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Edited Transcript of SPTN earnings conference call or presentation 15-Aug-19 12:00pm GMT

Q2 2019 SpartanNash Co Earnings Call

GRAND RAPIDS Aug 25, 2019 (Thomson StreetEvents) -- Edited Transcript of SpartanNash Co earnings conference call or presentation Thursday, August 15, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis Eidson

SpartanNash Company - Chairman, Interim President & CEO

* Mark E. Shamber

SpartanNash Company - Executive VP & CFO

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Conference Call Participants

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* Andrew Paul Wolf

Loop Capital Markets LLC, Research Division - MD

* Blake Anderson

Jefferies LLC, Research Division - Equity Associate

* Charles Edward Cerankosky

Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal

* Karen Fiona Short

Barclays Bank PLC, Research Division - Research Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD and Senior Retail & Staples Analyst

* Katie M. Turner

ICR, LLC - MD

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Presentation

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Operator [1]

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Good day, and welcome to the SpartanNash Company Second Quarter 2019 Earnings Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Katie Turner, Managing Director. Please go ahead, ma'am.

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Katie M. Turner, ICR, LLC - MD [2]

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Thanks. Good morning, and welcome to the SpartanNash Company's Second Quarter Fiscal 2019 Earnings Conference Call.

On the call today from the company are Dennis Eidson, Chairman and Interim President and Chief Executive Officer; and Mark Shamber, Executive Vice President and Chief Financial Officer.

By now everyone should have access to the earnings release, which was issued yesterday at approximately 4:05 p.m. Eastern time. For a copy of the release, please visit SpartanNash's website at www.spartannash.com/investors.

This call is being recorded and a replay will be available on the company's website for approximately 10 days.

Before we begin, we'd like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include, among others, competitive pressures amongst food, retail and distribution companies; the uncertainties inherent in implementing strategic plans and integrating operations; and general economic and market conditions. Additional information about the risk factors and uncertainties associated with SpartanNash's forward-looking statements can be found in the company's earnings release, most recent annual report on Form 10-K and in the company's other filings with the SEC. Because of the risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP measures and comparable period measures to provide investors with useful information about the company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by Regulation G is included in the company's earnings release, which was issued yesterday.

And it's now my pleasure to turn the call over to Dennis.

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Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [3]

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Thanks, Katie. Good morning, everyone, and thank you for joining us today. It's nice to be speaking with many of you again as the Interim President and CEO.

I want to take the opportunity to address our leadership transition, also provide an update of our strategies to sustain our top line growth while improving our profitability in the long run. Mark will then provide some additional detail on the second quarter financial performance, and then we'll open up the call for your questions.

First, on behalf of the Board and the entire SpartanNash team, I'd personally like to thank Dave Staples for his contributions throughout his tenure at the company. Since joining SpartanNash in 2000, Dave has presided over numerous successful business initiatives and was instrumental in driving growth across our business, and we wish Dave the best in the future.

As many of you know, I have a long history with SpartanNash, having retired as CEO in 2017. And prior to that, I served as President, Chief Operating Officer and EVP of Marketing and Merchandising dating back to 2003.

In the last few days since I've stepped back into the day role at SpartanNash, certainly been refreshing to see the passion and dedication of our associates across the organization. We're confident in the strength of our platform and the effort of our associates that help us to secure wins across all of our segments in order to gain momentum. I look forward to working together with this team to drive meaningful improvements while positioning SpartanNash to achieve long-term profitable growth and improve value for our shareholders.

As part of the effort, we've decided to exit the Indianapolis-based Fresh Kitchen operations and shift Caito's focus and expertise for the produce distribution and Fresh Cut operations. We believe this transition better aligns with Caito's operational expertise and it will enable them to improve service levels and efficiency. Production will continue as the transition plan is executed, and we're committed to make the transition as seamless as possible for our Fresh Kitchen customers, associates and our suppliers. We expect to complete this transition by the end of fiscal '19, and we'll update you on the development in the future quarters.

