SpartanNash Company

Good morning and welcome to the Spartan Nash first quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 Kaylee Campbell, Head of Investor Relations. Please go ahead.

Good morning and welcome to the Spartan Ash Company first quarter 2022 earnings conference call. On the call today from the company are President and Chief Executive Officer Tony Sarsom 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 a.m. Eastern Time. For a copy of the earnings release, as well as the company's supplemental earnings presentation, please visit Spartan Ash's website at www.spartannash.com backslash investors. This call is being recorded, and every play 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, If you will refer to Spartan Nash'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, 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 has included in the 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.

Thank you, Kaylee, and welcome to Spartan Ash. We are glad to have you on board as head of investor relations. And good morning, everyone. Thank you for joining us. On May 12th, we provided our preliminary earnings results. And today, I'm happy to walk you through additional highlights of the quarter. As part of our winning recipe, we're focused on transforming our supply chain. And this past quarter showed that our efforts are taking hold. We delivered an approximate 7% improvement in throughput year over year. We also secured more than $15 million in run rate cost savings, meeting our initial full year commitment of $15 to $30 million in annual savings ahead of schedule. We reached this significant milestone by leveraging data and insights to create efficiencies throughout the distribution network. We now expect to achieve $25 to $35 million run rate savings by the end of fiscal 2022. These two impressive accomplishments are a direct result of our supply chain transformation initiative, which is a foundational element for expanding our profitability. And we are just getting started. I wanted to thank our supply chain leaders for their hard work and dedication in making this possible. Moving to our retail segment, our team of frontline store associates continue to deliver quality service to shoppers resulting in comparable store sales that were up 7.2% in the quarter. We are building on strong momentum in our retail business and we saw our market share grow. We are focused on providing exceptional service and market competitive pricing. This is helping us retain our current customers and shoppers who have recently discovered our stores. We remain committed to our mission of delivering the ingredients for a better life. To drive growth margin and create more value, we are expanding our private label brand penetration. Overall, our private label sales increased 13.7% year over year, outpacing the company's overall sales growth. That is really impressive. Now, turning to our military business. I'm proud to say sales increased over the prior year quarter for the first time since Q1 of 2020. Additionally, we achieved military-adjusted EBITDA margins of 1.6%, exceeding our turnaround target of 1%. We are strategically positioning military for success through a variety of initiatives, and we continue to see opportunities to further increase the profitability of this business. One of these opportunities is around the recent extension of our private label contract with DECA. Our military distribution network gives us the unique ability to service 160 commissaries and 400 exchanges worldwide. We are proud to continue providing America's military heroes and their families with great value and a taste from home. And speaking of our unique global supply chain, we are currently leveraging our military network to provide critical food and supplies to Ukrainian refugees across Eastern Europe. Now, turn to the impact inflation had during the quarter. While inflation was a tailwind for us, our performance also reflects the continued execution of our winning recipe and our supply chain transformation initiative. Looking ahead to the remainder of the year, we expect to continue operating in a volatile and inflationary environment. Our teams are going above and beyond to effectively manage through these uncertainties. Additionally, the impact of inflation on our results should taper in