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Edited Transcript of SPTN earnings conference call or presentation 23-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 SpartanNash Co Earnings Call

GRAND RAPIDS Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of SpartanNash Co earnings conference call or presentation Thursday, February 23, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katie Turner

SpartanNash Company - IR, ICR. Inc.

* Dennis Eidson

SpartanNash Company - Chairman and CEO

* Dave Staples

SpartanNash Company - President and COO

* Chris Meyers

SpartanNash Company - EVP and CFO

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Conference Call Participants

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* Chuck Cerankosky

Northcoast Research - Analyst

* Shane Higgins

Deutsche Bank - Analyst

* Ryan Gilligan

Barclays Capital - Analyst

* Scott Mushkin

Wolfe Research - Analyst

* Chris Mandeville

Jefferies LLC - Analyst

* Ajay Jain

Pivotal Research Group - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the SpartanNash Company fourth-quarter 2016 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Katie Turner. Please go ahead.

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Katie Turner, SpartanNash Company - IR, ICR. Inc. [2]

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Thank you. Good morning and welcome to the SpartanNash Company fourth-quarter and fiscal-year 2016 earnings conference call. By now everyone should have access to the earnings release for the fourth quarter ended December 31, 2016.

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 would 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 might 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 general economic and market conditions. Additional information about the risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's fourth-quarter earnings release, fiscal annual report on Form 10-K, and the Company's other filings with the SEC.

Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statement. SpartanNash disclaims any intention or obligations to update or revise any forward-looking statement.

This presentation includes certain non-GAAP metrics 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 their most directly comparable GAAP measure and the other information as required by Regulation G is included in the Company's earnings release, which was issued after market close yesterday.

And with that, it's now my pleasure to introduce Mr. Dennis Eidson, Chairman and CEO of SpartanNash, for opening remarks.

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Dennis Eidson, SpartanNash Company - Chairman and CEO [3]

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Thanks, Katie. Good morning and thank you for joining our fourth-quarter and fiscal 2016 year-and conference call. With me this morning are Dave Staples, our President and Chief Operating Officer, and Chris Meyers, our EVP and Chief Financial Officer, as well as other members of our executive team.

On the call today, I will provide a brief overview and highlights of fourth quarter and the fiscal year. Steve will give an update on our business segments, and then Chris will offer you some additional detail on our financial results and guidance for fiscal 2017 before I issue some closing remarks. And then we will open up the call and take some questions.

Our fourth-quarter performance was a strong finish to an equally strong fiscal 2016, with growth and sequential improvement in many parts of our business. Despite the continued challenging deflationary environment, we achieved a 3.4% increase in net sales and adjusted diluted earnings per share of $0.53 and $2.19 for fiscal 2016, which exceeded the top end of the earnings guidance we issued last quarter.

As in past quarters, our results reflect the sound execution of our strategy to leverage our supply chain network and successfully drive new and expanded customer supply business. Despite ongoing deflationary headwinds, which were 2.3% in food distribution and 1.3% at retail, we grew sales in food distribution and military and also posted our fourth consecutive quarter of improved retail comp store sales trends.

We benefited from the shift of New Year's Day, which positively impacted the fourth quarter, as sales leading up to the holiday benefited fiscal 2016 while lowering sales volume in Q1 of 2017 and shifting holiday pay associated with New Year's Day into fiscal 2017.

Through our efforts, we made meaningful progress in the quarter and the year around expanding our high-quality service and product offerings, upgrading our retail stores, and making improvements in our supply chain network. And these efforts should continue to yield improvements on our operating results going forward.

Consistent with our objective to pursue strategic acquisition opportunities, we announced the acquisition of Caito Foods Service, a leading supplier of fresh fruits and vegetables and value-added meal solutions for retailers. And Blue Ribbon Transport, which provides temperature-controlled distribution and logistics services throughout North America.

In addition, we were competitively awarded by the Defense Commissary Agency to be the exclusive worldwide supplier of private-brand products to US military commissaries. We are excited about these opportunities and look forward to expanding on them in 2017.

As a result of our disciplined approach to operating the business, we strengthened our balance sheet, and our cash flow allowed us to reduce net long-term debt by $57.3 million from the prior year.

