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SPTN > SEC Filings for SPTN > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for SPARTAN STORES INC

Form 10-Q for SPARTAN STORES INC


25-Oct-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 375 independently owned grocery locations and our 97 corporate owned stores. Our Retail segment operates 97 retail supermarkets in Michigan under the banners D&W Fresh Markets, Family Fare Supermarkets, Glen's Markets, VG's Food and Pharmacy and Valu Land. In addition our retail segment operates 29 fuel centers/convenience stores, generally adjacent to our supermarket locations. Our retail supermarkets have a "neighborhood market" focus to distinguish them from supercenters and our Valu Land stores are distinguished from competitor's limited assortment stores by a focus on national brands and perishable offerings.

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 period. Many northern Michigan stores are dependent on tourism, which is affected by the economic environment and seasonal 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. Typically all quarters are 12 weeks, except for our third quarter, which is 16 weeks and includes the Thanksgiving and Christmas holidays. However, fiscal year 2012 included a 53rd week in the fourth quarter.

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
                                                                                                                    12 Weeks        24 Weeks
                                                   12 Weeks Ended                     24 Weeks Ended                 Ended           Ended
                                             Sept. 15,         Sept. 10,        Sept. 15,         Sept. 10,        Sept. 15,       Sept. 15,
                                               2012              2011             2012              2011              2012            2012
Net sales                                         100.0             100.0            100.0             100.0              0.3             0.3
Gross margin                                       21.0              21.4             20.6              21.1             (1.9 )          (2.4 )
Selling, general and administrative
expenses                                           17.9 **           18.2             18.1 **           18.3             (1.7 )          (1.5 )
Restructuring, asset impairment and other           0.1              (0.0 )            0.0              (0.0 )              *               *

Operating earnings                                  3.0               3.2              2.5               2.8             (5.2 )          (9.8 )
Other income and expenses                           0.3 **            0.5              0.4               0.6 **         (29.1 )         (16.0 )

Earnings before income taxes and
discontinued operations                             2.7               2.7              2.1               2.2             (0.3 )          (8.3 )
Income taxes                                        1.0               1.0              0.8 **            0.9             (2.2 )         (20.8 )

Earnings from continuing Operations                 1.7               1.7              1.3               1.3              0.8            (0.2 )
(Loss) earnings from discontinued
operations, net of taxes                           (0.0 )            (0.0 )           (0.0 )            (0.0 )              *               *

Net earnings                                        1.7               1.7              1.3               1.3              0.5            (0.2 )

* Percentage change is not meaningful

** Difference due to rounding

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Net Sales - Net sales for the quarter ended September 15, 2012 ("second quarter") increased $1.9 million, or 0.3%, from $619.6 million in the quarter ended September 10, 2011 ("prior year second quarter") to $621.6 million. Net sales for the year-to-date period ended September 15, 2012 ("current year-to-date") increased $3.3 million, or 0.3%, from $1,222.2 million in the prior year-to-date period ended September 10, 2011 ("prior year-to-date") to $1,225.5 million.

Net sales for the second quarter in our Retail segment decreased $1.1 million, or 0.3%, from $363.4 million in the prior year second quarter to $362.3 million. Net sales for the year-to-date period decreased $1.0 million, or 0.1%, from $708.9 million in the prior year-to-date period to $707.9 million. The second quarter decrease was primarily due to a decrease in comparable store sales of 1.0%, excluding fuel, partially offset by an increase in fuel center sales of $2.4 million. The year-to-date decrease was primarily due to a comparable sales decrease of 0.5% partially offset by an increase in fuel center sales of $3.1 million.

The comparable store sales decrease of 1.0% was due to an unfavorable calendar shift as an additional week of weaker fall season sales replace a stronger summer sales week, partially offset by the positive impact of store remodels and the YES Rewards promotional campaign. We define a retail store as comparable when it is in operation for 14 periods (a period is four weeks), and we include remodeled, expanded and relocated stores in comparable stores.

