SpartanNash Company (NASDAQ:SPTN) Q1 2020 Results Earnings Conference Call May 28, 2020 8:00 AM ET

Company Participants

Katie Turner – Investor Relations, ICR, Inc.

Dennis Eidson – Interim President and Chief Executive Officer

Mark Shamber – Executive Vice President and Chief Financial Officer

Conference Call Participants

Caitlin Howard – Barclays Capital

Christopher Mandeville – Jefferies

Kelly Bania – BMO Capital Markets

Charles Cerankosky – Northcoast Research


Good day and welcome to the SpartanNash Company First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Katie Turner. Please go ahead.

Katie Turner

Good morning and welcome to the SpartanNash Company first quarter fiscal year 2020 earnings conference call. On the call today from the company are Dennis Eidson, Chairman and Interim President and Chief Executive Officer, and Mark Shamber, Executive Vice President and Chief Financial Officer.

By now, everyone should have access to the earnings release, which was issued yesterday at approximately 4:30 PM Eastern Time. For a copy of the earnings release, please visit SpartanNash’s website at This call is being recorded and a replay will be available on the company’s website for approximately 10 days.

Before we begin, we’d like to remind everyone that comments made by management during today’s call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties, actual results may differ materially from the results discussed in these forward-looking statements.

Internal and external factors that may cause such differences include, among others, disruption associated with the COVID-19 pandemic; competitive pressures amongst food, retail and distribution companies; the uncertainties inherent in implementing strategic plans and integrating operations; and general economic and market conditions.

Additional information about the risk factors and uncertainties associated with SpartanNash’s forward-looking statements can be found in the company’s earnings release, most recent annual report on Form 10-K and the company’s other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP measures and comparable period measures to provide investors with useful information about the company’s financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by Regulation G is included in the company’s earnings release, which was issued yesterday.

It is now my pleasure to turn the call over to Dennis.

Dennis Eidson

Thanks, Katie. Good morning, everyone. And we appreciate you joining us today to discuss our first quarter financial results.

Before I get into our quarterly results, I’d like to comment on the COVID-19 pandemic and the actions we’re taking across our entire operations. Mark will then provide some additional detail on our first quarter financials and review our revised 2020 outlook. And finally, we’ll open up the call and take some questions.

First and foremost, our thoughts are with those affected by this virus. As the situation has continued to rapidly evolve, our first priority has been ensuring the wellbeing and safety of our team of associates, particularly those on the front lines driving our business forward every day, as well as our customers.

Our leadership team quickly and effectively collaborated, and I’m proud to say we took decisive action and continue to execute. We implemented heightened safety measures on our retail stores and distribution centers to protect against the spread of COVID-19 amongst our associates, customers and communities.

The safety and sanitation efforts implemented during the pandemic include the installation of plastic shields at key points of customer interaction within retail stores, as well as within our DCs and the purchase of face masks and gloves for all frontline associates working at our retail stores and distribution centers, as well as the promotion of social distancing through signs and floor markings throughout our retail stores.

Our team is also setting aside time twice per week for store guests who are at a higher risk of severe illness, including seniors, pregnant women, and those with compromised immune systems. We also increased Fast Lane staffing levels to accommodate the significant increase in the number of customers shopping online and are offering free same day home delivery of prescription medications from our pharmacies.

We proactively provided additional resources to help associates during this health crisis through an increase in their compensation. This includes weekly appreciation bonuses and an additional $2 per hour worked during times of significantly increased demand to more than 16,000 part and full time frontline associates.

We also doubled the existing associate discount in our company-owned retail stores to 20% off and extended emergency leave benefits to ensure associates who are sick are able to remain off work until they have fully recovered. As you would expect, we incurred both direct and indirect costs solely associated with these enhanced safety measures and support resources.

Our ability to respond to the incremental consumer demand during the first quarter enabled us to significantly exceed our financial expectations. We are pleased to be in a position to raise our annual outlook, reflecting our strong first quarter execution in a challenging and uncertain environment, as well as due to the realization of the benefits from many of our initiatives over the past year.

These initiatives include strong organic sales growth within the Food Distribution segment prior to and separate from the lift from COVID-19; exiting our underperforming food processing businesses; improving working capital levels by over $140 million from the same period a year ago; taking action to right-size our organization through human resource initiatives, which were executed during the first quarter; and continued improvement in our supply chain operational execution.

Our new guidance considers our results to date and expectations for our second quarter performance, which includes the anticipated impacts of the ongoing COVID-19 pandemic.

Going forward, we remain committed to our long-term strategy as we build upon SpartanNash’s existing foundation and increasingly position the company to sustain profitable growth.

Focusing on our first quarter financial results in a little more detail. For the quarter, consolidated net sales increased over 12% to $2.86 billion, representing the 16th consecutive quarter of growth for our company. This result exceeded our expectations as we benefited from higher sales across all segments from the COVID-19-related demand, as well as strong growth from existing customers in the Food Distribution segment.

