SpartanNash Company (NASDAQ:SPTN) Q1 2023 Earnings Call Transcript

SpartanNash Company (NASDAQ:SPTN) Q1 2023 Earnings Call Transcript June 1, 2023

SpartanNash Company beats earnings expectations. Reported EPS is $0.83, expectations were $0.63.

Operator: Welcome to the SpartanNash First Quarter 2023 Earnings Conference Call. At this time all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. I would now like to turn the call over to Kayleigh Campbell, Head of Investor Relations.

Kayleigh Campbell: Good morning and welcome to the SpartanNash Company’s First Quarter 2023 Earnings Conference Call. On the call today from the company are President and Chief Executive Officer, Tony Sarsam; and Executive Vice President and Chief Financial Officer, Jason Monaco. By now everyone should have access to the earnings release, which was issued this morning at approximately 07:00 A.M. Eastern Time. For a copy of the earnings release, as well as the company’s supplemental earnings presentation, please visit SpartanNash’s website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company’s website. Before we begin, the company would like to remind you that today’s discussion will include a number of forward-looking statements.

These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. We will refer to SpartanNash’s earnings release from this morning, as well as the company’s most recent SEC filings. We’ll see a discussion of factors that could cause the company’s actual results to differ materially from these forward-looking statements. Please remember that all forward-looking statements made today reflect our current expectations only and SpartanNash undertakes no obligation to update or revise these forward-looking statements. The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business and it has included in the earnings release a full reconciliation of certain non-GAAP financial measures to the most comparable GAAP measures, which can be found on SpartanNash’s website at www.spartannash.com/investors.

And now it is my pleasure to turn the call over to Tony.

Tony Sarsam: Thank you Kayleigh and good morning everyone. I’d like to start by welcoming our new class of summer interns to the SpartanNash family. This is our largest cohort yet and we’re excited to continue growing our internship program. This pipeline of diverse young leaders brings fresh perspectives and creative problem solving to our business. These interns will receive meaningful assignments and mentorship to help them grow and hopefully stay at SpartanNash. It is going to be a great summer. Alright, let’s pivot to our results and why we are excited about the future. First, we are proud to say that we are reiterating our full year guidance and 2025 long-term targets. We had a strong start to the year and our strategic transformational plans are working.

This is an inflection point in our organization. We had the right team in place to execute on our strategic long-term plan, and we are one, advancing our synergies between wholesale and retail segments. Two, rolling out a robust funnel of operational excellence initiatives and three, prudently managing our capital allocation. Our team also continues to do an outstanding job of managing through challenging macrodynamics. This last quarter, our team successfully cycled this significant retail wage increase. With that headwind behind us, we are confident about hitting our full year and long-term targets. We believe that growth benefits from our two transformational initiatives are merchandising transformation and our supply chain transformation will continue driving value.

Notably, we expect to realize more than 50% of the total gross benefits from both initiatives by the end of this year, and we expect these actions will also contribute to margin expansion. This gives us confidence in our ability to grow adjusted EBITDA by at least 40% in fiscal 2025 compared to 2021. We have momentum behind our strategic plan and there is plenty of runway ahead. And our core capabilities, which are people, operational excellence, and insights to drive solutions have given us focus we need to win in this environment. Okay, I want to turn to the highlights from our first quarter results. This past quarter we lapped our best quarterly adjusted EBITDA results from Q1 of last year and outperformed our internal expectations by delivering adjusted EBITDA of $76.8 million.

The team accomplished these strong results despite significant headwinds, which we anticipated would be the most impactful during the first quarter. This solid performance reflects our focus on executing our multi-pronged growth strategy as well as the success of our merchandising and supply chain transformations to date. These transformational initiatives are expected to drive significant profitable growth for years to come. Okay, taking a step back, you may remember that our merchandising transformation was born from our focus on creating enhanced offerings and value for our wholesale customers and retail shoppers. We want to create more enhanced offerings and value for customers, especially when they’re trying to stretch their dollars. Throughout these unprecedented food inflation we have worked hard to mitigate these rising costs.