the second half of the year. Turning to the labor environment, in order to attract and retain top towns in the labor market, we have taken several steps to enhance our associate experience. These include investments in wages, additional benefits, heightened focus on safety and training, associate recognition, and streamlined communication. We are seeing the benefit from these initiatives over the past two years, including 2.3 times higher than normal applicant flow and a 48% improvement in our safety incident rate. Turning to strategic growth. In the past couple of quarters, we introduced our winning recipe, defining who we are and where we are going. The formula is driven by our three core capabilities, people, operational excellence, and insights that drive solutions. If you visit the investor relations section of our corporate website, you can view the Q1 supplemental earnings presentation, which provides an overview of our winning recipe. Now, I'll get into some specifics illustrating how we're executing on our plan. Last month, as part of our e-commerce strategy, we announced a partnership with DoorDash. This partnership expands our grocery services and solutions across both our digital and physical platforms. It also enables us to empower our network of 2,100 independent retail customers. We're now providing them with additional tools and resources they need to grow their businesses and expand their digital footprints. Additionally, we'll be offering on-demand grocery delivery from more than 100 company-owned stores. Our customer-centric innovation is a key priority for driving growth. With this new omnichannel partnership, we will expand our customer base and capture more of the grocery retail market by rapidly scaling our digital offering. We also recently reached an agreement to acquire a three-star Michigan grocery chain, Shop and Save Food Centers. These stores will be converted into our popular family fair banner. Our focus right now is ensuring a smooth transition for our new team members and the customers they serve. We're also expanding shopper offerings through our robust loyalty program. I'm also pleased to announce that the Stockton California Distribution Center has been integrated into our network. Through our partnership with the Coastal Pacific Food Distributors, 500,000-square-foot multi-temperature facility is now fully servicing customers after a phased-in launch. Having a West Coast presence allows us to provide faster, fresher, and more cost-effective deliveries to our customers. The arrangement will also save roughly 1 million gallons of diesel fuel annually, while helping us reduce our fleet mileage by 10% or more than 7 million miles. This agreement further advances our progressive work in ESG by reducing our carbon footprint. We anticipate lowering our greenhouse gas emissions by an estimated 10,000 metric tons this year. And we are not done yet. If you have not seen the document, I highly encourage you to review our inaugural ESG report, which is available under the Corporate Responsibility section of our website at spartnash.com. Now let's talk about long-term targets. We have built a strong foundation based on our winning recipe. And our momentum gives us confidence in the growth targets we recently announced on May 12th. As a reminder, by 2025, we expect to grow net sales by at least 12% from fiscal 2021 to more than $10 billion. We expect to increase adjusted EBITDA by at least 40% from fiscal year 2021 to more than $300 million. And we expect to expand our adjusted EBITDA margin to 3% of net sales by an increase of 25% from fiscal year 2021. We are very pleased with the actions the current executive leadership team has taken, which is reflected in our performance. We believe our strategy provides a clear path for long-term growth and increased shareholder value. Before I turn the call over to Jason, I would like to extend one more heartfelt thank you to our Spartan Nash Associates, whose operational excellence and keen focus on winning has made these results possible. Your hard work and dedication is transforming our company. On behalf of the Spartan Nash executive leadership team, thank you for being our customers' unsung heroes. With that, I'll now turn the call over to Jason to walk you through the first quarter financial performance in great detail.