Retail comp store sales of 15.6% were positive for the third consecutive quarter, representing a significant acceleration from recent trends, driven by the COVID-19 pandemic.

As a reminder, our first quarter consisted of 16 weeks ended April 18. Our company experienced the impacts of COVID-19 across all three of our segments, beginning in the last six weeks of the quarter. There was a meaningful change in customer behavior in response to the pandemic as volumes increased due to retail consumer stacking up, followed by a shift to more food at consumption in connection with federal guidelines and state mandates and stay-at-home orders.

Within the Food Distribution segment, sales comparisons to the prior year increased 9.5% for the first 10 weeks of the quarter as growth with existing customers accelerated. In the last six weeks of the quarter, we experienced a significant shift to food at home in connection with the state mandated business shutdowns including restaurants, as well as stay-at-home orders. During this time, our sales trended higher than prior year by 29.7% and ended the quarter ahead of the prior year by 17.1%.

Our supply chain worked tirelessly to support the surge in volume, partnering with our suppliers and other distributors to maximize our capacity and most efficiently deliver product to our stores. I’m proud of their hard work and innovation.

Turning to the Retail segment. Through the first 10 weeks of the quarter, our comp store sales were on track to achieve our first quarter guidance of approximately flat and then accelerated to an increase of 42% for the last six weeks of the quarter, ending the quarter at 15.6%.

Our position in the marketplace as a local, convenient and trusted grocer helped us to gain market share during the pandemic. In our largest market, our proactive approach allowed us to be first in market to install plexiglass face guards, implement one way aisles, launch free pharmacy delivery and actually mandate masks for associates and customers.

As consumer behavior continues to evolve in this uncertain environment, we believe our strong ecommerce platform, data insights and understanding of consumer preferences, as well as the systems and infrastructure we have in place will position us well to capitalize on these changes in our industry.

Looking at the Military segment, sales decreased 3.2% for the first 10 weeks of the quarter compared to the prior year. In the last six weeks of the quarter, sales trended higher than the prior year by 18.1%, ended the quarter ahead of the prior year by 4.9%.

We recognize that, in many remote military communities, we are the sole grocery distributor, and our military heroes are relying on us. Our supply chain team is in constant contact with our CPG suppliers and holds daily telephonic meetings with our military customers to ensure that we’re able to reach to the increased demand.

We also continue to utilize innovative shipping solutions for troops stationed outside the continental United States, including airlifting products and revising naval shipping lanes into select European countries with US military bases.

We’re also taking action in this time of great need to care for our communities through a number of charitable initiatives. Through the SpartanNash Foundation, we recently made a grant to 19 Feeding America affiliated food banks. We’ve continued to support our local food bank charities through product donations, and have also donated N95 masks to local hospitals.

We are partnering with local restaurants to sell their food in our stores, while they are unable to open their dining rooms. These actions support our core value of supporting the communities to which we belong, especially in these uncertain times.

I’d also like to update you on a few of the other actions we’ve taken during the first quarter, which were unrelated to the COVID-19 pandemic and executed in the first 10 weeks of the quarter.

First, we undertook human resource initiatives to promote long-term cost savings. These initiatives included a voluntary early retirement program for qualified associates, as well as a reduction in force to right-size our operations and focus our efforts in the areas of the most operational and administrative demands.

Second, due to the loss of a major customer, we made the decision to exit the Caito Fresh Cut business and began to wind down those operations in March and completed production by the end of the quarter. While this was a difficult decision, particularly in light of our many associates who’ve been affected, we did not see a path to profitable operations within this area of our business.

We continue to value the legacy Caito distribution operations as a key component of our fresh produce distribution efforts. We expect both of these actions to support our overall strategies to realize long-term profitable growth.

And finally, I’d like to mention that the Board of Directors’ process to identify the next chief executive officer remains ongoing, and we made progress in the search over the over the course of the last quarter.

In summary, our first quarter operational and financial results demonstrate the strength and depth of our team. I’d like to thank our associates around the country for their collaboration, which led to achieving these results.

We’re pleased to have exceeded our expectations for the quarter and remain committed to associate and customer safety, as well as supporting our supply chain to respond to incremental demand.

I’ll now turn the call over to Mark for the financial review.

Mark Shamber

Thanks, Dennis. And I’d like to welcome everyone joining us on this morning’s conference call.

Net sales for the first quarter of fiscal 2020 increased to $2.86 billion, an increase of $314 million or 12.4% over 2019 first quarter sales of $2.54 billion.

Adjusted EPS for the first quarter of fiscal 2020 came in at $0.67 per diluted share compared to adjusted EPS of $0.24 per diluted share in fiscal 2019 first quarter, an increase of over 179%.

While it is difficult to identify all the impacts of COVID-19 on the quarter with a great deal of specificity, we have attempted to do so based on the trends we experienced prior to the dramatic surge in sales.