As a food solutions company we wholeheartedly believe that when families win, we all win. We are grateful to the CBG [ph] brands that have collaborated with us to ensure consumers maintain affordable access to groceries and essentials. We have processes in place to continuously monitor the impact of the macro environment on our business. Because of these processes, we are able to anticipate inflation related price gains brought forward by headwinds, and we strategically timed the launch of our merchandising transformation last year. Along with offsetting some headwinds, the merchandising transformation is providing a strong foundation for years of growth through enhanced customer led capabilities. The focus of the program involves filling as many shelves as possible with the right products at the right place at the right price.

We started realizing the benefits from the merchandising transformation this past quarter and we’re gaining momentum. Significant additional benefits from the total program are also flowing through to our wholesale customers and retail shoppers this past quarter, and the transformation will help SpartanNash and our wholesale customers attract new shoppers. Additionally, we have made significant progress since our Investor Day. We are now entering the next generation of the merchandising transformation. This includes the launch of one, the next phase of enhanced category planning, and two, our assortment and compelling offering program. For more details about the progress we’re making, please refer to Slide 10 in the supplemental deck. In fiscal 2023, the gross benefits that the company expects to realize from the merchandising transformation are $25 million to $35 million consistent with our long-term plan.

Turning to our supply chain transformation, which involves optimizing our network. We continue to find synergies and growth savings in our operations and there are plenty of opportunities ahead. Compared to the prior year, during the first quarter, the team delivered the following; one, we drove a 99 basis point improvement in the reported operating expenses in our wholesale segment. Two, we increased our throughput rate by 6% and three, we improved our fill rate to 77% compared to 61% in Q1 of 2022. I want to give a hearty congratulations to the SpartanNash supply chain team. They were recently recognized with the 2023 top Third Party Logistics and Cold Storage Providers award, a distinguished accomplishment in our industry. Their steadfast commitment to our customers and operational excellence is truly inspiring.

Okay, I want to provide a financial overview of our expectations for the transformational initiatives. In fiscal 2022 we realized $25 million of growth savings from the supply chain transformation, and this year we expect another $20 million to $30 million in benefits. To reiterate, we expect to realize more than 50% of their total gross benefits from both initiatives by the end of this year. This includes the expected gross benefits from the merchandising transformation and the gross savings from the supply chain transformation. This is remarkable progress and the entire SpartanNash team is proud of that. Alright, turning to our retail segment, we are leveraging insights from our marketing innovation to unlock more opportunities within our scaled retail operations.

Retail’s market share increased during the quarter within the segment’s $20 billion addressable market, and we have plenty of opportunities to grow share further. In an environment when consumers are time starved, we are providing solutions that offer value and convenience. We are enhancing the shopper experience by one, harmonizing banner brands and e-commerce sites to improve shopper’s omnichannel experience with an emphasis on digital promotions. Two, broadening local vendor relationships to deliver unique homegrown products. Three, creating personalized value experiences through loyalty offerings. And four, tailoring our own brand’s product based on shopper preferences. We are also amplifying our indulgence and convenience offerings. I want to provide an example of why I am so excited about these programs.

Our freshly prepared value-added produce sales are up almost 50% year-to-date. This is an incredible accomplishment. Suffice to say, we have a lot to be proud of and our building on this terrific momentum. I will now turn things over to our CFO, Jason Monaco to share more details about our financials.

Jason Monaco: Thanks Tony, and welcome to everyone joining us on today’s call. We feel great about the execution of our strategic plan, especially after a strong start to the year, and our team is doing a nice job of navigating through some uncertainties in the marketplace. As stated in today’s earnings release, we are reiterating our full year 2023 guidance, which incorporates both the elements of our long-term strategy and current expectations for the macro environment. Pivoting to the future, we continue to deliver strong results validating the strength of our strategic plan, which means heavily on one, the long-term value creation of our transformational initiatives and related margin expansion opportunities. Two, our balanced approach to capital allocation.

And three, our M&A framework that provides potential to stack incremental shareholder value on our organic plan. Now let’s jump into the detailed results. Net sales for the first quarter increased more than 5% to $2.91 billion compared to 2022s first quarter sales of $2.76 billion. This growth can be attributed to positive sales in both the wholesale and retail segments, which were favorably impacted by inflation trends. Gross profit for the quarter was 447 million or 15.4% of net sales compared to $451 million or 16.3% of net sales in the prior year’s first quarter. The gross profit rate decline was driven by lower forward by benefits in the wholesale segment compared to elevated levels in the prior year quarter, and reduced retail pharmacy margins.