And with that, I would like to turn the call over to Dave Staples. Dave?

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Dave Staples, SpartanNash Company - President and COO [4]

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Thanks, Dennis. I believe the results achieved in the fourth quarter continue to demonstrate our team's ability to execute well in a challenging environment. In our food distribution segment, despite continued deflation in proteins, produce, and dairy, we generated our fourth consecutive quarter of sales and adjusted earnings growth over the prior year, mainly due to business gains from new and existing customers as well as operational efficiencies and supply chain improvement.

While the independent food distribution industry remains highly competitive, we feel positive about our current sales pipeline. The strength and capabilities of our distribution network and our ability to provide innovative supply chain solutions continue to enable us to win new businesses.

During the quarter, as Dennis just mentioned, we announced a definitive agreement to acquire Caito Foods Service and Blue Ribbon Transport, and we are pleased to have completed the acquisition on January 5. Over the course of 2017, we plan to integrate Caito and BRT into our operation. And while we anticipate acquisition will be accretive and have identified certain synergy opportunities, we view this as a very strategic acquisition.

We believe Caito increases the size and scope of our customer base by strengthening our fresh product offering to existing and new customers and will also provide entry into the fast-growing freshly prepared ready-to-eat category through its Fresh Kitchen facility in Indianapolis. The Kitchen was USDA certified in January and will commence production in the first half of the year.

In the retail segment, while our sales trends continue to improve, net sales remain challenged as we continue to face ongoing deflationary pressures and depressed economic conditions in our North Dakota region. The sales trend improvement was partially benefited by 50 basis points due to the timing of New Year's Day, which shifted from the fourth quarter into the first quarter of 2017.

In 2017, we will be making targeted capital investments by converting certain stores to the Family Fare banner and remodeling others, while also continuing our store rationalization program as we continue to evaluate individual store performance, fit with our format, and overall business strategy.

In the first quarter, we anticipate piloting a new click-and-collect program in one of our Family Fare locations. Assuming results are in line with our expectations, we would begin the rollout of the program during the second quarter and anticipate having up to 25 stores online by the end of the year.

Open Acres, our new fresh brand that was launched earlier in the year, continues to be well received by customers in both corporate-owned and independent retail stores. For the fourth quarter, private-brand unit penetration in our retail operations was 21.3%, which approximates the national average. We ended fiscal 2016 with over 4,500 unique items and 7,100 total private-brand offerings as we continue to refine our assortment.

Turning to the military segment, we generated increased sales for the third consecutive quarter, as our new fresh business continues to offset the ongoing commissary and deflationary pressures in the core business. We continue to work on expanding the type and volume of products handled with new and existing vendors to improve both sales and margin in our core business.

We are also excited to partner with DeCA in its new initiative to offer private-brand products to US military commissaries, and we'll begin to roll out these products in the first half of fiscal 2017. We expect the full private-brand rollout will take several years and will have a positive effect on our competitive positioning, sales, and profit.

With that, I will turn the call over to Chris for further details on our financial results and our outlook for fiscal 2017.

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Chris Meyers, SpartanNash Company - EVP and CFO [5]

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Thanks, Dave. I'll begin with a detailed overview of our fourth-quarter results and then provide guidance for fiscal year 2017. Consolidated net sales for the fourth quarter increased to $1.83 billion or 3.4% compared to the prior-year quarter.

Consolidated gross profit margin for the fourth quarter was 14.2% compared to 14.6% in the prior year, which primarily reflects the mix of business operations. The ongoing deflationary environment resulted in a deflation-related LIFO benefit of $4 million this year versus $4.4 million in the prior-year quarter.

Reported operating expenses for the fourth quarter were $234.6 million compared to $225.3 million in the prior-year quarter. Fourth-quarter adjusted operating expenses were $223.5 million or 12.2% of net sales compared to $222.9 million or 12.6% of net sales in the prior-year quarter. This is an improvement of 40 basis points on a rate-to-sales basis.

The decrease in operating expenses on a rate to sales was primarily due to improved operating expense leverage resulting from sales growth and the mix of business operations, partially offset by higher healthcare and other benefit costs.