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As Dennis mentioned, that split falls roughly between the end of the 10th and the start of the 11th week of our first Quarter, or more specifically the week beginning Sunday, March 8, 2020. Accordingly, as we reference specific metrics from a pre-COVID standpoint, that is where we’re making the split for SpartanNash’s purposes.

On a GAAP basis, the company had earnings of $0.43 per diluted share in the quarter, an increase of 105% over the $0.21 per share of earnings generated in the first quarter of fiscal 2019.

Shifting to our business segments, net sales in Food Distribution increased by $200 million or 17.1% to $1.37 billion in the first quarter of fiscal 2020. Inflation accelerated to 2.05% in Food Distribution during the quarter, an increase of 66 basis points from Q4 and an increase of 123 basis points compared to the first quarter of fiscal 2019.

Reported operating earnings for Food Distribution in the first quarter totaled $11.4 million. Improvements largely driven by higher COVID sales volumes with existing customers were more than offset by cost and asset impairments associated with the decision to exit our fresh cut business in Caito following the loss of a major customer and the HR initiatives discussed previously.

Adjusted operating income totaled $26.3 million in the quarter versus the prior year’s first quarter adjusted operating income of $21.3 million.

First quarter adjusted operating earnings in the current year exclude $14.9 million of expenses, driven largely by the exit of our fresh cut business as detailed in table three under the Food Distribution segment in yesterday’s press release.

Fiscal 2019 first quarter adjusted operating earnings exclude the $3.2 million of income associated with a pretax gain net of various expenses which are also detailed in table three of the press release.

Military net sales of $704 million in the first quarter increased by $33 million or 4.9% compared to prior-year revenues of $671 million. Incremental volume was driven by higher comparable sales at DeCA locations in connection with COVID.

Military distribution reported an operating loss of $2 million in the first quarter compared to a loss of $1.6 million in the first quarter of fiscal 2019, primarily due to higher supply chain expenses and increased incentive compensation, partially offset by improved margin rates.

On an adjusted basis, Military’s operating loss was $1.4 million for the first quarter of fiscal 2020 compared to a loss of $0.8 million in 2019’s first quarter due to the same reason.

Finally, our Retail net sales came in at $783 million for the quarter compared to $702 million in the first quarter last year, an increase of 11.5% or $81 million.

Our comparable store sales improved to 16.6% for the first quarter of fiscal 2020 compared to comp sales of 0.5% for the fourth quarter of fiscal 2019. Comparable store sales benefited from the impact of paycheck downs associated with COVID-19 during the last six weeks of the fiscal quarter, coming in at 42%, as Dennis mentioned.

These results reflect increases of over 300% in our e-commerce sales in the last six weeks of the quarter, and e-commerce sales have increased by over 400% for the same period in the prior year through the first five weeks of Q2.

Similarly, our private brand product sales increased by over 60% in Q1 over the last six weeks of the quarter, and are up approximately 39% through the first five weeks of Q2 over the same period in fiscal 2019.

First quarter adjusted operating earnings in Retail came in at $15.3 million compared to $2.7 million in 2019’s first quarter. Retail reported GAAP income of $12.6 million for the first quarter of 2020 compared to a loss of $0.8 million in the prior year’s first quarter.

The increase was driven primarily by the COVID-related sales during the quarter, while we also benefited from lower-than-expected health care expenses, partially offset by higher DIR fees paid to pharmacy benefit managers and significantly higher incentive compensation driven by the strong comparable sales and increased profitability.

While not as apparent due to our comparable sales growth, we continue to see pressure from the increase in DIR fees in the pharmacy as pharmacy margins were $2.4 million lower than the first quarter of 2019 and below our expectations. As we progress through the remainder of fiscal 2020, we once again expect pharmacy DIR fees to represent a headwind as the PBMs continue to increase their fees on both a rate and dollar basis.

Interest expense decreased $4.2 million in the first quarter of fiscal 2020 to $7.6 million due to lower average debt levels associated with reductions in working capital and lower interest rates compared to the same period last year, with more than 80% of the year-over-year reduction having no connection to the steps taken by the Federal Reserve during the first quarter of fiscal 2020.

In the first quarter of 2020, we generated consolidated operating cash flows of $129.3 million compared to $13.5 million during the prior-year period, an increase of over $115 million.

The year-over-year improvement was driven by a combination of the company’s efforts to reduce working capital and improve return on capital, the unplanned reductions in working capital associated with the COVID surge, and the shift in timing of the Easter holiday, shifting a week earlier in the quarter with the corresponding impact on increased collections of accounts receivable before quarter end.

Additionally, we generated positive free cash of $111 million in the first quarter fiscal 2020 versus generating negative free cash of $2 million in the prior year’s first quarter.

During 2020 first quarter, we declared and returned $7 million in the form of cash dividends. We also repurchased shares at an average price of $11.62 for a total of $10 million in the quarter.