Additionally, LIFO expense increased slightly compared to the prior year quarter. The gross profit rate decline was partially offset by benefits realized as a result of the merchandising transformation initiative and increased volume and margin rates within the military customer channel. As a percentage of sales, our reported operating expenses decreased 76 basis points from the prior year quarter, primarily due to a reduction in the supply chain expense rates as a result of efficiencies realized from our supply chain transformation initiative as well as lower incentive compensation. The decreases in expenses were partially offset by one, investments in retail store wages. Two, an increase in corporate administrative costs, which includes costs related to the next phase of our merchandising transformation initiative.

And three, higher restructuring and asset impairment charges. Turning to our segments, in the first quarter net sales and wholesale increased $103 million to $2.1 billion, an increase of 5.2% when compared to the prior year’s first quarter. This increase was due primarily to the inflationary impact on pricing as well as an increase in military volume. Our case volumes were down, which reduced net sales by 2.9%. However, we maintained core share and feel confident that new customers and organic business will help offset the secular volume pressures. The wholesale segments adjusted EBITDA totaled $57.5 million in the quarter versus 2022s first quarter adjusted EBITDA of $57.7 million. The slight decrease was due to a lower gross profit rate and increases in corporate administrative costs.

These increases were partially offset by a reduced rate of supply chain expenses driven by our supply chain transformation and lower incentive compensation. Wholesale reported first quarter operating earnings were $26.3 million compared to $28.1 million in the prior year’s first quarter. Retail sales came in at $822 million for the quarter compared to $781 million in the first quarter of 2022, an increase of 5.2%. Our comparable store sales momentum remains strong at 5.4% in the first quarter, primarily due to inflation related pricing, partially offset by unit volumes. Retail adjusted EBITDA increased modestly to $19.3 million from $18.9 million in the prior year quarter. The increase was due to lower incentive compensation and health insurance costs.

This increase was partially offset by continued investments in store wage rates and a lower gross profit rate. Retail reported an operating loss of $2 million in the first quarter compared to a break even reported earnings in 2022s first quarter. The decrease in the reported operating earnings in the current year was due to restructuring and asset impairment charges related to two store closures. On a consolidated basis our reported first quarter net earnings were $11.3 million compared to $19.3 million in the prior year’s quarter. Net earnings reflected a steep increase in interest expense of $7.4 million or a drag of $0.15 on both the reported and adjusted EPS versus the prior year quarter. The increase was primarily due to higher borrowing rates, which increased interest expense by $7 million.

We lapped our best quarterly adjusted EBITDA results from Q1 of last year and outperformed internal expectations by delivering $76.8 million in adjusted EBITDA in the first quarter compared to $76.6 million in Q1 of 2022. The team accomplished this despite a challenging macro environment. As discussed during our Q4 call, we cycled $14 million of headwinds during the first quarter, including $4 million in retail wage investments and $10 million forward buy headwinds. As Tony mentioned, we have effective processes in place to help our teams diligently monitor and manage the impacts of forward buys. Moving to the balance sheet, our ratio of net long-term debt to adjusted EBITDA increased over the current quarter from 2 to 2.3 times. Our liquidity remains strong, giving us flexibility to support our strategic and long-term plans, including both organic and inorganic investments.

For the quarter, we used 2.7 million of cash from operating activities compared to generating 10 million of cash in operating activities in the prior year quarter. The decrease in cash flows compared to the prior year quarter was due primarily to changes in working capital. We also continue to take a disciplined approach to capital allocation. During the quarter, we returned 18.7 million to shareholders through one, $10.9 million in share repurchases and two, $7.8 million in dividends. Looking towards the future, during the past quarter we increased our borrowing capacity of our revolver by $115 million to $1.13 billion through the addition of new lenders. The additional capacity aligns with our recent growth and provides flexibility in supporting our strategic long-term plan, including both organic and inorganic investments.

