Spartan Stores Announces First Quarter Fiscal Year 2013 Financial Results

Spartan Stores, Inc., (Nasdaq:SPTN) a leading regional grocery distributor and retailer, today reported financial results for its 12-week first quarter of fiscal 2013 ended June 23, 2012.

First Quarter Results

Consolidated net sales for the 12-week first quarter increased 0.2 percent to $603.9 million compared to $602.6 million in the same period last year, as sales increased in both the distribution and retail segments.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) for the quarter was $22.6 million, or 3.8 percent of net sales, compared to $24.6 million, or 4.1 percent of net sales last year.

“We are pleased with our ability to improve the sales momentum in our retail segment, despite continuing to operate in a challenging environment during the first quarter,” stated Dennis Eidson, Spartan’s President and Chief Executive Officer. “We remain focused on tightly managing the controllable aspects of our business and believe the marketing and promotional efforts around our YES Rewards program will continue to enhance and emphasize our value offering to the consumer. Additionally, we remain committed to increasing the return to our shareholders, as demonstrated by the increase in our quarterly dividend and continued share repurchases.”

First quarter gross profit margin decreased 60 basis points to 20.2 percent from 20.8 percent in the same period last year. The decline in gross profit margin was due to lower margins in both business segments due to reduced inflation-driven inventory gains, the launch of the Company’s “Yes Is More” promotional campaign in the retail segment, market conditions in certain fresh departments, as well as, grand opening promotional expenses.

First quarter operating expenses were $110.0 million, or 18.2 percent of net sales, compared to $111.3 million, or 18.5 percent of net sales in the same period last year. The Company’s expense leverage was driven by productivity improvements in the distribution and retail segments, as well as lower employee incentive compensation expenses compared to the prior year period, offset by increased marketing and supply expenses associated with the “Yes Is More” promotional campaign and grand opening expenses associated with one new store, one relocated store and two remodeled stores.

Earnings from continuing operations for the first quarter of fiscal 2013 were $6.1 million, or $0.28 per diluted share, compared to $6.1 million, or $0.27 per diluted share in the first quarter of fiscal 2012. As a result of changes to the State of Michigan’s tax laws, the first quarter of fiscal 2013 includes a net after-tax benefit of $0.6 million, or $0.03 per diluted share, and the first quarter of fiscal 2012 includes a net after-tax charge of $0.5 million, or $0.02 per diluted share.

Distribution Segment

Net sales for the distribution segment were $258.3 million in the first quarter of fiscal 2013 compared to $257.1 million in the same period last year.

First quarter fiscal 2013 operating earnings for the distribution segment were $7.8 million compared to $7.4 million in the same period last year. The increase in operating earnings is due to lower employee incentive compensation expense and continued improvements in operating expense controls, partially offset by a lower gross profit margin due to reduced inflation-driven inventory gains.

Retail Segment

Net sales for the retail segment were $345.6 million in the first quarter of fiscal 2013 compared to $345.4 million in the same period last year. Comparable store sales, excluding fuel, were up 0.1 percent, a significant improvement in the run-rate due to the Company’s capital plan and the “Yes Is More” promotional program, as well as a favorable calendar shift.

First quarter fiscal 2013 operating earnings for the retail segment were $3.9 million compared to $6.6 million in the first quarter of fiscal 2012. The decrease in operating earnings was due to the launch of the “Yes Is More” promotional program and the grand openings of one new store, one relocated store and two remodeled stores. In addition, earnings were impacted by reduced inflation-driven inventory gains and market conditions in certain fresh departments, partially offset by lower employee incentive compensation and ongoing cost containment initiatives.

Balance Sheet and Cash Flow

Cash flow used in operating activities for the first quarter of 2013 was $19.2 million compared to cash flow provided by operating activities of $6.7 million for the first quarter of fiscal 2012. This decrease was primarily due to the timing of seasonal working capital requirements given that the first quarter ended one week closer to the July 4 th holiday than last year and a $9.8 million tax payment related to the previously mentioned tax law change which will reverse over the remainder of fiscal 2013.

As previously announced, the Company continued to strengthen its financial position by amending its credit facility to increase operational flexibility, extend the maturity date to June 2017 and lower its interest expense by $0.4 million annually. In addition, the Company repurchased approximately 604,000 shares of its common stock in the first quarter of fiscal 2013 for a total expenditure of $10.9 million. As of the end of the first quarter, the Company had approximately 50 percent of the authorized $50.0 million repurchase program available for future stock repurchases. The Company also increased its dividend for the second consecutive year, to $0.32 on an annual basis, from $0.26, which represents a 23 percent increase.