With respect to our strategic business objectives, our team has made progress in many areas during the current quarter. Although we've not achieved our profitability goals, we remain focused on translating our sales growth into improved bottom line performance.

Consolidated net sales increased 5.3% to $2 billion, representing the 13th consecutive quarter of growth for the company. We also continued to make progress on our other strategic objectives during the quarter and are particularly pleased with our ability to strengthen our team, improve working capital and lower debt levels.

In the Retail segment, sales growth was driven by contributions from the newly acquired Martin's business. Additionally, we've experienced a positive consumer response to the relaunch of the Family Fare banner in West Michigan, resulting in a favorable trend in the sales for these locations.

In the Food Distribution segment, net sales increased 3% before the impact of the elimination of intercompany sales to Martin's. However, we experienced some deceleration in the rate of sales growth from recent quarters, largely due to unseasonably cool and very wet weather. We're pleased that these trends will improve during the month of July as the weather became more favorable and the rate of growth approximated to our recent levels.

In the Military segment, net sales increased nominally, even as the broader commissary environment continue to contract in the current quarter. We expect Military revenues to continue to be slightly ahead of 2018 the remainder of this year as we benefit from new business and growth in DeCA's private brands.

As we move forward, we expect Project One Team, our previously discussed company-wide initiative, will help drive growth and profitability in our business. Our team has made progress in the last 6 months since starting this initiative, and we continue to remain on track to achieve greater than $20 million in annual run rate savings by the end of fiscal 2020.

At this time, we've implemented several initiatives across the organization and are in the process of implementing more significant initiatives, which include improving the systems and policies for inventory procurement and management, supply chain efficiency, and automation and routine administrative tasks. The effect of implementing these cost savings opportunities are not expected to be material to earnings in '19 due to the time and resources required during the start-up phase.

Another strategic objective is strengthening the management team, systems and supply chain. And most recently, we welcomed Walt Lentz as the President of Food Distribution. His depth of experience of supply chain, manufacturing and the retail landscape will benefit the Food Distribution segment and the company's entire supply chain. We're excited to see that Walt hit the ground running and has already been aligning with some of the other leaders in the organization to improve the company's way that we take food places.

And I'm also especially pleased with the progress the team has made on our strategic objective to reduce debt and working capital investment. Since the second quarter last year, we paid down over $90 million in debt resulting in an $8 million net debt reduction in the net balance, despite the $87 million used to fund the Martin's acquisition. As a result of our significant reduction to our revolving credit facility, last week, we paid off our term loan, which will contribute to [lower our] rate of interest expense, not only in the back half of this year, but also going forward.

Our team has also reduced working capital by over $15 million from the second quarter of last fiscal year, while growing sales mid-single digits. I commend the team for their efforts to date and look forward to the improvements of where we'll be making the balance of the fiscal year as we work towards our $30 million capital reduction target.

And now I'll turn the call over to Mark for the financial review.

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [4]

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Thanks, Dennis, and good morning to everyone joining us on the conference call and webcast today.

Net sales for the second quarter of fiscal 2019 increased to $2 billion, as Dennis mentioned, an increase of $100 million or 5.3% over 2018's second quarter sales of $1.9 billion.

Adjusted EPS for the second quarter of fiscal 2019 came in at $0.34 per diluted share compared to adjusted EPS of $0.50 per diluted share in fiscal 2018's second quarter.

On a GAAP basis, the company reported a loss of $0.19 per diluted share in the quarter compared to earnings of $0.50 per share in the second quarter of fiscal 2018.

Shifting to our business segments. Net sales in Food Distribution decreased by $6.3 million or 0.7% to $935.4 million in the second quarter of fiscal 2019. Excluding the elimination of intercompany sales to Martin's subsequent to the acquisition, sales increased by 3%, primarily due to sales growth from existing customers.

