SpartanNash Company

Thank you and good morning. 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 Bart Gnash's website, www.spartanash.com forward slash 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 Spartanash's earnings release from this morning, as well as the company's most recent SEC filing, 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 Spartan Ash 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 Spartan Ash's website at spartanash.com forward slash investors. And now, it is my pleasure to turn the call over to Tony.

Thank you, Kaylee, and good morning, everyone. Glad to be here. I want to start today's call with a focus on our people-first culture. We recently celebrated our frontline hourly associates with our annual Circle of Excellence Awards. These associates walked the Spartan ash green carpet while the company's senior leaders cheered them on. We have now inducted more than 200 associates into this highly coveted Circle of Excellence. The Circle of Excellence is one of several recognition programs we have implemented in the past few years that are helping us to move the needle with associate engagement and retention. In fact, our total company retention rate has improved by nearly 20% since we launched our strategic plan. Turning to other recent news, I wanted to speak for a moment about the acquisition announcements we made in October. I'm pleased to say that we are on track to close the Fresh Encounter deal this month. The acquisition will add 49 stores to our retail portfolio, which expands our footprint in Ohio and Indiana and allows us to begin serving Kentucky. In addition to expanding our retail footprint, we are also winning in wholesale by capturing new sales from Fresh Encounters' other distributors. Additionally, last week we announced the acquisition of Markham Enterprises, which consists of three fuel centers and convenience stores in Michigan. We are energized by the opportunities within the C-Store space, especially due to the channel's stable demand. This transaction is expected to close by the end of this year, and we look forward to welcoming the Markham team members into our family of associates. Looking ahead, we are continuing to evaluate M&A opportunities based on our disciplined M&A framework, which is designed to maximize shareholder value. Before we jump into recent results, I wanted to provide some color on the grocery industry and provide an update on our outlook. According to syndicated data, the markets where we operate grew only 40 basis points during the past quarter compared to Q3 of 2023, while total U.S. grocery was up about 1.1%. The slower market growth in our other geographies has weighed on both the retail and wholesale segments. Okay, so what does this mean for SART and ASH? As we announced today in our earnings release, we are updating our 2024 guidance and also giving an early read into next year. Jason will dive into the details in a moment, but first I want to provide some context. So, while we are pleased to see that our transformational initiatives are outperforming our expectations, We expect these headwinds to persist into 2025, impacting our previously communicated targets in our long-range plan. We are taking a practical and methodical approach to mitigating the macro pressures, and we are steadfast in our commitment to driving results and growing shareholder value. Okay, shifting gears to recap the third quarter. Our consolidated net sales decreased 60 basis points to $2.25 billion. Lower volume in the wholesale segment was partially offset by higher volume in our retail segment. On the wholesale side, a 1.6% decrease was due to lower volumes, inclusive of a 2.9% headwind within the segment from our Amazon business. One of the continued bright spots within the wholesale segment is our military business. Compared to prior year quarters, the military channel has grown sales over the past 11 consecutive quarters and continues to bolster our growth. Now, turning to our retail segment, our retail business grew 1.9% bolstered by incremental sales from the recently acquired Metcalf stores. From a comp standpoint, we are starting to see some positive trends. Although our comparable store sales were down 70 basis points, our same store sales improved sequentially each period during the past quarter, and we had the three best periods of the year so far in Q3. Turning to profitability, Our Q3 adjusted EBITDA was $60.5 million, while adjusted EBITDA margin of 2.7% was flat compared to last year's third quarter. So, as we previously discussed, our transformational initiatives have delivered benefits an entire year ahead of schedule. All of these benefits are helping to partially offset the headwinds I discussed earlier. And we plan to capture more benefits from the 2024 investments by the end of this year. This includes our shrink reduction and non-product procurement initiatives expected to generate $20 million in run rate savings by year end. Before I turn the call over to Jason, I want to thank our team for their steadfast commitment in executing our long-term strategic plan. Since its inception in 2021, we have made significant progress. This progress has improved associate safety and retention, helped us to win new business, expanded operating productivity, increased our margins and captured cost savings, enabled us to further collaborate with suppliers, delivered value-add products and outstanding service to our wholesale customers and retail shoppers, and allowed us to make increased investments in our people. We expect these initiatives to continue generating benefits into 2025 and beyond. All of these elements have also built a solid foundation for organic and inorganic growth supporting our effort to drive results and grow shareholder value. And with that, I'll now turn the call over to Jason to walk you through the quarterly financials in greater detail.

