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| SPTN > SEC Filings for SPTN > Form 10-Q/A on 28-Apr-2009 | All Recent SEC Filings |
28-Apr-2009
Quarterly Report
Executive Overview
Spartan Stores is a leading regional grocery distributor and grocery retailer, operating principally in Michigan and Indiana.
We operate two reportable business segments: Distribution and Retail. Our Distribution segment provides a full line of grocery, general merchandise, health and beauty care, frozen and perishable items to approximately 350 independently owned grocery stores and our 100 corporate owned stores. Our Retail segment operates 100 retail supermarkets in Michigan under the banners Family Fare Supermarkets, Glen's Markets, D&W Fresh Markets, Felpausch Food Centers and VG's Food and Pharmacy and 19 fuel centers / convenience stores under the banners Family Fare Quick Stop, Glen's Quick Stop, D&W Fresh Markets Quick Stop and Felpausch Quick Stop which are typically located adjacent to one of our supermarkets. Our retail supermarkets have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores.
Our sales and operating performance vary with seasonality. Our first and fourth quarters are typically our lowest sales quarters and therefore operating results are generally lower during these two quarters. Additionally, these two quarters can be affected by the timing of the Easter holiday, which results in a strong sales week. Many northern Michigan stores are dependent on tourism, and therefore, are most affected by seasons and weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months. All quarters are 12 weeks, except for our third quarter, which is 16 weeks and includes the Thanksgiving and Christmas holidays.
On December 29, 2008, Spartan Stores acquired certain assets and assumed certain liabilities related to VG's Food Center, Inc. and VG's Pharmacy, Inc. (collectively, "VG's"). The results of operations of the VG's acquisition are included in the accompanying consolidated financial statements from the date of acquisition. VG's was a privately-held operator of 17 retail grocery stores based in southeastern Michigan. Prior to the acquisition, VG's was an independent customer of Spartan Stores' Distribution segment. This transaction, following our successful acquisitions of D&W Food Centers and Felpausch Food Centers, represents another step in the component of our business strategy focused on growing our business through opportunistic acquisitions of other grocery operators that are adjacent to or in markets where we operate today. The VG's stores serve communities in key Michigan markets where we previously had no retail presence.
The VG's transaction is expected to increase annual retail segment sales by approximately $300 million, but annual consolidated sales are expected to increase by approximately $150.0 million as VG's was an existing distribution customer. The acquisition is expected to be slightly dilutive to net earnings during the 2009 fourth quarter, but accretive to net earnings during fiscal 2010.
We previously operated 14 deep-discount food and drug stores under the banner The Pharm. In fiscal 2009, we completed the closure and sale of prescription files of all The Pharm stores, allowing us to concentrate efforts and resources on business opportunities with the best long-term growth potential and focus more on core distribution and conventional supermarket operations. The financial results of The Pharm stores have been included in discontinued operations in the accompanying consolidated financial statements for all periods presented.