Inflation accelerated to 115 basis points in Food Distribution during the quarter, an increase of 33 basis points from Q1 and an 81 basis point improvement as compared to the second quarter of fiscal 2018.

Reported operating earnings for Food Distribution in the second quarter totaled $272,000 compared to $18.7 million in the second quarter of fiscal 2018, primarily due to asset impairment charges associated with the repositioning of the Caito Fresh Production operations, losses from the Fresh Kitchen operations and higher supply chain expenses, partially offset by lower recall expenses than in the prior year and favorable adjustments to incentive compensation.

Adjusted operating income totaled $16.8 million in the quarter versus the prior year's second quarter adjusted operating income of $19.8 million.

Second quarter adjusted operating earnings in the current year exclude $16 million in asset impairment charges as well as the allocation of onetime costs associated with Project One Team in the current quarter.

Fiscal 2018 second quarter adjusted operating earnings exclude $1.1 million in expenses, which are detailed in Table 3 of yesterday's press release.

Military net sales of $490.6 million in the second quarter reflect an increase of $0.9 million or 0.2% compared to prior year revenues of $489.7 million. Incremental volumes from new business with an existing customer and DeCA's private brand program drove the sales increase, which is partially offset by lower comparable sales at commissary locations. Military Distribution reported an operating loss of $1.6 million in the second quarter compared to earnings of $3.1 million in the second quarter of fiscal 2018, primarily due to higher supply chain costs and lower margin rates, partly due to a shift in the mix in the business as well as the cycling of gains related to the sale of a closed facility in the prior year quarter.

On an adjusted basis, Military's operating loss was $1.5 million for the second quarter of fiscal 2019 compared to operating earnings of $2.3 million in 2018 second quarter.

Finally, our Retail net sales increased 22.6% to $570 million for the quarter compared to $464.6 million in the second quarter last year. The sales increase was due to the Martin's acquisition. Excluding this acquisition, sales decreased 3.3% due to lower sales associated with store closures totaling $10.2 million, and a decrease in comparable store sales of 2%, partially due to the shift in the Easter holiday, which we estimated 0.5%, and unfavorable weather conditions for this first 2 periods of this quarter. The comparable sales trends have improved sequentially in the July and August time frame.

Reported -- retail reported GAAP operating earnings of $8.7 million for the second quarter of 2019 compared to $8 million in the prior year's second quarter. First quarter adjusted operating earnings in Retail were $8.2 million compared to $7.7 million in 2018 second quarter. The increase was primarily driven by the contribution of the acquired Martin's stores, the favorable impact in closing underperforming stores and lower incentive comp, mostly offset by higher fees paid to pharmacy benefit managers.

Interest expense increased $1.7 million in the second quarter of fiscal 2019 to $8.7 million, due to higher interest rates compared to same period last year. Interest associated with the borrowings to fund the Martin's acquisition were more than offset by debt paid down through cash from operations. We recognized pension termination costs of $9 million in the second quarter, primarily due to settlement expense as we are distributing assets and winding down on our corporate pension plan as previously announced. We expect additional noncash expense of approximately $10 million to $11 million in the third quarter related to the final asset distributions of the plan.

So the first half of fiscal 2019, we generated consolidated operating cash flows of $103.8 million, consistent with the prior year-to-date period of $104.3 million.

Our total long -- net long-term debt decreased by $12.4 million to $682.3 million compared to $694.7 million at the end of the second quarter of 2018, that we were able to offset the acquisition of Martin's and other investments with cash generated by operations and the disposition of certain closed facilities.

From an outlook perspective, we have reiterated our full year 2019 sales -- net sales guidance of mid-single-digit sales growth, which was originally provided on February 20, 2019. As communicated in our earnings release, we expect full year earnings of $1.20 to $1.35 per share on an adjusted basis, excluding charges totaling $32 million to $36 million after taxes, which includes after-tax charges to terminate the company's frozen pension plan of $7 million to $8.3 million for the remainder of the year, and projected losses in disposition expenses associated with the company's planned exit of its Fresh Kitchen operations of $3.7 million to $4 million, and other items as detailed in Table 6 of yesterday's earnings release.