Thanks, Tony, and welcome to everyone joining us on today's call. Turning to our quarterly results. Net sales in the quarter decreased by 0.6% to $2.25 billion versus third quarter 2023 sales of $2.26 billion. As Tony mentioned, Lower volume in the wholesale segment was partially offset by higher volume in our retail segment. Gross profit for the quarter increased to $355 million or 15.8% of net sales compared to $348 million or 15.3% of net sales in the prior year's third quarter. Our gross profit dollar increase was somewhat offset by volume declines, while the 50 basis point margin increase was driven by an accretive sales mix, higher vendor funding, and a reduction in LIFO expense. As a percent of sales, our reported operating expenses increased 32 basis points from the prior year. Higher restructuring charges, as well as retail store labor and healthcare costs, led to higher SG&A in the third quarter. These increases were, however, partially offset by lower corporate administrative costs and benefits realized from the merchandising transformation. We expect returns from the investments we've made in 2024 to materialize by the end of this year. Compared to the prior year quarter, interest expense increased $600,000 to $9.9 million. Consolidated net earnings decreased by $200,000 to $10.9 million, while EPS was flat to last year at 32 cents per diluted share. Net margin of 0.49% was flat compared to the prior year quarter. On an adjusted basis, Net earnings decreased $2.3 million to $16.5 million, or 48 cents per diluted share, compared to 54 cents last year. Adjusted EBITDA decreased by $400,000 compared to the prior year quarter to $60.5 million. Now, turning to our segments. Compared to the prior year quarter, net sales and wholesale decreased $25.9 million, or 1.6%. primarily due to reduced case volumes with independent retailers and one national account customer, partially offset by growth in other national account customers and the military channel. Wholesale adjusted EBITDA was $44.8 million, an increase of 14.8% compared to last year's $39 million. The approved results were driven by a higher gross profit rate, lower corporate administrative costs, and benefits from the Merchandising Transformation Initiative, which more than offset the sales declines. Wholesale reported third quarter operating earnings were $21.1 million compared to $18.2 million in the prior year's third quarter. The favorability was partially offset by higher restructuring charges in the current quarter. Now, moving to the retail segment. While our comp store sales were off 0.7% for the quarter, we saw segment sales grow 1.9% to $675 million versus the prior year quarter due to contributions from Metcalf's, as Tony mentioned earlier. And our supermarkets, ex-fuel centers, were up 2.9% compared to the prior year quarter. Retail adjusted EBITDA was $15.7 million compared to $21.9 million in the prior year's quarter. About half of the change was due to higher healthcare costs, with the remainder driven by higher store wage rates and a lower gross profit rate. These increases were partially offset by higher sales volume and lower corporate administrative expenses. Retail reported operating earnings were $3.9 million, compared to $4.9 million in the third quarter of 2023. Now, turning to our balance sheet, our leverage ratio of net long-term debt to adjusted EBITDA increased in the third quarter to 2.4 times, compared to 2.2 times at the end of the second quarter. Year to date, we generated $123.3 million of cash from operating activities, an increase of more than 28% compared to the same period last year. The increase was due largely to ongoing earnings and our efforts to improve our working capital position. Our liquidity at the end of the third quarter is about $500 million, giving us capacity to fund our strategic plan and M&A. As reported in our earnings release, we updated and narrowed our full year guidance based on current market conditions, which have been partially offset by our operating performance to date and the ongoing benefits we expect to realize from our transformational initiatives. Turning to the guidance ranges, we still expect net sales to be $9.5 to $9.7 billion. Adjusted EBITDA is now expected to be $252 to $257 million. with the midpoint of the new guidance about the bottom of the prior range. And adjusted EPS is now expected to be $1.85 to $1.95 per diluted share within the previous guidance range. Based on our spending to date, we also narrowed our CapEx guidance and expect it to be in the range of $135 to $140 million. We also continue to expect food inflation to be about 1% for the fiscal year. As a reminder, our full year guidance includes the benefits of tuck-in acquisitions. Before I turn the call back over to Tony, I wanted to provide more color on his comments about next year. For your reference, we still plan to give our typical full year guidance during our next earnings report for Q4. As Tony mentioned earlier, the industry has been operating in a dynamic environment. When we met with many of you in late 2022 at our investor day, Our team set long-term targets based on the market conditions and trends at that time, resulting in our growth to $10 billion in revenue and $300 million in adjusted EBITDA. Since 2022, the market conditions have been more volatile than the industry expected. While softer market conditions have manifested recently in our geographies, we remain focused on the controllables. This includes the execution of our margin-enhancing transformational initiatives which are outperforming our expectations. Circling back around, in fiscal 2025, we expect low single-digit top-line growth and mid-single-digit adjusted EBITDA growth compared to the updated 2024 guidance ranges. Achieving this outlook would deliver a compound annual growth rate of approximately 7% versus 2019. Included in our 2025 expectations are the benefits of two tuck-in acquisitions. First, Fresh Encounter is expected to contribute more than $350 million in retail segment sales, or about $225 million on a total company basis after wholesale eliminations. As Tony mentioned, our wholesale business is also benefiting from this transaction since we will be picking up volume from other distributors, which contributes to the return for this investment. We are making progress on the deal and expect Fresh Encounter to close this month. The second acquisition that we announced, Markham, is expected to add more than $20 million in net sales on an annual basis. This deal is on track to close by the end of this year. In aggregate, on an annual basis, we expect these acquisitions to add more than $10 million in adjusted EBITDA. We're funding both of these acquisitions through our existing credit line and expect them to be accretive in 2025. And with that, I'd like to turn the call back over to Tony.

