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SPTN > SEC Filings for SPTN > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for SPARTANNASH CO

Form 10-Q for SPARTANNASH CO


14-Aug-2014

Quarterly Report


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

Executive Overview

SpartanNash is headquartered in Grand Rapids, Michigan. Our business consists of three primary operating segments: Military, Food Distribution and Retail. We are a leading regional grocery distributor and grocery retailer, operating principally in the Midwest, and the largest distributor, by revenue, of grocery products to military commissaries and exchanges in the United States.

Our Military segment contracts with manufacturers to distribute a wide variety of grocery products to military commissaries and exchanges located in the United States, the District of Columbia, Europe, Puerto Rico, Cuba, the Azores, Egypt and Bahrain. We have over 30 years of experience acting as a distributor to U.S. military commissaries and exchanges.

Our Food Distribution segment provides a wide variety of nationally branded and private label grocery products and perishable food products, including dry groceries, produce, dairy products, meat, deli, bakery, frozen food, seafood, floral products, general merchandise, pharmacy and health and beauty care from 13 distribution centers to approximately 2,100 independent retail locations and 166 corporate-owned retail stores located in 31 states, primarily in the Midwest, Great Lakes, and Southeast regions of the United States.

Our Retail segment operates 166 supermarkets in the Midwest which operate primarily under the banners of Family Fare Supermarkets, No Frills, Bag 'N Save, Family Fresh Markets, D&W Fresh Markets, Sun Mart and Econofoods. Our retail supermarkets typically offer dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, beverages, tobacco products, health and beauty care products, delicatessen items and bakery goods. We offer pharmacy services in 82 of our supermarkets and we operate 30 fuel centers. Our retail supermarkets have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores.

Typically, all quarters are 12 weeks, except for our first quarter, which is 16 weeks and will generally include the Easter holiday. Our fourth quarter includes the Thanksgiving and Christmas holidays.

                                                         Percentage of Net Sales                            Percentage Change
                                                                                                         12 Weeks       28 Weeks
                                              12 Weeks Ended                  28 Weeks Ended              Ended          Ended
                                         July 12,        July 20,        July 12,        July 20,        July 12,       July 12,
(Unaudited)                                2014            2013            2014            2013            2014           2014
Net sales                                    100.0           100.0           100.0           100.0           178.0          189.5
Gross profit                                  14.7            20.5            14.8            21.3            98.9          100.5
Selling, general and administrative
expenses                                      12.8            18.0            13.4 *          18.6            97.6          106.4
Restructuring and asset impairment
charges                                        0.1             0.2             0.0             0.2             9.2          (45.7 )

Operating earnings                             1.8             2.3             1.4             2.5           115.3           66.1
Other income and expenses                      0.3             0.3             0.3             0.6           145.4           48.0

Earnings before income taxes and
discontinued operations                        1.5             2.0             1.1             1.9           110.1           71.9
Income taxes                                   0.5             0.8 *           0.4             0.7           100.4           64.7

Earnings from continuing operations            1.0             1.2             0.7             1.2           115.9           76.3
Loss from discontinued operations,
net of taxes                                  (0.0 )          (0.0 )          (0.0 )          (0.0 )          18.8          (16.2 )

Net earnings                                   1.0             1.2             0.7             1.2           116.7           78.2

* Difference due to rounding


Adjusted Operating Earnings

Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of its military, food distribution and retail 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 operating earnings is a performance measure that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted operating earnings format.

Adjusted operating earnings 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 operating earnings, cash flows from operating activities and other income or cash flow statement data. The Company's definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.


Following is a reconciliation of Operating earnings to adjusted operating earnings for the twelve and twenty-eight weeks ended July 12, 2014 and July 20, 2013.