We expect adjusted EBITDA will range from $183 million to $195 million. This outlook does not include costs associated with the CEO transition and costs from a nonrecurring supplemental transition incentive program for eligible associates.

From a GAAP perspective, we expect that reported earnings from continuing operations will be in the range of $0.21 to $0.47 per diluted share. We are updating our capital expenditures guidance to a range of $86 million to $92 million. And we now expect depreciation and amortization to range from approximately $89 million to $91 million, interest expense to range from $34 million to $35 million, and our reported and adjusted effective tax rates to range from 22% to 23% due to a shift in profitability into lower tax jurisdictions.

And at this point, I'd like to turn the call back over to Dennis.

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Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [5]

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Thanks, Mark. In closing, we recognized that much work still remains to be done to return our organization to the profitability levels that we expect. Our team remains extremely focused on moving the company forward in this area, and I'm excited to see how the new members of the team are contributing to build an even stronger organization. I personally look forward to what we will accomplish at SpartanNash as this team reaches its full potential.

With that, I'll turn the call over to you, Keith, and open up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Chris Mandeville with Jefferies.

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Blake Anderson, Jefferies LLC, Research Division - Equity Associate [2]

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This is Blake on for Chris. Can you, first of all, walk us through the learnings just from your assessment of the Fresh Kitchen business? I know you've been discussing some options there with outside experts. So just a little more detail on the main problems you're experiencing, what you found out, and how you came about the decision to sell that business.

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [3]

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Yes. I mean I think, Blake, and I appreciate the question. I think at this point about our findings and the decisions, I don't want to focus too much on that we have at this point made the decision to exit that business. And we have a process underway that we think will be completed by the end of the fiscal year. I think at the end of the day, it was strategically a good decision. There were some expectations of sales growth from some customers and where we thought there would be opportunities as well, they eventually -- the sales came -- or the sales have come, they have come at a lower rate than I think we initially anticipated. And the length of the runs or the -- we have far more SKUs and smaller runs than I think were originally in the projections. And so while the team made significant efforts to reduce our labor costs associated with that and manage the strength associated with that, we just weren't able to get them to a level where we felt, as the additional sales came onboard, that we could wait for that period of time. And then it was a scenario where the sales lead time I think was perhaps longer than we initially expected. And by virtue of the shorter runs, we've talked probably in the last 3 or 4 quarters about looking to see measurable improvements so that we could see that we're on a trajectory. And the sales growth, we've added customers, we've added volume, it just hasn't happened at the pace that we needed. And so we felt the right decision was to exit at this point in time and move forward.

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Blake Anderson, Jefferies LLC, Research Division - Equity Associate [4]

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Okay. That's helpful. And then are you willing to share any numbers on the EBITDA level it had? Or maybe how much of a headwind it was to margins, so we can think about the list going forward?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [5]

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No. I don't think we're going to get into that level of detail. I mean it was sort of an integrated operation, and so in trying to break out some of the administrative aspects of it at this time, I think it's a little challenging. And given -- we talked about the fact, if you go back to some of the prior calls, that we were doing $40 million to $45 million of business. And we're -- with what we're exiting, we're only going to exit on about $20 million of the business. It would all be projections as to what we think what portion of the business that we're retaining into the Fresh Cut operations will do. And I don't want to get there until we've actually had that up and running and sort of see what it does in the results. So we've given guidance for the back half as to what we expect the losses would have been had we continued at the current run rate as well as some of the expenses that we expect to incur as part of this process and part of the shutdown, but I'm not going to try to go back into the history of it because it just -- it would all be sort of a pro forma that may or may not be dead on.

