Nash Finch Company (NAFC) reported second-quarter 2013 earnings (excluding one-time items) of 64 cents per share, 7.2% lower than 69 cents per share reported in the year-ago period. The drop was due to pressure on military gross margins during the quarter.
Earnings, however, surpassed the Zacks Consensus Estimate of 48 cents by 33.3%. The earnings beat was backed by higher than expected sales following several strategic initiatives like competitive pricing and strategic partnerships during fiscal 2012.
Nash Finch's total sales in the second quarter of 2013 were $1.2 billion, up 9.1% from the year-ago quarter. The takeover of 12 Bag 'N Save stores in May 2012, and 18 No Frills stores during the second quarter boosted total sales by $23.1 million. Sales exceeded the Zacks Consensus Estimate of $1.14 billion.
Adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) in the second quarter of 2013 declined 3.2% to $26.9 million. The EBITDA margin shrank 30 basis points (bps) to 2.2% . Selling, general and administrative expenses amounted to $72.2 million up 14.8% from the prior-year quarter.
Military Distribution:Sales inched up 2.2% year over year to $537.5 million in the second quarter of 2013 backed by initiatives to attract new business connections and proper utilization of the military distribution network.
The segment's EBITDA decreased 41.5% from the prior-year quarter to $6.9 million, owing to the decline in gross margin related to lower contractual margin rates and low inflation during the quarter. The EBITDA margin was 1.3% in the reported quarter, down 90 bps from the prior-year quarter.
Food Distribution:Food Distribution sales increased 10.3% to $487.2 million in the quarter. The increased was primarily due to addition of new Food distribution customers in the quarter.
Segment’s EBITDA climbed 26.2% to $11.9 million in the quarter. EBITDA margin inflated 30 bps year over year to 2.4% in the reported quarter due to increased sales and early termination of a long-term supply agreement with a food distribution customer.
Retail: Retail sales went up 32.0% to $180.1 million, driven by the Bag 'N' Save and No Frills supermarkets acquisitions.
Segment’s EBITDA stood at $8.1 million in the quarter up 62% from $5.0 million in the prior-year quarter. The EBITDA margin inflated 90 bps year over year to 4.5% in the reported quarter.
Cash and cash equivalents for Nash Finch stood at $1.18 million as of Jun 15, 2013, compared with $1.3 million as of Mar 23, 2013. Long-term debt went up to $416.1 million in the quarter from $381.4 million in the prior quarter.
Nash Finch’s earnings were not very encouraging. Bottom line declined year over year, but top line grew 9.1% in the quarter. Moreover, a low food inflation rate continues to affect the company as it limits the company’s pricing power.
We expect lower contractual margin rates to continue to pressurize on gross margins in the Military segment.
In Jul 2013, NAFC entered into a $1.3 billion definitive merger agreement with leading grocery distributor Spartan Stores Inc. (SPTN). The agreement will closeby the end of calendar 2013. The merger is expected to generate $50 million annual cost synergies and involve a one-time integration cost of $26 million within three years.
The merger is of great interest to the investors as the combined entity will form a leading wholesale and food distributor boasting 22 distribution centers covering 37 states and 177 retail stores. Also, Nash Finch will be able to expand in Michigan, Indiana and Ohio.
Moreover, the new entity is expected to earn about $7.5 billion in sales and will command a strong portfolio of private brands like Spartan Stores’ Spartan and Nash Finch’s Our Family among many others.
Currently, Nash Finch carries a Zacks Rank #3 (Hold).
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