Thank you, Jason. We are really pleased with the progress we are making. Our strategic initiatives are providing a strong foundation for growth. Furthermore, we are leveraging that progress and our core capabilities to pursue deals that fit into our M&A criteria. One key area of growth is within our retail business, and I'm pleased to announce that we recently welcomed Juma Berry as our new Senior Vice President and Chief Retail Officer. Juma is stepping into this position preceded by our Executive Vice President, Corporate Retail, Tom Swanson, as Tom will depart the organization and work to support the company through a smooth transition. Juma will oversee retail strategy and operations across Spartan Ash's growing retail footprint. I'd like to offer Juma a warm welcome to Spartan Ash and offer our thanks to Tom for his contributions to the company throughout the years. All right. Before we open the call for Q&A, I would like to take a moment to thank our veterans Spartan Nash has the privilege of serving active military members and veterans by distributing groceries to more than 160 commissaries and 400 exchanges worldwide. This Monday on Veterans Day, we honor veterans and their families who sacrificed so much so we can live freely. With gratitude, I want to extend my heartfelt thanks to all of our veterans, including the hundreds of Spartan Nash associates who are veterans. With that, I'd like to turn the call back over to the operator and open it up for your questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad now. You will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star 1 on your phone now. Our first question comes from Chuck Serinkoski from North Coast Research. Please ask your question.

Good morning, everyone. Looking at the Markham acquisition and the fuel side of it, can you talk about what you're doing there, the strategic importance of being in the fuel distribution business, and how much kind of cost savings does that bring to Spartan Ash?