Thanks, Tony, and welcome to everyone joining us on today's call. Let's jump into the detailed results. Net sales for the first quarter increased 4%, or about $106 million. to $2.76 billion, compared to 2021's first quarter sales of $2.66 billion. This growth can be attributed to positive sales in all three business segments. Our GAAP EPS came in at 53 cents per diluted share in the quarter, compared to 54 cents per share in the first quarter of 2021. On an adjusted basis, diluted EPS for the quarter was 83 cents, compared to 59 cents in the first quarter of 2021. On an adjusted basis, the increase in profitability from the prior year quarter was due primarily to improvements in the gross profit rate, where we saw an increase to 16.3% compared to 15.7% in the prior year quarter. Gross profit margin growth was driven by improvements within the food distribution and military segments. Inflation during the first quarter led to higher LIFO expense, which increased $8.5 million over the prior year's first quarter. This incremental expense is included in gross margin but is excluded from adjusted earnings. The increase in gross margin was partially offset by higher SG&A costs, including higher costs in retail, store, and supply chain labor, increased fuel prices, and higher incentive compensation related to strong company performance. In addition, our reported GAAP results also include $3.5 million of costs related to shareholder activism. The labor market conditions continue to drive higher wages, additional use of overtime, and reliance on costly third-party contractors within our supply chain. Despite these headwinds, we've made significant progress on our supply chain transformation initiative during the quarter. This includes achieving more than $15 million in run rate cost savings, reaching the range of our original full-year 2022 commitment ahead of schedule. Turning to our segments, net sales and food distribution increased by about $37 million, or almost 3%, to $1.37 billion in the first quarter, driven primarily by the favorable impact of inflation on pricing. We continue to see an upward trend in inflation as the quarter progressed. In fact, inflation exceeded 10% by the end of the quarter, while certain categories, including proteins and dairy, continue to see the largest overall increases. Looking forward, our outlook assumes continued inflation for the remainder of 2022, with the impact on results tapering in the second half of the year. Reported operating earnings for food distribution in the first quarter totaled $26.7 million, compared to $21.1 million in the prior year quarter. The increase in reported operating earnings for the segment was driven by higher gross margins, partially offset by an increase in incentive compensation and higher supply chain wages. Adjusted operating earnings totaled $34.6 million in the quarter versus the prior year's first quarter adjusted operating earnings of $22.3 million. Military net sales of $612 million in the first quarter increased by 4.7% compared to prior year sales of $584 million. The increase was driven by inflationary pricing, partially offset by reduced case volumes. Notably, though military case volumes declined in the first quarter, the rate of decline slowed compared to the trend experienced over the previous year. The first quarter reported operating earnings in the military business of $1.4 million compared to a loss of $5.1 million in 2021's first quarter, reflects improvements in the gross margin rate. These benefits were partially offset by increased incentive compensation, as well as increased supply chain labor expenses. The segment's adjusted operating earnings of $4.7 million for the quarter is up $9.3 million from 2021's first quarter loss of $4.6 million. Retail's net sales came in at $781 million for the quarter, compared to $739 million in the first quarter of 2021, an increase of 5.7%. Our comparable store sales momentum remains strong at 7.2% for the first quarter. First quarter reported operating earnings in the retail segment were $0.03 million compared to $14.2 million in the prior year quarter. The decrease was driven largely by market competitive pricing, higher utility and supply costs, investments in wages made throughout the course of 2021, and increased expenses. Retail adjusted operating earnings were $4 million for the quarter compared to $14.8 million in 2021's first quarter. Each of the segment's adjusted operating results exclude the impact of LIFO expense in both years and the costs related to shareholder activism in the current year. Overall, we achieved a first quarter record adjusted EBITDA of $76.6 million compared to $64.8 million last year. The company's ratio of net long-term debt to adjusted EBITDA increased slightly to 1.9 times compared to 1.8 times at prior year end. The increase was due to strategic inventory purchases in the current quarter in anticipation of further product cost inflation and to maximize service to our customers. For the quarter, we generated $10 million of cash from operating activities compared to using $31.8 million of cash in operating activities in the prior year quarter. The increase in cash from operating activities compared to the prior year is due primarily to these changes in inventory. During the quarter, the company declared $7.7 million in cash dividends, equal to 21 cents per common share. The company did not repurchase shares during the quarter. We currently have approximately $80 million remaining on our current share repurchase authorization and are committed to returning value to our shareholders through share repurchases as well as continued regular dividends. As announced on May 12th, we raised our fiscal 2022 guidance. The adjusted EBITDA range was increased by $10 million and is now expected to range from $224 to $239 million. Adjusted EPS is now expected to range from $2.17 to $2.32 per diluted share. These updates to our EBITDA and EPS ranges recognize the strong start to the year across our operating segments. Improved gross margins in the food distribution and military segments and ahead of planned supply chain transformation results partially tempered by economic headwinds, gives us confidence in the improved outlook. These headwinds include the impact of limited labor availability and rising wages, as well as expectations of future interest rate increases. We also raised our fiscal 2022 guidance as it relates to consolidated net sales, with an updated range of $9 to $9.3 billion. Our outlook now reflects improvements in all three reporting segments. With the continuation of positive results in the military business, we now expect military full-year sales will be negative 4% to flat as compared to the prior year. We also expect that food distribution sales will now be up 3% to 5% from the prior year and that retail comparable sales will range from positive 1% to 3%. We are delivering on our turnaround goals and are executing on our winning recipe. while being focused on managing through volatile conditions to create sustainable shareholder value. And now, I'd like to turn the call back over to Tony.