                                                   12 weeks      12 weeks      28 weeks      28 weeks
                                                     Ended         Ended         Ended         Ended
(Unaudited)                                        July 12,      July 20,      July 12,      July 20,
(In thousands)                                       2014          2013          2014          2013
Operating earnings                                 $  32,649     $  15,166     $  60,227     $  36,258
Add:
Asset impairment and restructuring charges             1,078           987         1,205         2,220
Expenses related to merger transaction and
integration                                            2,581         2,377         6,749         2,377

Adjusted operating earnings                        $  36,308     $  18,530     $  68,181     $  40,855

Reconciliation of operating earnings to adjusted
operating earnings by segment:
Military:
Operating earnings                                 $   6,731     $      -      $  12,292     $      -
Add:
Expenses related to merger transaction and
integration                                               24            -             24            -

Adjusted operating earnings                        $   6,755     $      -      $  12,316     $      -

Food Distribution:
Operating earnings                                 $  11,128     $   6,765     $  25,489     $  26,086
Add:
Asset impairment and restructuring charges               307            -          1,029            -
Expenses related to merger transaction and
integration                                            2,554         2,377         6,722         2,377

Adjusted operating earnings                        $  13,989     $   9,142     $  33,240     $  28,463

Retail:
Operating earnings                                 $  14,790     $   8,401     $  22,446     $  10,172
Add:
Asset impairment and restructuring charges               771           987           176         2,220
Expenses related to merger transaction and
integration                                                3            -              3            -

Adjusted operating earnings                        $  15,564     $   9,388     $  22,625     $  12,392

Adjusted earnings from Continuing Operations

Adjusted earnings from continuing operations is a non-GAAP operating financial measure that we define as earnings from continuing operations plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

We believe that adjusted earnings from continuing operations provide a meaningful representation of our operating performance for the Company. We consider adjusted earnings from continuing operations as an additional way to measure operating performance on an ongoing basis. Adjusted earnings from continuing operations is meant to reflect the ongoing operating performance of our military, food distribution and retail 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. We believe that adjusted earnings from continuing operations provides useful information for our investors because it is a performance measure that management uses to allocate resources, assess performance against its peers and evaluate overall performance. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with us request our operating financial results in adjusted earnings from continuing operations format.


Adjusted earnings from continuing operations 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 earnings from continuing operations may not be identical to similarly titled measures reported by other companies.

Following is a reconciliation of Earnings from continuing operations to adjusted earnings from continuing operations for the twelve and twenty-eight weeks ended July 12, 2014 and July 20, 2013.

                                                                    12 Weeks Ended
                                                 July 12, 2014                           July 20, 2013
                                                             Earnings                                Earnings
                                                               from                                    from
                                         Earnings           continuing            Earnings          continuing
(Unaudited)                                from             operations              from            operations
(In thousands, except per share         continuing          per diluted          continuing         per diluted
data)                                   operations             share             operations            share
Earnings from continuing
operations                             $     17,395        $        0.46        $      8,056       $        0.37
Adjustments, net of taxes:
Restructuring and asset impairment
charges                                         665                 0.02                 615                0.03
Expenses related to merger
transaction and integration                   1,593                 0.04               1,480                0.06 *
Favorable settlement of
unrecognized tax liability                     (595 )              (0.02 )                -                   -

Adjusted earnings from continuing
operations                             $     19,058        $        0.50        $     10,151       $        0.46

Weighted average diluted shares
outstanding                                  37,810                                   21,940

* Includes rounding

                                                                     28 Weeks Ended
                                                 July 12, 2014                            July 20, 2013
                                                             Earnings                                 Earnings
                                                               from                                     from
                                         Earnings           continuing             Earnings          continuing
(Unaudited)                                from             operations               from            operations
(In thousands, except per share         continuing          per diluted           continuing         per diluted
data)                                   operations             share              operations            share
Earnings from continuing
operations                             $     29,914        $        0.79         $     16,968       $        0.78
Adjustments, net of taxes:
Restructuring and asset impairment
charges                                         747                 0.02                1,369                0.06
Debt extinguishment                              -                    -                 1,690                0.08
Expenses related to merger
transaction and integration                   4,186                 0.11                1,480                0.06 *
Favorable settlement of
unrecognized tax liability                     (595 )              (0.01 )*                -                   -

Adjusted earnings from continuing
operations                             $     34,252        $        0.91         $     21,507       $        0.98

Weighted average diluted shares
outstanding                                  37,738                                    21,875

* Includes rounding


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 SpartanNash and costs associated with the closing of operational locations, interest expense and the provision for income taxes to the extent deducted in the computation of net earnings.

