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Spartan Stores Fiscal 2007 Third-Quarter Net Earnings Increase More Than 75 Percent

Posted on: Wednesday, 31 January 2007, 18:00 CST

Spartan Stores, Inc., (Nasdaq:SPTN) today reported financial results for its 16-week third quarter ended December 30, 2006.

Third-Quarter Results

Consolidated net sales for the 16-week third quarter increased 12.7 percent to $723.5 million from $642.3 million in last year's third quarter. Net sales increased across both of the Company's business segments due primarily to the acquisition of D&W Food Center stores, comparable store sales growth of 3.2 percent aided by fuel sales, new distribution business and pharmacy sales associated with the Company's recent purchase of pharmacies located within the acquired D&W Food Center stores.

Third-quarter operating earnings increased 59.5 percent to $13.2 million from $8.2 million in the same period last year. The earnings improvement was driven primarily by sales growth, the D&W acquisition and related synergies, and continued operating efficiencies.

"We are pleased to report another quarter of solid sales growth and significantly higher earnings," stated Craig C. Sturken, Spartan Stores' Chairman, President and Chief Executive Officer. "Our third-quarter net sales, operating earnings, and net earnings are at their highest levels in many years. We experienced solid sales growth in both our retail supermarket and distribution businesses despite the unseasonably warm winter weather in our northern Michigan markets and a challenging economic environment."

Earnings from continuing operations for the third quarter were $6.1 million, an increase of 26.9 percent, compared with $4.8 million in the same period last year. Last year's third quarter included net special after-tax benefits of approximately $0.5 million.

Third-quarter net earnings increased 75.6 percent to $5.9 million, or $0.27 per diluted share, from $3.4 million, or $0.16 per diluted share, in the same period last year. The third-quarter net earnings includes a $1.4 million increase in interest expense to $3.9 million from $2.5 million in the corresponding period last year due to higher outstanding borrowings used to fund the Company's acquisitions, as well as interest rate increases. Last year's third-quarter net earnings include the previously mentioned net special after-tax benefits.

Net earnings for the quarter included a ($0.2) million, or ($0.01) per diluted share, loss from discontinued operations compared with a ($1.4) million, or ($0.06) per diluted share, loss from discontinued operations last year. Last year's discontinued operations included a $1.1 million after-tax charge for pension withdrawal liabilities arising from previously closed stores.

Third-quarter gross margin increased 100 basis points to 19.0 percent compared with 18.0 percent in last year's third quarter. The increase was due primarily to a larger concentration of higher margin retail sales as a result of the acquisition of D&W Food Centers and related market synergies, but was partially offset by higher volumes of lower margin fuel center and pharmacy sales.

Third-quarter operating expenses increased to $124.1 million, or 17.1 percent of sales, from $107.5 million, or 16.6 percent of sales in the same quarter last year. The increase in operating expenses as a percentage of sales was due primarily to the higher operating costs associated with the acquired retail operations. Last year's third-quarter operating expenses included total net special pretax charges of $0.7 million related to asset impairment and exit costs, residual professional fees associated with the Company's strategic review initiative and a contract dispute resolution, partially offset by a favorable state tax audit adjustment.

Last year's third-quarter other income and expense also includes a $1.4 million gain on the sale of real estate.

Operating Segments

Distribution Segment

Net sales in the distribution segment increased 3.2 percent to $387.0 million from $375.0 million in the same period last year. The sales increase was due to additional distribution customers and an increase in sales to existing customers, partially offset by ending relationships with two unprofitable customers totaling $6.3 million. Annual net sales to these two customers for fiscal 2006 were approximately $19 million, or less than two percent of annual distribution net sales.

Operating earnings for the segment increased 9.1 percent to $7.9 million, from $7.3 million in the same period last year due to better fixed cost absorption and efficiencies resulting from higher sales volumes, partially offset by an increase in employee compensation costs.

Retail Segment

Third-quarter retail net sales increased 25.9 percent to $336.6 million from $267.3 million in the same period last year. The sales increase was due primarily to incremental sales from the acquired retail stores and pharmacies, as well as comparable store sales growth of 3.2 percent, partially offset by the closing of two stores in the first quarter and a decline in sales at the Pharm stores. The comparable store sales growth was aided by additional fuel center sales and the closure of competitor retail stores. Excluding fuel center sales, comparable store sales increased 0.6 percent.

Retail operating earnings increased significantly to $5.2 million from $1.0 million in the same period last year. The increase in operating earnings was the result of higher sales volumes in existing stores, the D&W Food Center acquisition and related synergies and operational efficiencies. Last year's third-quarter retail operating earnings included net pretax charges of $0.6 million related to asset impairment and exit costs for closed stores and a contract resolution.