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Blake Anderson, Jefferies LLC, Research Division - Equity Associate [6]

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Okay. Understood. And then last one just very quickly on Retail. Could you give us what Martin's same-store sales were versus the rest of your banners? Are you willing to break that out at all?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [7]

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No. I mean we'll talk about what Martin's is doing when they fall into the comp. But we've -- I mean I stay during my 2 years here, I don't know we've ever broken any particular banner out. So we're sharing what the sales are. We gave you an estimate I think when we announced the transaction as to what they were doing historically. That should give you some sort of range as to how they're performing. But we're not going to carve it out because I think there'd be an expectation we do that going forward. And we typically don't do individual banners.

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Operator [8]

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And the next question comes from Karen Short with Barclays.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [9]

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So just a bigger picture question. I mean obviously, I've realize that Kitchen has been a disappointment. But the industry has also been very tough. So I guess as I look to the decision with respect to Dave, how do you think about it being self-inflicted as opposed to just being in the general industry malaise? Because I think if you look at the industry in general, most retailers are seeing top line growth with operating profit declines. So just kind of trying to parse out how much of it is really just industry?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [10]

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So Karen, let me just make sure I understand the question and then maybe there's a portion Dennis will answer, and there's a portion I'll try to answer. So you're -- if I understand what you just asked, you're asking if how much of our recent performance we feel is self-inflicted versus what portion is associated with the industry as a whole. And you're focusing primarily on the retail side? Or are you asking for all the segments?

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [11]

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No. I would say for all -- I mean not necessarily Military, but distribution and Retail. I mean -- and I ask it in the context of like, again, obviously, Kitchen has been a problem, but is what's happening at Spartan really a Spartan issue or is the industry?

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Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [12]

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It's crucial I think -- Karen, I think the answer is kind of, yes, right? It is not one or the other. And I think we certainly recognize that the macro environment is a difficult one in the space. And yes, there is -- we reflect on that. We're pretty heartened by the fact that we've been able to generate positive sales consistently despite that environment, we put in the releases the 13th consecutive quarter. And I guess we're not as pleased with our ability to get an appropriate amount of that top line sales to cascade to the bottom line. Some of that is industry pressures, to be sure. Other things that are causing some of our shortfall, we think are executional in nature. And we believe that we will be in a position to get those improved going forward. So it's a complex business. And there is no simple answer to the question, but I think it's a broad-based kind of solution that we need to have in place.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [13]

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Okay. That's helpful. And then I guess just on the quarter, can you maybe provide some color on traffic versus basket in Retail? And then also give us an update on the rate of attrition you're seeing in distribution? And then along those lines, have you seen any recent customer wins or losses that are worth noting, I mean, even if you obviously haven't called anything out in the press release?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [14]

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Yes. Well, let me -- so let me answer the second question first. And then I don't know that I have handy, and I don't know that we've typically talked on ticket versus basket size, but we can do that next. I mean I would say that, look, we -- in any given quarter there are some customers that we win and there are some customers that maybe we're showing declines on, whether they've chosen to close the store, whether they've merged or things of that nature. I would say for this quarter, we probably had about in the low to mid-teens of new customers. Having said that, the volumes associated with those customers, I don't know that anyone individually or in the aggregate I would then attempt to call out, but I would say the number of wins we had would be typical for any given quarter.

As it relates to the attrition of the business, I think that there's nothing that, again, that was out of the ordinary. I think we talked on the -- or Dennis covered in his comments and I mentioned as well and it was in the press release, we saw with the unusually or unseasonably cooler spring and into early summer, and the weather, we saw softer numbers, but as we return to sort of a more typical summer time frame, we've seen in July and into August to-date that the sales have returned. And so while probably 2/3 of the period or 2/3 of the quarter might have had some softness, I attribute that more to a weather component than anything from a competition perspective just because of what we've seen since the weather has returned to more typical levels.