Good morning, Chuck. So, yeah, sure. As I mentioned on that call, we run right now, or previously ran about 36 of those fuel centers. And we find that the stability of that product for shoppers and for folks fueling up is actually something that's really attractive. The margins are good and the overall revenue is consistent and good as well. So we think that's a place where as we're looking for opportunities to change and grow our footprint, we'll have an eye toward those types of things. This one came up and looked like a really attractive deal for us. So we jumped in and we think that's possible. We'll actually do more of those as we look for ways to expand what we do and what we do well.

Yeah, Chuck, this is Jason. The only thing I'd add here is these are three kind of traditional fuel stations and convenience stores. They're relatively co-located to existing supermarkets that we have in the market here in Michigan. And we see not just opportunities in the C-Store space, which is huge, but we also see opportunities in the synergy between our supermarkets, the loyalty programs that exist, and those stores based on their location. So we're excited about the Markham acquisition. We're excited about fuel and convenience stores, and you should expect to see us continue to invest both organically and inorganically in that space.

And switching to another subject, private label. How did that do in the quarter, and what might you be doing there that's different from your competitors?

Hey, Chuck, it's Jason again. We had a stable quarter this quarter. Our penetration on own brands has remained very strong in the high 20%. And we continue to see strength in not just our primary private label offering of our family, our primary brand of our family, but also we've seen really nice progress in our finest reserve brand extension that we launched about a year ago now. And we're excited about the prospects going forward. So To me, it's a continuation of meeting consumers where they're at, giving them an opportunity, whether they're looking for a premium offering with finance reserve or looking for a discounted offering in today's environment where we want to make sure groceries aren't breaking the bank. We want to make sure that we give consumers what they need. And we've been pleased with our family and our brand's offering. as it's helped us improve the flow of traffic into our stores. We still have work to do on traffic, but we've seen sequential improvement in foot traffic, and we attribute that to continuing to be competitive in our entire value offering, which includes private label.

Thank you.

Our next question comes from Alex Slagle from Jefferies. Please ask your question.

All right, thanks. Good morning. I guess high level, just two acquisitions in a fairly short period. I'm wondering what changed, whether it was specific opportunities that became available or maybe the valuations are better or really kind of reached that ideal time for Spartan to make this kind of move. Just high level thoughts on that and the timing.

Yeah, you bet. This is Tony again. It's sort of all of what you said. As we've mentioned a number of times in these calls, we're always going to be sort of vigilant for opportunities to grow through M&A in ways that actually support our overall growth strategy. And what you said is precisely correct. These were two opportunities that the time was right for growth. the previous owners, and they're folks that we know well. In particular, in case of Fresh Encounter, we have served them for, I believe, 58 years. So we have a very deep relationship with that organization, with those stores. And as I link the story I said earlier about, you know, overall growth that is sort of at the baseline in this industry, I think you have to be looking for ways to expand. And we're going to look for ways to expand geographically, if that makes sense, and look for ways to expand even within the density of our current geography. So we're always going to be vigilant. And I think we'll be looking for these types of opportunities on an ongoing basis.

Great. And the Amazon Fresh business. Any sense we're closer to getting back on track there with the formatting changes and start to reaccelerate that as we look ahead. And I'm not sure if you assume any of that in the initial 25 outlook or how you're setting the stage on that.

Yeah, I think we're getting to a place of greater stability there. It's been a couple of years of declines. We've talked about, you know, quite a bit on these calls as well. And we're working with Amazon on the current realities of that business and finding ways to grow and be more efficient We can grow in a productive way for both us and for our customer. We're not counting on a lot of growth there. In the future, we're counting on having a great relationship with Amazon and moving our business forward together in partnership we've talked about, you know, over the years.

All right. Thanks for the update.

Our next question comes from Ben Wood from BMO Capital Markets. Please go ahead.

Hi, good morning. This is Ben on for Kelly here. Wanted to, can you talk us through the cadence of the quarter and maybe how any update on quarter to date? As far as like sales volumes, it seems like maybe you got some volume improvement on the retail side, inflation and promotional perspective, anything incremental you're seeing happening with consumer behavior?