The Company had total net long-term debt (including current maturities and capital lease obligations and subtracting cash) of $154.6 million as of June 23, 2012 versus $137.0 million at the end of the first quarter of fiscal 2012. The Company’s total net long-term debt-to-capital ratio is 0.33-to-1.0 for the first quarter of fiscal 2013 and the net long-term debt-to-Adjusted EBITDA ratio on an annual Adjusted EBITDA basis is 1.44-to-1.0. The Company anticipates substantially reducing its net long-term borrowings from these levels over the remainder of fiscal 2013 due to the Company’s strong cash flow and the non-recurring nature of certain significant first quarter cash payments.

The Company believes that cash flow from operations and the approximately $155.0 million of availability under its revolving credit facility will be sufficient to fund its operations and strategic growth initiatives for fiscal 2013.

Outlook

Mr. Eidson continued, “While the economic environment in our markets remains challenging, we are pleased with the improvement in our comparable store sales trend, the solid execution of our operating plan and our ability to provide the brands, products and services that best deliver value to our consumer in today’s economy. We are encouraged by the sales performance of our latest Valu Land store and continue to work on opening three to five new Valu Land locations during the second half of fiscal 2013. As we look to the remainder of the year, we continue to expect the pace of the economic recovery to continue, although at a slower rate. We also expect lower inflation-related gains when compared to the prior year for the next couple of quarters. However, we expect the unfavorable impact to be lower in the second and third quarters of fiscal 2013 than we experienced in the first quarter.”

The Company expects that second quarter comparable store sales will be lower when compared to the first quarter of fiscal 2013 by 1.0 to 1.5 percent and second quarter earnings from continuing operations will be slightly below the prior year’s results. This expectation reflects the continued economic challenges, lower inflation-related gains and the calendar shift previously mentioned.

For fiscal 2013, the Company expects flat comparable store sales and anticipates that earnings per diluted share from continuing operations for fiscal year 2013 will approximate fiscal year 2012, excluding the 53 rd week last year.

The Company continues to expect capital expenditures for fiscal year 2013 to be in the range of $42.0 million to $44.0 million, with depreciation and amortization in the range of $39.0 million to $40.0 million. Following the amendment to the Company’s credit facility, the Company now expects total interest expense to approximate $13.0 to $14.0 million.

Conference Call

A telephone conference call to discuss the Company’s first quarter of fiscal 2013 financial results is scheduled for 9:00 a.m. Eastern Time, Thursday, August 2, 2012. 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 tenth 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 private and national brand products to approximately 375 independent grocery locations in Michigan, Indiana and Ohio, and to our 97 corporate owned stores located in Michigan, including Family Fare Supermarkets, Glen's Markets, D&W Fresh Markets, VG's Food and Pharmacy, and Valu Land.

Forward-Looking Statements

This press release contains forward-looking statements. Forward-looking statements are identifiable by words or phrases such as “priority”, “trend”, “outlook”, “position”, ”opportunity”, “momentum”, “potential” or “strategy” ; that an event or trend “could”, “will” or “should” occur “begin” “remain” or “continue” or is “likely” or that Spartan Stores or its management “anticipates”, “believes”, “expects” or “plans” a particular result, or is “confident” or “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, our new retail banner and model, 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 and repurchase shares 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
(Unaudited)
(In thousands, except per share amounts)
     
12 Weeks (Year-to-Date) Ended
June 23, 2012 June 18, 2011
 
 
Net sales $ 603,912 $ 602,564
Cost of sales   482,192     477,227  
Gross margin 121,720 125,337
 
Operating expenses
Selling, general and administrative 101,337 102,974
Depreciation and amortization   8,670     8,367  
Total operating expenses 110,007 111,341
 
Operating earnings 11,713 13,996
 
Non-operating expense (income)
Interest expense 2,266 2,419
Non-cash convertible debt interest 890 823
Other, net   (48 )   (70 )
Total non-operating expense, net   3,108     3,172  
 
Earnings before income taxes and discontinued operations 8,605 10,824
Income taxes   2,529     4,689  
 
Earnings from continuing operations 6,076 6,135
 
Income/(Loss) from discontinued operations, net of taxes   (73 )   (106 )
 
Net earnings $ 6,003   $ 6,029  
 
Basic earnings per share:
Earnings from continuing operations $ 0.28 $ 0.27
Loss from discontinued operations   (0.01 )   -  
Net earnings $ 0.27   $ 0.27  
 
Diluted earnings per share:
Earnings from continuing operations $ 0.28 $ 0.27
Loss from discontinued operations   (0.01 )   (0.01 )
Net earnings $ 0.27   $ 0.26  
 
Weighted average shares outstanding:
Basic   21,853     22,691  
Diluted   21,939     22,777  
 