Thank you, Jason. We are very pleased with the continued momentum of our performance, which is a direct reflection on the actions we've taken across our business. We believe our strategy provides a clear path for long-term growth and increased shareholder value. Now, Kayla will make a brief statement before we open the lineup for Q&A.

Thank you, Tony. As a reminder, the purpose of today's call is to discuss our first quarter results and the progress we're making through the execution of our strategy. Please keep our conversations focused on these topics. As it relates to matters involving our annual meeting, we remain in dialogue with our shareholders and will continue to ensure our actions are in the best interest of all shareholders. I encourage you to visit our SpartanNashTransformation.com website for more information and updates. Additionally, we have filed a definitive proxy statement, a white proxy card, and other relevant documents with the SEC in connection with the solicitation of proxies for the Annual Meeting. Shareholders are strongly encouraged to read our definitive proxy statement and all other documents filed with the SEC carefully and in their entirety because they will contain important information. Shareholders may obtain a copy of any documents filed by the company with the SEC at no charge at the SEC's website or on our spartannashtransformation.com website. Now, I'd like to turn the call back over to the operator and open it up for your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Chuck Cernkoski with North Coast Research. Please go ahead.

Good morning, everyone. Great quarter. Could you talk about the retail sales a little bit with gas? I'm not sure you excluded gas from the comps, but could you give some commentary on what the numbers looked like with and without gas and how profitable gas was in the quarter? and how gallons trended.

Good morning, Chuck. This is Jason Monaco. Thanks for joining this morning. On fuel itself, we saw fuel dollars naturally raise significantly with the higher price points. Gallons were up marginally in the quarter and profit margins themselves on a per gallon basis were about flat to last year. And to your first question, is it in comps? It's excluded from our comps, our comp sales of 7.2% and the continued momentum on that front.

Okay, that's great. Now, is that strong comps? Does that include anything you can tell that's left over from the pandemic? Or is it mostly just inflation? Because those are pretty strong numbers.

Yeah, they're great numbers. Chuck, this is Tony. The pandemic has waned, obviously, and what we look at now is there are some habits from the pandemic that we think are going to be sticky for the long haul, but I don't think it's temporary anymore at this point. So we have, with the inflation rising, we think we had almost about 10% inflation during the quarter overall. Naturally, with the natural elasticity that follows with that, there's a little bit of slight unit decline. But the team has done a great job overall of kind of managing the price for the consumer. It's difficult, as you know, in the retail space to find a way to make sure that you get pricing that the consumers can manage in their budgets. And we've done, I think, a really good job of managing our key value items to that. And as I mentioned a moment ago, Our own brands have done really, really well. We think with our own brand performance, we're seeing great growth there. They're good quality products. They're historically and currently at slightly lower price points than national brands. And the availability has been good. So I think the fact we have great partnerships and solid availability in the own brands has also been a component of driving our comps.

Are you able to comment, please, on what you're seeing in terms of changes in product mix as a result of the acceleration in inflation and how fuel costs might be affecting in-store purchasing habits.

Sure. And Chuck, this is Jason again. So a couple of things I highlight. And if you step back and look at our business performance, as I noted before, fuel prices are up significantly. And kind of the first order impact we're seeing is, as Tony mentioned, the performance in own brands. Our own brands and private label portfolio is growing at about twice the rate of our non-private label portfolio. So we're seeing consumer shifts on that front. Secondarily, just as a reminder, our store footprint and the products and the offerings that we have in our retail business really cater to these sorts of needs. So, for example, we're winning with those consumers that are loyal to our stores, but we're also winning with on what we characterize as kind of fill-in and smaller shops as well. So as consumers have perhaps less money in their pocket and they need to buy a smaller basket, the convenience that we offer with our supermarket formats is really winning, and we're seeing strong growth and performance on that front.

And then finally, with this coastal Pacific facility in Stockton, California, You say it's been fully phased in. Is there an option for Spartan to purchase that? Are you leasing it in any way? What are sort of the mechanics of how it fits in with your logistics network?

Yeah, great question. So I characterize it as a partnership really from start to finish. And we've had a long partnership with Coastal Pacific on the military side. The way that this arrangement works is that we are – We are leveraging Coastal's operations. They're operating the site. We have a presence there to ensure we have quality and service to our customers out of that site. But it's on a fee basis, if you will. So if you think about this program, what it's allowed us to do is to take about 10% of the miles out of our network by being located closer to our customers. It's allowed us to have fresher deliveries to our customers on the West Coast. And last but not least is that it's allowed us to take over a million gallons of diesel fuel out of our consumption and 10,000 tons of carbon out of our carbon footprint. So we're proud of the arrangement and the creative way that our teams have found an access to the West Coast that's really been a win-win for the environment, for our customers, and ourselves.

Thank you. The next question comes from Greg Bettish-Kanian with Wolf Research.

Please go ahead. Good morning. This is Spencer Hannes on for Greg. Maybe if we can just take a step back for a minute. Could you talk about how you're thinking about the synergies between your three segments? And then when we look at the military segments performance in the quarter, generating almost $10 million of EBITDA, what is driving the inflection of profitability there? And is there an opportunity to spin that business now that you've seen sort of the improvement in profitability there? Thanks.

