Adjusted EBITDA $ 25,988   $ 25,717   $ 81,686   $ 78,739  
 
Reconciliation of operating earnings to adjusted EBITDA by segment:
 
Retail:
Operating earnings $ 2,129 $ 1,178 $ 19,940 $ 17,906
Add:
Depreciation and amortization 8,806 8,442 21,692 20,534
LIFO expense 785 465 1,749 665
Restructuring, asset impairment and other (2 ) (247 ) (100 ) (94 )
Non-cash stock compensation and other (gains) charges   (155 )  

632

*
  982    

1,767

*
Adjusted EBITDA $ 11,563   $ 10,470   $ 44,263   $ 40,778  
 
Distribution:
Operating earnings $ 10,863 $ 15,411 $ 27,029 $ 34,119
Add:
Depreciation and amortization 2,610 2,602 6,499 6,416
LIFO (income) expense 349 (1,160 ) 912 (4,568 )
Restructuring, asset impairment and other - (2,178 ) (37 ) 434
Other unusual items - - 1,194 -
Non-cash stock compensation and other charges   603    

572

*
  1,826    

1,560

*
Adjusted EBITDA $ 14,425   $ 15,247   $ 37,423   $ 37,961  
 

* Prior year stock compensation has been reclassified to conform to the current year to reflect the amount included in the administrative cost allocated to the Retail segment.

Notes: Consolidated Adjusted EBITDA is a non-GAAP operating financial measure that we define as net earnings from continuing operations plus depreciation and amortization, and other non-cash items including imputed interest, deferred (stock) compensation, the LIFO provision, as well as adjustments for unusual items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations, interest expense and the provision for income taxes to the extent deducted in the computation of Net Earnings.

We believe that Adjusted EBITDA provides a meaningful representation of our operating performance for the Company as a whole and for our operating segments. We consider Adjusted EBITDA as an additional way to measure operating performance on an ongoing basis. Adjusted EBITDA is meant to reflect the ongoing operating performance of all of our retail stores and wholesale operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because Adjusted EBITDA is a performance measure that management uses to allocate resources, assess performance against its peers and evaluate overall performance, we believe it provides useful information for our investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with us request our operating financial results in Adjusted EBITDA format.

Adjusted EBITDA is not a measure of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. Our definition of Adjusted EBITDA may not be identical to similarly titled measures reported by other companies.
SPARTAN STORES, INC. AND SUBSIDIARIES RECONCILIATION OF LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS TO TOTAL NET LONG-TERM DEBT
(A NON-GAAP FINANCIAL MEASURE)

(Unaudited)
 
  December 31,     January 1,
(In thousands) 2011 2011
 
Current maturities of long-term debt and capital lease obligations $ 49,313 $ 4,161
Long-term debt and capital lease obligations   129,916     170,886  
Total Debt 179,229 175,047
Cash and cash equivalents   (55,059 )   (25,267 )
Total net long-term debt $ 124,170   $ 149,780  

Notes: Total net long-term debt is a non-GAAP financial measure that is defined as long-term debt and capital lease obligations plus current maturities of long-term debt and capital lease obligations less cash and cash equivalents. The Company believes investors find the information useful because it reflects the amount of long-term debt obligations that are not covered by available cash and temporary investment.

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