So I think that covers on the distribution side. And then as it relates to the basket size, I'm not sure -- I can tell you that I don't have it right in front of me, so I don't know if I can answer that. I don't know if it's something I can follow up with you on or if, Dennis, do you have to add...

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Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [15]

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Yes. So I think the -- so the numbers that I saw, Mark, I think were the negative 2, which as you said is really impacted by the Easter shift of about 0.5%, but the negative 2, we actually had the negative transaction comp and positive sales per transaction without identifying the actual rates. That was the mix, Karen.

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Operator [16]

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And the next question comes from Scott Mushkin with Wolfe Research.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [17]

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Dennis, nice to talk to you again, and I wish Dave all the best, too. I know guys have worked with -- a long time together -- so in the past. So I guess what I wanted to do, I want to talk a little bit about what -- kind of the direction of the industry. We have Walmart report this morning. And I think what was noteworthy is that they actually reported on the retail side slight deflation in food. And so I think you guys commented about 132 basis points, if I got that right, of inflation on the wholesale level, really suggesting some pinch here, not only on your own retail business but also on your customers. So I was wondering if in this environment if should we attack that margin, how do you help your customers when the retail pricing seems to be stuck in neutral at best and maybe actually falling even though costs are going up?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [18]

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Well, I mean I think maybe when I started, I don't know that we called it out in the script. But on our side from an inflation standpoint, we saw about 80 basis points for the quarter on the retail side. So I know that, that would contradict what Walmart is saying, and so maybe there is a mix or a blend perspective. But we actually saw a sequential acceleration from an inflation standpoint because last quarter we were about 18 basis points. So we went up over 60 basis points, almost quadruple, still sub 1% for the quarter. But we actually saw an acceleration.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [19]

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And Mark, is there -- and Dennis, does that make you a little nervous though? Because it might be Walmart taking pricing down, right? Or holding the line?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [20]

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Well, I mean I think, Scott, if we go back to almost a year -- I mean almost 2 years ago, I think, we saw what Walmart was doing and we talked about it for a period of time in our markets. And so as I think it about today and I think about where we are 2 years later and I think about the commentary that Walmart made a year or so ago that caused a lot of concern, I mean I think we have already gone through that battle with Lidl into the U.S., and Walmart whether they were attempting to push back against further incursions from Aldi or Lidl expanding. I think we've seen that pricing. And so they've returned to what might be referred to as more rational levels over the last 9 to 15 months. But we're still on some of the basic commodities at levels that would be lower than where we were 2 years ago. I think perhaps what they're referencing, what they're seeing is now being pushed into other geographies within the country because I don't know that we're seeing it as we sit here today. But as I look at price checks and see information that gets shared by yourself and your peers, from your price checks, some of those prices are still well above what they are in our markets.

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Operator [21]

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And the next question comes from Andrew Wolf from Loop Capital Markets.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [22]

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I want to follow up on Scott's question on Walmart I guess continuing to push into price. Sort of sounds like maybe them and -- as a larger player is maybe what's going on as they're continuing to do that but the rest of the industry frankly isn't, which isn't -- which I believe historically has been kind of the case they've maintained in an inflationary -- turn to an inflationary environment. Historically, Walmart's maintained price and created a sharper pricing image and then boosted up their prices later. I'm not saying that I know what they're going to do, but I know historically, I think that's been the case. First of all, do you agree that in the sense that's maybe what's going on as you look at price studies that you might have done for you or you do yourself, sort of whether your customers in the broader market, other large teams that are compete out there? And second do you agree that, that is kind of a historical pattern that one would expect in the return to inflation?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [23]

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Yes. I mean I think on the first part, Andy, because I might have lost you in the middle as to what the question was. But I think that, yes, I mean we've -- what you're referencing we've seen and we certainly -- we were talking before about $0.99 gallons of milk and egg prices and banana prices below -- approaching or below where costs were. And I think those have migrated back to perhaps not historical levels, but they have certainly drifted their way back up over the last 12 to 18 months. And so I think we've experienced a need in not all of our markets, but certainly, some of our markets, we've experienced it during that time frame. And I can't speculate to same comment you made, I can't speculate that, that is what they're going to do or not. But I think that what we saw in the back half of '17 and the first half or first 3 quarters of '18, that's what we were up against and battled through. And I think those -- we commented at the time that those sort of investments likely weren't sustainable and that they would return to some sort of higher watermark, and I think that's what we've seen occur.