Balance Sheet

Long-term debt at December 30, 2006 (including current maturities) increased to $128.0 million from $65.7 million at March 25, 2006 as a result of borrowings and the assumption of capital leases associated with the D&W Food Centers and pharmacy acquisitions.

Year-to-date net cash provided by operating activities increased 11.3 percent to $36.9 million from $33.2 million in the corresponding period last year. Net cash provided by discontinued operations includes proceeds of $1.5 million related to the third-quarter sale of a previously closed retail store and $3.1 million year-to-date including all discontinued operations asset sales.

Year-To-Date

Consolidated net sales for the 40-week, year-to-date period rose 14.1 percent to $1.8 billion from $1.6 billion in the corresponding period last year. The net sales increase was primarily the result of incremental sales from the D&W acquisition, higher comparable store sales, incremental sales from new distribution customers and increased sales to existing customers. The increase was partially offset by the closing of two retail stores in the first quarter of fiscal 2007, the transitioned distribution business mentioned earlier and the unseasonably warm winter weather in the Company's northern Michigan region during the third quarter.

Year-to-date operating earnings improved 41.6 percent to $37.4 million from $26.4 million in the same period last year. The improvement was primarily the result of higher sales volumes, higher gross profit margins due to a greater mix of more profitable retail sales and synergies resulting from the D&W retail store acquisition. The year-to-date results include pretax charges of $4.5 million for asset impairments and exit costs from two closed retail stores and $1.1 million of previously disclosed training and start-up costs associated with the D&W acquisition. These costs were partially offset by favorable pretax insurance reserve adjustments of $1.3 million recorded in the second quarter. The year-to-date period last year included $1.9 million in pretax charges related to asset impairments and exit costs, residual advisory fees from the conclusion of the Company's strategic review process and a contract dispute resolution, partially offset by a favorable state tax audit adjustment.

Net earnings for the 40-week period increased 39.3 percent to $17.9 million from $12.9 million in the same period last year.

Outlook

"Our business strategies are producing solid financial results in spite of the unseasonably warm weather conditions and the softness in the regional economy we serve," said Mr. Sturken. "We believe our consumer focused distribution business model is amplifying our existing customers' financial performance and strengthening their competitive market position. We also believe that our strong value proposition is gaining the attention of a wider audience of prospective customers.

"In the retail segment, our consumer-centric strategy includes building fuel centers and adding in-store pharmacies, which continue to contribute significantly to our growth. We are moving forward to aggressively integrate and improve the operations at our D&W Fresh Market stores to bring them up to their performance potential and up to our internal performance standards. By fiscal year end, we expect to complete two D&W Fresh Market store remodels and begin a third. We also expect to start construction on a Family Fare replacement store that will include 60 percent more retail square feet and will be our Family Fare prototype store. In addition, we plan to continue prudently seeking available acquisition growth opportunities within our Midwest market.

"As expected, our distribution sales growth has moderated relative to the first half of fiscal 2007," continued Mr. Sturken. "Excluding the effect of the extra week of sales in this 53-week fiscal year, we expect this trend to continue in the fourth quarter as we cycle new business gained last year. However, we remain confident in our ability to attract new customers, increase sales penetration with existing customers and to capitalize on consolidation or other business opportunities arising from the current dynamics in the grocery distribution industry.

"Excluding the extra week of sales this year, in the retail division we continue to expect fourth-quarter comparable store sales growth to be in the low single digit range," said Mr. Sturken. "We expect to achieve this sales growth despite the soft regional economy and competitive retail store openings currently affecting our Pharm stores.

"We expect fourth quarter earnings to improve compared with the prior year period, despite the favorable items included in last year's fourth quarter, as gross margin rates benefit from a greater mix of higher margin retail sales and as operational efficiencies are realized from the acquisition. As a percentage of sales, we expect selling, general and administrative expense for the fourth quarter to be higher than last year due to the higher mix of retail sales and higher employee compensation costs, but the increase will be partially offset by better fixed cost absorption.

"We expect capital expenditures for fiscal 2007 to range from $31 million to $33 million, depreciation and amortization to range from $21 million to $23 million, with interest expense of approximately $13 million," concluded Mr. Sturken.

Conference Call

A telephone conference call to discuss the Company's third-quarter financial results is scheduled for 9:00 a.m. Eastern Time, Thursday, February 1, 2007. A live webcast of this conference call will be available on the Company's website, www.spartanstores.com. Simply click on "For Investors" and follow the links to the live webcast. The webcast will remain available for replay on the Company's website for approximately ten days.