Great. Thank you, Spencer. This is Tony. So our business, if you can go back to the winning recipe that we shared, our corporate identity and how we think about our business and the difference we make for our customers and our shoppers, we have a unique way to leverage those business segments. And we're fundamentally a wholesaler, a grocery wholesaler, 71% of our business. We have a segment of our business that is retail at 29%, and because those stores are a full-scale business, they are larger on average than our customer stores, the 2,100 independent grocers that we serve. We have an opportunity to really understand what makes a difference to those folks, and we can model that and show them that, and it allows us to provide services and generate those services, everything from human resource services to IT services to category management, how to think about pricing and different geographies. All that works together very nicely between the retail part of our business and, again, the larger part of our business, which is grocery wholesale. So we continue to leverage that. We're getting great feedback as we're taking the next step on that and mining the insights that can make a difference and drive solutions for our customers. And so we're delighted where we are right now. We're getting really good feedback from our customers about how that is all working together. We're also delighted about the performance of our military. We had a great quarter. We've had a nice run. You may remember back to when I first got started here, I did job one with the military to figure out how we can make it better and be a good operator, provide the ingredients for a better life to our military men and women all across the globe. And we've done that. We've made operational changes. We've made improvements to our facilities, improvements to our network, and worked directly with DECA to improve the network efficiency there. We have made improvements in our dray arrangements with our manufacturing suppliers. All that is coming together, and we have some great growth there on the profitability as you've seen. We are still focused exclusively on making that a great business, and that's the focus of the team. That's the focus of the overall organization. I think your question was, are we in a better position to sell it now? It's certainly better to sell something that's making more profit than something that's not, but that's not our focus at all. Our focus right now is actually continuing the path of improving the operations, improving the service, and we think that's going to be a fine business and that we don't see any reason why it can't be the same profitability as the balance of our portfolio.

Got it. That's really helpful. And then maybe we could pivot to the cost savings target. You raised that $25 to $35 million for this year from $15 million. What's driving that change in outlook? And then how much of those savings do you expect to contribute to the long-term $300 million EBITDA target that you guys put out there?

Yeah, so I'll start. Let me just pick up a little bit here, too. So we've had really great success. Very proud of the work we've done in the transformation of our supply chain. and the focus on operational excellence overall by the supply chain team. Our throughput progress has been terrific. We're ahead of schedule there. We're ahead of schedule on some of the network changes that we've made, and all that has delivered savings and productivity that's ahead of schedule. So we felt bullish on taking our number up for the year, and that number increase will carry over. The $25 to $35 million that we quoted for this year will continue and will continue to grow. Our team has the next wave of ideas and how the supply chain gets transformed, and it will be a significant player within that $300 million. I would say probably roughly in the range of a quarter of the overall profitability on the way to $300 will come from supply chain improvements.

Thanks, Tony, and kind of building that out, maybe putting a little more detail on the performance thus far and where we're headed. Just as a reminder, and you may pick this up, Spencer, in the notes, there's a 7% increase in throughput, and that throughput reflects pretty closely to our cost performance in the warehouse and in warehouse operations. But beyond that, as you kind of step back and think about the supply chain transformation, as we've talked about before, You've got the warehouse operations. We also have network optimization where we've executed both the addition and the subtraction of sites over the last 12 to 15 months to ensure we've got the right locations and the right inventory at the right place. That together with transportation and route improvements and with improvements in the way that we manage our inventory have all delivered and frankly delivered ahead of schedule. So what we've done is taken that $15 to $30 million run rate And we've brought the bottom end of that forward by three quarters and raised the total guidance for the exit of this year to that $25 to $35 million range. We feel good about it, and that's also playing a role in the raised guidance for the overall company performance, the plus 10 EBITDA at both the bottom and top end of the range.

Got it. Really helpful and nice job this quarter. Thanks.

The next question comes from Scott Mushkin with R and five, please go ahead.

Hey guys. Thanks. Uh, thanks for taking my questions. Um, it's just a lot on, on pack here. So one of the things I wanted you guys said, uh, this is more macro. I'm going to start there, uh, that you expect. And we've heard this from other companies and I just, I guess I would push back a little bit that inflation is going to somehow decrease as we move through the year. Um, I don't believe, at least our research would say, the Ukraine war is actually not even reflected in prices yet. And, of course, diesel continues to move forward or up. So I was just wondering what gives you that confidence and how much of your guidance is dependent on this idea that things will get better?