The adjusted fourth-quarter results primarily exclude $8.4 million of asset impairment charges associated with underperforming stores as well as $2.7 million of merger and integration activity mainly associated with the acquisition of Caito and Blue Ribbon Transport. The prior-year quarter sales primarily reflect $1.2 million of merger integration and acquisition costs as well as $1 million of restructuring charges.

Adjusted EBITDA for the fourth quarter improved to $50.8 million from $49.9 million in the prior-year quarter, representing 2.8% of net sales in both periods. Reported earnings from continuing operations for the fourth quarter were $12.8 million or $0.34 per diluted share compared to $17.2 million or $0.46 per diluted share in the prior-year quarter.

Adjusted earnings from continuing operations for the fourth quarter increased to $20 million or $0.53 per diluted share, representing an improvement of $0.01 per diluted share over the prior-year quarter. These results exclude net after-tax charges of $0.19 per diluted share, primarily related to the adjustment previously mentioned as well as net restructuring gains primarily attributable to a favorable lease buyout.

For the prior-year fourth quarter, adjusted earnings from continuing operations exclude net after-tax charges of $0.06 per diluted share related to the previously mentioned adjustment.

Turning to our operating segments, fourth-quarter net sales for the food distribution segment increased 8.4% to $838.6 million from $773.7 million in the prior-year quarter. The increase was primarily due to new business gains and the timing of the New Year's Day holiday, which more than offset the impact of continued deflation.

Reported fourth-quarter operating earnings for the food distribution segment were $21.1 million compared to $22.6 million in the prior-year quarter. Fourth-quarter adjusted earnings increased to $23.9 million from $23.4 million last year.

The segment's higher sales and supply chain improvements were largely offset by continued deflation, a lower inflation-related LIFO benefit compared to the prior year, and higher healthcare and other benefit costs. The LIFO benefit for the food distribution segment was $2.1 million in the fourth quarter compared to $3.2 million last year.

In our military segment, fourth-quarter sales improved to $510.4 million, primarily due to new business gains associated with the distribution of fresh products offsetting the continued lower sales at DeCA-operated commissaries. Reported and adjusted fourth-quarter operating earnings for the military segment were both $3.4 million, down slightly from $3.6 million and $3.7 million, respectively, in the prior-year quarters due to higher healthcare costs.

In our retail segment, fourth-quarter net sales were $479.2 million compared to $489.6 million last year. Comparable store sales, excluding fuel, improved to negative $1.2 million from negative -- or 1.2% from negative 1.8% a quarter ago as the timing of the New Year's Day holiday helped mitigate the impact of ongoing deflation and continued challenging economic conditions in North Dakota. The decrease in net sales at retail was primarily due to lower sales attributable to retail store closures as well as negative comp store sales, partially offset by higher retail fuel prices and gallons sold compared to the prior year.

Reported fourth-quarter operating earnings in the retail segment were $200,000 compared to $6.8 million in the prior-year quarter. Retail fourth-quarter adjusted operating earnings improved to $8.7 million from $8.4 million last year. The increase was due to cost reduction, higher fuel margins, and the closure of underperforming stores, which largely offset lower comparable-store sales and higher benefit costs.

From a cash flow perspective, our fiscal-year 2016 operating cash flow was $154.5 million compared to $219.5 million last year. The decrease was primarily due to customer advances, higher inventory levels to support sales growth, as well as the timing of working capital and income tax payments.

Total net long-term debt decreased $57.4 million to $406.7 million compared to $464.4 million at the end of last year. During the fourth quarter, we amended our existing credit facility to provide more flexibility, including the ability to increase the size of the term loan, extend the maturity from January 2020 to December 2021, and eliminate the highest-cost tier of our pricing grid. The end of the quarter had net long-term debt to adjusted EBITDA ratio of 1.8 times, which is better than our year-end target of 2 times.

Now to briefly review the fiscal-year 2016 annual results. Consolidated net sales increased $82.6 million to $7.73 billion. The increase was primarily driven by business gains in food distribution and military, which more than offset the negative impact of food deflation in all segments, lower sales at DeCA-operated commissaries, and an increase in comparable retail store sales.

