Spartan Posts Modest Q1 Sales Gain, Tabs 28% Profit Loss

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Spartan Posts Modest Q1 Sales Gain, Tabs 28% Profit Loss

Spartan Stores’ $6.9 million first-quarter profits took a 28 percent hit from the $9.5 million earned in the same period last year as a result of the loss of income generated by its former drug store chain Pharm.

The Grand Rapids, Mich.-based retailer and distributor meanwhile posted a 2 percent sales gain of $596 million from $586.7 million for the same period last year, during the 12-week first quarter of fiscal 2010. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) also improved, increasing 9.4 percent to $25 million from $22.8 million in the same quarter last year, primarily as a result of the acquisition of VG’s Food and Pharmacy stores.

First-quarter operating earnings were $15 million, compared with $15.0 million in the same period last year. Operating earnings were negatively affected by lower procurement gains, costs related to a store closing, the introduction of the new customer loyalty program late in the quarter, and lower per-gallon retail fuel margins. These items were partially offset by a lower LIFO inventory valuation expense and the benefits of cost containment initiatives.

“We are pleased to report steady operating profits despite the prolonged economic challenges and the incremental costs associated with this year’s business and operational initiatives,” said Dennis Eidson, Spartan’s president/CEO. “As anticipated, comparable-store sales at our retail supermarkets declined during the quarter, due to economic uncertainty, which is causing changes in consumer purchase behavior such as a shift to lower-priced private label products, and price deflation in certain high-volume product categories. We finished remodel activity on two stores that were substantially complete in the fourth quarter, and an additional two stores during the first quarter. These stores, as well as others previously improved under our capital investment program, continue to perform well.”

Earnings from continuing operations for the quarter were $6.8 million, or 31 cents per diluted share, vs. $7.1 million, or 32 cents per diluted share, last year as a result of higher interest expense associated with the VG’s acquisition. Prior-year net earnings included earnings from discontinued operations of $2.3 million, or 11 cents per diluted share, due primarily to an after-tax gain on the sale of prescription files from the company’s Pharm retail stores, which were closed, along with the results of these stores operations. As a result, net earnings for the quarter were $6.9 million, or 31 cents per diluted share, compared with $9.5 million, or 43 cents per diluted share, last year.

As previously disclosed in public filings, the prior-year financial statements were adjusted for the required adoption of two new accounting standards. One requires that the company recognize non-cash interest expense on its $110 million convertible senior notes based on the market rate for similar debt instruments without the conversion feature as of the date of debt issuance. This increased reported interest expense by about $0.7 million for the first quarter of fiscal 2009. The second requires the company to include unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents in the computation of earnings per share. This increased the weighted average dilutive shares outstanding by 0.4 million shares for the first quarter of fiscal 2009.

“The financial results for the quarter were very close to what we had anticipated, and we remain pleased with the overall performance of retail stores included in our capital investment program, the improved penetration of our private label sales, and the value proposition that we offer our customers,” said Eidson. “We continue to progress with the integration of our VG’s retail store acquisition and are using the additional insight gained during the integration process to further refine our offerings and services in these markets to address the current economic environment.”

Citing Spartan’s recently launched customer loyalty program at its Glen’s stores late in the quarter, Eidson said that the company “firmly believe[s] that this new program will provide better and more sophisticated visibility into consumer purchasing behavior. This insight will help us to be more efficient and effective with our promotions, marketing and merchandising programs, while bringing better overall value to our customers.”