Our total net long-term debt decreased by $88.4 million to end the quarter at $576 million compared to $664.4 million at the end of fiscal 2019 as we paid down over $91 million of debt during the quarter.

Our net long-term debt to adjusted EBITDA ratio decreased to 2.9 to 1 in the first quarter from 3.7 to 1 at the end of fiscal 2019, driven by the combination of our strong debt paid down during the quarter, as well as more than a 35% increase in adjusted EBITDA to $74 million.

We expect to continue to make progress on our leverage and that we will be, by the end of the fiscal year, closer to our target of 2.5 times before the impact of seasonal variances.

As covered in our press release last evening, we are revising our fiscal 2020 earnings guidance, while we are withdrawing our initial sales guidance issued on February 19 2020 due to the uncertainty associated with estimating sales, although we expect to materially exceed that initial sales guidance.

For fiscal year 2020, we now anticipate adjusted earnings per share from continuing operations of approximately $1.85 to $2 compared to our prior projection of $1.12 to $1.20. Reported earnings per share from continuing operations are expected to range from $1.48 to $1.81 compared to our prior projection of $0.93 to $1.04.

For the second quarter of fiscal 2020, adjusted earnings per share are expected to increase 70% to 100% over fiscal 2019 second quarter adjusted earnings per share of $0.33.

The company’s updated outlook for the second half of the year does not include any adjustment for future impacts from the COVID-19 pandemic. However, we currently estimate that any incremental costs related to COVID-19 will be more than offset by the improved food at home sales trend.

We now expect fiscal 2020 adjusted EBITDA to be in the range of $205 million to $215 million compared to our prior guidance of $180 million to $190 million, consistent with our projected increases in operating earnings.

Our guidance continues to reflect capital and IT capital expenditures in the range of $80 million to $90 million for fiscal year 2020.

Depreciation and amortization are now expected to be $88 million to $92 million for the fiscal year. Interest expense is now expected to range from $19.5 million to $21 million in fiscal 2020. And the company’s guidance reflects an adjusted effective tax rate of 23% to 24.5% and a reported effective tax rate of 14% to 18%.

At this point, I’d like to turn the call back over to Dennis.

Dennis Eidson

Thanks, Mark. So, in closing, we’re pleased with our start of the year and we’ll continue to focus on our execution to respond to challenges from the COVID-19 pandemic, with our priority continuing to be the wellbeing and safety of our associates and customers. We remain confident in the strength of our platform as we look to achieve these objectives.

And with that, I’d like to turn the call back over to Sarah and open it up for any questions.

Question-and-Answer Session


Thank you. [Operator Instructions]. Our first question will come from Karen Short with Barclays. Please go ahead.

Caitlin Howard

Hi, good morning. This is Kate Howard on for Karen. Thanks for taking our question. First, I was hoping you could help us parse through the margin flow through puts and takes at Retail and help us think about how much is related to pure leverage on sales, any gas margin benefit, any shrink benefit, reduced promotional cadence, and so forth. And then, any directional commentary would be helpful. And related to that, how to think about modeling out the second quarter and what aspects are sticky versus not?

Dennis Eidson

Yeah, that’s a lot to unpack in that question, Kate. I guess, I’ll share some information. I think some of the items that you’re specifically asking about, we don’t typically provide in. So, I’m not sure even in this circumstance that we would get to that level of detail. But maybe breaking it down from top of the P&L to the bottom and letting it kind of flow through, I think as we look at the top line, even though we didn’t give sales guidance through the first five weeks of the quarter, we were running in the low 20s from a retail comp. I think we’re just under 23% through the first five weeks. And so, I think, directionally, that should give you an idea of where things currently are. And again, trying to predict where they’ll be and how that trend will move is difficult. But that’s where they are through the first five weeks.

On the margin side, again, we don’t generally get into a lot of the different details that you asked, and so I’m not going to try to break those out now. However, I would say that, in the first quarter, our estimate across the organization, again, not by business unit, but our estimates across the organization are that we probably had $6 million to $8 million associated with COVID costs and over the six weeks at the end of the first quarter, we would expect a similar number for the entire second quarter. So, roughly the same number over twice the number of weeks as we had in the first period.

And so, I think on the flow through, I think that it’s – the ratio that we’ve had for retail in the first quarter is a reasonable rate to continue to use, barring any changes sort of in the race and sort of how the breakdown is of what we’re selling, but I would say that in general, that’s a relatively good margin to use going forward.

And I think there was probably another couple of things you had asked beyond that, but I think that answers most of your questions for Retail.

Caitlin Howard

Yeah, that’s very helpful for Retail. I guess my second question is just on SNAP benefits. So, we know that there’s incremental dollars out there. And can you give us any color of what you saw maybe in the first quarter or what you’re seeing thus far in 2Q and if there’s any impact to Spartan?

Mark Shamber

EBT sales have dramatically changed for us going – the first 10 weeks of the quarter, our EBT sales were actually running negative, about 16% actually. And no surprise, the economy here has been very, very robust. So, less food stamps, we’re getting less.