Yeah, so working backwards, our guidance is not tied to things getting better on the inflation front. When we say that we expect the inflation to wane, we're looking at things like what we saw in the last month where inflation may go from 11% to 10%. We're not talking about a quick retreat there. We agree that we think inflation is going to be around for a long time. I think you're right. I think the disturbances in the Ukraine are not fully hit yet. There's a whole other wave of missed agricultural cycle that's going to be very significant from the war in the Ukraine. There are a number of other things on the horizon in our own country around labor contracts and shipping ports and railroads and all kinds of other things that, you know, we may be looking at more supply chain disruptions and we may be looking at inflation rates that are more extended. So when we talk about them declining, we're talking about, you know, we don't think it's going to be double-digit the balance of the year. And we may see some contraction on that rate as we hit some of the overlaps from the end of last year. We tend to agree. We were early on this dialogue that inflation is not at all transitory. It's going to be here for a while. We're in a cycle now that the underlying causes of the inflation are not quick fixes, and they're going to be around for a couple of years, I think, at least.

That's a great caller, a really great caller. So then the other question I had, and you guys went into this in your kind of monologue, but I do want to push a little bit on the idea that it does seem maybe a kind of naysayer would say, hey, gosh, this military business and the distribution business almost looks like it turned on a dime from a profitability perspective. What would you say to that, someone pushing back that way?

They're pushing back that it turned on a dime?

Yeah, that it turned so fast that it's got to be more temporary than permanent.

Oh, I see. So you're not arguing that we should be slower. Look, I think there were some things as a, you know, I've got a team here of seasoned operators that I brought in, and there were some things that they saw that we could do very quickly. And so there were some things that came fast. But the things that we have done and the changes we're making right now in our warehouse and our networks, Our permit changes, we're changing the delivery schedules to our commissaries in a way that is more profitable for us and maintains great effectiveness for the commissaries. We are working with our manufacturing suppliers to re-look our agreements with them and those are changes that are baked into contracts and they'll be around. I think we acted quickly because we had to act quickly. We had a business that was not doing so well when I first got here, and we had to make very quick changes, and we found some really good, productive ones to make.

Okay, my final one before I yield, and this is real quick. Fill rates from manufacturers to you guys and then your fill rates to your customers.

Great, great question. So fill rates for manufacturers, as I've mentioned in the last couple of calls, have remained disappointing. The manufacturers are suffering from the same types of problems that a lot of businesses are on staffing and disruptions that come from the staffing issues. Our fill rates have been sort of static. They're improving modestly from uh from our uh from our suppliers we're making a better headway candidly internally in terms of that gap between what we've received and what gets shipped out so we are now right now we are performing internally uh better than we were pre-pandemic in terms of here's here's the portfolio of goods we got versus we ordered here's we're going to fulfill on the way out of our business that gap you know historically has been about eight or nine points it's around six to seven points right now uh for us so So we feel great about our performance still in the circumstance where we're still receiving really tough numbers from our manufacturing community.

All right, guys, thank you. And obviously a lot of heavy lifting done during the quarter, so congratulations to the team on that. Good work, guys. Thanks so much.

The next question comes from Peter Saleh with BTIG. Please go ahead.

Great, thanks and congrats on the quarter. Tony, I think you mentioned that inflation was up about 10% in the quarter. I was hoping you could give us a little bit more color on the retail comps, you know, the really strong 7.2% number in the quarter. Can you break down a little bit how much of that was actual pricing or basket increases versus maybe transaction growth? Just trying to understand how the consumer trended in the quarter.

Yeah, great question. So what we're seeing, right now we're seeing an increase in trips to our stores. I think there's a little bit of an, and this is my opinion, there's a little bit of an oddity going on here where you have the scenario where people are getting out more as they're getting more comfortable after the pandemic, at a time when you might expect them to be taking fewer trips while gas prices are increasing. So you have these kind of competing effects. But we saw a pretty significant uptick in our trips. The basket size is smaller. The net of that was modestly negative, roughly close to zero. But we're seeing more trips, slight decline in units, and of course, then we have higher rings overall because of the inflation. So that's a little bit of the mix of what's going on. So we're encouraged by the fact that people are coming in. We're also seeing the mix of our customers, more shoppers. We're adopting more shoppers into the loyalty category. And we're seeing more of them come in routinely for their fill-in trips. So we're seeing some really good things around the visits to the stores. And we're seeing on the overall basket, we think, is sort of what you'd expect, slightly lower units and, of course, higher prices.