Reported earnings from continuing operations for fiscal year 2016 were $1.52 per diluted share compared to $1.57 per diluted share in the prior year. Adjusted earnings per share from continuing operations improved to $2.19 per diluted share compared to $1.98 per diluted share last year. 2016 results were positively impacted by $0.03 per diluted share due to the shift of New Year's Day, which benefited fiscal-year 2015 sales and shifted related holiday payout of fiscal year 2016 and into 2017.

I will now provide further detail on our outlook for fiscal year 2017. We are excited about opportunities for growth with the recent acquisition of Caito and BRT, the partnership with DeCA to provide private-brand products, and targeted capital investment in ongoing merchandising and marketing enhancements in our retail segment. However, we expect to face continued headwinds from deflation through at least the first half of the year.

For fiscal year 2017, we expect to see growth in year-over-year sales in food distribution, continued challenges with sales at DeCA that impact the military segment, and slightly negative to flat comparable retail store sales that improve through the course of the year.

From a profitability perspective, the outlook for 2017 reflects Caito and BRT having combined sales of approximately $550 million and being accretive to 2017 earnings, with minimal contributions from the Fresh Kitchen as that operation ramps up during the course of the year.

In the military, we expect limited contributions from the DeCA private brand program in the second half of the year as that program gets rolled out. Additionally, the Company expects deflation to eventually subside in the second half of the, year, and, as a result, does not expect a similar deflation-related FIFO benefit of $0.07 per diluted share in fiscal year 2017. The Company also anticipates benefits from efficiency initiatives to be realized in the second half of the year.

Specific to the first quarter of 2017, we anticipate flat to slightly negative earnings due to the shift of New Year's Day, which negatively impact both first-quarter sales and profits, the timing and recognition of benefit costs, unseasonably warm weather, and the seasonality of the Caito business, which is stronger in summer months.

As a result, we expect adjusted earnings per share from continuing operations for fiscal year 2017 of approximately $2.26 to $2.35, including merger integration costs and other expenses and gains. We expect capital expenditures for fiscal year 2017 to be in the range of $70 million to $72 million, with depreciation and amortization of $79 million to $81 million, and total interest expense of $25 million to $27 million.

I will now turn to call back over to Dennis for his closing remarks. Dennis?

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Dennis Eidson, SpartanNash Company - Chairman and CEO [6]

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Thanks, Chris. In conclusion, we were pleased with our performance in 2016. And in spite of this challenging operating environment, we believe that we are well positioned to continue to leverage our strong business model to grow both sales and earnings in 2017.

We are making clear progress on our priorities, and we have a solid pipeline of opportunities in our distribution and military channels to our ongoing business development efforts, the recent acquisition of Caito and Blue Ribbon Transport, and our new partnership with DeCA for private-brand products.

We also continue to enhance our retail business to improve the overall customer experience, primarily through the expansion of our consumer-centric merchandising and marketing programs. While we expect the deflationary environment to continue through the first half of the year, we remain confident in our overall strategy and believe our focus on providing value and innovative solutions to our food distribution and retail customers will continue to serve our business well.

In closing, I would like to thank all of our associates for their hard work and dedication in order to achieve our 2016 results, and look forward to another good year ahead.

And with that, I guess we can open up the call and take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Chuck Cerankosky, Northcoast Research.

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Chuck Cerankosky, Northcoast Research - Analyst [2]

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Could you, first off, just repeat those deflationary numbers as they hit the segments? I just couldn't write fast enough at the start of your call. And then I have another question.

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Dennis Eidson, SpartanNash Company - Chairman and CEO [3]

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Yes. Deflation in the quarter in our food distribution segment was 2.3% and deflation in the retail segment was 1.3%.

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Chuck Cerankosky, Northcoast Research - Analyst [4]

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Okay. Does that suggest you are passing on a little bit less in one segment than the other? Or, better said, better pricing in one segment versus the other?

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Dennis Eidson, SpartanNash Company - Chairman and CEO [5]

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I think that's an inexact science. I mean there's maybe some truth to that at a macro level, but item by item, that probably isn't the way I would think about it. It also depends on the commodity. Fresh probably gets passed through quicker than center store. It's not a simple answer, but that's how I would respond.