So I think yes, they are doing that in other parts of the country. It's quite likely that once they have pushed and maintained -- gotten those gains in other geographies, that they may then allow pricing to drift back up. We've seen that some inflation has drifted in. And so I know what Scott referenced at Walmart called out and haven't had a chance to fully digest their release. But I could say that we've seen inflation both on the wholesale and the distribution side this quarter. But again, as we've referenced the last few quarters, they are not the same, right? So there's almost a 35 basis point spread between what we are seeing in wholesale and what was reflected at retail.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [24]

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Okay. It's quite helpful. This one might be for Dennis. Kind of as I view the sort of challenges to get this -- the 2 largest segments going to profit growth, which I think is your goal for next year. As I look at wholesale and I guess we can throw Military in there, the sales are decent to good, but clearly there is some execution issues. And when I look at Retail, ex Martin's, it's more of a sales productivity issue, something Karen alluded to, and I would think more so than execution. Do you agree? Am I kind of framing it the right way? And if so, could you kind of elaborate on it, what you -- on the plans on the execution side and wholesale and sales productivity side in Retail?

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Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [25]

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So in the -- little bit touching on where Karen was going. And clearly, on the distribution side, we're heartened by our ability to continue to grow the top line. It is the growth engine of the company going forward, we articulated that. We believe, yes, there are some macro challenges that are causing some disruption in the profitability. And we also believe there are plenty of things that we can improve on in the segment. Supply chain, Walt is brand new but clearly will be a primary focus of where that improvement will come. Inventory management is another area that we think we have some opportunities to improve the metrics around that. The kicking unproductive inventory out, the focus on working capital is some of those hidden benefits that kind of just cascade down through the P&L when you start executing at a higher level. And so we believe that's there to do. So on the Retail side, we've discussed about that segment and how it plays into our strategy. And when we did the Martin's acquisition last year, it was a -- fit very nicely into the portfolio, an adjacent market of customer that we were servicing for decades. It I think fit right into the strategy that the company has talked about with regard to retail acquisitions, that we would be opportunistic there. Also if that Martin's business was in the Western part of the U.S., we wouldn't have engaged in that transaction. But this made sense and fits the strategy.

And I think the retail landscape is tough and we've done some things more recently in some of our stores here in our homebred reference market that seem to be resonating with the consumer with regard to improving sales trends pretty significantly. And in some cases -- and some of the initiatives aren't working exactly as we thought they would. But our job as an organization is to get the retail comp store sales from red to black. And I can tell you the team is focused on that. When I spoke about Walt engaged on the supply chain side, but Lori Raya is relatively new to the organization and she's got the merchandising and marketing functions in the company. She's bringing a lot of fresh ideas. And I think the combination of Lori and Walt will help on both of those fronts.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [26]

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Okay. And now I could just kind of link in the Project One initiative and assuming the cost savings begin to flow in as you project. How -- I think I heard a reference to using those for growth, which to me sounds like some kind of -- well, could be a lot of things, but it could include reinvestment, for example, and price or something like that. Do you have a sense like at this time at least like how to save -- the Project One cost reductions might be allocated between driving growth for the business versus just flowing it through to the bottom line?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [27]

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Yes. Andy, I don't know that the way Project One -- look, I can say -- I can tell you exactly how -- as much as we're not going to get -- share that level of detail, I can tell you exactly how we expect it to flow through -- the improvements to flow through the business and in which divisions and in what time frame is -- we've got a whole group of folks managing the project as well as all the associates that are working on it to make those initiatives take place. As we look into 2020 and we set our plans in order to present that next year and kind of give you folks guidance, I think it's still a bit early as to where we're going to take some of those opportunities and invest or reinvest in the business. I don't know that we're in a position to necessarily break that out. And there may be some aspects when you talk about reinvesting, there may be components that if we try -- we were to try to do something price or otherwise, that honestly we probably wouldn't share for competitive reasons until they were already in place in the market.