If you look at the post – the last six weeks of the quarter, food stamps were up 45%. Remember that ended April 18. But if you look at the more current Q2 five weeks, our food stamps have gone up 113%. So, we’ve seen a significant increase in food stamp redemption into this early part of the second quarter.

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Our next question will come from Christopher Mandeville with Jefferies. Please go ahead.

Christopher Mandeville

Good morning, guys. Dennis, I guess I was curious if you could speak to just some of those signs of distribution strength that you’re realizing pre-COVID. Any additional color you can offer there with respect to where those gains are coming from? And maybe do you have any visibility on the pipeline going forward? Or, for that matter, is the demand that you’re realizing from existing accounts today potentially too much from a capacity standpoint to onboard good business?

Dennis Eidson

Multiple questions there. We’ve guided the last quarter that we thought Food Distribution would be mid-single digits positive. And so, we exceeded that a bit at 9.5% for the first 10 weeks. We had a strong start to the year. It is primarily through existing distribution customers. Obviously, there’s always some puts and takes and we did onboard some new business.

I would say to you that when you add on the kind of volume we did to the supply chain, nearly 30% lift in those last six weeks, it has been and continues to be a challenge for us to get the efficiencies out of the system. So, sometimes it can be too much of a good thing, but our supply chain team has just done a remarkable job. We were really stressed there a lot by the vendor community’s inability to keep up and we’re getting trucks that are half full and sort of full because of allocation of product, but we think this is something we can work through. And we think there’s a big tail wind here as well.

Christopher Mandeville

And you think on the supply chain front, at least from the vendors’ perspective, we’ve been hearing anecdotal evidence of how they’re kind of streamlining their own processes, really focusing in on select high velocity SKUs to the detriment of some tail-end SKUs, if you will. Did you see that play through your distribution and how do you envision that moving forward?

Dennis Eidson

Yeah, we absolutely see that. We’ve actually got north of 2,000 SKUs that are either strict allocation and/or they’ve just ceased producing in order to be more efficient in their systems. So, we’re feeling that. And I think, going forward, like so much of what’s happened here with the pandemic, the change in behavior, I suspect we’re going to have manufacturers reducing unproductive SKUs from their portfolio. That’s just a Dennis guess. It’s not like we’ve seen material on that, but I think it’s a logical kind of extension of what’s going on so far.

Christopher Mandeville

Got it. Okay. And then, the final one for me before I just hop back into queue is – so, Mark, now that you guys are down to 2.9 times leverage and expect to be around 2.5 by year end, I suppose I can do some math on what that requires to get there. But in terms of any additional free cash flow that you’ll generate throughout the remainder of the year, how should we be thinking about that being put to use between the likes of M&A, dividends and buyback?

And just to kind of add one other wrinkle to the question. How does the M&A market look today?

Dennis Eidson

On the leverage, the 3.7 to 2.9, we’re delighted with that. Now, I think Mark’s comments, we’ll get closer to the 2.5 times that we’ve historically talked about being our sweet spot. So, we think we’re going to continue to make progress. Obviously, when you’re levered up, 3.7 times, you think about M&A a little bit differently from your balance sheet. I would say, as it relates to M&A, we’ve been pretty consistently discussing our being opportunistic around the retail side for M&A. Martin’s was a great example, an existing customer, adjacent marketplace, made good sense. I think we do retail like that. And then, on the distribution side, I think, obviously, always looking for the right opportunity to add scale and to expand our network to allow us to be even more efficient as we continue to grow the business. Kind of lost on all of this is the fact that – I mentioned in my remarks, but at 16 consecutive quarters, we’ve grown the top line and that’s – we celebrate that here. And I think it’s a good kind of omen for things to come.

Christopher Mandeville

Got it. I just want to sneak one more in there. On the Retail front, was there any real divergence in terms of performance regionally between the likes of, call it, core Michigan versus the Dakotas versus Nebraska and how did that play out in terms of market share gains?

Dennis Eidson

Yeah, it’s a good question. We got it all over. And I would say to you – and I’ve been hanging around this space really my whole life. I’ve never seen the kind of market share gains that we picked up in my career. They were very meaningful. And these are AC Nielsen numbers. And I would tell you, they were slightly better in Michigan than they were in Indiana and Nebraska, but they were all very significant.

Christopher Mandeville

All right. I’ll leave it there. Thanks, guys.

Dennis Eidson

Thanks, Chris.


Our next question comes from Kelly Bania with BMO Capital. Please go ahead.

Kelly Bania

Hi, good morning. Thanks for taking my questions and congrats on a great quarter here. Wondering if you could talk about just inflation. We, obviously, saw the data for the industry in April, which really accelerated. Wondering if you could just help us understand what you’re seeing at wholesale and retail and how that’s turning into May. And just the impact of maybe vendors pulling back on promotions and mix and all the factors driving kind of price and mix across the board here.

