SpartanNash Company (NASDAQ:SPTN) Q2 2023 Earnings Call Transcript

SpartanNash Company (NASDAQ:SPTN) Q2 2023 Earnings Call Transcript August 17, 2023

SpartanNash Company beats earnings expectations. Reported EPS is $0.65, expectations were $0.63.

Operator: Welcome to the SpartanNash Second Quarter 2023 Earnings Conference Call. At this time, all participants are 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 second 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 7:00 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. If you will refer to SpartanNash’s earnings release from this morning, as well as the Company’s most recent SEC filings, you will 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. First, I want to thank our independent grocery customers, suppliers and analysts who recently attended our largest ever Food Solutions Expo. More than 2,000 industry folks gathered for three days of networking, educational sessions, model store tours and auctions. Attendees got to sample our new fresh and finest upscale private label offerings. They saw a demonstration of our autonomous in-stock scanning robot powered by Simbe Robotics. And we instituted a new awards program for our top suppliers. Those 10 companies were presented with a SpartanNash Impact Award for the ways they partnered with us to create a terrific customer and shopper experience. We also celebrated our fastest-growing customers, and our customers who are going above and beyond to give back to their communities.

And we did so with our new Vision Awards program. Our vision of seeing a day when our customers say, “I can’t live without them”, really came to life at the expo. Speaking of customers, you may have seen in our earnings release this morning that we are refreshing our go-to-market strategy. This plan builds on our signature strength of being the most customer-focused, innovative food solutions company. Along with providing our customers with enhanced service, the plan is expected to contribute $20 million in run rate cost savings, starting later this year. I will get into the specifics of this program in a few minutes. Right now, I want to highlight the progress we are making on our strategic plan, which demonstrates our strong turnaround story.

We are energized about how the plan incorporates long-term value creation through our transformational initiatives and related margin expansion opportunities. These initiatives, our supply chain transformation, merchandising transformation and marketing innovation continue to gain momentum. In fact, we expect to realize more than 50% of the total gross benefits from our transformational initiatives by the end of this year. This progress gives us confidence in achieving our long-term target of more than 40% increase in adjusted EBITDA to over $300 million by fiscal 2025. Turning to the current year. I’m very proud of our team for delivering solid results in the first half of 2023. Jason will provide details on our full year guidance later. And I am proud to say that today we reiterated our bottom line expectations.

Now let’s pivot to highlights from our second quarter. Compared to prior year quarter, our net sales increased 1.7% to $2.31 billion, and our retail comparable sales remained strong with a 3.9% increase. We also improved our throughput rate by 3% since last quarter. And most notably, we increased our adjusted EBITDA by 7% to $66.1 million. Another highlight from the quarter relates to our retail banner consolidation work. As we announced last month, we consolidated three brands representing 8% of our store base. These stores were remodeled and rebannered as Family Fare, our flagship retail banner. Shoppers are embracing the enhanced store experience and new loyalty program. Our investments are accelerating growth and delivering bottom line benefits.

Overall, our rebanners and remodels continue to drive double-digit sales growth. And although a small sample of our total, the upmarket stores that were remodeled last year continue to experience an average sales lift of 17% year-over-year. Banner consolidation is part of our long-term strategic plan, which leverages the strength and equity of our brands for growth and operational efficiency. As part of the plan, we remain on target to remodel or refresh 25% of our stores. So, overall for the quarter, we were able to maintain profitability despite the macro pressures that our entire industry is experiencing. We credit this success, the transformational initiatives that our team continues to aggressively execute upon. In an environment like this, we are determined to provide solutions for our Wholesale customers and Retail shoppers.

And as I mentioned earlier, we announced changes to our go-to-market strategy. Our team has deliberately developed this plan, which improves both the efficiency and effectiveness of our organization. Our new go-to-market strategy involves: One, realigning all associates who have contact with customers into the sales function, and providing all customers with a single point of contact, so their support and service is highly coordinated; Two, focusing on operational excellence in our stores by expanding on training and brand standard; Three, executing on the value-added service we provide to our independent grocery customers to help them grow; and Four, completing integrations from prior M&A activities and setting up an organizational structure that enables easier integrations for the future.

These changes will help us to realize our signature strength to be the most customer-focused, innovative, food solutions company. We have the right strategy, teams and capabilities to execute on our long-term plan, and we are in a prime position to grow. I mean, I’ll turn things over to our CFO, Jason Monaco to share more details about our financials.

