Smart & Final Prepares to Open Third-Party Warehouse

LOS ANGELES -- During a conference call yesterday discussing its third-quarter results released Tuesday, which included a 5.2 percent overall sales increase, Smart & Final president and c.e.o. Etienne Snollaerts said it planned to address the company's distribution challenges by such measures as opening a new third-party warehouse next month east of Los Angeles for high-cubic food and high-velocity items.

Smart & Final's goal, according to Snollaerts, is to handle these items -- which make up less than 10 percent of its total warehouse SKUs but a much higher percentage of its cubic footage volume -- in a separate facility, to reduce the burden on the company's principal warehouse, in Commerce, Calif. A facility such as the one slated to open in December was "in mind" for about two years previously, he said.

He added that Smart & Final has had a similar system in place for over a year at its northern California facility in Modesto, which he noted was "working very well." In the longer term, he said, the company would employ "such arrangements as these" in additional locations, leading to higher productivity rates and lower unit costs across Smart & Final's distribution system.

Snollaerts characterized distribution operations at his company as "at an almost normal situation," with employees still being trained in the new supply chain software, which had posed a challenge to implement. He expected operations to be up to speed early next year.

Although the company's struggles with higher-than-expected distribution costs negatively affected the company's gross margin rate throughout 2005, "[W]e are continuing the implementation of a new supply chain management system to improve the accuracy and timeliness of warehouse operations. Our operational performance has steadily improved since the initial phase of the supply chain system implementation, with current warehouse shipment rates in line with the prior year average. . .[I]n the third quarter, our income from continuing operations, excluding the litigation charge [for the settlement of a class action matter and a related pretax charge of $19.0 million], surpassed the prior year's results," said Snollaerts.

Also during the call, Snollaerts noted that the company had opened three new stores during the quarter, bringing the 2005 year-to-date new store openings to seven in total. He noted that Smart & Final was still on track to open 15 new stores in 2005 and the same number in 2006.

The company has already opened two Cash & Carry stores, which serve the foodservice business market, including restaurants, caterers, and small businesses, in the L.A. area, and plans to open a third before year-end, as part of a "three-store test" of the format in Southern California, an "experiment" Snollaerts described as going well. At the present time the company sees "good growth opportunities" in both the Cash & Carry and Smart & Final formats.

Smart & Final reported sales for its sixteen-week third quarter ended Oct. 9, 2005 of $634.4 million, a rise of $31.2 million, or 5.2 percent, over third quarter 2004 sales of $603.2 million. Third-quarter 2005 comparable store sales grew 3.3 percent over the year-ago period.

Gross margin from continuing operations rose $0.7 million, or 0.6 percent, to $109.4 million for the third quarter of 2005, vs. $108.7 million last year. As a percentage of sales, gross margin was 17.2 percent for the third quarter of 2005, compared with 18.0 percent for the third quarter of 2004. The year-to-year decrease in gross margin rate was mainly because of higher distribution costs.

Smart & Final Inc. operates 241 nonmembership warehouse stores for food and foodservice supplies in California, Oregon, Washington, Arizona, Nevada, Idaho, and northern Mexico.
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