Based on the terms of our credit facility, we had excess availability of more than $475 million as of the end of the first quarter. As our earnings release mentioned, today we reiterated our full year 2023 guidance. Overall, we expect the strong results to continue with net sales expected to be in the range of $9.9 billion to $10.2 billion. In wholesale we continue to expect sales to grow between 4% and 7%. In retail, we expect comparable sales to grow 2% to 5% for the year. We continue to expect that our adjusted EBITDA will be in the range of $248 million to $263 million. We expect interest expense to be $37 million to $42 million for the full year, which is incorporated into our guidance, and we continue to expect adjusted EPS to be in the range of $2.20 to $2.35 per share.

To echo Tony’s comments, we’ve launched and made significant progress on our transformational initiatives. Let’s break down the expected benefits from both initiatives that are in sight. For ease of reference, please refer to Slide 8 in the supplemental deck that’s posted on our website. Consistent with the commitments made at our Investor Day this past November, throughout the long-term plan period, the transformational initiatives are expected to realize gross benefits of $125 million to $150 million with net benefits of $40 million to $55 million, which includes the offsetting impacts of significant macro headwinds — of these total gross benefits in fiscal 2023, we expect to realize one, gross savings from the supply chain transformation of $20 million to $30 million and two, gross benefits from the merchandising transformation of $25 million to $35 million.

So how are we tracking, from a run rate perspective we exited the first quarter by securing more than $20 million of gross benefits from the merchandising transformation. And we continued our momentum in our supply chain transformation with $30 million in gross run rate savings. As a reminder, the expected gross benefits from the merchandising transformation excludes the additional benefits that are flowing to our wholesale customers and retail shoppers. And now I’d like to turn the call back over to Tony.

Tony Sarsam: Thank you, Jason. To summarize, we are executing our strategic long-term plan, which is evident in our results. The success of our merchandising and supply chain transformations are securing gross savings and generating significant benefits for our wholesale customers and retail shoppers, as well as our own bottom line. Our team remains focused on continuing to drive strong results, serve more customers, and grow long-term shareholder value. Jason and I will be out on the road soon meeting with investors. Please feel free to reach out to Kayleigh to coordinate a meeting. Additionally, we look forward to seeing our sell side analyst at the SpartanNash Food Solutions Expo next month. With that, I’d like to turn the call back over to the operator and open it up for your questions.

Q&A Session

Operator: [Operator Instructions]. And our first question comes from Chuck Cerankosky from Northcoast Research. Your line is open.

Charles Cerankosky: Hey, good morning Tony and Jason and Kayleigh. When you’re looking at the market right now, your volumes were down overall, but some food retailers are reporting up volumes. Can you sort of talk about your competitive position and one example would be Costco last week talking about grocery category showing up volume while they got hit hard in some of the discretionary categories?

Tony Sarsam: Well, alright, good morning, Chuck. We — when you think about the — our direct to kind of grocery channel that we studied pretty carefully, I can’t speak to what Costco’s shift is, but in our case we had an expectation of gross share in the first quarter and we actually beat that expectation. Gross share versus the other folks in our neck of the woods that would include our — includes Walmart, Kroger, Meyer, and a number of other kind of key retailers. So, we feel good about our overall performance in again, the channel that we that we compete with most, I think most directly.

Charles Cerankosky: Okay. And one of the biggest — this is for Jason, one of the biggest headwinds was the interest expense you face. Any strategies to get around that, I know you can’t fight what’s going on at the Fed but it was a pretty big cash outflow item and brought down the operating earnings quite a bit to what you what you showed at pretax, anything to talk about there, Jason?

Jason Monaco: Hey good morning, Chuck and thanks for the question. On the interest expense side, of course, as you noted, we obviously can’t control what the Fed does and what floating rates look like. But during the quarter we fixed out $150 million of our debt exposure. We benefited from that hedge in the quarter, gave us a couple of pennies. But as you know, we saw a significant increase in interest expense in the quarter primarily related to the rate increase. So roughly $0.15 drag on EPS in the quarter, most of that was the rate increase. We muted some of that with the use of that hedge and we wanted to make sure we had a reasonable balance of fixed and floating because we also don’t believe that the rates are going to stay this high forever.