Sure. I think I'll just make one note kind of working backwards. We are – and we'll talk – we can talk more about this. I imagine we'll have more questions about what we're doing in stores on our consumer value proposition. One of those things you mentioned just a minute ago is finding the price points and sort of the overall – price value that makes sense for shoppers. And so as we're thinking about that and testing ideas, we are testing both doing more deals and doing a little bit more stuff sold on deal as well as looking for the depth that actually speaks to our shoppers. So in these last quarter, we did some work in some of our geographies on going to more depth and looking for, again, with the stuff that resonates with shoppers and that type of deal that they're looking for. So it was certainly – We'll certainly be looking at that as a tool for how we grow our business organically.

Yeah, Ben, this is Jason. I think Tony alluded to the cadence earlier in the call. We had sequential improvement throughout the quarter, finished the comps at minus 0.7. Overall, our growth in retail was just under 2%. Our supermarkets were a little north of 2%. And I don't want to lose sight of the wholesale business. We talked a little bit earlier about Amazon and its impact. In our wholesale business, we were up nearly 3% ex-Amazon. So we've been pleased with elements of our growth and pleased that we're continuing to drive performance. Obviously, we've got some headwinds we've been working through in the past with Amazon, and that's starting to stabilize. And we're looking forward to really building on the growth thus far And that's why you see us focusing on programs like CBP where we've had some really nice early successes and we're learning and building on that growth, particularly in our fresh space. And that gave us the confidence to come out and say we see next year kind of low single-digit growth despite our markets growing at 0.4%. And we see bottom line growth continuing to drive operating leverage with mid-single digit EBITDA growth. So together, we feel good about where we're at and we want to continue to drive the margin enhancing programs, the growth initiatives that we've got underway to continue to build on the success despite the recent challenges in the marketplace. So we control what we can control and then focus on delivering bottom line value for shareholders.

Okay, great. That's helpful. And then I just wanted to switch gears here and talk about maybe kind of the value-added services and then in particular kind of digital and where your independent customers stand with digital. I think in the space we've seen tremendous digital growth from some of the national peers. So, why don't you know what you're hearing from that? Are you hearing that there's a demand for more of that, that the customer's looking for more of that omni-channel? Just any commentary or learnings that you're seeing, anything you're digging in on the digital front?

We have a team that is doing great work on growing our overall digital capability for our stores and what we can offer to our wholesale customers as well. We have, I think some of the stuff that we see anywhere folks are really exploiting digital are the, well, mostly it's a combination of general merchandise and grocery. Our stores are going to be typically – our customer stores are typically smaller, typically more rural. They probably will not be given to the types of growth we've seen, so the big metro folks can combine that with, you know, soft goods and general merchandise. But there's a desire for that, and we're growing it. We're growing it in our stores, and we are providing some of those services to our customers as well.

Yeah, great question. Maybe I'll take half a step back, Ben. services. And that suite of services is something where we bring value, not just because they individually create value, but as a package. And the skills and capabilities we have as a retailer can come to bear and help our independent customers grow and develop and make them win in their business spaces. Now, specifically, as it relates to the digital space more broadly, maybe a couple of things I'll call out. We've had a lot more interest from our customers in electronic shelf labels, and we've been rolling those out, beginning to roll those out with certain customers. We've had some work around enhanced media and the digital media space. So more broadly, when you think about digital, I think you were alluding to digital or online ordering, but more broadly, the ecosystem that we play in and we're providing services and offering those to our customers in a way that helps build an entire package of value. So kind of early phases, but enhanced media, electronic shell tags, and helping our customers reach people in new digital ways.

Okay, great. Thank you very much.

If you would like to ask a question, please press star 1 on your telephone keypad now. you will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star 1 on your phone now. Our next question comes from Scott Mushkin from RFR5 Capital. Please ask your question.