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Operator [28]

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(Operator Instructions) And the next question comes from Chuck Cerankosky with Northcoast Research.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [29]

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Could you talk a little bit about -- in Food Distribution, the labor supply and productivity situation?

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I know you have some absenteeism issues. And what are sort of the offsets to that from internal programs, including the automation?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [30]

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Well, I think -- look, I think as it relates to the supply, you see the unemployment numbers. I mean we're -- as a country I think we're approaching full employment. And I think that while it's perhaps a little more challenging than it's been in the recent past, we're still able to attract folks into the company by virtue of our good starting wage and the benefits that we offer. I think that from our standpoint and we've talked about a little bit, these learning curves of associates getting up to say our standards, has been a bit more delayed than what we've seen in recent years. And so we're not getting as much productivity as quickly as we might have in the past. They eventually do get to that level. But it's not in the same -- it used to be, "Hey, it's 60 days or at this point 90 days or at this point." There may be a lag associated with that compared to what we've seen historically. To the question on the absenteeism, we still experience some unexplained absenteeism in some of our DCs. And I think that's something that's a challenge that we've had to work through, and I don't want to attribute it to a generational thing versus the full employment scenario. But it's something that we face, and we're working through a variety of solutions to try to address that in the future. From the standpoint -- what was the -- from the standpoint of the second part of the question, I think it's too early to speculate on anything from an automation perspective. I think we're focused on being more efficient in our operations, and I think Walt's got a number of initiatives that he is driving through the organization to help our rates and help get improvements within the supply chain, and I would say they're not automation driven.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [31]

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And looking at the 2 distribution segments, Military and the traditional grocery. How -- I realize those are separate segments, how integrated now are the distribution platforms to better utilize the assets involved?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [32]

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The platforms, there are parts that they share, but they're -- for the most part they are on different platforms. And Arif Dar, who is our new CIO that joined at the beginning of the year, that's one of the initiatives that he has in place is over the coming next couple of years, maybe a little longer, we've got an initiative to get our -- on a whole platform across our entire distribution network.

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Operator [33]

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And your next question is a follow-up from Chris Mandeville's line with Jefferies.

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Blake Anderson, Jefferies LLC, Research Division - Equity Associate [34]

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I just had one follow-up. On your Retail business, I was wondering if you could share how many remodels you now have done. Just give us the update on that number. And then how many you have left? Are you -- do you have a number in the pipeline we can expect? And then Fast Lane locations, I think they're about 65 as of the end of last year. If you could let us know how many stores have that now?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [35]

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Yes. So I think on the Fast Lane, we haven't rolled Fast Lane out to any additional stores, so that would still be the same number, the 65 you quote is still the same number. On the remodels, I would say it depends on -- are you talking for the current fiscal year or over what period of time are you referencing? I would say that for the current fiscal year, we did 10 major remodels and then we had a number of the stores that had whether you want to call them medium or touch-ups. And so the number would get into the mid- to high teens if you factor in all of them. But from a major remodel perspective, it's about 10.

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Operator [36]

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And as we have exhausted all the questions, I'd like to return the floor to Dennis Eidson for any closing comments.

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Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [37]

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I want to thank everybody for their questions and participation on today's call, and certainly look forward to speaking again with all of you when we report our third quarter fiscal '19 results. Thanks.

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Operator [38]

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