And so what we’re doing is weathering that storm along the way. In addition to that, when you think about the outlook for the year, we’re going to start lapping the higher rates from last year as we move through 2023. Our outlook reflects kind of a flattish rate profile for the rest of the year and we expect that we will be lapping the higher rate increases that began mid-2022. In addition to that, of course, we maintain a diligent and disciplined approach to capital management, working capital, etc. to ensure that we’ve got the right management of our cash flow and ensure that we do our best to keep that debt load managed and balanced.

Charles Cerankosky: Jason, any prognostication about where Spartan’s debt level will be told that will be at year end?

Jason Monaco: Yeah, we don’t guide to that number. But typically, we keep our leverage in kind of 2 to 2.5 range, it’s typically been running closer to 2. We can do the math against the guide of 248 to 263 and EBITDA, to kind of point to where we think debt will be by the end of the year.

Charles Cerankosky: Alright, thank you.

Operator: And our next question comes from Rob Dickerson from Jefferies. Your line is open.

Rob Dickerson: Great, thanks so much. I guess just first question, just on the SG&A lines, obviously attractive and helped in the quarter. As we think kind of through the rest of the year, I think I heard you say, there were some clear benefits in the quarter, but then there were small sets and benefits outweighed the offsets. But, for argument’s sake it is basically flat year-over-year. Yeah, as you kind of think through the rest of the year is that kind of like should be how we’re thinking about kind of the cadence and the progression of that SG&A or could there be potential drivers as we get through the year, that actually would increase the SG&A, that’s just the first question? Thanks,

Tony Sarsam: Hey Rob, thanks for joining. And maybe I’ll start with kind of talking about our supply chain transformation. We’re really energized by the benefits that have dropped to the bottom line in 2022, the roughly $25 million run rate we exited the year at. We’re committed to another $20 million to $30 million this year, that stacks on top of that, and that’s a big driver of the improvement in OPEX that you saw in this quarter’s results. And we expect that we have not reached the peak run rate of this year’s outlook yet. So we expect that to continue to ramp up through the remainder of the year. So despite the challenging headwinds, we’re confident that we’re going to we’re going to deliver strong bottom line EBITDA growth throughout the year and we expect that to continue to progress on the back of the supply chain transformation.

Rob Dickerson: Okay, fair enough. And then kind of back to the volume question. I mean, clearly, I guess some we’re seeing some positive traffic, not everyone kind of in general, the CPG industry is clearly still seeing volumes decline. And we’re just going through a repricing cycle. You’ve kind of talked about kind of some of your kind of own store brand initiatives, how you plan to potentially incrementally kind of improve or ship the mix. So I am just curious that within your stores in the retail side, in the locations where you like — have you kind of sensed some kind of shift incrementally into trade down or would you say kind of collectively not so much, like everything’s kind of par for the course, it’s more of just consumers essentially maybe buying a little bit less?

Tony Sarsam: Yeah, great. This is Tony, let me let me give you a couple of things to think about there. So overall, it’s a couple of notions. Our traffic is actually up for the quarter versus last year, by a little bit. And we’re seeing as you’ve noted the volume down and sales up on the strength of the inflation over pricing. We’re seeing in folks basket is an interesting mix, so we’re seeing that roughly, the price per unit is roughly the same as the amount of inflation that we’re seeing from our suppliers so that their overall rehab — think a little less than 10%, inflation. In the quarter we saw about 10% price increase. The mix in the basket, there was a combination of folks seeking out ways to save money and particularly with, as you noted, with our family brand and looking for ways to kind of find those great analog products and national brands at a lower price, and still seeking out opportunities for either convenience or indulgence.

And so where we see that I’ll give you a couple of examples, frozen food, for example, some of the frozen meals, saw some pretty significant inflation for the quarter. And those sales also were still decent for the quarter. We think people are looking for ways to kind of get back to work or their families. They’re seeking out some of those choices. As I noted in the earlier comments, also we’re seeing people look for ways to just save time on things like we mentioned, the fresh cut fruit and vegetables. Those sales are way up for us and those are a higher price per pound trade off, that we see folks looking for that. That combination of indulgence and convenience, while at the same time looking to save money on some of those [indiscernible] store items.