Results of Operations
The following table sets forth items from our Consolidated Statements
of Earnings as a percentage of net sales and the year-to-year percentage change
in dollar amounts:
(Unaudited)
Percentage of Net Sales Percentage Change
------------------------------------- -------------------
16 Weeks Ended 40 Weeks Ended 16 Weeks 40 Weeks
----------------- ----------------- Ended Ended
-------- --------
Jan. 3, Jan. 5, Jan. 3, Jan. 5, Jan. 3, Jan. 3,
2009 2008 2009 2008 2009 2009
------- ------- ------- ------- -------- --------
Net sales 100.0 100.0 100.0 100.0 (0.7 ) 4.7
Gross margin 20.1 19.5 20.1 19.7 2.3 6.6
Operating expenses 17.8 17.6 17.3 17.3 0.7 4.8
------- ------- ------- ------- -------- --------
Operating earnings 2.3 1.9 2.8 2.4 17.4 19.5
Other income and expenses 0.4 0.4 0.4 0.4 (14.6 ) (6.9 )
------- ------- ------- ------- -------- - -------- -
Earnings before income taxes 1.9 1.5 2.4 2.0 27.4 25.2
and discontinued operations
Income taxes:
Net impact of enactment of - (0.3 ) - - * -
Michigan Business Tax
Income taxes 0.8 0.5 1.0 0.7 49.1 45.2
------- ------- ------- ------- -------- --------
Total income taxes 0.8 0.2 1.0 0.7 349.6 45.2
------- ------- ------- ------- -------- --------
Earnings from continuing 1.1 1.3 1.4 1.3 (15.4 ) 14.4
operations
Earnings from discontinued 0.0 0.0 0.1 0.1 (31.8 ) 7.5
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* Percentage change is not meaningful
Net Sales - Net sales for the quarter ended January 3, 2009 ("third quarter") decreased $5.9 million, or 0.7 percent, from $787.8 million in the quarter ended January 5, 2008 ("prior year third quarter") to $781.9 million. Net sales for the year-to-date period ended January 3, 2009 ("current year-to-date") increased $89.4 million, or 4.7 percent, from $1,906.1 million in the prior year-to-date period ended January 5, 2008 ("prior year-to-date") to $1,995.5 million.
Net sales for the third quarter in our Distribution segment decreased $12.8 million, or 3.1 percent, from $410.7 million in the prior year third quarter to $397.9 million. Net sales for the current year-to-date period increased $12.4 million, or 1.3 percent, from $986.9 million in the prior year-to-date period to $999.4 million. The third quarter decrease was due to a decrease in pharmacy product sales of approximately $9.1 million, a decrease in other sales to existing customers of $6.1 million and the elimination of sales to VG's stores of $2.6 million (due to our acquisition of the stores), partially offset by the addition of new distribution customers of $5.0 million. The year-to-date increase was due to the addition of new distribution customers of $49.0 million and an increase in sales to existing customers (excluding pharmacy) of $5.3 million, partially offset by the elimination of sales to Felpausch stores of $20.6 million and VG's stores of $2.6 million (due to our acquisitions of the stores), and a decrease in pharmacy product sales of $18.7 million. As a result of the acquisition of VG's, we expect reported annual Distribution sales to decline approximately $150.0 million due to the elimination of intercompany sales.
Net sales for the third quarter in our Retail segment increased $6.9 million, or 1.8 percent, from $377.1 million in the prior year third quarter to $384.0 million. Net sales for the year-to-date period increased $76.9 million, or 8.4 percent, from $919.1 million in the prior year-to-date period to $996.1 million. The third quarter increase was primarily due to comparable store supermarket sales growth of $11.1 million and sales from the recently acquired VG's retail stores of $5.1 million, partially offset by lost sales relating to four sold stores and one closed store of $9.0
million since last year's third quarter and a decrease in fuel center sales of $0.3 million due to lower retail prices. The year-to-date increase was primarily due to incremental sales from the recently acquired Felpausch retail stores of $43.2 million and VG's stores of $5.1 million, increases in fuel center sales of $24.4 million and supermarket comparable store sales growth of $22.3 million, partially offset by lost sales relating to the sold and closed stores of $18.3 million.
Retail comparable store sales, excluding fuel, increased 3.3 percent for the third quarter principally due to our marketing programs and ongoing capital investment program, including store remodels. Excluding sales from fuel centers and Easter holiday sales in the prior year first quarter, comparable store sales increased 3.1 percent. The Easter holiday occurred in the first and fourth quarters of fiscal 2008. There will be no Easter holiday during fiscal 2009. We define a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), and we include remodeled, expanded and relocated stores in comparable stores.
Gross Margin - Gross margin represents sales less cost of sales, which include purchase costs and promotional allowances. Vendor allowances that relate to our buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for our merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.