Photo by Franki Chamaki on Unsplash

Jason Monaco: Thanks, Tony, and welcome to everyone joining us on today’s call. We are extremely pleased with the progress we are making. I want to highlight some of our key successes before jumping into the detailed results. One, our second quarter adjusted EBITDA increased 7% to $66.1 million from $61.8 million last year. Two, our reported net earnings were $19.5 million, an increase of 3.8 times compared to net earnings of $5.1 million in Q2 of last year. Three, we significantly improved operating leverage as a percentage of sales. Our reported operating expenses decreased 135 basis points. And four, our liquidity remains strong, giving us flexibility to support our strategic long-term plan, including both organic and inorganic investments.

Our plan is working. We are growing market share and we are driving results with years of growth ahead. Now, let’s jump into the quarterly results. Net sales for the second quarter increased $39 million or 1.7% to $2.31 billion, compared to 2022 second quarter. This increase 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 $352 million or 15.2% of sales compared to $354 million or 15.6% of sales in the prior year’s second quarter. The gross profit rate decline was driven by cycling an elevated inflation related price change benefits in the Wholesale segment in the prior year quarter. This was partially offset by benefits as a result of the merchandising transformation initiative and higher overall margin rates in our Retail segment.

Additionally, LIFO expense decreased by $13 million or 58 basis points, compared to the prior year quarter. As a percentage of sales, our reported operating expenses improved 135 basis points from the prior year quarter, due primarily to: One, lower incentive compensation; Two, a reduction in the supply chain expense rates as a result of efficiencies realized from our supply chain transformation initiative; and Three lower restructuring and asset impairment charges. Interest expense increased $4.8 million to $9.3 million compared to the prior year quarter due to the higher rate environment. Turning to our segments. In the second quarter, net sales in Wholesale increased $32 million to more than $1.6 billion compared to the prior year period.

The 2% increase was due primarily to inflationary impacts on pricing. This was partially offset by demand changes from one national account. For a little more context, let’s talk about our Wholesale volume. We are pleased that we maintained core share during the quarter and all of our customer channels achieved expectations with the exception of Amazon Fresh, who addressed changes to its grocery business in its recent earnings update. We are working closely with them as they manage through format changes that resonate more with its customers. With that said, we believe its demand profile has leveled out at this time, and the bottom line impacts have already been built into our run rate expectations. We strive to support our customers as they grow profitably.

With the changes from our go-to-market strategy that Tony touched on earlier, we believe we have the right programs and teams in place to provide custom solutions for each customer, both now and into the future. And we remain extremely encouraged that new customers and organic business will help us continue to grow share. Moving to the bottom line. The Wholesale segment adjusted EBITDA totaled $40.7 million in the quarter versus 2022 second quarter adjusted EBITDA of $42.6 million. This was primarily due to lower gross profit related to cycling inflation-related price gains in the prior year quarter. These decreases were partially offset by better leverage of operating expenses which include the benefits of our supply chain transformation. Our team did a solid job managing through a challenging macro environment as we cycled expected inflation-related price gains from 2022.

For the quarter, inflation eased faster than we previously expected, with the pace of price increases moderating. Wholesale reported second quarter operating earnings were $21.5 million compared to $12.7 million in the prior year period. Now turning to our Retail segment. Sales came in at $679 million for the quarter compared to $672 million in the second quarter of 2022, an increase of 1%. Our comparable store sales momentum remained solid at 3.9% in the second quarter, due primarily to inflation-related pricing. Partially offsetting the strong same-store sales were lower fuel prices in the quarter, reducing net sales by 2%. Retail adjusted EBITDA increased to $25.4 million from $19.2 million in the prior year quarter. The increase was due to: One, the success of our marketing innovation; Two, strong returns on our store remodels and banner conversions; Three, higher gross profit rate; and Four, lower wages and benefits.

This increase was partially offset by lower volumes, which are consistent with market trends and reduced pharmacy margins. Retail reported operating earnings of $14.2 million in the quarter compared to a reported operating loss of $0.4 million in 2022, second quarter. Moving to our balance sheet. Our ratio of net long-term debt to adjusted EBITDA improved sequentially by 10 basis points to 2.2 times, compared to the first quarter of this year. And our liquidity remains strong, giving us flexibility to support our strategic plan. In the first half of the year, we generated $49.7 million of cash from operating activities, compared to $28.5 million in the prior year period. In the second quarter, cash from operating activities was $52.4 million, driven by continued focus on delivering strong cash flow.

This increase was due primarily to earnings and inventory improvements. During the first half of the year, we paid more than $15 million in cash dividends, equal to $0.43 per common share. We also bought back over 765,000 shares for a total of $18.5 million. And as of the end of the second quarter, we have approximately $25 million remaining on our share repurchase authorization. In total, the Company returned $33.6 million to shareholders in the first half of 2023. As our earnings release mentioned, we reiterated our full year adjusted EBITDA and adjusted EPS guidance based on our operating performance to date, and our positive outlook from the benefits we continue to realize from our transformation initiatives. We continue to expect that our adjusted EBITDA will be in the range of $248 million to $263 million.

