SpartanNash Company (NASDAQ:SPTN) Q3 2023 Earnings Call Transcript

SpartanNash Company (NASDAQ:SPTN) Q3 2023 Earnings Call Transcript November 8, 2023

SpartanNash Company misses on earnings expectations. Reported EPS is $0.54 EPS, expectations were $0.6.

Operator: Welcome to the SpartanNash Third Quarter 2023 Earnings Conference Call. At this time all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. I would now like to turn the call over to Kayleigh Campbell, Head of Investor Relations. Please go ahead.

Kayleigh Campbell: Good morning and welcome to the SpartanNash company third quarter 2023 earnings conference call. On the call today from the company, our President and Chief Executive Officer, Tony Sarsam; and Executive Vice President and Chief Financial Officer, Jason Monaco. By now everyone should have access to the earnings release, which was issued this morning at approximately 7 a.m. Eastern time. For a copy of the earnings release, as well as the company’s supplemental earnings presentation, please visit SpartanNash’s website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company’s website. Before we begin, the company would like to remind you that today’s discussion will include a number of forward-looking statements.

These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. If you will refer to SpartanNash’s earnings release from this morning, as well as the company’s most recent SEC filings, you will see a discussion of factors that could cause the company’s actual results to differ materially from these forward-looking statements. Please remember that all forward-looking statements made today reflect our current expectations only and SpartanNash undertakes no obligation to update or revise these forward-looking statements. The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business and it has included in the earnings release a full reconciliation of certain non-GAAP financial measures to the most comparable GAAP measures, which can be found on SpartanNash’s website at www.spartannash.com/investors.

And now it is my pleasure to turn the call over to Tony.

Tony Sarsam: Thank you, Kayleigh. Good morning, everyone. Glad to be here. To kick us off, I want to call out some highlights from our most recent ESG report that we published last month. We’re still early in our sustainability journey and are making strides and I’m happy to share with you all today. From 2021 to 2022, we reduced fleet mileage by 12%, exceeding our 10% goal. We decreased DC ozone depleting emissions by a whopping 59%. We converted 85% of our retail stores and DCs to LED lighting, and we diverted more than 4 million pounds of food from landfills. On the governance side, we demonstrated our ongoing commitment to board refreshment, exemplified by the addition of three new directors in 2022 and one new director this past August.

As a people first company, I’m incredibly proud of the team’s continued focus on safety. Since 2020, one of our biggest accomplishments has been an improved safety record, including a 72% decrease in lost time incidents. Over the past year, our ESG committee and subcommittees have strategically embedded our 2025 ESG goals into our master action plan. We are committed to creating solutions and improve the lives of our associates and the communities we serve. We encourage all stakeholders to read the 2022 ESG report, which is available on the company website. We had the privilege of serving the U.S. military. As a grocery wholesaler we bring the taste of home to the men, women and families of the U.S. military around the world. This Veterans Day weekend, we honored those who have served the United States of America.

Now turning to our Q3 results, consolidated net sales came in at $2.3 billion, a decrease of 1.4% from a year ago. During the last quarter we continued to experience a decrease in sales on our Amazon business. Outside of this impact, we observed positive sales trends and our wholesale segment as well as for the consolidated company. We continue to work closely with Amazon as they manage through changes in their grocery format. Adjusted EBITDA increased 6% improving 19 basis points compared to the prior year quarter. Our solid bottom-line performers amidst a challenging environment is attributable to the benefits from our transformational initiatives. Even in an environment where national brands volumes declined, our own brands portfolio held strong.

Our new refresh own brands products are helping consumers across all income levels further stretch their dollars. Speaking of solutions to help our customers and retail shoppers, we have made huge strides since launching our merchandising transformation last year. As a food solutions company, we have been relentless on combating food inflation. For more than a year, our enhanced category planning has leveraged data from commodity markets and other industrial benchmarks to address rising input costs. Our methodical cost management has helped us capture share and provide additive value to our wholesale customers and retail shoppers. We continue to appreciate and grow with vendors who are collaborating with us to find creative solutions. We are now in the process of launching the next phase of our merchandising transformation through our compelling offer.

This program is accelerating our customer led capabilities in the following areas. One, simplifying the assortment using advanced analytics; two, showcasing the power of our own brands; three, reducing costs of serving our warehouses and stores; four, improving in stocks for shoppers; and five, creating an easier to navigate planogram, all these actions lead to a better overall shopping experience. There are significant unlock potential within our retail stores and based on our learnings. We also plan to scale the program to independent customers to help them drive their business. Turning to our recently remodeled upmarket stores. We are growing at double the rate of the rest of our retail portfolio due to the store’s innovative offerings. We continue to reinvest in our stores and are on target to renovate or refresh 25% of the base during the plan period from 2021 through 2025.