So that’s kind of what we’re seeing in the basket right now.

Rob Dickerson: Okay, that was very helpful. Appreciate that. And then I guess, just last question on free cash flow. In the quarter there’s a bit of a past from drag event, just considering, kind of the step up in CAPEX this year. Is the assumption here, that kind of as we get through the rest of the year, at least in the back half that you have some inventory benefit that’s helping working capital such that the drag we’re seeing in the first quarter should clearly reverse in the back half, such that free cash flow is fine for the year? That’s it. Thanks so much.

Jason Monaco: Thanks, Rob. Yeah, we expect to see continued improvement and cash flow through the remainder of the year. And, we expect to continue to work towards improved working capital positions. I think the balance for us is ensuring that as we continue to work through our merchandising transformation work and our engagement with the vendor community, that we’re transitioning from the — we’re transitioning as goods become available, and that as we partner with key players in the CPG and food space, that we get the right products in our warehouses. So there’s going to be a period of transition as we bring inventory and move old inventory out if you will. But I expect cash flow to continue to improve through the remainder of the year.

Rob Dickerson: Alright, super. Thanks so much.

Operator: Our next question comes from Benjamin Wood from BMO Capital Markets. Your line is open.

Benjamin Wood: Hey, hi, good morning. Thanks for taking our question, asking on behalf of me and Kelly. Just wanted to start with how did fill rates from your vendors or suppliers track in the quarter compared to your expectations, I think we talked last quarter about the expectation that CPG players might decide to take some share and more promotions would follow and stocks would improve, just wondering how that is tracking or tracked in Q1 versus the plan and where we are compared to pre-COVID?

Tony Sarsam: Yeah, it’s great question. So we did indeed expect that the fill rates would improve in this first quarter. We set some fairly aggressive targets against that and they improved actually substantially more than we had targeted. We saw as I mentioned earlier, about 77% fill rate versus 61% a year ago, and that fill rate increased pretty markedly, the cadence was pretty market increased during the quarter itself. We actually wanted it to last six weeks or so north of 80%. So those are the highest numbers we’ve seen by good measure, since pre-COVID. And, predictable and the fact that they’re increasing as what you just recounted a moment ago from our last call that we believe that as things get a little softer in terms of volume, they will see better performance on fill rate and overall ideas around seeking deals from the vendor community. And we’re seeing just that.

Benjamin Wood: Great, thank you. And then just a couple on inflation, if I may. I’m sorry, if I missed it. What was inflation five segments during the quarter? And then I guess asking the following up on a previous question, just a different way, are you guys seeing in any categories or skews or cases where inflation has come down that there’s a pickup in volume or a change in consumer behavior, any impact on kind of your own brand penetrations in those areas, just trying to get a sense of how elasticities are tracking?

Jason Monaco: Hi Ben, this is Jason. Thanks for the question. From an inflationary standpoint, inflation — our outbound inflation landed around high single digits, little north of 9% in our food business. And it was similar to that in retail. When you take a look at the categories, there are a couple that stand out when you want to think about where we’re at. Produce generally is flat to down or we saw flat to down in the quarter. Our dairy business or dairy inflation continued to rise pretty significantly. Interestingly, you would have expected more pickup in produce as pricing declined. But we didn’t see units blow through strongly in that space as consumers continued to balance a fixed wallet, if you will. And Tony talked about our retail business earlier, we saw trips go up and we’ve done a great job of really building a model where consumers continue to drive trips into our store.

And we work to continue to build items in the basket. But consumers are strapped and we’re creating solutions that really win for consumers. And that includes things like our own brand, our private label portfolio, which continues to grow at rates that are 50% more than our overall business or more. We continue to create solutions in our deli and our fresh business that Tony alluded to in the prior remarks, which — where we saw 50% in improvements in prepared and cut fruits and meals, where folks can come in and have something done for them in exchange or in lieu of perhaps dining at a restaurant. So we’re looking at the marketplace and finding a way to win in spite of what’s going on or in the market that we operate in. So we can’t control what the economy does but we can control how we behave in that economy and we can make sure that we win despite some of those headwinds.

Benjamin Wood: Great, thank you.

Operator: [Operator Instructions]. And our next question comes from Andrew Wolf of C.L. King. Your line is open.