Absolutely, Pete. And this is Jason. I'd just add modestly to that discussion. Just if you kind of back up and look at the same store comps of 7.2%, As Tony said, it's largely inflation-driven, but there's some moving parts beneath the surface if you pull back the cover with trips and basket size. The other thing I'd point you to is that this retail business is performing what I would characterize as kind of at or better than the median for the general retail grocery space. And so there's a lot of moving parts, but we think we cop well relative to many of the other players in the space.

Thank you for that. Just maybe one more on the retail segment. Can you just talk about what you're seeing on wages and the impact there? It sounded like you're starting to see some more applicant flow, but yet maybe wages took another leg up. Just trying to understand your comments on that this morning.

Yeah, great. So we are seeing better applicant flow about almost 2.5% times sort of the normal applicant flow that we saw in sort of right around just pre-pandemic and during the pandemic. We believe that's a combination of effects. We've taken our entry-level wages up, as you know. We took them up just almost 11% in 2021. We will probably take them up close to that same number here in 2022. So it's a big change in those entry-level wages. The combination of wage improvements, benefit improvements, and what we've done with the overall culture of the organization around training, around communications, all those things woven together we think have led to not just better applicant flow but better stickability once people get here as well. They find a home that they can stay at. We're not out of the woods yet. We think that overall there's a real tough shortage of good quality talent for all businesses. So we have to compete. We know that we have to compete on all those fronts. The opening offer has to be a solid entry-level pay, and that's why we made those big changes.

Great. And then just lastly, a nice improvement in the military segment in terms of the margins there. Should we expect this going forward? Is there any seasonality that we should be aware of or anything that would preclude you from kind of hitting these targets on a go-forward basis?

Yeah, great question. We see ourselves as being past and in the 1% EBITDA margin range going forward. So as Tony said when he first got here, there was a challenge in that business. We've applied operational performance improvements. We've applied enhanced customer engagement at practices, and we've reached the 1% goal, and I expect that going forward we're going to be continuing to run at or above that 1% level.

Great. Thanks and congratulations.

Thank you.

The next question comes from Andrew Wolfe with CL King. Please go ahead.

Thanks. Good morning. So on the distribution side, you know, you just sort of went through on retail, you know, kind of a real sales growth exercise. So if your sales are up almost 3%, 2.8% versus 10% inflation, you know, simple math says cases, not mix-adjusted, but cases would be down around seven. So, you know, if there's something else going on, like mix or something, maybe it can help us understand that. But also, you know, why is that? Is there some big customer that, you know, left the business we don't know about, or is it just, you know, the typical independent customer is not ordering as much at this juncture?

Hey, good morning. This is Jason Monaco. Good to hear from you, Andy. I think the one thing I'd call out here, and we've mentioned this on some of the prior calls, is we're still in the process of lapping the insourcing of some of the business that we used to do with DG. And we've expected that to carry over through into the third quarter. So we're on kind of the phase down. It's all out of the network, but you're seeing the positive or the negative comps in this case from prior year.

Okay, so that's the DG Fresh stuff. Can you say how much that is so we can ourselves get a sense of how much is going to go away, how much better your cases will get?

What I'd suggest is that I would characterize the rest of our business looks a lot like the retail business in our wholesale kind of core independent space.

Okay, that's helpful. And back to retail, you did mention competitive pricing. I assume for you guys that was a response to something in the market. So would that response be your customers just naturally seeing inflation and going to discounters, or are there other supermarket chains already starting to do something with their pricing? What is the dynamic that caused you guys to get more sharp on your pricing?

Yeah, and I'd characterize it kind of if you step back and think about the context that we're operating in, we're in a had been in an accelerating inflationary environment. So when you think about competitive pricing, it doesn't necessarily mean that we are taking prices down. It may mean the pace at which prices are going up to match the inflationary pressures on the back end. And as we think about understanding what our consumers need and managing through those price changes, What we want to do is ensure that we're sensitive to those consumer needs, we're pricing properly, we're focused on the key value items in the stores, and we feel good about the outcome in that we drove the 7-plus percent comps, the flat-ish volumes in a rising price environment, and maintained a grew share in many instances.