Gross margin for the third quarter increased $3.6 million, or 2.3 percent, from $153.8 million in the prior year third quarter to $157.4 million. As a percent of net sales, gross margin for the third quarter increased to 20.1 percent from 19.5 percent. Gross margin for the year-to-date period increased $25.0 million, or 6.6 percent, from $375.5 million in the prior year-to-date period to $400.5 million. As a percent of net sales, gross margin for the year-to-date period increased to 20.1 percent from 19.7 percent. The improved gross margin rate was due principally to an increase in the mix of higher margin retail sales compared with the prior year and improved margin rates in our retail segment.
Operating Expenses - Operating expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, utilities, equipment rental, depreciation and other administrative costs.
Operating expenses for the third quarter increased $0.9 million, or 0.7 percent, from $138.6 million in the prior year third quarter to $139.6 million. As a percent of net sales, operating expenses were 17.8 percent for the third quarter compared to 17.6 percent in the prior year third quarter. Operating expenses for the year-to-date period increased $15.9 million, or 4.8 percent, from $329.1 million in the prior year-to-date period to $345.0 million. As a percent of net sales, operating expenses were 17.3 percent in the current year-to-date and prior year-to-date periods.
The net increase in third quarter operating expenses was primarily due
to the following:
• Increases in compensation and benefits of $1.7 million.
• Increased occupancy costs of $1.5 million.
• Additional operating costs associated with the acquired VG's retail
stores of $1.1 million.
• Reduced operating costs related to the sale of four retail stores
and closure of one store since the prior year third quarter of $2.4
million.
• Reduced operating expenses due to replacement of the Michigan
Single Business Tax (MSBT) with a new income tax for the State of
Michigan of $0.4 million. The MSBT was not considered an income tax
and was included in operating expenses.
• Decreases in transportation fuel costs of $0.2 million.
The net increase in year-to-date operating expenses was primarily due
to the following:
• Additional operating costs associated with the acquired Felpausch
retail stores of $9.4 million.
• Increases in compensation and benefits of $5.5 million.
• Increased occupancy costs of $3.1 million.
• Increases in transportation fuel costs of $1.3 million.
• The cost of operating additional fuel centers of $1.3 million.
• Additional operating costs associated with the acquired VG's retail
stores of $1.1 million.
• Reduced operating costs related to the sale of four retail stores
and closure of one store since the prior year third quarter of $4.5
million.
• Reduced operating expenses due to replacement of the MSBT with a
new income tax for the State of Michigan of $1.4 million.
Interest Expense - Interest expense decreased $0.6 million, or 14.3%, from $3.8 million in the prior year third quarter to $3.2 million. Interest expense decreased $0.5 million, or 6.4%, from $8.6 million in the prior year-to-date period to $8.1 million. The decrease in interest expense was due to a decrease in average outstanding borrowings.
On January 2, 2009, we entered into an interest rate swap agreement. The interest rate swap is considered to be a cash flow hedge of interest payments on $45.0 million of borrowings under our senior secured revolving credit facility by effectively converting a portion of the variable rate debt to a fixed rate basis. Under the terms of the agreement, we have agreed to pay the counterparty a fixed interest rate of 3.33% and the counterparty has agreed to pay Spartan Stores a floating interest rate (based upon the 1-month LIBOR) on a notional amount of $45 million. The interest rate swap agreement expires concurrently with its senior secured revolving credit facility on December 24, 2012.
Income Taxes - The effective tax rate is 41.4% and 40.7% for the third quarter and current year-to-date period, respectively. The difference from the statutory rate is primarily due to State of Michigan income taxes. The new state income tax is a larger burden on our net earnings than the former Michigan Single Business Tax (MSBT).
During the prior year second quarter, the Michigan legislature enacted a new business income tax effective January 1, 2008, which replaced the former MSBT that was in effect through December 31, 2007. The new income tax law was subsequently revised on September 30, 2007, two weeks after the end of our prior year second quarter, to correct a deficiency in the tax code that would have significantly penalized Michigan-based companies. Because the legislative revision was not enacted until our fiscal 2008 third quarter, generally accepted accounting principles required recognition of the negative impact of the originally enacted law in our prior year second quarter results, and a credit of this same charge in the third quarter of fiscal 2008 when the revision was enacted. As a result, we recorded a one-time, non-cash charge of $2.7 million in Income taxes in the prior year second quarter and a corresponding change in deferred taxes on income, and credited the same amount in the third quarter as a reduction to Income taxes of $2.7 million. As a result of this credit, and five days of MBT expense, in the prior year third quarter, the effective income tax rate was 11.7% and 35.1% for the third quarter and year-to-date periods ended January 5, 2008, versus the Federal statutory income tax rate of 35%.