We believe that adjusted EBITDA provides a meaningful representation of our operating performance for SpartanNash 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 our military, food distribution and retail 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 and adjusted EBITDA by segment are performance measures that management uses 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 the twelve and twenty-eight weeks ended July 12, 2014 and July 20, 2013.

                                               12 Weeks Ended                           28 Weeks Ended
(In thousands)                        July 12, 2014       July 20, 2013        July 12, 2014       July 20, 2013
Net earnings                         $        17,319     $         7,992      $        29,629     $        16,628
Add:
Discontinued operations                           76                  64                  285                 340
Income taxes                                   9,779               4,879               17,359              10,537
Interest expense                               5,475               2,239               12,949               6,006
Debt extinguishment                               -                   -                    -                2,762
Non-operating expense (income)                    -                   (8 )                  5                 (15 )

Operating earnings                            32,649              15,166               60,227              36,258
Add:
LIFO expense                                   1,555                 640                3,527                 246
Depreciation and amortization                 19,417               9,492               46,970              22,218
Restructuring and asset impairment
charges                                        1,078                 987                1,205               2,220
Expenses related to merger
transaction and integration                    2,581               2,377                6,749               2,377
Non-cash stock compensation and
other                                          1,000                 808                4,514               1,708

Adjusted EBITDA                      $        58,280     $        29,470      $       123,192     $        65,027

--------------------------------------------------------------------------------
Reconciliation of operating earnings to
adjusted EBITDA by segment:
Military:
Operating earnings                               $  6,731       $     -       $ 12,292       $     -
Add:
LIFO expense                                          362             -            833             -
Depreciation and amortization                       1,486             -          5,679             -
Expenses related to merger transaction and
integration                                            24             -             24             -
Non-cash stock compensation and other                 (64 )           -            (59 )           -

Adjusted EBITDA                                  $  8,539       $     -       $ 18,769       $     -

Food Distribution:
Operating earnings                               $ 11,128       $  6,765      $ 25,489       $ 26,086
Add:
LIFO expense (income)                                 795            214         1,757           (194 )
Depreciation and amortization                       7,705          2,087        17,433          4,903
Restructuring and asset impairment charges            307             -          1,029             -
Expenses related to merger transaction and
integration                                         2,554          2,377         6,722          2,377
Non-cash stock compensation and other                 714            294         3,669            714

Adjusted EBITDA                                  $ 23,203       $ 11,737      $ 56,099       $ 33,886

Retail:
Operating earnings                               $ 14,790       $  8,401      $ 22,446       $ 10,172
Add:
LIFO expense                                          398            426           937            440
Depreciation and amortization                      10,226          7,405        23,858         17,315
Restructuring and asset impairment charges            771            987           176          2,220
Expenses related to merger transaction and
integration                                             3             -              3             -
Non-cash stock compensation and other                 350            514           904            994

Adjusted EBITDA                                  $ 26,538       $ 17,733      $ 48,324       $ 31,141

Net Sales - Net sales for the quarter ended July 12, 2014 ("second quarter") increased $1,159.1 million, or 178.0 percent, from $651.1 million in the quarter ended July 20, 2013 ("prior year second quarter") to $1,810.2 million. Net sales for the year-to-date period ended July 12, 2014 ("year-to-date") increased $2,712.5 million, or 189.5%, from $1,431.4 million in the prior year-to-date period ended July 20, 2013 ("prior year-to-date") to $4,143.9 million. The second quarter increase in net sales was primarily due to $1.2 billion in sales generated as a result of the merger with Nash-Finch, partially offset by decreased sales due to closed stores in the Retail segment and lower sales to existing customers in the Food Distribution segment. Retail comparable store sales for the second quarter were flat. The later timing of the Easter holiday, which resulted in the post-Easter week of low volume sales moving out of the first quarter and into the second quarter accounted for an estimated 80 basis point decrease in comparable store sales in the second quarter. The increase in year-to-date net sales was primarily due to $2.7 billion in sales generated as a result of the merger with Nash-Finch, as well as a comparable store sales increase of 1.3 percent and net new business gains in the food distribution segment. The increase in year-to-date net sales was partially offset by decreased sales due to closed stores and lower sales to existing customers in the Food Distribution segment.