Mark Shamber

So, maybe I’ll tackle the inflation part and then I’ll let Dennis and I together tackle the promotion side of it. I would say on the inflation front, we referenced the numbers for the quarter. And so, when we look at where we’ve gone, as of late, on the retail side, we finished the quarter and we were at about 1.76%. So, up 43 basis points from the fourth quarter. Compared to the prior year, it was more than double, right? Last year’s first quarter, about almost 10 times. Last year’s first quarter was 18 bps and 176 bps. You’re up 158 bps.

In period five, we saw retail take a little bit of a decline in the inflation and went to about 1.62%. And it was a little bit here and there. There wasn’t anything from a broad category standpoint. Although as I now talking about Food Distribution, I would say that the inflation rate in meat doubled in retail from the first quarter to period five. The challenge is that when we look at meat from a Food Distribution standpoint, it nearly tripled from the first quarter. So, the first quarter, we are running probably about a little bit north of 6.25% for meat. And for the fifth period, due to a lot of the plant closures and some of the shortages, we saw inflation of almost 17% within the meat category. And so, for distribution, we saw a significant uptick where we’re at just under 5% for inflation. We think that the meat inflation that we’re seeing will ease off and come back over the next few periods. But certainly for period five, there was that additional pressure and, obviously, that’s eating into the margins a little bit on the retail side.

Dennis Eidson

We’re going to digest that meat margin impact at Retail. We’ve been eating that early in the second quarter of 17%. We can’t get that at shelf. We had a little bit of a similar problem in Q2 with dairy. Dairy was the most inflationary category in Q2 at wholesale. I think eggs went from $0.75 to $3 a dozen. You just can’t keep up. So, we had some contraction in our dairy margins in Q1. And that just happens.

We’re seeing a little less promotional activity, and that’s having an impact throughout our system through the distribution segment as well as the retail segment. I think the team has done a great job managing through that and how it impacts our P&L. We’ve continued to stay promotional, not all of our competitors. And our largest competitor here in Michigan happened to pull their print ad. We stayed with the print ad and have continued through the whole pandemic. And although we’ve scaled it back a few pages, we think being promotional is important. And I think that may be another reason that we gained some share, along with being first to market on some of those things that I think consumers were happy to see that we were proactive.

So, a lot of moving parts to the promotional piece, though, Kelly.

Kelly Bania

Okay, thank you. And you talked about quarter-to-date, I think, around 23% at Retail. Can you talk about distribution? And is that following a similar pattern? Or just maybe help us think about where that’s trending?

Dennis Eidson

Yeah. So, through the first five weeks of Q2, we’re just under 23% positive comps at Retail. And again, it’s been driven by the basket size, continues to be over 45% positive. And although, we were 30% – 29.7% in distribution, we’re still running very strong in distribution. Not quite 29.7%, but pretty close to it. We’re north of the number that we reported just now on the retail in Q2. So, continues to be strong there as well.

Mark Shamber

And I would just highlight that that’s the Food Distribution side. The Military side has eased off to a greater extent, and a lot of that’s driven by access to the bases and individual base commanders have the authority to limit access to the commissaries, which are on the bases. And we think that that is a contributing factor as well as some of the longer distances that folks have to travel from a shelter in place standpoint that’s impacted on the Military side. So, the Military has trended below those numbers.

Kelly Bania

Okay, that’s helpful. And, Mark, I think you mentioned – I think you said $6 million to $8 million in incremental COVID costs on the Retail side.

Mark Shamber

No, that was the whole company. We didn’t break out the individual business units.

Kelly Bania

Okay. But I guess expecting a similar dollar amount for Q2, but across the full quarter. So, maybe can you just think about the puts and there and when we should expect kind of the incremental pay and appreciation bonus, et cetera, to kind of tail off and how it affects the second quarter kind of cost outlook?

Mark Shamber

Yeah, Kelly. And that’s part of the reason we kind of gave a range because we’re not really sure as to when some of those different things will drop off. We’ve changed our programs a number of times since COVID kind of kicked in, and we continue to, I guess, change from a weekly standpoint some of the different incentives and frontline pay that we provide to the associates. And so, it’s a little bit tough to say when it’s going to discontinue or how it’s going to play out over the remainder of the week.

But one thing that I would share that we have been doing is that, as an example, some of the costs that we’re incurring right now that we’ve utilized outside services, we plan to bring inhouse from a sanitization standpoint and have purchased the equipment or have the equipment on order. And so, we think as we get later into the year that we’ll be bringing some of those costs down significantly because the procurement of equipment and doing it on a weekly basis internally, maybe 75% to 80% less than paying a third party to do it right now.

Kelly Bania

Okay, that’s helpful. And I guess just bigger picture, longer-term question as we think about exiting the fresh cut business, and years ago, when that was started, that was a faster growing category that was going to help kind of get some new customers. Where do you think Spartan can be longer term with respect to those categories? Are you going to be out of those kind of fresh cut categories longer term? Is there an opportunity to do that in a different way? Or just maybe strategically how you’re thinking about that segment of the business?