Discontinued Operations
Our former insurance operations and certain of our retail and grocery distribution operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the condensed consolidated financial statements for all periods presented, unless otherwise noted.
During the fourth quarter of fiscal year 2008, Spartan Stores approved a plan to close the remaining 14 The Pharm stores. In fiscal 2009, we completed the closure and sale of prescription files of all The Pharm stores, allowing us to concentrate efforts and resources on business opportunities with the best long-term growth potential and focus more on core distribution and conventional supermarket operations. Cash proceeds of $13.8 million were received. Asset impairment charges and exit costs of $5.6 million were recognized.
Liquidity and Capital Resources
The following table summarizes our consolidated statements of cash
flows for the year-to-date and prior year-to-date periods:
(In thousands)
January 3, January 5,
2009 2008
----------- ------------
Net cash provided by operating activities $ 46,824 $ 19,788
Net cash used in investing activities (143,512 ) (78,762 )
Net cash provided by financing activities 74,610 53,242
Net cash provided by discontinued operations 11,861 5,065
-- -------- -- ---------
Net decrease in cash and cash equivalents (10,217 ) (667 )
Cash and cash equivalents at beginning of year 19,867 12,063
-- -------- -- ---------
Cash and cash equivalents at end of period $ 9,650 $ 11,396
-- -------- -- ---------
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Net cash provided by operating activities increased from the prior year-to-date period primarily due to increased net earnings, timing of new business in the prior year, collection of new customer advances made in the prior year with delayed payment terms and timing of cash flows related to inventories and accounts payable.
Net cash used in investing activities increased during the current fiscal year primarily due to the recent acquisition of VG's, and capital expenditures. Capital expenditures, which do not include acquisitions, increased $12.9 million to $42.6 million, of which our Retail and Distribution segments utilized 76.8% and 23.2%, respectively. Expenditures were used for store remodels and refurbishments, new fuel centers and new equipment and software. Under the terms of our senior secured revolving credit facility, should our available borrowings fall below certain levels, our capital expenditures would be restricted each fiscal year. Our current available borrowings are over $70 million above these limits as of January 3, 2009 and we do not expect to fall below these levels. Including VG's, we expect capital expenditures to range from $58.0 million to $60.0 million for fiscal 2009. Our planned capital expenditures for the remainder of fiscal 2009, include completion of one replacement store, two store remodels, in addition to new equipment and software and the beginning of construction of one new store.
Net cash provided by financing activities includes cash paid and received related to our long-term borrowings, dividends paid, tax benefits of stock compensation and proceeds from the issuance of common stock. The increase in cash from financing activities was primarily due to borrowings on our senior secured revolving credit facility that were used to finance the VG's acquisition. In the prior year-to-date period, proceeds of $110 million from the issuance of convertible senior notes were used to reduce borrowings on the revolving credit facility, to pay related financing fees and to partially fund the Felpausch acquisition. Cash dividends of $3.3 million were paid in each year-to-date period. Although we expect to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the board of directors to declare future dividends. Each future dividend will be considered and declared by the board of directors in its discretion. Whether the board of directors continues to declare dividends depends on a number of factors, including our future financial condition and profitability and compliance with the terms of our credit facilities. Our current maturities of long-term debt and capital lease obligations at January 3, 2009 are $3.9 million. Our ability to borrow additional funds is governed by the terms of our credit facilities.
Net cash provided by discontinued operations contains the net cash flows of our discontinued operations and consists primarily of the proceeds from the sale of assets and the payment of store exit cost reserves, insurance run-off claims and other liabilities. Included in current year cash flows from discontinued operations are proceeds on the disposal of assets of $13.8 million. We expect cash provided by our discontinued operations will be approximately $10.0 million to $11.0 million in fiscal 2009.