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Chuck Cerankosky, Northcoast Research - Analyst [6]

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Okay. And then turning to Caito, what percent of its business, if any, did it already do with Spartan? And then as you observe this business, integrate this business, what is the opportunity over the next one to three years to add Caito products to your existing customers and then perhaps get some of their customers that are new to you to start buying more from total Spartan distribution?

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Dave Staples, SpartanNash Company - President and COO [7]

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As you know, in our I'd guess call it sort of the Midwest facility of alignment that we don't have produce operations today. And Caito has partnered with us to offer a certain number of our customers produce.

It's not a big percentage. So it's not a significant component of their business, but it's certainly there. We think obviously long term, not only in the distribution of produce are there opportunities for us to either work to get Caito into existing SpartanNash customers, but also work to get SpartanNash into Caito customers.

We actually think the real exciting part is going to be quite we start to get into the Fresh Kitchen and the Fresh Cut and when we can begin to take these kind of programs out to market across a broader base. And as you know, the Fresh Kitchen isn't even in full production yet. So that's still on the to-come.

And with the Fresh Cut, it's really now starting to work through the ideas of how can we transport it; what is the true limit of distance we can send this and some of the logistics involved. But we are really excited as we get through this year and into next year with some of the opportunities we see out there to expand these offerings.

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Chuck Cerankosky, Northcoast Research - Analyst [8]

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Dave, is there a number to put on that, if you start with the $550 million in revenue that the upside, other than what might be its inertial growth, might be 10%, 15% of that as you build out the business?

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Dave Staples, SpartanNash Company - President and COO [9]

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Yes. We aren't going to give that kind of specifics over time. But I think it's going to be a nice opportunity.

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Chuck Cerankosky, Northcoast Research - Analyst [10]

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All right. Thank you, and good luck in 2017.

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Operator [11]

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Shane Higgins, Deutsche Bank.

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Shane Higgins, Deutsche Bank - Analyst [12]

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Thanks for taking the question. Just real quick, I jumped on a little bit late. Did you guys quantify the accretion of Caito in 2017, or can you guys give us just some indication of what it might be?

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Chris Meyers, SpartanNash Company - EVP and CFO [13]

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We did not quantify the accretion specifically related to Caito. We obviously have increased EPS during the course of the year, and Caito is part of that. But it is part of our food distribution segment and we only disclose earnings at the segment level. So we did not specifically disclose the Caito accretion to the distribution segment.

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Shane Higgins, Deutsche Bank - Analyst [14]

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Okay, great. And then you guys had a nice quarter for the distribution business. I was just wondering if you guys could quantify what the impact of Gordy's was in the quarter. And when do you guys cycle that win?

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Chris Meyers, SpartanNash Company - EVP and CFO [15]

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We don't specifically give guidance for results on a customer-by-customer basis. But it was a very good win for us that we are very happy with. I would tell you that the business onboarded near the end of the first quarter of last year, and so you will see a little accretion related to that in the first quarter of 2017 as well.

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Shane Higgins, Deutsche Bank - Analyst [16]

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Okay, great. And then I just wanted to discuss your loyalty program, your guest rewards. And just to get a sense of how that is progressing, and how you are leveraging that consumer data to help you guys improve your merchandising and marketing programs. Just an update on that would be great.

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Dave Staples, SpartanNash Company - President and COO [17]

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Yes. As you know, Shane, we have been working with that whole thought of personalization now. We're in probably our third year. And we continue to really be excited about where we see it taking us and the kind of information and data we can use, from share of wallet and how we approach the consumer to get them to expand that with us in categories they are not shopping as fully as possible. As well as just really beginning to understand the likes and dislikes of individual customers and being able to tailor offerings to those likes and dislikes.

And I think as we roll out this click and collect and this takes our whole e-commerce and personalization efforts to a next level, I think it gets pretty exciting the things we can do, from tailoring the ad when you get onto our website to really targeted promotions to understanding how we segment our customers better to make sure we have the right offers to the right segments.

As opposed to clustering stores, we will begin to cluster customers. And so I think it's going to be a real exciting year for us as we put more and more of this capability into play.