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Dennis Eidson

Yeah, that’s a good question. And I think the fresh cut opportunity still exists. I think there are a couple ways to potentially harness it. One is, in some of our stores, we’re actually – and we’ve got a program we call Fresh Divide where we actually have a process to do it in-store in a really quite robust way where a consumer can bring out the fruit she wants diced or the vegetables and we’ll do it custom. That’s one approach.

I think the second approach could be where there may be smaller facilities attached to a distribution center that could potentially service a tighter geography. The difficulty of shipping that processed product over long distances with limited shelf life certainly is a challenge. So, we’re going to study that a bit more as we look into the future.

Kelly Bania

Thank you.


Our next question comes from Chuck Cerankosky with Northcoast Research. Please go ahead.

Charles Cerankosky

Good morning, everyone. In looking at the strong business trends so far to date, can you talk about what it means for capital spending? Not so much for this year, but to the degree it does, let’s discuss it. But I’m thinking about next year, Dennis and Mark, what kind of wear and tear are you seeing on the truck fleet? Where you need to add capacity for things you think are sustainable gains in market share to the extent that you might have to build additional warehouse capacity, et cetera?

Dennis Eidson

Yeah. Chuck, I think from our standpoint, as it relates to rolling stock and handling equipment, we’ve got rotational programs in place on the rolling stock that we rotate the fleet every number – I think it’s five years, six years, somewhere, depending on the tractors, and the trailers obviously have a slightly longer life. So, I don’t think that that really changes anything there. If anything, during some of the surge aspects, we may have leased from a month to month standpoint some additional equipment. And then, to the extent it becomes permanent, we’ll go out and procure that additional capital accordingly from that standpoint, so that when we know what is the ongoing rate, we’ll adjust from that perspective. And if anything, it maybe accelerates part of the refresh that we’re doing on some of the NHE.

Charles Cerankosky

How about warehouse capacity?

Dennis Eidson

Well, I think on the warehouse capacity, it’s something we have to continue to look at. Part of the success that we’ve had over the last year and really leading up to the surge in reducing the amount of inventory that we had in the DCs and the improvement in working capital gives you additional capacity within those DCs, whether it’s to carry more reserve stock and/or bring in additional SKUs, if you exit from an underperforming SKU perspective. But it’s something – certainly, if the rates should continue, then we’ll have to put it into focus, so that we ensure that we can continue with these elevated levels. The question is, if you asked me where we’ll be at the end of the year, I don’t think I could answer that. And so, there’s a balance of being ready to build for the future, but not building so much that you’re not going to use it for the next five years.

Charles Cerankosky

Got it. Thanks very much. Good luck as you deal with this uncertain, but strong sales outlook.

Dennis Eidson

Thanks, Chuck.


Our next question comes from Scott Munchkin [ph] with Farside Capital [ph]. Please go ahead.

Unidentified Participant

Hey, guys. Thanks for taking my questions. So, these are really more kind of industry structural questions, and they’re kind of little bit tied together. So, omnichannel, maybe I missed it, but I don’t know if you guys gave any numbers around that. So, I’d love to understand that.

And then, I also wanted to get your thoughts on – we had some good survey data in our consumer surveys, which show omnichannels really coming of age. And I wanted to see what you guys think where we settle out omnichannel in the next couple of years.

And then, the other structural question is, the small and medium-sized grocers seem to have really benefited here. Do you think that is something that could continue? Or how are you thinking about those customers of your distribution and how they can handle kind of the new environment vis-à-vis omnichannel, but just kind of a whole new world. Thanks.

Dennis Eidson

Yeah. Let me take a whack at that and Mark can embellish as he sees fit. So, our e-commerce numbers were really very, very encouraging. So, if you go back pre-COVID, the 10 weeks to start the year – let me back up a bit. We have 84 of our 155 locations that have an e-commerce solution. I don’t know the exact number, but it’s probably 70% of volume. I’m not sure exactly that number, but it’s the bigger stores. Some of these smaller rural towns, one-store towns, we don’t have the option there, but we were doing 2.2% of the volume in those stores in our e-commerce platform. And then, when we get to the six weeks of COVID where it hit, that went up to 5% of the volume in those stores. And through the first five weeks of Q2, we’re just short 7% of the volume being done on our e-commerce platform.

And we do a – we call it OSAT, overall satisfaction, on a score of 1 to 5, 5 being the best. We had a 76% score of customers giving us a 5 on that platform despite the fact that our service level in terms of out of stocks was appreciably from the historic levels. Historically, we’ve performed our net OSAT metric in the mid-80s. And I think the team did a spectacular job working this. We kept our wait times down in terms of once the consumer got there.