Okay. And lastly, Jason, just when you were answering one or two times on the you know, the cost savings and supply chain. I think you referenced productivity or throughput. Is that the main driver? You know, I mean, throughput being up 7% seems like quite an improvement. But at this juncture, is that the main driver of what you're realizing in your results?

Yeah, I would characterize it as about half of the benefits The remainder coming from transportation efficiencies, route efficiencies, network optimization, inventory management practices, and the like. But it's a significant portion, and that throughput flows right to the bottom line.

Great. That's it for me. Thank you.

The next question comes from Christina Katai with Deutsche Bank. Please go ahead.

Great. Good morning, and congrats on a very nice quarter. I wanted to go back to inflation. I mean, you did mention sort of 10% or higher exiting the quarter from a food inflation perspective. Can you just talk about what you are seeing specifically in retail stores? Regarding consumer behavior, I know you said that private label is growing at double the rate, which I would imagine means that there is some trade down happening. But are you seeing any resistance to these higher prices? Do you think we have reached the ceiling? And how best to think if inflation remains this high for a prolonged period of time?

Yeah, it's a great question. So we are – so first and foremost, we remain very vigilant in the study of this because there's not a – There's not a playbook that exists for the last 40 years on how consumers will behave. We haven't had the advent of prolonged double-digit food inflation in this country since the 1970s, and the world was quite different back then. So we're learning along the way as well. We're seeing some things that look like stuff we might expect, though. I mentioned earlier a little bit of a flight to the private label and looking for ways to – to get a great experience at a lower price to those vehicles. So we obviously have mentioned that, and you mentioned that just a second ago. But we're also seeing really strong growth in fresh, and fresh is a typically higher cost, higher margin part of the store. So I think that what we'll see is that people will look for ways to save money on key value items that are sort of everyday items for them, and look for ways to actually maintain some element of indulgence and interest and find their way to explore the continued joys of living through food at home. We think there'll be a little bit of a bifurcation, and we've certainly seen that. As an example, we'd say in an inflationary market, flowers might not be seen as a really important staple, but our floral business is up, and we're doing quite well with floral. Our deli business is doing well, so prepared meals that people still are seeking convenience and an easy way to get a solution. And our deli business is doing quite well in that regard. And I should note that this is either complicated analyses. Deli business might be doing well because people are not going to the restaurant. We don't know the precise reason why people are making those choices, but we're seeing really strong growth in fresh, strong growth on a lot of those higher cost, higher margin items. At the same time, people are being very aggressive in center store trying to find their way to lower priced items.

Christina, I would say, just adding to that, demand for food at home trends is likely to continue as this food inflation plagues consumers, and we're here to bring solutions to those consumers, whether it's prepared meals or a private label offering to ease the budget. But we believe price-sensitive behaviors are going to continue to strengthen as we continue to work through this inflationary cycle, which, as Tony said, I won't characterize as unprecedented, but unprecedented in terms in the business lives of probably everybody on the phone today.

Yeah, that makes sense. Thank you for that. And I guess just one question on the supply chain, which obviously remains very challenging. I think you mentioned the ongoing tightness in the labor market, although it sounds like it is improving. Can you just talk a bit more about some of the improvements that you are seeing, especially from a logistics operations perspective? to really overcome some of these challenges as we think about supply chains essentially remaining dislocated for longer than we initially thought.

Yeah, so we have certainly dialed up our focus on improving the overall logistics part of our business or the transportation part of our business. You know, we always mentioned that piece about coastal facility. That was a big hit that we've talked about already today. But additionally to that, we're looking at ways that we can actually reposition and get closer to to our consumers, our customers, through our network DC. There's a lot of great tools and new science that allows you to be more efficient in that regard. We're just wrapping up a transportation management system that went live here just recently. It's giving us some great insight about how we can maintain overall effectiveness in the network and be more efficient. So that will continue to be a big focus for us. It's cost. It's cost in an area that's escalating faster because of the fuel pricing and diesel pricing. So as Jason mentioned earlier, we've seen some of that here in this last quarter. Some of those improvements in productivity came from that area. It's a significant part of our future growth and that pathway to 2025 as well. So it will continue to be a focus for us.

Great. Thank you so much, and congrats again on a good quarter.

Thank you.

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

All right. Well, I'd like to start by just thanking everyone for their participation in today's call. We certainly look forward to speaking with you again, and we'll report out our second quarter 2022 results. So with that, I wish everybody a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.