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Shane Higgins, Deutsche Bank - Analyst [18]

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Okay. And is that -- the yes Rewards is now available into all your stores, correct?

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Dave Staples, SpartanNash Company - President and COO [19]

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Well, I guess it's available, whether it's used or not. We don't require it in all stores. So if you are in a Family Fare, the majority of the Family Fares require the card, but not all of them even require it at this point. But we get pretty good data, and we are up to, I believe it's about 82 Family Fare stores. So we are getting feedback from all of those stores.

Our D&W is in. That gets us another 12 stores. So we're getting very robust add, I would say, from 90 to 100 stores and then we are getting some levels of data from a chunk of the remainder.

As we continue to roll out our remodel program and as stores convert to Family Fare, the program goes into place more fully and it becomes much more the offer.

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Shane Higgins, Deutsche Bank - Analyst [20]

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Okay, great. And then just the last one from me on your store closings. What do you guys have in terms of leases coming up for expiration in 2017? And how should we think about modeling unit growth for the year? And that's it for me.

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Dave Staples, SpartanNash Company - President and COO [21]

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Yes. I think, as we look at that, we don't really want to get publicly out there about those kind of decisions. They impact a lot of our associates, and it's always a difficult decision to make.

But I think we have been pretty open with everybody that we are going to continue to look at our store base and we're going to continue to look at how our stores fit with our store base. And we will make what we think are the appropriate decisions based on all those things lining up.

I think there will be more activity along those lines, as we've said. But I really -- I don't think it's right to get into too much detail on that.

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Shane Higgins, Deutsche Bank - Analyst [22]

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Okay, got it. Thanks a lot, guys.

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Operator [23]

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Ryan Gilligan, Barclays.

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Ryan Gilligan, Barclays Capital - Analyst [24]

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Thanks for taking the questions. Can you elaborate a bit on the efficiency initiatives that roll on in the second half of the year? So what types of initiatives or what segments are impacted, the size, etc.?

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Dave Staples, SpartanNash Company - President and COO [25]

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Well, yes. We're not going to go into real deep specifics today. It's competitive. But our network is a critical advantage for us, and we feel really good about our network. But Derek doesn't let me get any rest, because he's always pushing to make it better. He's always pushing to really be able to serve our customers better.

So we are always thinking about how can we get a little more efficient, how can we improve our assortment, how can we work on our path, how do we manage the SKUs we have and get the most productivity out of them? So as we work through the shrink world, as we look at the efficiency of the network, as we look at the product assortment of the network, whether that extends into the retail operations or through the distribution, those are all the types of things we're working on.

So I would say it's a lot of the same that we've talked about to you in the past. We continue to see opportunities to get better and better, and we will be continuing to put those in place.

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Ryan Gilligan, Barclays Capital - Analyst [26]

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That's helpful, thanks. And can you give us an update on the pipeline for nontraditional distribution opportunities? What are the biggest types of opportunities here?

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Dave Staples, SpartanNash Company - President and COO [27]

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Yes. Without letting anything out of the bag, we just continue to -- it seems, anyway -- get referrals from other customers, get referrals from things people have seen us do. I think our name and our reputation for innovative solutions is expanding.

And so we continue to be just sought out, I think, for some of the non what we call traditional business. So that nontraditional business continues to put forth opportunities as well as our conventional lines. I think we're taking care of the customers we have and I think that is being seen and respected.

And I think we just continue to have interest in really all facets of our distribution business. The DeCA program, I think, is a perfect example. 42 companies went after that private-brand business and we were able to work with DeCA, show them the expertise that we bring to the table.

We talk a lot about how we believe retail provides us with a differentiated approach to distribution, and I think you've got like a perfect example there. We were able to bring our expertise in private brand and how we've worked with our own stores as well as our independent customers to really develop, I think, a top-notch private-brand program.

And DeCA was able to see that and really decided that it was worth going with SpartanNash exclusively because of that expertise. And so that's, I think, a real shining example of how we are able to put our model and our thought process together and lead with our knowledge of the industry to win some pretty key accounts.