Certainly, we were in a position where we were days out in some instances in some locations to get an appointment for click and collect. About 20% of the volume is delivered. About 80% is click and collect curbside. We also talked to our customers that participated and asked them how frequently they thought they may use the service or will they stop using the service, and 76% of our customers said, after the pandemic, they’re going to continue to use e-commerce, consistent to the point you just made.

I think IRI did a similar survey and their number was 84%. So, we’re feeling pretty good about that. So, I think that’s a very strong tailwind for us, and we’re going to continue to work through that. We do have loyalty data, card data. So, we know the new customers who played, and we’re obviously reaching out to them as is appropriate.

But I think that’s a strong tailwind for us. And then, I think you’re right. The smaller footprint stores seem to have benefited. I commented that in my remarks earlier, we’re that convenient, local, it feels like we got so many positive comments from customers. So, I’m going to throw in trusted, neighborhood store, right, part of your community. We took care of our associates early. We were first to do a lot of those things. And I think that all resonated. So, I do think there’s a tailwind there as well. And I also think that that impacts our distribution customer base the same way it affects our stores.

So, I think you’re right. I think there were some other things that really helped us as well. Our private brand penetration, I think Mark brought up, we were up 60% on our private brand at six weeks after COVID. We’re still running just a little short of 40% up on private brand. That’s, I think, another takeaway that we have. So, I think lots of good things potentially come out of a very serious and difficult situation that we’re all dealing with.

Unidentified Participant

My follow-up question – and thanks for that – is around, you talked about SNAP being up, what was it, 113% in the five weeks, you talked about huge private label uptake. Generally, that suggests a consumer that is very cautious around – and a consumer that is likely to get more and more interested in price. So, any thoughts you have there on just the current environment? Obviously, unemployment rate is really high. I think, in Michigan, it’s very high. So, what’s going on with the consumer, their behavior, a lot of cross currents in all of retail, but it seems those numbers would make you a little bit cautious?

Yes, I think that’s a great question. And I think part of the – what you’re saying with the food stamp redemption is there were more food stamps distributed. So, we should get a lift. Did we get an outsized lift? It appears to me – I don’t have anything quantifiable here. It appears to me that we did. The food stamp numbers as we get – government data comes out a little delayed. It appears that we did, but we got an outsized lift everywhere, as I talked about the market share. So, is it consumers taking less longer trips to go to maybe a supercenter? Potentially, it is that. How much of that is actually increased spending versus a shift in spending from the currency change from a debit card to food stamps? I don’t know.

The private brand, I think you’re right, is a bit of a harbinger. As we look at those numbers, and they were rolling off at 60%, they were stunning. Part of that as product from national CPGs was running short or being reallocated or was unavailable and we had a private label alternative. We benefited from that consumer trial on private brand.

The good news is, as we surveyed our customers about that private brand when they made that switch and they tried it, like, 90% of the customers said that they gave our private brand either a good or an excellent rating, and the intention to repurchase was strong.

So, yes, it may be talking about a little bit of stress in the consumer. It maybe is about availability. But still I think it’s a positive for us going forward.

Unidentified Participant

Thanks, guys. Appreciate it.


Our next question is a follow-up from Christopher Mandeville with Jefferies. Please go ahead.

Christopher Mandeville

Hey, guys. I just wanted to follow-up really quickly on the fuel profit contribution to the quarter after we realized pretty record fuel margins to help offset some material volume declines. So, Mark, if there’s any ability to speak to that. And then, maybe help us understand how volumes might have recovered quarter-to-date.

Mark Shamber

Yeah. I would say that, for the entire quarter, we were probably down low-double digits in gallons, probably 11%, 12% for the quarter. Dollar-wise, it’s probably little bit north of 20%, just because the price per gallon was down a fair amount. So, blended, it probably works out a little bit north of 10%. For us, we benefited a little bit on the margin overall for the quarter. Leading up to kind of the COVID surge, the margins were actually a little bit below seasonal norms. And so, while we benefited from larger margins in the last six weeks, it really only brought us back to almost a level that we would have been from our plan perspective.

As we look at where we are, I think that we’re seeing that the gallons are starting to increase. They’re still below sort of what our projections were and versus the prior year, but the differential – where we’re seeing some weeks during the COVID surge down 40% to 50%, we’re probably now back down closer to the 20% range.

Christopher Mandeville

Okay, that’s helpful. And then, just sorry, I might have missed this, but did you reference the breakdown or split between traffic and ticket for retail in the quarter?

Dennis Eidson

We didn’t. But the ticket for the quarter was up. It was almost 50%. It was 49% for the Q. I’m sorry. It was 49% for the six weeks of COVID. And for the full quarter, it was up 17%.

Christopher Mandeville

Got it. Okay. Thanks, guys.

Mark Shamber

Thanks, Chris.


This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Eidson for any closing remarks.

Dennis Eidson

Thanks, Sarah. I want to thank everybody for their participation on today’s call. We look forward to speaking with you again when we report our second quarter 2020 results. Everybody, have a great day and stay safe.


The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.