Spartan Stores reports fiscal Q2 net earnings of US$10.3M, down 9.7% from year ago period; consolidated net sales up 2.9% to US$619.6M

Nevin Barich

GRAND RAPIDS, Michigan , October 19, 2011 (press release) – Spartan Stores, Inc., (Nasdaq:SPTN) a leading regional grocery distributor and retailer, today reported financial results for its 12-week second quarter ended September 10, 2011.

Second Quarter Results

Consolidated net sales for the 12-week second quarter increased 2.9 percent to $619.6 million compared to $602.1 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 3.8 percent to $31.1 million, or 5.0 percent of net sales, compared to $30.0 million, or 5.0 percent of net sales in the year-ago period.

"The consolidated net sales increase combined with our management team's focus on tightly managing the controllable aspects of our business enabled us to report both improved earnings from continuing operations, excluding unusual items, and Adjusted EBITDA as compared to the same period last year," stated Dennis Eidson, Spartan's President and Chief Executive Officer. "Our efforts to provide the consumer with a quality shopping experience are paying off as we have improved nearly every key driver of overall consumer satisfaction, specifically with our focus on fresh excellence. These efforts, combined with our chain-wide loyalty card, will enable us to provide even more value and to have a better connection to the consumer than ever before."

Second quarter gross profit margin decreased 110 basis points to 21.4 percent from 22.5 percent in the same period last year. The decline was primarily due to a higher mix of distribution and fuel sales, a lower fuel gross margin rate and an increased LIFO expense of approximately $2.3 million this year versus last year. The increased LIFO expense was due to higher inflation in this year's second quarter and a $1.5 million LIFO credit generated in last year's second quarter as a result of lower inventories from the warehouse consolidation initiative.

Operating expenses totaled $112.8 million, or 18.2 percent of net sales, compared to $113.1 million, or 18.8 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 expenses and general cost containment initiatives, partially offset by a pre tax charge of $1.2 million for unusual corporate professional fees, $0.7 million on an after tax basis.

Excluding the previously mentioned after-tax unusual charge of $0.7 million in this year's second quarter and last year's second quarter after-tax benefit related to the Company's warehouse consolidation initiative of $0.7 million, earnings from continuing operations would have been $11.0 million, or $0.48 per diluted share, compared to $10.6 million, or $0.47 per diluted share last year. Second quarter earnings from continuing operations as reported were $10.3 million, or $0.45 per diluted share, compared to $11.3 million, or $0.50 per diluted share, in the same period last year.

Distribution Segment

Second quarter net sales for the distribution segment increased 3.1 percent to $256.2 million from $248.6 million in the year-ago period due to new customer growth, improvement in pharmacy related sales and increased sales to existing customers. This is the fourth consecutive quarter that distribution sales have increased.

Operating earnings for the segment were $8.8 million compared to $10.7 million in the same period last year. The decrease in operating earnings was due to the previously mentioned unusual corporate professional fees and the warehouse consolidation impact. Excluding these items operating earnings would have been $10.0 million in this year's second quarter compared to $9.5 million in the same period last year.

Retail Segment

Second quarter net sales for the retail segment increased 2.8 percent to $363.4 million compared to $353.5 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 1.3 percent. The decrease in comparable store sales was due to a shift in the timing of food stamp distributions by the State of Michigan to the third quarter from the second quarter of fiscal 2012 and weaker comparable store sales over the Labor Day holiday selling period due to unfavorable weather conditions and a more cautious consumer.

Retail segment operating earnings for the quarter decreased 1.3 percent to $11.2 million compared to $11.4 million in the year-ago period. The decrease in operating earnings was primarily attributed to higher debit/credit card fees, incremental LIFO expense and higher incentive compensation costs partially offset by lower health care expenses and benefits from cost containment initiatives.

Balance Sheet and Cash Flow

The Company continued to report strong levels of net cash provided by operating activities of $42.5 million for the year-to-date period ended September 10, 2011. Total net long-term debt (including current maturities and capital lease obligations and subtracting cash) was $115.4 million versus $149.2 million at the end of the second quarter of fiscal 2011.

Outlook

"While the Michigan economy has improved from its lows, overall consumer discretionary spending is still negatively pressured due to an increase in unemployment rates since last year end, higher fuel prices and an increase in food inflation. Therefore, while we still expect the Michigan economy to grow, it will be at a slower rate than we originally anticipated. We remain confident that as the economy improves Spartan Stores is well positioned for increased growth as we continue to execute our capital investment program and we benefit from the rollout of our loyalty program to our Family Fare and D&W Fresh Market locations. The rollout began in mid September and while it is still early we are pleased with the initial consumer response. Consequently, we continue to remain cautiously optimistic about our operating outlook and the continued improvement of our key financial metrics in fiscal 2012," concluded Mr. Eidson.

The Company expects earnings from continuing operations for the second half of the year, excluding the 53rd week and the prior year unusual items, will approximate last year while Adjusted EBITDA will exceed the prior year's levels. However, the third quarter will face several significant headwinds, which will cause it to be less profitable than a year ago. The first of these headwinds is a significant increase in the LIFO expense of $1.7 million which is a result of the current year's inflation. Second, the launch of the Yes loyalty card in the quarter is expected to negatively impact gross margins, marketing expense and store labor by an incremental $1.2 million. Finally, incentive compensation is expected to exceed the prior year by $1.0 million due to the timing of the prior year's provision. These headwinds are expected to be partially offset by the continued impact of inflation and improved sales as comparable store sales become flat to slightly positive and distribution sales continue to grow versus last year, but at a lower rate. As a result of the net impact of these events the Company expects to report earnings per share in the range of $0.20 to $0.23 for the third quarter.

The Company anticipates that the fourth quarter of fiscal 2012's financial performance will rebound and offset most if not all of the third quarter shortfall to the prior year as the incremental LIFO expense is expected to be lower than the third quarter. Additionally, in the fourth quarter of fiscal 2012 the Company expects it will continue to benefit from the Yes program without the incremental start-up costs and will incur substantially lower incentive compensation expense than the prior year due to the timing of the prior year provision and the cycling of a significant retirement payment.

The Company continues to expect capital expenditures for fiscal 2012 in the range of $43.0 million to $45.0 million with depreciation and amortization in the range of $37.0 million to $38.0 million and total interest expense approximating $15.0 million.

Conference Call

A telephone conference call to discuss the Company's second quarter of fiscal 2012 financial results is scheduled for 9:00 a.m. Eastern Time, Thursday, October 20, 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 97 corporate owned stores located in Michigan, including D&W Fresh Markets, Family Fare Supermarkets, Glen's Markets and VG's Food and Pharmacy.

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