Andrew Wolf: Thanks. Good morning, everybody. Just to start with the gross profit line earlier, and I didn’t hear it, but is it the $10 million headwind in terms of a comparison on the holding gains, is that the highest, I know they’re 16 weeks, but is that the highest rate, the highest comparison and our comparisons using going forward?

Jason Monaco: Yeah, Andrew, good morning. This is Jason. Yeah, that’s the highest, highest rate of the year. We expect it to moderate in kind of Q2 and Q3. You should think about it being roughly half that numberish, and then easing in the fourth quarter as we fully lap the peak periods of price increases from the vendor community.

Andrew Wolf: Great, thanks, Jason. On cost structure, it sounds like you’re now — was this the last quarter where you have the wage inflation that you put into your own cost structure? And what does that — what are you seeing in the labor market and what do you expect for wage inflation for the rest of the year?

Tony Sarsam: So the — this is Tony. The wage inflation, the peak of that overlap was also in Q1, that was the sort of big increases we took last year overlap during the quarter. We have a continuous process for offering increases and offering and then staying competitive in the marketplace. So there will be wage inflation in the future quarters, but the biggest one was in Q1 by good measure. In terms of the marketplace, we are seeing a better applicant flow. I think the combination of effects the economic effects influenced that. We have also made our offerings stronger, both in terms of wages and benefits. And we believe that’s impacting, and we’ve done a lot of work here also to make this a very compelling offer from a cultural standpoint, and we’re seeing an increased stick rate versus what we saw over the last two to three years as well.

So all that is moving in the right direction, still a very tight labor market though, we’re not waving the victory flag just yet in terms of that, because it is still — it’s still tough, so very competitive getting especially these key entry level roles in everybody’s business. And so we are continuing to dial up our efforts there and make sure that our people first organization offers the most compelling place to work. So that’s an ongoing battle. But we’re actually seeing some good wins here recently on the labor market.

Andrew Wolf: Yeah, thanks. And the last is on just on the year-over-year increase in expenses, operating expenses, dramatically slowing from last year. And you called out lower accruals I think incentive comp. What else is explaining it, I mean, are there — are you — in either wholesale or retail are you actually with the throughput being up, you actually manage your labor hours down somewhere given there is still inflation or is there another maybe a benefit accrual that’s also filling in there this lower year over year, just can you help us sort of reconcile that? Or is there anything special in the quarter that may not flow through the rest of the year? Thank you.

Tony Sarsam: Yeah, I’ll start and I’ll have Jason maybe add a little color. Big influence on that has been the vendor throughput rate, and really terrific work their supply chain team has done to increase the overall throughput up. I mean that was 6% in the first quarter. Last year, you may remember, we finished up almost 8% on throughput. And those are big, big influences on the overall cost performance, our business biggest driver, we haven’t produced by good measure. And our cost per case performance was terrific. It’s especially in light of moving fewer cases and overcoming those fixed costs and to deliver a great number on the supply chain side. So we feel great about all that. We’ve actually increased our service in our stores, we’ve actually added strategically as labor in different parts of the store to make sure we have a great offering for our shoppers.

And even with that we’ve had — we found good ways to secure productivity in other parts of the store and manage it to kind of bounce all that. So feeling really strong about the performance, both our retail and supply chain team on labor overall.

Jason Monaco: Yeah, building on Tony’s comments, dead on with the productivity, it is really driving improved results in the P&L. A couple of other things I’d highlight here along the way, our healthcare cost has declined year-over-year as our workforce has remained relatively healthy coming through a really volatile period of COVID in the rear view mirror. And, so that’s played a role in improving our cost position as well. But overall, the programs that we have in place are working, our transformations are delivering bottom line results, and our teams have done a great job delivering on the promise of operational excellence, and that operational excellence is achieving improved cost position.

Andrew Wolf: Great, thank you for the color. Appreciate it.

Operator: And our next question comes from Peter Saleh from BTIG. Your line is open.

