Spartan Q2 Profits Slide on Negative Sales

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Spartan Q2 Profits Slide on Negative Sales

Spartan Stores, Inc.’s earnings declined 2 percent in the 12-week second quarter ended Sept. 12, 2009 to $10.4 million, or 47 cents a share, down from $10.6 million, or 48 cents a share, while sales fell to $610 million from $627 million a year earlier. The Grand Rapids, Mich.-based retailer and distributor attributed its weaker sales performance to price deflation in certain key categories, significantly lower fuel prices, a shift in the mix toward more private label products, and the generally frail economic environment.

The change in Spartan’s second-quarter operating earnings of $21 million vs. last year’s record $22.5 million reflects lower sales- and procurement-related gains, reduced fuel margins, and the incremental costs associated with the acquired retail stores. Spartan’s $30 million EBITDA ratio for the quarter, which represented 4.9 percent of net sales vs. $31.5 million, or 5.0 percent of net sales in the same period last year, is encouraging, however, according to company officials.

“We are pleased that we have been able to maintain a strong level of operating earnings and EBITDA despite the current operating environment,” said Dennis Eidson, Spartan’s president and CEO. “Consumers continued to behave cautiously, given the challenging economic environment, and we experienced significant price deflation in three of our high-volume product categories, as well as unseasonably cool weather in our Michigan markets that are influenced by tourism. These factors, along with the strong second-quarter comparable-store sales reported last year and competitive openings in the first and second quarter, accounted for the majority of our quarter-over-quarter retail comparable-store sales trend.

“As we progress through this difficult period,” continued Eidson, “we are continuing to work on strengthening our consumer value proposition and improving the controllable factors of our business that will create additional operating leverage, and position our company to benefit when economic growth resumes.”

Earnings from continuing operations for the quarter, including higher interest expense associated with the company’s most recent acquisition, were $10.5 million, or 47 cents per diluted share, compared with $11.6 million, or 52 cents per diluted share last year. Net earnings for the quarter were $10.4 million, or 46 cents per diluted share, compared with $10.6 million, or 48 cents per diluted share in last year’s second quarter. Last year’s second-quarter net earnings included a loss from discontinued operations of $1 million, or four cents per diluted share, related to the Pharm store exit and operational wind-down costs.

Spartan’s second-quarter gross profits increased 200 basis points to 22.3 percent from 20.3 percent in the same period last year, due primarily to an increase in the mix of higher-margin retail sales compared with the prior year.

Further, second-quarter retail sales increased 11.3 percent to $360.2 million from $323.5 million in the same period last year, an increase due primarily to the incremental sales related to the VG’s acquisition that was nevertheless partially offset by lower same-store sales, a $9.3 million decline in fuel sales due to significantly lower retail pump prices, and the loss of $5 million in sales related to two closed stores and one sold store since last year’s second quarter. The retail segment experienced a 5.1 percent decline in same-store sales because of significant deflation in the meat, produce and dairy categories, competitive store openings, unseasonably cool weather in Michigan and the weak economic environment.

During the quarter, Eidson said Spartan “continued to build on the strength of our market position by completing a store relocation project and opening two additional fuel centers. We also substantially completed another major remodel project late in the second quarter. Store opening, remodel, closing and other costs for the quarter were comparable to the prior year. We are continually working to enhance the value delivered to our consumers, to make shopping more convenient and to bring them what they are asking for,” said Eidson, pointing to several programs that he noted have positively resonated with customers, including an emphasis on health and wellness with a new nutrition guide program in D&W and Family Fare stores, launched early in the third quarter, and a “Michigan’s Best” initiative that clearly identifies and promotes 2,400 products grown, made or processed in the state.

“We continued to implement our rewards-based customer loyalty program at our Glen’s stores during the quarter, and the customer acceptance rate so far has been very favorable,” added Eidson. “We are encouraged by the program’s progress at this early stage, as a high percentage of sales at these stores were being made on the customer reward cards.”

Serving about 350 independent grocery stores in Michigan, Indiana and Ohio, Spartan Stores also owns and operates 97 retail supermarkets in Michigan, including Family Fare Supermarkets, Glen’s Markets, D&W Fresh Markets, Felpausch Food Centers and VG’s Food and Pharmacy.