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Ryan Gilligan, Barclays Capital - Analyst [28]

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Helpful. And I know it's early innings on click and collect, but is it maybe a solution that you can offer your distribution customers down the road?

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Dave Staples, SpartanNash Company - President and COO [29]

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Click and collect certainly is a solution our distribution customers can use, depending on the technological disposition of a customer whether this click-and-collect solution will be the one they use. But I think what we're going to be able to do as a result of this is help them through the process should they desire that help.

So this system is pretty -- I guess I would say this is pretty technically advanced. It actually is going to take our website to new levels. It's going to bring apps into the process. When we fully get the whole entire click-and-collect program we've purchased in place, it's going to be very, very all-encompassing.

And so not all of our customers are going to desire a solution like that. However, there are many options for them that can meet different levels of technical desire. And so we are very well aware of those and we help our customers partner up with those different providers. But I think what we are really going to be able to bring them are the learnings we get as we go deeper in the process.

Now, we've had click and collect in I think it's up to nine stores today. But we have various different versions of it. And as we took those learnings, we just thought we needed a much more comprehensive solution. And that's how we landed on the program we decided to go with today.

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Ryan Gilligan, Barclays Capital - Analyst [30]

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That's really helpful. Thank you.

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Operator [31]

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Scott Mushkin, Wolfe Research.

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Scott Mushkin, Wolfe Research - Analyst [32]

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Thanks for taking my question. So couple things. I wanted to see where you think performance outside the acquisitions next year, like what the levers are there to drive EBIT. It sounds like DeCA and retail are going to have more challenges as we look at this year. So I was wondering what you think levers are available outside the acquisitions to grow the business. Is it primarily distribution?

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Chris Meyers, SpartanNash Company - EVP and CFO [33]

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Yes. I think the food distribution is going to be the primary driver of that segment. We expect continued growth from the Caito business, but also excluding the Caito business, we expect continued growth in that business.

We also continue to look for opportunities to improve our efficiencies throughout all the different segments that we operate in. The headwinds at DeCA are something we would try to overcome with cost-saving initiatives to the degree we can, possibly.

There's also the private-brand program that you mentioned that will ramp up through the course of this year that probably won't impact our earnings substantially at all in 2017, but we do have optimism for 2018 and 2019 where that will help us as well.

So I don't know if, Dave, you have anything to --

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Dave Staples, SpartanNash Company - President and COO [34]

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Yes. You know, Scott, I think that and our continued efforts to refine our promotion and merchandising strategy in the retail business and then take that through our distribution business. We are really working a lot with the CPG companies to get them to partner with us on their new ideas.

And in retail, obviously everyone wants to talk about the perimeter. And that's critical, right, as the world changes and you want to be fresh and you want to be relevant. And we certainly are focused on that. But also that reinvigoration of the center store and trying to use a full shop as a competitive advantage against some of these more narrow-focused participants we think is going to be a big deal.

So we are trying to get the CPGs to see us as that partner who is very willing to experiment with new ideas and new thoughts in the center store. We've had a couple really nice programs come out of that that we are able to take out to our distribution customers.

So there's still a strong focus by us on that, growing that core distribution business either through new accounts or selling more of the existing accounts we have. And I think, while you asked excluding Caito, I think when we partner that with Caito, that even gives us ability to drive even more growth into that core organic-type thought process.

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Scott Mushkin, Wolfe Research - Analyst [35]

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So do you guys think that you'll see profit growth outside of distribution in the other two segments, or is that not the expectation?

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Chris Meyers, SpartanNash Company - EVP and CFO [36]

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We don't specifically guide on the operating income on a segment-by-segment basis. We just guide it on a total overall basis. So we didn't really provide that level of granularity in our guidance.

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Scott Mushkin, Wolfe Research - Analyst [37]

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Okay, perfect. And then I just wanted to touch base on two of, I guess, kind of current environment. Obviously, produce is very deflationary right now. But usually when we get deflation in a normal environment in some of these commodity categories, it actually helps profit dollars.

Where are we in produce? Are we seeing some help from profit dollars in produce deflation, or is it just a net negative at this stage? And then I have one last one.