Our principal sources of liquidity are cash flows generated from operations and our senior secured revolving credit facility. Interest on our convertible senior notes is payable on May 15 and November 15 of each year. The revolving credit facility matures December 2012, and is secured by substantially all of our assets. As of
January 3, 2009, our senior secured revolving credit facility had outstanding borrowings of $85.5 million, available borrowings of $90.3 million and maximum availability of $100.3 million, which exceeds the minimum excess availability levels, as defined in the credit agreement. We believe that cash generated from operating activities and available borrowings under the credit facility will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future. However, there can be no assurance that Spartan Stores' business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our credit facility.
Our current ratio increased to 1.27:1.00 at January 3, 2009 from 1.11:1.00 at March 29, 2008 and our investment in working capital was $43.1 million at January 3, 2009 versus $20.5 million at March 29, 2008. Our debt to total capital ratio at January 3, 2009 was 0.50:1.00 versus 0.43:1.00 at March 29, 2008. The change in these ratios was primarily due to obligations assumed related to the VG's acquisition and seasonal inventory build.
For information on contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended March 29, 2008. At January 3, 2009, there have been no material changes to our significant contractual obligations outside the ordinary course of business, except for the assumption of lease obligations and store exit costs in the VG's acquisition. As of January 3, 2009, our obligations under the leases assumed in the VG's acquisition are as follows:
(In thousands) Payment Due by Period
-------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
---------- year ----------- ----------- years
------------- -------------
Operating leases $ 30,129 4,866 7,255 5,872 12,136
Capital leases 11,476 690 1,536 1,803 7,447
Interest on capital 6,344 831 1,512 1,266 2,735
leases
Lease and ancillary 17,117 702 3,356 3,356 9,703
costs - -------- -- ---------- -- -------- -- -------- -- ----------
of closed stores,
including
imputed interest
Total $ 65,066 $ 7,089 $ 13,659 $ 12,297 $ 32,021
- -------- -- ---------- -- -------- -- -------- -- ----------
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Indebtedness and Liabilities of Subsidiaries
On May 30, 2007, the Company sold $110 million aggregate principal amount of 3.375% Convertible Senior Notes due 2027 (the "Notes"). The Notes are general unsecured obligations and rank equally in right of payment with all of the Company's other existing and future obligations that are unsecured and unsubordinated. Because the Notes are unsecured, they are structurally subordinated to our subsidiaries' existing and future indebtedness and other liabilities and any preferred equity issued by our subsidiaries. We rely in part on distributions and advances from our subsidiaries in order to meet our payment obligations under the notes and our other obligations. The Notes are not guaranteed by our subsidiaries. Many of our subsidiaries serve as guarantors with respect to our existing credit facility. Creditors of each of our subsidiaries, including trade creditors, and preferred equity holders, generally have priority with respect to the assets and earnings of the subsidiary over the claims of our creditors, including holders of the Notes. The Notes, therefore, are effectively subordinated to the claims of creditors, including trade creditors, judgment creditors and equity holders of our subsidiaries. In addition, our rights and the rights of our creditors, including the holders of the notes, to participate in the assets of a subsidiary during its liquidation or reorganization are effectively subordinated to all existing and future liabilities and preferred equity of that subsidiary. The Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing such indebtedness and to existing and future indebtedness and other liabilities of our subsidiaries (including subsidiary guarantees of our senior credit facility).
The following table shows the indebtedness and other liabilities of our subsidiaries as of January 3, 2009:
Spartan Stores Subsidiaries Only
(In thousands)
January 3,
2009
------------
Current Liabilities
Accounts payable $ 100,767
Accrued payroll and benefits 30,386
Other accrued expenses 17,768
Current portion of exit costs 10,066
Current maturities of long-term debt and capital 3,883
lease obligations -- ---------
Total current liabilities 162,870
. . .
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