About Spartan Stores

Grand Rapids, Michigan-based Spartan Stores, Inc., (Nasdaq:SPTN) is the nation's tenth largest grocery distributor with warehouse facilities in Grand Rapids and Plymouth, Michigan. The Company distributes more than 40,000 private-label and national brand products to over 350 independent grocery stores in Michigan, Indiana and Ohio. Spartan Stores also owns and operates 68 retail supermarkets and 19 deep-discount food and drug stores in Michigan and Ohio, including Family Fare Supermarkets, Glen's Markets, D&W Fresh Markets, and The Pharm.

Forward-Looking Statements

This press release contains forward-looking statements. The discussion under the heading "Outlook" is entirely forward-looking. These forward-looking statements are subject to a number of factors that could cause actual results to differ materially. Our ability to successfully realize expected benefits of new relationships, realize growth opportunities, expand our customer base, effectively integrate and achieve the expected benefits of acquired stores, anticipate and successfully respond to openings of competitors' stores, achieve expected sales and earnings, control expenses, realize efficiencies, implement plans and strategies, strengthen our customers' position and performance, identify and successfully execute on future acquisition opportunities, and continue to pay dividends is not certain and depends on many factors, not all of which are in our control. Additional information about risk factors that may cause actual performance to be inconsistent with these forward-looking statements is contained in Spartan Stores' Form 10-K Annual Report, Form 10-Q Quarter Report and other reports and filings with the Securities and Exchange Commission. Other risk factors exist and new risk factors may emerge at any time. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of future results. Spartan Stores undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date of this press release.

SPARTAN STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

(Unaudited)

Third Quarter Ended

Year-to-Date

(16 weeks)

(16 weeks)

(40 weeks)

(40 weeks)

Dec. 30,

2006

Dec. 31,

2005

Dec. 30,

2006

Dec. 31,

2005

Net sales

$

723,547 

$

642,274 

$

1,810,947 

$

1,587,135 

Cost of sales

586,320 

526,530 

1,458,245 

1,292,038 

Gross margin

137,227 

115,744 

352,702 

295,097 

Operating expenses

Selling, general and administrative

117,828 

100,773 

294,541 

252,183 

Provision for asset impairment and exit costs

- 

787 

4,464 

1,057 

Depreciation and amortization

6,246 

5,939 

16,257 

15,408 

Total operating expenses

124,074 

107,499 

315,262 

268,648 

Operating earnings

13,153 

8,245 

37,440 

26,449 

Other income and expenses

Interest expense

3,920 

2,538 

9,729 

6,070 

Other, net

(27)

(1,414)

(113)

(1,506)

Total other income and expenses

3,893 

1,124 

9,616 

4,564 

Earnings before income taxes and discontinued operations

9,260 

7,121 

27,824 

21,885 

Income taxes

3,208 

2,351 

9,706 

7,232 

Earnings from continuing operations

6,052 

4,770 

18,118 

14,653 

Loss from discontinued operations, net of taxes

(158)

(1,413)

(201)

(1,791)

Net earnings

$

5,894 

$

3,357 

$

17,917 

$

12,862 

Basic earnings (loss) per share:

Earnings from continuing operations

$

0.29 

$

0.23 

$

0.87 

$

0.71 

Loss from discontinued operations

(0.01)

(0.07)

(0.01)

(0.09)

Net earnings

$

0.28 

$

0.16 

$

0.86 

$

0.62 

Diluted earnings (loss) per share:

Earnings from continuing operations

$

0.28 

$

0.22 

$

0.85 

$

0.69 

Loss from discontinued operations

(0.01)

(0.06)

(0.01)

(0.09)

Net earnings

$

0.27 

$

0.16 

$

0.84 

$

0.60 

Weighted average number of shares outstanding:

Basic

21,014 

20,812 

20,859 

20,758 

Diluted

21,455 

21,321 

21,260 

21,330 

SPARTAN STORES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

Dec. 30,

2006

March 25,

2006

ASSETS

Current assets

Cash and cash equivalents

$

13,160 

$

7,655 

Accounts receivable, net

43,862 

45,280 

Inventories

118,145 

95,892 

Other current assets

16,564 

12,234 

Property and equipment held for sale

3,418 

6,634 

Total current assets

195,149 

167,695 

Other assets

Goodwill

142,440 

72,555 

Deferred taxes on income

- 

9,061 

Other, net

16,899 

14,108 

Total other assets

159,339 

95,724 

Property and equipment, net

141,311 

115,178 

Total assets

$

495,799 

$

378,597 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable

$

96,411 

$

90,992 

Accrued payroll and benefits

31,008 

29,423 

Other accrued expenses

21,130 

18,356 

Current portion of exit costs

8,111 

6,513 

Current maturities of long-term debt and capital lease obligations

5,216 

1,675 

Total current liabilities

161,876 

146,959 

Long-term liabilities

Other long-term liabilities

19,848 

13,402 

Exit costs

26,053 

8,804 

Long-term debt and capital lease obligations

122,822 

64,015 

Total long-term liabilities

168,723 

86,221 

Shareholders' equity

Common stock, voting, no par value; 50,000 shares authorized; 21,616 and 21,023 shares outstanding