Our retail team continues to find solutions. For example, we are currently implementing a cash and deposit automation program by significantly reducing administrative hours. The program enables our store associates to provide better customer service while optimizing our shopper experience. Our signature strength is to be the most customer focused, innovative food solutions company. Now that we’re executing on our winning recipe, we’re even attracting former customers. They have seen our momentum and are boomeranging back to SpartanNash. We’re eagerly welcoming them back into our family. They see us as a long-term strategic partner as they focus on their next phase of growth. This is a true testament to the progress we have made over the past three years.

We are winning with these customers because of our reliable service made possible through our optimized supply chain network. The benefits our merchandising transformation provides our wholesale customers and an aligned team of associates who are focused on helping our customers take their grocery business to the next level. In addition, we’re winning new wholesale customers. This is due to our differentiated services and execution of our winning recipe. We look forward to growing our businesses together. Overall, we are seeing the labor market and applicant flow stabilize. Since last November we reduced our turnover rate by nearly 12%. With more mature onboarding and training and development investments, we are focused on hiring the right people, training them to do a great job and retain them for the long-term.

I love recognizing associates for their hard work. Our leadership team recently honored our frontline associates throughout our supply chain retail, through our Circle of Excellence Program. Congrats to all those winners, thank you for all you do to deliver the ingredients for a better life. This past quarter, we hosted our annual leadership summit, and the theme was flying in formation. I’m already seeing the impact of that inspiring messaging throughout our company. Our team has fully embraced cross functional work. We are aligned, we are focused, and we are relentless in our pursuit of providing food solutions. Thank you again to our associates who are flying in formation. I will now turn things over to our CFO, Jason Monaco to share more details about our financials.

Jason Monaco: Thanks, Tony, and welcome to everyone joining us on today’s call. I want to highlight some of our key successes from this past quarter before jumping into the detailed results. First, our adjusted EBITDA increased more than 6% to $60.9 million from $57.3 million last year. Our reported net earnings increased 17.6% to $11.1 million compared to net earnings of $9.5 million in Q3 of last year. And our cash flow and liquidity remained strong, giving us flexibility to support our strategic long-term plans, including both organic and inorganic investments. Year-to-date, we’ve generated nearly $96 million of cash from operating activities and returned almost $41 million to shareholders through share repurchases and dividends.

Now turning to our quarterly results. Net sales for the third quarter decreased $32 million, or 1.4% to $2.26 billion compared to 2022 third quarter. Consistent with industry pressures, both segments were unfavorably impacted by volume headwinds. Gross profit for the quarter was $348 million, compared to $351 million in the prior year’s third quarter. While the rate was relatively flat, the dollar decline was driven by lower unit volumes in both segments. On a sequential basis, the gross profit rate grew 11 basis points to 15.35% of net sales. I’ll discuss additional segment variances momentarily. LIFO expense decreased $8 million or 36 basis points compared to the prior year quarter as inflation eased as we’ve expected. As a percentage of sales, our reported operating expenses improved 12 basis points from the prior year quarter.

During the quarter efficiencies realized from our supply chain transformation help to offset industry-wide headwinds. The decrease in expenses was also due to lower incentive compensation compared to the prior year quarter. These expense reductions were partially offset by an increase in acquisition and integration charges and severance costs related to the previously announced organizational realignment. Interest expense increased $3.2 million compared to the prior year quarter to $9.3 million, due primarily to the higher rate environment. Other income for the third quarter included an $800,000 gain related to a previously terminated post-retirement plan. Now, turning to our segments. Net sales and wholesale decreased $28 million to $1.6 billion compared to the prior year quarter.

The 1.7% decrease was due primarily to demand changes within the Amazon business. Moving to the bottom line, the wholesale segments quarterly adjusted EBITDA was $39 million, compared to $38.3 million during the same period last year. Despite cycling inflation related price gains of over $8 million in the prior year quarter. The segment’s bottom-line increased due to benefits realized from the merchandising transformation, better leverage of operating expenses, which include the benefits of our supply chain transformation, and lower incentive compensation. Wholesale reported third quarter operating earnings were $18.2 million, compared to $14 million in the prior year period. Now, turning to our retail segment. Sales came in at $662 million for the quarter compared to $667 million in the third quarter of 2022.

Our comparable store sales grew 1.2%. Continued reductions in EBT benefits offered to consumers in our retail geography adversely impacted same-store sales by approximately 3% this past quarter, a trend that has accelerated in the last six months. As Tony mentioned, our new and refreshed own brands products are helping consumers across all income levels, further stretch their dollars. Retail adjusted EBITDA increased $2.9 million to $21.9 million from 19 million in the prior year quarter. This increase was due to the ongoing success of our marketing innovation work, reduced incentive compensation, and a decrease in health care benefits expense. The increase was partially offset by industry wide volume pressure and lower pharmacy margins. Retail reported operating earnings were $4.9 million, compared to $5.3 million in 2022’s third quarter.