Net sales for the second quarter in our Distribution segment increased $3.0 million, or 1.2%, from $256.2 million in the prior year second quarter to $259.2 million. Net sales for the current year-to-date period increased $4.2 million, or 0.8%, from $513.4 million in the prior year-to-date period to $517.6 million. The second quarter increase was primarily due to new distribution customer business partially offset by a decline in pharmacy sales and lower sales to existing independent customers. The year-to-date increase was due to new distribution customer business of $8.6 million partially offset by lower sales to existing independent customers and lower pharmacy sales.

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 second quarter decreased $2.5 million, or 1.9%, from $132.7 million in the prior year second quarter to $130.2 million. As a percent of net sales, gross margin for the second quarter decreased to 21.0% from 21.4%. The decline in gross margin rate was due to reduced inflation-driven inventory gains in both the retail and distribution segments and investments associated with the second phase of our "Price Freeze" and "Yes Is Even More" promotional campaign in the retail segment, as well as, a higher mix of lower margin distribution and fuel sales. Gross margin for the year-to-date period decreased $6.2 million, or 2.4%, from $258.1 million in the prior year-to-date period to $251.9 million. As a percent of net sales, gross margin for the year-to-date period decreased to 20.6% from 21.1% for the reasons noted above.

Selling, General and Administrative Expenses - Selling, general and administrative ("SG&A") expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, shipping and handling, utilities, equipment rental, depreciation and other administrative costs.

SG&A expenses for the second quarter (excluding restructuring) decreased $2.0 million, or 1.7%, from $112.9 million in the prior year second quarter to $110.9 million. As a percent of net sales, SG&A expenses were 17.8% for the second quarter compared to 18.2% in the prior year second quarter. SG&A expenses (excluding restructuring) for the year-to-date period decreased $3.3 million, or 1.5%, from $224.2 million in the prior year-to-date period to $220.9 million. As a percent of net sales, operating expenses (excluding restructuring) were 18.0% for the current year-to-date period compared to 18.3% in the prior year-to-date period.

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The net decrease in second quarter SG&A expenses (excluding restructuring) was primarily due to the following:

Decreased incentive compensation expense of $1.6 million.

Decreased unusual corporate professional fees of $1.2 million.

Decreased store labor of $0.4 million.

Decreased workers compensation costs of $0.4 million.

Increased depreciation and amortization of $0.4 million.

Increased healthcare costs of $0.9 million.

Increased various other expenses.

The net decrease in year-to-date SG&A expenses (excluding restructuring) was primarily due to the following:

Decreased incentive compensation expense of $2.6 million.

Decreased unusual corporate professional fees of $1.2 million.

Decreased store labor of $0.8 million.

Decreased workers compensation costs of $0.4 million.

Increased supplies and marketing related expenses of 1.8 million.

Increased healthcare costs of $0.9 million.

Increased depreciation and amortization of $0.8 million.

Decreased various other expenses due to continuing focus on containing costs.

Restructuring, Asset Impairment and Other - The second quarter charges of $0.4 million primarily relate to a single store that required impairment and the values in the Consolidated Balance Sheet were reduced. The asset impairment charges were recorded due to the local economic and competitive environment of this store and its impact on forecasted financial performance. The prior year second quarter restructuring benefit of $0.1 million related primarily to change in estimates made related to final settlements of expired leases and expenses related to two closed retail stores.

Interest Expense - Interest expense decreased $0.3 million, or 9.2%, from $3.4 million in the prior year second quarter to $3.1 million. For the year-to-date period, interest expense decreased $0.4 million, or 6.4%, from $6.6 million to $6.2 million. The decrease in interest expense was due primarily to lower net borrowings.

Income Taxes - The effective tax rate was 37.5% and 38.2% for the second quarter and prior year second quarter, respectively. For the year-to-date period and prior year-to-date period the effective income tax rate was 34.7% and 40.2%. The difference from the statutory rate is the result of changes to the State of Michigan's tax laws. The first quarter of fiscal 2013 includes a $0.6 million net after-tax benefit and the first quarter of fiscal 2012 includes a net after-tax charge of $0.5 million due to these changes. Excluding these items the effective tax rate for the year-to-date period was 37.6% and 38.3% for fiscal 2013 and fiscal 2012 respectively.

