SpartanNash Lowers 2019 Profit Guidance After Preliminary Q1 Results Come In
SpartanNash’s preliminary Q1 results indicate that net sales will be $2.54 billion, compared with $2.39 billion for fiscal 2018 Q1, and adjusted EBITDA is estimated to be $190 million to $205 million, down from the $210 million to $220 million previously predicted. The wholesaler has accordingly adjusted its outlook for the remaining quarters of fiscal 2019.
“While we made significant progress against our strategic objectives, challenges in the supply chain, fresh kitchen and retail operations did not allow us to convert our top-line success to the bottom line. This, along with the ongoing voluntary recall at our fresh-cut fruit operations caused us to fall short of our original financial expectations in the first quarter and will impact our fiscal year 2019 outlook. We continue to be pleased with our sales growth and ability to attract new business at our fresh-kitchen operations. Our team remains focused on deploying strategies to generate profitability from this growth, despite the historically tight labor markets and higher cost of transportation,” said David Staples, president and CEO.
Staples also noted that the company issued a voluntary recall of fresh-cut melon products and stopped production of those items for about two weeks as a result of a suspected salmonella outbreak. Non-melon production has resumed and watermelon production is predicted to be back on track within a week. Cantaloupe and honeydew will return soon after, allowing SpartanNash to resume regular operations. The CEO added that no tests of the facility came back positive for contagions.
“Finally, in our retail operations, we continue to navigate a tough environment, which was compounded in the last period of the quarter by the significant shifts in the timing of government SNAP benefit payments and the Easter holiday,” Staples said. “Our team remains committed to improving our operational execution and financial results as we begin the implementation of initiatives in connection with our company-wide program, Project One Team, and we continue to build out our supply chain leadership.”
Project One Team, which was announced at the end of last year, is a company-wide initiative to drive growth while increasing efficiency and reducing costs as a way to address the inability to translate top-line growth to bottom-line results. The effort is now estimated produce $20 million in annual run-rate efficiencies and cost reductions in two years.
“As we look to the remainder of the fiscal year, we believe our comparisons to the prior year will improve sequentially each quarter,” Staples said.
He also noted that SpartanNash remains committed to the top five objectives established for 2019:
Achieve Mid-Single-Digit Sales Growth
In the first quarter, SpartanNash realized more than 6 percent sales growth compared with the same quarter in the prior year. This growth was bolstered by contributions from the newly acquired Martin’s Super Markets business in the retail segment, as well as growth in both the food distribution and military segments. Before the intercompany elimination of Martin’s sales, the food distribution segment realized growth of 5.2 percent.
Realize an Annual Run Rate of $15 Million of Savings
The grocery wholesaler has exceeded its objective by identifying more than $20 million in savings opportunities, which it expects to achieve in its run rate over the next 24 months. The effect of implementing these opportunities isn't currently expected to be material to earnings in 2019.
Strengthen Management Team, Systems, Supply Chain Operations
During the first quarter, SpartanNash appointed a new chief merchandising and marketing officer, a chief information officer and several other key additions throughout its IT and supply chain operations. Other strategic additions to the management team at various levels are currently in process. The company continues to invest in enhancements to its systems and supply chain operations; however, some improvements are developing more slowly than initially expected, partly due to the competitive employment environment in both warehousing and transportation.
Reduce Debt and Working Capital While Lowering Financial Leverage Ratios
Adjusted for the funding of the Martin Super Markets acquisition, SpartanNash paid down more than $20 million in debt in the first quarter of fiscal 2019. The company also reduced its inventory levels by more than 2 percent from the first quarter of fiscal 2018, without negatively impacting customer service levels, despite continued sales growth. The wholesaler will continue to focus on debt and working capital improvements for the remainder of fiscal 2019.
Improve Adjusted Operating Earnings and Adjusted EBITDA Growth
The first quarter of fiscal 2019 profitability was significantly below the company’s expectations due to the factors mentioned above. SpartanNash is focused on achieving growth in its financial performance through initiatives aligned with the organization’s overall strategy, which include the strategic objectives noted previously. In addition to the items above, the company is in the process of executing strategic investments in the retail segment in connection with the implementation of its new retail brand positioning. SpartanNash expects to begin realizing the benefit of these investments in the second half of 2019.
SpartanNash’s core businesses consist of distributing grocery products to independent and chain retailers, corporate-owned retail stores, and U.S. military commissaries and exchanges, as well as fresh produce distribution and fresh-food processing. The company serves customer locations in all 50 states and the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain, Djibouti and Egypt. Grand Rapids, Mich.-based SpartanNash also operates 158 supermarkets, mainly under the Family Fare Supermarkets, Martin’s Super Markets, D&W Fresh Market, VG’s Grocery, Dan’s Supermarket and Family Fresh Market banners. Through its MDV military division, the company is a leading distributor of grocery products to U.S. military commissaries. SpartanNash is No. 35 on Progressive Grocer’s 2018 Super 50 list of the top grocers in the United States.