Moving to our balance sheet. Our leverage ratio of net long-term debt to adjusted EBITDA improved sequentially by 10 basis points to 2.1x compared to the second quarter of this year. Year-to-date, cash flow remained strong at nearly $96 million. Over the same period, we’ve paid more than $22 million in cash dividends equal to $0.645 per common share. We also bought back 765,000 shares for a total of $18.5 million. And as of the end of the third quarter, we have approximately $25 million remaining on our share repurchase authorizations. In total, the company has returned nearly $41 million to shareholders year-to-date. As our earnings release mentioned, we updated our full year guidance based on the current trends and market conditions we are observing.

We lowered the top-end of our full year net sales guidance to $9.65 billion to $9.85 billion. We narrowed the range while affirming the same midpoint for our adjusted EBITDA, which we now expect will be between $253 million and $258 million. And we updated our adjusted EPS to be in the range of $2.20 to $2.28 per share, which reflects the ongoing elevated interest rate environment. Since 2021, we’ve made huge strides on our strategic plan. We have a highly scalable business model with a sustainable trajectory of profitable growth. Our winning recipe and benefits from our transformational initiatives continue to enhance value for our shareholders. And now, I’d like to turn the call back over to Tony.

Tony Sarsam: Thank you, Jason. To echo Jason’s last comment, we have made huge progress on our long-term plan. Since 2021, we have been building a people first culture, recruiting a talented team of leaders, developing and executing on a long-term strategic plan and implementing key transformational initiatives. We continue to be energized about how the plan incorporates long-term value creation through our transformational initiatives and related margin expansion opportunities. It’s no secret our industry is facing substantial headwinds. Instead of seeing a mountain to climb, we see the ample opportunities this dynamic environment has created. With a strong foundation from the execution against our long-term strategic plan, we are well positioned to actively pursue opportunities to further grow share, drive, improved results, and maximize shareholder value.

The holiday season ahead of us, I want to express my gratitude to our entire team, many of them serving on the front lines, but we’re helping ensure we are delivering the ingredients for a better life. With that, I’d like to turn the call back over to the operator to open it up for your questions.

Operator: [Operator Instructions] And our first question comes from Andrew Wolf of CL King. Your line is open.

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Q&A Session

Andrew Wolf: Thank you. Good morning. Just had a couple of questions. First is on market share. What is your sense of your adjusted volume if we take out the Amazon business, how it’s trending and how you think you’re trending versus the market?

Jason Monaco: Hey, Andrew. This is Jason. Good morning. Thanks for the question. If you strip out the Amazon business, we would have seen net growth. And from a market share standpoint, we’ve seen growth in our retail business and solid growth in wholesale. Overall, the Amazon is the primary driver of a negative revenue profile in business.

Andrew Wolf: Kind of related as a follow up, is the same-store sales number that your retail division produces? Is that similar to what you’re seeing from your — on average, obviously, I’m sure there’s a range. But on average, is that similar to what you’re seeing from the wholesale customers?

Jason Monaco: Yes. So it’s a similar profile excluding the impact our pharmacy business, which obviously a different mix profiles between our independent customers and our own retail stores.

Andrew Wolf: Okay. Got it. And just, if you could just sort of dive into maybe a little more on your outlook. Not really a guidance question. I don’t think as much as something that’s topical, just on inflation and deflation and/or deflation and how you think that could impact your two segments as we kind of look out for the longer term.

Tony Sarsam: Yes. So it’s Tony. And the inflation is coming down, as we’ve all seen empirically in food as they are kind of each month is down a little bit more than it was the previous month. We expect that trend to continue. We’re not actually breaking out the crystal ball and said we’re going to have deflation but we have seen a pretty steady trend of inflation coming back down to sort of normal levels for the food right now.

Andrew Wolf: Just a follow up, do you think you’ve sort of moved beyond the sort of the big swings and holding games that impact this quarter? Or is it already sort of cycled out?

Jason Monaco: Yes, Andrew. Definitely, we’re moving past the heaviest part of that — those gains versus last year, we lapped about $8 million of benefits from last year versus this year. Inflation on the whole — and our wholesale segment, finished the quarter in the kind of low single digits, think about it around 3%. And we’re seeing that benefit fade as we expected.

Operator: Thank you. Our next question comes from Rob Dickerson from Jefferies. Your line is open.

Rob Dickerson: Great. Thanks so much. I just wanted to ask kind of about the vendor side and know historically, you’ve spoken to potentially seeing some or the expectation of some increased vendor promotional activity. So I’m just curious kind of how that’s playing out so far, kind of what the perspective is, as you know, we move into ’24. And then just secondly, I may have missed it. But I don’t think I heard kind of how the private label part of the business is trending relative to kind of the overall business. Thanks.

Tony Sarsam: Great questions. So first of all, our own brands performance has been very strong, we’ve grown, both our penetration as well as our overall performance versus national brands. Units are up substantially versus the national brands and the sales are also up, even in light of the fact that we’ve done some pretty significant discounting, to try to kind of bring people in and give them better price points, as a lot of our shoppers, of course, are seeking deals in the broader inflationary times. So your first question, was — one real quick?