Hey, Tony. Hey, Jason. Thanks for taking my questions. So I kind of had two. I guess the first thing is you look at the industry, There's definitely some trends emerging where one is just growth in the broad line companies, Walmart, Amazon, outside the Amazon Fresh. And then two is kind of organic and specialty. So I guess my question is, you know, how do you combat slash address these trends with your business as it currently sits? And then how do you think about these trends with M&A, future M&A?

Great question.

And I think I'll offer a couple of thoughts here. So as we think about both our consumer value proposition as well as the acquisition, we have a hard eye toward or keen eye toward looking for those types of products that our shoppers are looking for, particularly local is a big thing in our market. So as we think about how These stores, again, which are going to be skewed toward more suburban, rural, we're bringing in more and more local products, and those that have that same kind of specialty impact, if you will. They're specialized for that market and often very unique products. So, we're seeing more and more take on that. Even if you think about what we did with the Metcalfe, for example, that acquisition has a very significant focus on the local sort of specialty type items that community really wants. So we think that's actually going to be a really important part of our future as we think about the overall customer value proposition in our stores and making sure those kind of fresh, healthy, and local options and exploring those boundaries more and more because we're seeing the same thing that you just articulated around that desire. And it'll be something we'll have an eye toward as we think about acquisitions as well and think about how we actually get more learnings and more types of elements of our overall portfolio that speak to that.

Okay, thanks.

My second question, our research would say that there's probably a lot more, a further step up in promotions coming from CPG. I don't know if that's what you're thinking as we look at 25, and how should we, if you agree with me, how should we think of it in relation to your business as we get into 25?

Yeah, so as I mentioned a little bit ago, we are looking at ideas around having more and more differentiated items as well as differentiated price points. And we have the same types of desire for growth as our suppliers do. So we're actually working in lockstep with them to find ways to find those deals, find the right way to merchandise them. and find those price points that speak to consumers. So we're looking at more ideas around bundling, around multiple items, around the kind of buy one, get one, buy three, get two, those kinds of things. And we're seeing that actually start to resonate with some of our shoppers and some of our communities. So I think what you, I would say, likely see, what you see from us anyway, as you can see us doing more of that, And we've had sequentially more depth over the course of this year as we're exploring those ideas and trying to, again, get the right value for the people coming to our stores. And, of course, as you said is precisely right, the food manufacturers are also keenly desirous of finding those right price points as well. So, I think you'll see more of that.

Yes, Scott, this is right up our alley with the merchant. Hey, Scott, sorry about that. This is right up our alley with the merchant transformation. We've been focused on this for the last few years, building out capabilities with respect to our engagement and our vendor relationships and really building on those relationships. And you've heard us say this before, but we think when our consumers win, our customers will win, we'll win, and our vendors will win. And that's the way we think about it across the entire supply chain. We want to make sure we bring the best value to our shoppers and along the way our suppliers will win as well. In this tighter volume environment across the United States and particularly in our geographies, I'd expect continued promotional activity and investments from the vendors along the way so that we all continue to win together.

Hey, Jason. Is that your thoughts in 25, you know, part of why you think EBITDA growth will be there is that, you know, the vendor funding will continue to accelerate as they try to get their volumes back on track?

Yeah, Scott, we're counting on our programs, particularly around the margin enhancing activities, continuing to deliver value. We also recognize it's on the backdrop of an environment where in our geographies, the market growth is less than the national market growth. And that's why we wanted to come out and be transparent now with kind of the latest or most recent changes in market conditions and say, we believe that our programs worked We believe they create long-term value. We're just building it off a lower base with the starting point coming out of 2024.

All right, perfect. Thanks, guys.

There are no other questions at this time. I will now turn the call back over to Tony Sarsom for closing remarks.

All right. Well, thank you, and thank you all for your participation in today's call. We certainly appreciate your interest in Spartan Ash. And from our family to yours, we'd like to wish you all a very pleasant good day.

This concludes today's conference call. Thank you for attending.