SPARTAN STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
   
June 23, 2012 June 18, 2011
ASSETS
 
Current assets
Cash and cash equivalents $ 6,093 $ 37,713
Accounts receivable, net 61,253 62,228
Inventories 132,435 132,476
Prepaid expenses 10,011 7,927
Other current assets 13,880 1,289
Deferred taxes on income 725 2,041
Property and equipment held for sale   1,708     1,708  
Total current assets 226,105 245,382
 
Other assets
Goodwill, net 240,037 241,132
Other, net   61,310     56,781  
Total other assets 301,347 297,913
 
Property and equipment
Land and improvements 22,087 21,569
Buildings and improvements 242,506 221,937
Equipment   288,820     308,908  
Total property and equipment 553,413 552,414
Less accumulated depreciation and amortization   296,519     312,615  
Net property and equipment   256,894     239,799  
 
Total assets $ 784,346   $ 783,094  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities
Accounts payable $ 127,873 $ 129,737
Accrued payroll and benefits 32,146 30,035
Other accrued expenses 19,350 19,411
Current portion of restructuring costs 3,340 4,330
Current maturities of long-term debt   4,328     4,235  
Total current liabilities 187,037 187,748
 
Other long-term liabilities 15,627 17,765
Restructuring costs 7,315 10,158
Deferred taxes 86,813 71,324
Postretirement benefits 13,590 14,635
Long-term debt   156,397     170,489  
Total long-term liabilities 279,742 284,371
 
Shareholders' equity
Common stock, voting, no par value; authorized 50,000
shares; outstanding 21,774 and 22,837 shares 153,848 172,672
Preferred stock, no par value, authorized 10,000 shares;
no shares outstanding - -
Deferred stock-based compensation (9,078 ) (9,593 )
Accumulated other comprehensive loss (13,793 ) (13,084 )
Retained earnings   186,590     160,980  
Total shareholders' equity   317,567     310,975  
 
Total liabilities and shareholders' equity $ 784,346   $ 783,094  
 
SPARTAN STORES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
       
Year-to-Date
(12 weeks)

June 23, 2012
(12 weeks)

June 18, 2011
Net cash (used in), provided by operating activitites (19,188 ) $ 6,722
Net cash (used in) investing activities (6,596 ) (10,384 )
Net cash provided by, (used in) financing activities 5,465 (2,251 )
Net cash (used in) discontinued operations   (64 )   (198 )
Net decrease in cash and cash equivalents (20,383 ) (6,111 )
Cash and cash equivalents at beginning of period   26,476     43,824  
Cash and cash equivalents at end of period $ 6,093   $ 37,713  
 
SPARTAN STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA
(Unaudited)
(In thousands)
 
Year-to-Date Ended
June 23, 2012   June 18, 2011
(12 weeks)   (12 weeks)
Retail Segment:
 
Net Sales $ 345,564 $ 345,435
Operating Earnings $ 3,891 $ 6,594
 
Distribution Segment:
 
Net Sales $ 258,348 $ 257,129
Operating Earnings $ 7,822 $ 7,402
 
SPARTAN STORES, INC. AND SUBSIDIARIES
RECONCILIATION OF NET EARNINGS TO ADJUSTED EARNINGS BEFORE INTEREST,
TAXES, DEPRECIATION AND AMORTIZATION
(Unaudited)
(In thousands)
   
Year-to-Date
June 23, 2012

(12 Weeks)
  June 18, 2011

(12 Weeks)
Consolidated:
Net earnings $ 6,003 $ 6,029
Plus:
Discontinued operations 73 106
Income taxes 2,529 4,689
Non-operating expense   3,108     3,172
Operating earnings $ 11,713   $ 13,996
Plus:
Depreciation and amortization 8,670 8,367
LIFO (income) expense 790 658
Non-cash stock compensation & other charges   1,469     1,550
Adjusted EBITDA $ 22,642   $ 24,571
 
Retail Segment:
Operating Earnings $ 3,891 $ 6,594
Plus:
Depreciation and amortization 6,711 6,454
LIFO expense 424 438
Non-cash stock compensation & other charges   770     772
Adjusted EBITDA $ 11,796   $ 14,258
 
Distribution Segment:
Operating Earnings $ 7,822 $ 7,402
Plus:
Depreciation and amortization 1,959 1,913
LIFO (income) expense 366 220
Non-cash stock compensation & other charges   699     778
Adjusted EBITDA $ 10,846   $ 10,313
 

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.

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 AND
CAPITAL LEASE OBLIGATIONS
(A NON-GAAP FINANCIAL MEASURE)
(Unaudited)
(In thousands)
       
June 23, 2012 June 18, 2011
 
Current maturities of long-term debt and capital lease obligations $ 4,328 $ 4,235
Long-term debt and capital lease obligations   156,397     170,489  
Total Debt 160,725 174,724
Cash and cash equivalents   (6,093 )   (37,713 )
Total net long-term debt $ 154,632   $ 137,011  

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 investments.

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