SpartanNash Company

Good day and welcome to the Spartan Ash Company second quarter 2021 earnings call. All participants will be in a listen only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Mandeville with ICR. Please go ahead, sir.

Good morning, and welcome to the Spartan Nash Company second quarter 2021 earnings conference call. On the call today from the company are President and Chief Executive Officer Tony Tharsen and Executive Vice President and Chief Financial Officer Jason Monaco. By now, everyone should have access to the earnings release, which was issued yesterday at approximately 4.30 p.m. Eastern time. For a copy of the earnings release, please visit Spartan Nash's website at www.spartannash.com forward slash investors. This call is being recorded in a replay. It will be made available on the company's website for approximately 10 days. Before we begin, the company would like to remind you that today's discussion will include a number of forward-looking statements. If you will refer to Spartan Nash's earnings release from yesterday, 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, Spartan Nash 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 is included in yesterday's earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. And it is now my pleasure to turn the call over to Tony. Tony?

Thank you, Chris, and good morning, everyone. Overall, Q2 is a strong showing for Spartan Ash, with both our top and bottom lines exceeding expectations. Like the rest of the industry, we have been challenged by historic labor shortages, strains on global supply chain, and rising prices. However, I could not be more proud of how the team overcame these obstacles in our second quarter. I am encouraged by our momentum heading into the second half of the year, which is reflected in our decision to improve our full-year guidance. Jason will provide details on our updated outlook, but first I wanted to cover a few highlights from the quarter. I'll begin with food distribution. Our warehouse labor and transportation costs remain unfavorable and worsened in recent months. Nonetheless, our supply chain team proved resourceful and agile, taking swift actions to manage inventory and profitability. The team strategically reduced inventory by over $60 million during the quarter. This inventory reduction allows the distribution centers to operate more efficiently and provides a solid foundation for the supply chain transformation initiative to begin. I'll share more on this initiative shortly. In the retail segment, our top-line trends are proving quite resilient as we cycle last year's COVID lift. Sales remain higher relative to 2019 levels. On a two-year basis, our comps have improved from 9.3% to 12.1%. The demand for food at home has persisted, and our stores benefited from an overall increase in traffic compared to the prior quarter. Regarding digital sales, we've seen over 100% growth since 2019, and to continue the expansion of our digital channel, we recently opened our first micro-fulfillment center. Lastly, in our military segment, we continue to realize top-line headwinds. Domestic traffic across the DECA channel is down as shoppers have not yet fully returned to bases after leaving to shop elsewhere during the pandemic. While these trends have caused the segment to trail expectations, our team has been working proactively to leverage positive trends within exports. The team is also executing gross margin initiatives, which have already produced favorable results. With regard to our 2021 key performance indicators, we are making progress on many fronts. Our private label efforts are ahead of our expectations year-to-date, and we continue to build momentum through the year. Notably, we continue to make improvements within our assortment, pricing, and marketing. Specifically, we've taken steps to redesign our labels and launch new items in the fresh category. We are also getting our private label products in more homes through the expansion of our locations that offer fast lane and ready-to-eat home delivery. We continue to see favorability within our gross margin profile, and we're focused on our broader gross margin efforts across the company. We're seeing exceptional cost increases, some of which must be passed on to consumers. Meanwhile, our procurement team is actively negotiating the best possible terms with our suppliers. Overall, we are satisfied with the results, even as we navigate uncertainties related to inflation and cycling pandemic trends. Regarding our human capital indicators, we saw continued strong performance in safety, resulting in reduced incident rates due to our intense focus on safety awareness. Our newly energized safety team is implementing a myriad of process improvements to strengthen our performance. Everything from the introduction of universal stretching routines to prevent injury and promote wellness, to incorporating new safety discussions before all meetings. These small acts of safety help to support our people-first strategy. The safety team is also playing a critical role to implementing appropriate mitigating measures in response to our recent COVID surge. We are still quite challenged with the associate hiring and retention due to this highly competitive labor market. To put the challenge of this unique labor market into perspective, company-wide we currently have over 4,000 open positions. As you might imagine, we have taken a number of proactive measures to help us maintain a pipeline of top talent. To accelerate hiring, we recently raised the starting wage for numerous positions, which has helped attract more candidates. We've also shortened the length of time required in positions for associates to become eligible for benefits. On the retention side, we are heavily focused on associate recognition, and we're excited to launch a number of new associate recognition programs for the front line and for our leaders. We are also investing in more diversity, equity, and inclusion programming, as well as training and development for associates. We are expanding our total rewards with additional discount days in our retail stores, tuition reimbursement, wellness benefits, and more. As I said in our Q1 earnings call, we are facing a war for talent, and we are taking significant steps to win this war through our people-first culture. On to our final KPI, improving distribution service levels. This ties directly to our supply chain transformation initiative that we announced last quarter. Today, we want to provide more details on this initiative, which will address the short-term challenges in the supply chain. It will also allow us to capitalize on the growth of our network in the long term. Based on the blueprinting phase we recently completed, we have organized this initiative into the following work streams. Warehouse operations, sales and operations planning, inventory optimization, network strategy, and procurement. Starting with warehouse operations, we are incorporating best practices across the network through process standardization and guidance for issue resolution. The culmination of these warehouse initiatives will ultimately lead to greater operational efficiency and enhanced control of labor costs. As for sales and operations planning, we are implementing a more robust process that fully integrates all functions of the organization. This is the best way to ensure supply chain execution and excellence across the network. Improvements to sales and operations planning will help us capture changes to the business environment and bring those insights to our supply chain operators. This provides our teams with the lead time necessary to make adjustments to inventory, labor, and transportation capacity that match the current demand. This process will improve our ability to respond more quickly to broader business issues in real time and best serve our customers' needs. Regarding the inventory optimization workstream, we will focus on a couple of key areas. We will leverage data and analytics to better manage inventory across the entire network. This will improve efficiency in our distribution centers and reduce excess inventory. We'll also evaluate capacity by warehouse and temperature class to allow data-driven buying decisions. In short, these actions will help us ensure that we have the right products in the right location at the right time. To summarize where this project will take us from a financial perspective, the Supply Chain Transformation Initiative is expected to provide 15 to 30 basis points of supply chain benefits on a run rate basis. We are eager to continue to make progress on our supply chain transformation and we'll have more updates along the way. Lastly, I've been with Spartan Nash now for almost a year and plan to update the broader community on enhancements we've made to our strategy. Along with the leadership team, I am pleased to announce that we will be holding a investor day this December. Be on the lookout for more information in the coming months. I'm excited to share our refreshed strategy as well as comprehensive updates on the status of our supply chain transformation. I'll now turn the call over to Jason to walk through the financial performance in greater detail and provide you with an update on our full year outlook.