Peter Saleh: Great, thanks. And thanks for all the color this morning on the inflation in the quarter. You guys mentioned it was up around 9% and the high single digit range. Just curious if you could give us a little bit more color on the expectations going forward, maybe in 2Q and for the balance of the year on inflation. I believe last year around this time is when we kind of saw some of the peak inflation trends. Just curious if we should expect that still to moderate, are you seeing some of that moderation on a year-over-year basis, and inflation already starting to occur?

Jason Monaco: Yeah, good morning, Pete and thanks for the question. Our plan and our outlook reflects a step down in inflation from Q1 through the remainder of the year. We expect to end the year close to kind of pre-COVID inflationary rates. Obviously, there’s no perfect crystal ball on what inflation is going to do and how the Fed is going to respond and how the economy interacts. For planning purposes, we’ve assumed that step down through the remainder of the year and included that in our outlook.

Peter Saleh: Great. Okay. And then just in terms of the private label penetration, Jason, I think you mentioned, you’re seeing some nice growth in private label. Can you talk about or maybe elaborate a little bit more on what you’re seeing in terms of the growth rate there and where does that stand as a percentage of mix?

Jason Monaco: Yeah, our penetration in private label continues to grow. We’re in the low 20s, I think a little north of 21%. I don’t have the final number in front of me here. For the growth overall, we delivered growth that was about 50% higher than the comps so it was around 8% for the quarter.

Peter Saleh: Great, thank you very much.

Operator: Next question comes from Krisztina Katai from Deutsche Bank. Your line is open.

Jessica Taylor: Good morning, this is Jessica Taylor on for Krisztina. Thanks for taking our questions. I wanted to start with your top line performance, if you could give us any details on kind of the cadence through the quarter?

Tony Sarsam: Good morning, and thanks for the question. From a top line standpoint in our retail business, it was relatively stable. Naturally, we had some ups and downs through the various holidays throughout the first 16 weeks of the year, but relatively stable. Overall, we feel good about where we’re at on the retail side. In wholesale, our independent customers tracked relatively closely from a trending standpoint to our retail business, and our military business which we haven’t talked about a whole lot today, in fact, much at all, continues to show unit volume growth on a year-over-year basis. And we’re energized to be able to provide goods to the — goods and services to the patrons and members of our military.

Jessica Taylor: Thank you for that. And then just continuing on — just on the retail side, can you talk a little bit about the promotional environment that you’re seeing with your competitors, especially as we start to see some deflation on certain categories and how you’re thinking about that for the remainder of the year?

Jason Monaco: Great questions. From a promotional standpoint, we’ve continued to see promotional rates run similar to prior year maybe up just modestly. Yeah, I think naturally, as we enter a period of challenged unit volume, we’ll continue to pursue opportunities together with our vendor partners. And I want to remind — kind of remind the group that we’ve got this merchandising transformation underway and we’ve partnered with a number of vendors in the vendor community to really drive growth and drive performance for them and their brands, as well as to create value for consumers and our customers along the way. And I would expect that as the industry continues to be challenged from a unit volume standpoint, that we’ll continue to partner and collaborate with those vendors as well to continue to drive performance, whether that be it through promotions or innovation or other methods.

Jessica Taylor: Thank you, best of luck.

Operator: And our next question comes from Chuck Cerankosky from Northcoast Research. Your line is open.

Charles Cerankosky: To follow up on private label a little bit, what sales trends did you see if any that were different between military, wholesale, and retail?

Tony Sarsam: Not a lot Chuck, this is Tony. We are more developed obviously in our retail business than our wholesale and then again over military. We are military because it’s an interesting opportunity and we’re actually pursuing introducing new items into the military. And we’re always looking for ways to grow that business broadly speaking so the one place you’ll see a lot more focus from us is in the fresh areas as we as we go develop more of produce and baked goods and meat items in our fresh and finest brand. But overall, there wasn’t a big difference between the three in terms of growth rates steady, and as Jason mentioned, significantly better than the national brands.

Charles Cerankosky: Great, thank you.

Operator: And there are no other questions at this time. I’ll turn the call back over to Tony Sarsam for closing remarks.

Tony Sarsam: Very good. Well, thank you all for your participation on today’s call. A lot of great questions. We just want to wish all of you from our family to yours a very pleasant day and a great summer ahead.

Operator: The meeting has now concluded. Thank you for joining and have a pleasant day.