Net sales for the second quarter and the year-to-date period in our Military segment were $502.4 million and $1,186.6 million, respectively.


Net sales for the second quarter in our Food Distribution segment, after intercompany eliminations, increased $496.0 million, or 182.4 percent, from $271.9 million in the prior year second quarter to $767.9 million. Net sales for the current year-to-date period in our Food Distribution segment, after intercompany eliminations, increased $1,130.3 million, or 185.7%, from $608.6 million in the prior year-to-date period to $1,738.9 million. The second quarter increase was primarily due to additional sales of $501.4 million resulting from the merger, partially offset by the negative effect of the change in timing of the Easter holiday and the reduction to the Supplemental Nutrition Assistance Program (SNAP). The year-to-date increase was primarily due to additional sales of $1,121.1 million resulting from the merger, net new business of $8.1 million and a net increase in pharmacy sales of $4.3 million, partially offset by lower sales to existing customers.

Net sales for the second quarter in our Retail segment increased $160.6 million, or 42.4 percent, from $379.2 million in the prior year second quarter to $539.8 million. Net sales for the year-to-date period increased $395.6 million, or 48.1%, from $822.8 million in the prior year-to-date period to $1,218.4 million. The second quarter increase was primarily due to sales of $184.9 million resulting from the merger, partially offset by a decrease in sales of $17.1 million due to store closures. Retail comparable store sales for the second quarter were flat to the prior year, primarily due to the later timing of Easter, which accounted for approximately 80 basis points, and the impact of the cutbacks in SNAP benefits. The year-to-date increase was primarily due to sales of $426.3 million resulting from the merger and a comparable store sales increase of 1.3 percent, or $8.8 million, partially offset by a decrease in sales of $33.2 million due to store closures and lower fuel sales $5.8 million. 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.

Gross Profit - Gross profit represents net sales less cost of sales, which include purchase costs, freight, physical inventory adjustments, markdowns 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 profit for the second quarter increased $132.0 million, or 98.9 percent, from $133.4 million in the prior year second quarter to $265.4 million. As a percent of net sales, gross profit for the second quarter decreased to 14.7 percent from 20.5 percent. Gross profit for the year-to-date period increased $306.8 million, or 100.5%, from $305.1 million in the prior year-to-date period to $611.9 million. As a percent of net sales, gross profit for the year-to-date period decreased to 14.8% from 21.3%. The second quarter and year-to-date gross profit rate decreases were principally driven by sales mix due to the merger with Nash-Finch and the impact of low inflation. Excluding the gross profit resulting from the merger with Nash-Finch, year-to-date gross profit decreased $10.4 million, or 3.4 percent, and as a rate to sales decreased to 20.9 percent from 21.3 percent.

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, including merger transaction and integration expenses, for the second quarter increased $114.4 million, or 97.6 percent, from $117.3 million in the prior year second quarter to $231.7 million. As a percent of net sales, SG&A expenses were 12.8 percent for the second quarter compared to 18.0 percent in the prior year second quarter. SG&A expenses, including the merger transaction and integration expenses, for the year-to-date period increased $283.8 million, or 106.4%, from $266.7 million in the prior year-to-date period to $550.5 million. As a percent of net sales, SG&A expenses were 13.4% for the current year-to-date period compared to 18.6% in the prior year-to-date period. The dollar increase in the second quarter was due primarily to $119.1 million in expenses related to the Nash-Finch operations, partially offset by decreased store labor and SG&A expenses of $4.4 million due to store closures. The decrease as a percent of sales was primarily due to the merger with Nash-Finch and related synergies. Excluding the expenses related to Nash-Finch operations and the expenses related to the merger transaction and integration, SG&A expenses for the second quarter would have decreased $4.9 million, or 4.2 percent, from $114.9 million in the prior year second quarter to $110.0 million primarily due to store closures. As a

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