Adjusted EBITDA

Consolidated Adjusted EBITDA is a non-GAAP operating financial measure that we define as net earnings from continuing operations plus depreciation and amortization, and other non-cash items including imputed interest, deferred
(stock) compensation, the LIFO provision, as well as adjustments for unusual items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations, interest expense and the provision for income taxes.

We believe that Adjusted EBITDA provides a meaningful representation of our operating performance for the Company as a whole and for our operating segments. We consider Adjusted EBITDA as an additional way to measure operating performance on an ongoing basis. Adjusted EBITDA is meant to reflect the ongoing operating performance of all of our retail stores and wholesale operations; consequently, it excludes the impact of items that could be considered "non-operating" or "non-core" in nature, and also excludes the contributions of activities classified as discontinued operations. Because Adjusted EBITDA is a performance measure that management uses

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to allocate resources, assess performance against its peers, and evaluate overall performance, we believe it provides useful information for our investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with us request our operating financial results in Adjusted EBITDA format.

Adjusted EBITDA is not a measure of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. Our definition of Adjusted EBITDA may not be identical to similarly titled measures reported by other companies.

Following is a reconciliation of net earnings to Adjusted EBITDA for quarters and year-to-date periods ended September 15, 2012 and September 10, 2011.

                                                         Second Quarter                     Year-to-Date
                                                   Sept. 15,        Sept. 10,        Sept. 15,        Sept. 10,
(In thousands)                                       2012             2011             2012             2011
Net earnings                                      $    10,305      $    10,252      $    16,308      $    16,281
Add:
Discontinued operations                                    50               18              123              124
Income taxes                                            6,203            6,341            8,732           11,030
Interest expense                                        3,071            3,412            6,227            6,654
Non-operating expense                                    (681 )            (42 )           (729 )           (112 )

Operating earnings                                     18,948           19,981           30,661           33,977
Add:
Depreciation and amortization                           8,805            8,408           17,475           16,775
LIFO expense                                              590              869            1,380            1,527
Restructuring and asset impairment costs                  356             (135 )            356             (135 )
Other unusual items                                        -             1,194               -             1,194
Non-cash stock compensation and other charges             292              810            1,761            2,360

Adjusted EBITDA                                   $    28,991      $    31,127      $    51,633      $    55,698


Reconciliation of operating earnings to
adjusted EBITDA by segment:

Retail:
Operating earnings                                $     8,099      $    11,217      $    11,990      $    17,811
Add:
Depreciation and amortization                           6,833            6,432           13,544           12,886
LIFO expense                                              424              526              848              964
Restructuring and asset impairment costs                  356              (98 )            356              (98 )
Non-cash stock compensation and other charges             687              365            1,457            1,137

Adjusted EBITDA                                   $    16,399      $    18,442      $    28,195      $    32,700

Distribution:
Operating earnings                                $    10,849      $     8,764      $    18,671      $    16,166
Add:
Depreciation and amortization                           1,972            1,976            3,931            3,889
LIFO expense                                              166              343              532              563
Restructuring and asset impairment costs                   -               (37 )             -               (37 )
Other unusual items                                        -             1,194               -             1,194
Non-cash stock compensation and other                    (395 )            445              304            1,223

Adjusted EBITDA                                   $    12,592      $    12,685      $    23,438      $    22,998

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Discontinued Operations

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.

Liquidity and Capital Resources

The following table summarizes our consolidated statements of cash flows for the
year-to-date second quarter and prior year-to-date second quarter:



                                                    September 15,             September 10,
(In thousands)                                          2012                      2011
Net cash provided by operating activities          $           895           $        42,463
Net cash (used in) investing activities                    (18,354 )                 (21,439 )
Net cash (used in) financing activities                     (1,561 )                  (2,462 )
Net cash provided by (used in) discontinued
operations                                                      35                      (306 )

Net (decrease) increase in cash and cash
equivalents                                                (18,985 )                  18,256
Cash and cash equivalents at beginning of
period                                                      26,476                    43,824

Cash and cash equivalents at end of period         $         7,491           $        62,080

Net cash provided by operating activities decreased from the prior year-to-date period primarily due to increased investment in inventory due predominantly to the shift in timing of our quarter end, the payment of fiscal year 2012 incentive compensation and profit sharing, $9.8 million first quarter tax payment related to the previously mentioned tax law change and $5.0 million in advanced payments to customers under new supply agreements. The $9.8 million first quarter tax payment related to the timing of tax basis income recognition and will reverse over the remainder of fiscal 2013.