125,468 

123,256 

Preferred stock, no par value, 10,000 shares authorized; no shares outstanding

- 

- 

Deferred stock-based compensation

- 

(2,873)

Accumulated other comprehensive loss

(276)

(276)

Retained earnings

40,008 

25,310 

Total shareholders' equity

165,200 

145,417 

Total liabilities and shareholders' equity

$

495,799 

$

378,597 

SPARTAN STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Year-to-Date

(40 weeks)

(40 weeks)

Dec. 30,

2006

Dec. 31,

2005

Net cash provided by operating activities

$

36,936 

$

33,174 

Net cash used in investing activities

(73,301)

(14,765)

Net cash provided by (used in) financing activities

41,129 

(17,540)

Net cash provided by (used in) discontinued operations

741 

(3,967)

Net increase (decrease) in cash and cash equivalents

5,505 

(3,098)

Cash and cash equivalents at beginning of period

7,655 

14,880 

Cash and cash equivalents at end of period

$

13,160 

$

11,782 

SPARTAN STORES, INC. AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL DATA

(in thousands)

(Unaudited)

Third Quarter Ended

Year-to-Date

(16 weeks)

(16 weeks)

(40 weeks)

(40 weeks)

Dec. 30,

2006

Dec. 31,

2005

Dec. 30,

2006

Dec. 31,

2005

Retail Segment:

Net Sales

$

336,551 

$

267,251 

$

866,627 

$

691,725 

Operating Earnings

$

5,241 

$

994 

$

16,169 

$

10,035 

Distribution Segment:

Net Sales

$

386,996 

$

375,023 

$

944,320 

$

895,410 

Operating Earnings

$

7,912 

$

7,251 

$

21,271 

$

16,414 

SPARTAN STORES, INC. AND SUBSIDIARIES

RECONCILIATION OF OPERATING EARNINGS TO EARNINGS BEFORE INTEREST,

TAXES, DEPRECIATION AND AMORTIZATION (A NON-GAAP FINANCIAL MEASURE)

(in thousands)

(unaudited)

Third Quarter Ended

Year-to-Date

(16 weeks)

(40 weeks)

Dec. 30,

2006

Dec. 31,

2005

Dec. 30,

2006

Dec. 31,

2005

Retail Segment:

Operating earnings

$

5,241 

$

994 

$

16,169 

$

10,035 

Plus:

Depreciation and amortization

4,147 

3,519 

10,304 

9,074 

Provision for asset impairments and exit costs

- 

450 

4,464 

720 

Michigan Single Business Tax expense

99 

64 

265 

163 

Other non-cash charges

255 

348 

742 

716 

EBITDA

$

9,742 

$

5,375 

$

31,944 

$

20,708 

Distribution Segment:

Operating earnings

$

7,912 

$

7,251 

$

21,271 

$

16,414 

Plus:

Depreciation and amortization

2,099 

2,420 

5,953 

6,334 

Provision for asset impairments and exit costs

- 

337 

- 

337 

Michigan Single Business Tax expense

225 

16 

1,001 

759 

Other non-cash charges

712 

553 

2,028 

1,215 

EBITDA

$

10,948 

$

10,577 

$

30,253 

$

25,059 

Consolidated:

Operating earnings

$

13,153 

$

8,245 

$

37,440 

$

26,449 

Plus:

Depreciation and amortization

6,246 

5,939 

16,257 

15,408 

Provision for asset impairments and exit costs

- 

787 

4,464 

1,057 

Michigan Single Business Tax expense

324 

80 

1,266 

922 

Other non-cash charges

967 

901 

2,770 

1,931 

EBITDA

$

20,690 

$

15,952 

$

62,197 

$

45,767 

Notes: EBITDA is a non-GAAP financial measure that our credit facility defines as Net earnings from continuing operations plus depreciation and amortization, and other non-cash charges including imputed interest, deferred (stock) compensation, LIFO expense and costs associated with the closing of retail store locations, plus interest expense, the provision for income taxes and Michigan Single Business Tax to the extent deducted in the computation of Net Earnings.

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. The EBITDA information has been included as one measure of the Company's operating performance and historical ability to service debt. The Company believes investors find the information useful because it reflects the resources available for strategic opportunities including, among others, to invest in the business, make strategic acquisitions and to service debt. EBITDA as defined by the Company may not be comparable to similarly titled measures reported by other companies.

Source: Business Wire

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