SpartanNash’s Q2 Net Sales Rise Tempered by Weak Earnings
SpartanNash Co. reported a 5.3 percent net sales increase for its 12-week second quarter ended July 13, the company’s 13th consecutive quarter of growth, but its results were shadowed by a leadership shakeup spurred by the company's poor financial performance, and the decision to exit its Fresh Kitchen business by the close of the fiscal year in a bid to boost operating earnings and EBITDA.
Dennis Eidson, named interim president and CEO in the wake of Dave Staples’ resignation, noted that “the board of directors and I remain confident in the company’s overall strategic direction. I am excited to work with our team of talented associates as we focus our efforts on improved execution, while continuing to drive our top-line sales growth.”
SpartanNash’s consolidated Q2 2019 net sales grew $100 million to $2 billion, from $1.90 billion in the year-ago period. The company attributed the increase to incremental volume in the retail segment, resulting from the acquisition of Martin’s Super Markets and growth in the military distribution segment, despite a slow start to the quarter because of the Easter holiday shift and unseasonably cool weather.
Q2 2019 gross profit was $289 million, or 14.5 percent of net sales, compared to $265.7 million, or 14 percent of net sales, last year. As a percent of net sales, the improvement in gross profit was mainly attributable to the higher mix of retail sales following the Martin’s acquisition, according to SpartanNash.
The company posted Q2 2019 operating earnings of $7.4 million compared with $29.8 million in the year-ago period, citing asset impairment charges primarily related to the Caito Fresh Production business, including the impending exit of the Fresh Kitchen operations; lower margin rates on comparable sales; higher supply chain costs; and incremental losses from Fresh Kitchen, partly offset by favorable incentive compensation, incremental earnings from the newly acquired Martin’s business and lower recall charges than in the prior year.
SpartanNash saw a Q2 2019 loss from continuing operations of $6.8 million, or 19 cents per diluted share, versus earnings of $17.8 million, or 50 cents per diluted share, last year, noting the factors listed above, in addition to settlement expense of $8.7 million associated with the termination of its corporate pension plan and higher interest expense caused by higher interest rates on the company’s borrowings.
Adjusted earnings from continuing operations for Q2 2019 were $12.2 million, or 34 cents per diluted share, compared with $17.9 million, or 50 cents per diluted share, in the year-ago period.
Segment Sales and Earnings
The company’s Q2 2019 retail segment net sales grew $105.4 million, or 22.7 percent, to $570 million from $464.6 million last year. Excluding the Martin’s acquisition, sales dropped 3.3 percent as a result of lower sales following store closures and a 2 percent comps decline. Comps were adversely affected by the occurrence of the post-Easter week in Q2 2019 by 0.5 percent, as well as the aforementioned unseasonably cool weather.
Reported Q2 2019 operating earnings for retail were $8.7 million compared with $8 million in the year-ago period, which SpartanNash mainly attributed to the contribution of the acquired Martin’s stores, the favorable impact of closing underperforming stores and favorable adjustments to incentive compensation, partly offset by higher fees paid to pharmacy benefit managers.
Q2 2019 net sales for SpartanNash’s food distribution segment fell $6.3 million, or 0.7 percent, to $935.4 million, from $941.7 million last year. Excluding the effect of the elimination of intercompany sales to Martin’s after the acquisition, sales edged up 3.0 percent, mainly because of sales growth from existing customers. Reported food distribution operating earnings were $0.3 million, compared with $18.7 million last year, due to the asset impairment charges mentioned above, losses associated with the Fresh Kitchen operations, and higher supply chain expenses, partly offset by lower recall charges than in the prior year, and favorable adjustments to incentive compensation.
The military distribution segment’s net sales bumped up $0.9 million, or 0.2 percent, to $490.6 million from $489.7 million in Q2 2018, primarily because of incremental volume from new business with an existing customer that started late in Q4 2018 and the Defense Commissary Agency’s (DeCA) private-brand program, partly offset by lower comps at DeCA-operated locations. The reported operating loss for military distribution was $1.6 million, versus $3.1 million in the year-ago period, chiefly due to lower margin rates, partly because of a shift in the mix of business, and higher supply chain costs, along with the cycling of gains related to the sale of a closed facility in the prior-year quarter, partly offset by favorable adjustments to incentive compensation.
The company also reiterated its focus on fulfilling its top five objectives for 2019: achieve mid-single digit sales growth – something it managed to do in Q2 2019; realize more than $15 million of savings over the next 24 months from Project One Team, a company-wide initiative to drive growth while increasing efficiency and reducing costs; strengthen its management team, systems and supply chain operations through moves like the recent hiring of Walter Lentz as president of food distribution; reduce debt and working capital while lowering financial leverage ratios, with the aim of achieving total working capital improvements of $30 million for the full fiscal year; and improve adjusted operating earnings and adjusted EBITDA trends.
The last objective informs SpartanNash’s decision to exit the Indianapolis-based Fresh Kitchen operations, and concentrate instead on its produce distribution and fresh-cut operations, which it described as “the hallmark of the Caito business,” acquired by the company in 2017.
SpartanNash’s core businesses include distributing grocery products to a diverse group of independent and chain retailers, its corporate-owned retail stores and U.S. military commissaries and exchanges, as well as fresh produce distribution and fresh food processing. The Grand Rapids, Mich.-based company serves customer locations in all 50 states and the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain, Djibouti and Egypt, and operates 160 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. Additionally, through its MDV military division, SpartanNash is a leading distributor of grocery products to U.S. military commissaries. The company is No. 33 on Progressive Grocer’s 2019 Super 50 list of the top grocer’s in the United States.