Net cash used in investing activities decreased during the current year-to-date period primarily due to proceeds from the sale of assets. Our Retail and Distribution segments utilized 83.4% and 16.6% of our capital spending, respectively in fiscal 2013 and 85.8% and 12.2% in fiscal 2012, respectively. Expenditures during the current fiscal year were primarily related to two store remodels and payments on the construction of 3 new stores. We expect capital and real estate development expenditures to range from $42.0 million to $44.0 million for fiscal 2013.

Net cash used in financing activities includes proceeds from the issuance of common stock, stock repurchases, tax benefits of stock compensation, dividends paid, financing fees and net change in our long-term borrowings. Payments on other long-term borrowings were $1.8 million and financing fees paid were $1.3 million in the current year-to-date period, partially offset by net proceeds from revolver borrowings of $14.2 million. In the prior year-to-date period, net other long-term repayments totaled $1.9 million partially offset by net proceeds from revolver borrowings of $0.1 million. The company repurchased approximately 634,000 shares of its common stock in the current year-to-date period for a total expenditure of $11.4 million. Cash dividends of $1.7 million were paid in the first and second quarters of fiscal 2013 versus $1.5 million in the first and second quarters of fiscal 2012. This increase was due to a 23% increase in dividends from $0.065 per share to $0.08 per share that was approved by the Board of Directors and announced on May 15, 2012. 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 at its discretion. Whether the Board of Directors continues to declare dividends and repurchase shares 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 September 15, 2012 are $4.2 million. Our ability to borrow additional funds is governed by the terms of our credit facilities.

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Net cash used in discontinued operations includes the net cash flows of our discontinued operations and consists primarily of the payment of store asset impairment costs and other liabilities partially offset by sublease income.

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 2017, and is secured by substantially all of our assets. As of September 15, 2012, our senior secured revolving credit facility had outstanding borrowings of $14.2 million and additional available borrowings of $165.3 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.

On January 9, 2012, Spartan Stores announced the early termination of its interest rate swap agreement. The Company repaid the balance on its credit facility and swap termination fee from available cash.

Our current ratio increased to 1.23:1.00 at September 15, 2012 from 1.13:1.00 at March 31, 2012 and our investment in working capital increased to $41.5 million at September 15, 2012 from $24.7 million at March 31, 2012 principally due to inventory investment and prepaid taxes.

Our total net long-term debt (including current maturities and capital lease obligations net of cash and cash equivalents) to total capital ratio at September 15, 2012 was 0.31:1.00 versus 0.26:1.00 at March 31, 2012 and our debt to capital ratio at September 10, 2011 was 0.32:1.00 versus 0.30:1.00 at March 26 2011. Total net long-term debt is a non-GAAP financial measure that is defined as long-term debt and capital lease obligations plus current maturities of long-term debt and capital lease obligations less cash and cash equivalents. The Company believes investors find the information useful because it reflects the amount of long term debt obligations that are not covered by available cash and temporary investments.

Following is a reconciliation of long-term debt and capital lease obligations to total net long-term debt and capital lease obligations as of September 15, 2012 and March 31, 2012.

                                                        September 15,         March 31,
(In thousands)                                              2012                 2012
Current maturities of long-term debt and capital
lease obligations                                      $         4,185        $    4,449
Long-term debt and capital lease obligations                   150,789           133,565

Total Debt                                                     154,974           138,014
Cash and cash equivalents                                       (7,491 )         (26,476 )

Total net long-term debt                               $       147,483        $  111,538

For information on contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2012. At September 15, 2012, there have been no material changes to our significant contractual obligations outside the ordinary course of business.

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

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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 September 15, 2012:

                        Spartan Stores Subsidiaries Only

                                 (In thousands)



                                                                          September 15,
                                                                              2012
. . .
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