And we continue to expect adjusted EPS to be in the range of $2.20 to $2.35 per share. Today, we slightly lowered our full year net sales guidance to $9.65 billion to $9.95 billion to reflect the demand changes from the national account that I mentioned a few moments ago. However, despite this revision, we remain confident in our ability to maintain profitability. To echo Tony’s comments, we’ve launched and made significant progress on our transformational initiatives and we are advancing our long-term strategic plan with our go-to-market strategy. This step further bolsters our confidence in achieving our long-term goals. To see how the planned benefits are tracking, please refer to slide 8 in the supplemental deck, which is posted on our website.

And now, I’d like to turn the call back over to Tony.

Tony Sarsam: Thank you, Jason. I want to close with few thoughts about our turnaround story and the compelling growth ahead of us. In less than three years, we have built a people-first culture and recruited a talented team of leaders, developed and executed on a long-term strategic plan, and implemented key transformational initiatives. We’ve also grown share, we have won customers, and we’ve delivered record adjusted EBITDA. With this progress, we are accelerating our capability to grow. We have a highly scalable business model with a sustainable trajectory of profitable growth. And at the center of all this growth is a continued focus on driving results to increase value for our shareholders. I’m so confident in the path we are on, and I’m optimistic about the days ahead as we continue to execute on our winning recipe. With that, I’d like to turn the call back over to the operator to open it up for your questions.

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Q&A Session

Operator: [Operator Instructions] And our first question today comes from Charles Cerankosky with Northcoast Research.

Charles Cerankosky: Good morning, everyone. With the inflation rate abating, do you anticipate a return to more normal forward buying opportunities in the wholesale business?

Tony Sarsam: Yes. Chuck, this is Tony. We — certainly, as we leveled out here, we have obviously the flurry of activity from last year with the extraordinary number of price requests. Those have been leveling off and coming down. I believe that we’ll find ourselves back in the situation where we might have been a couple of years ago in a more normal — more normal situation in terms of the number of price requests and the pacing of those price requests. And I think we’re on our way to that place.

Charles Cerankosky: And what does that mean directly for the gross profit benefit in the wholesale due to forward buying?

Jason Monaco: Yes. Hey Chuck, this is Jason. So the way I think about it is that we’ve got a wind down of the lapping of prior year inflation-related price gains, which we talked about last quarter. We continue to face that headwind on a benefit from last year. And as the vendor community continues to ramp up promotional spending or promotional investments with weaker volumes across the entire industry, we expect that we’ll continue to capitalize or have the ability to capitalize on those forward buy opportunities buying into promotions, as we did prior to COVID in a more normalized environment. So, we see it as a piece of the margin-enhancing programs going forward. But if you think about it in total, we’ll have a wind down of the price change benefits from last year and a wind up of the promo activities. It won’t necessarily be a one-for-one, but we look at the business in its entirety and look for opportunities to continue to drive profitable growth.

Charles Cerankosky: So, sort of a normalization. And could you comment on what you’re seeing in store brand sales, both in your Retail segment as well as in Wholesale?

Tony Sarsam: For our own brands? Yes, our own brands outpaced national brands again for the quarter. We saw that — a nice change and we grew net positive because national brands collectively were EBIT negative on a net basis. So, we continue to grow there, which is a nice vote of confidence for our own brands of products as we see that continued growth even after the really significant growth we had last year. So, we feel great about where our own brands and again, we’re seeing decent growth there versus the national brands.

Operator: Your next question will come from Andrew Wolf with CL King.

Andrew Wolf: I wanted to start asking on the Wholesale sector, the volume decline and whether that was — I understand you — you maintain core market share. So, should we — the implication be that that was more driven by the national account, demand change at the national account, or is the rest of the portfolio sort of down with the market? I’m just trying to see if sort of on the margin or sequentially, if there’s any improvement in the core portfolio of customers on the volume side, even if it’s down, it’s down less for example.

Jason Monaco: Good morning, Andrew. This is Jason. Yes, you’ve drawn the right conclusion that the primary driver of the — kind of the miss versus what we thought we would see was that national account. Outside of that national account, our Wholesale business units were down marginally, call it, less than 1%, which compares quite favorably to an industry-wide decline in unit volume of kind of mid-single digits. So, when we think about it, we grew share in the Wholesale segment in our core space, in our military space, and we were challenged with one national account customer.