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Dennis Eidson, SpartanNash Company - Chairman and CEO [38]

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Produce deflation is relatively new. And I guess you know that the January numbers were even more difficult than the fourth quarter. We were deflationary 5% in Q4 in the distribution segment and 16% in period one, believe it or not, really driven primarily by that [Western] bench. The bench was like 39% deflationary on the PPI, if you follow that.

I would say, generally speaking, as it relates to -- and I think we touched on this earlier, that kind of the stickiness of margin. Produce tends to get passed through more quickly, almost immediately, than you see with better store product. So it has not been some big help to the margin rates or the margin performance subsequent to the deflation in produce.

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Scott Mushkin, Wolfe Research - Analyst [39]

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Okay. And then my last one, and thanks for that answer. So my last one is just our research has showed Walmart now investing in price in some of your markets, retail markets.

And my question is while it's very new, what's your outlook for them? When they do this, they tend to be pretty aggressive. We've shown them taking share as this happens and then competitors respond. So wanted to get your comments on what's going on in Michigan. Has or have Meyer and Kroger responded to Walmart's activities and what your outlook is as this unfolds over the next month or so?

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Dave Staples, SpartanNash Company - President and COO [40]

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As you know, Walmart is nothing new to us. When you put Walmart and Meyer together, we're one of the most heavily penetrated states. So we've dealt with this kind of activity I think over the course of our existence.

And if you follow the industry, you know Walmart has done this before and they will do it again. And so it's just part of the competitive landscape. I think we are trying to use our tools because I think value is critical, whether Walmart has a price reduction or not. It's about what value do you offer your customer. And that value equation is broader than just price. I think that's how we've competed all along.

That being said, with our new insight into the consumers, we are trying to figure out how we are more targeted with offers so that we can target those people most impacted more effectively, offering them that value in price they are looking for, but the value overall in a better shopping experience and different product quality.

So I think we're going to continue to refine those type of strategies and work hard to isolate the opportunities where we can be more effective with our promotional dollars to target where they matter most. And I think in additionally, we are experimenting with a number of different thoughts on how we bring a different thought-on value to the consumer, whether that's in produce or private brand.

And we are experimenting with that in other markets. And we look to take those learnings and really maybe change the game a little bit by ourselves here as we go forward.

So I think that's how we look at it. I don't think I can really get too much more specific than that because I don't want to tip our hand. But I think we just look at it as, hey, it's the game we've been in and it's a business we are going to continue to be in and it's just part of how it flows.

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Scott Mushkin, Wolfe Research - Analyst [41]

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All right, perfect. And I actually just wanted to say -- Walmart talked about things being a little slow so far. And clearly, the weather up in Michigan has been warm. Any comments on what's going on right now? And then I'll yield, and thank you.

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Dave Staples, SpartanNash Company - President and COO [42]

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Well, you know, January, Scott, I think across the industry -- I have not talked to anyone who said they had a great January. You probably talk to even more people than I do.

There are a number of things -- obviously, the holiday shift that Dennis and Chris talked about impacted January the most. We had no snow. It's amazing. We had a very snowy December, and that was a benefit. And then I think the ski resort operators in Michigan opened up earlier than they have ever opened. And that snow ended by December 22, and I don't know if we've had 3 inches since.

So it's been just a very, very unusual winter for us. I think yesterday, it was 66 degrees and sunny and today is going to be in the mid to high 50s.

So January got off tough. The good news is, while we got off on a tough January and the weather didn't really improve that much in February, our February has bounced back to what I would consider much more in line with the trend.

So January was unusual month. I think we feel much better about the three weeks in February, that it's bouncing back in line with little bit more where we had been trending. So it's a mixed bag, I guess, is the best way to describe it. But we are feeling like January was maybe the aberration at this point.

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Scott Mushkin, Wolfe Research - Analyst [43]

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Thanks, guys.

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Operator [44]

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Chris Mandeville, Jefferies.

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Chris Mandeville, Jefferies LLC - Analyst [45]

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So just for a point of clarification, I appreciate you providing the color on the holiday impact for retail. But were there actually any sales effect for wholesale and DeCA? And if so, can you help quantify that for us just so we can adjust accordingly in Q1?

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Chris Meyers, SpartanNash Company - EVP and CFO [46]

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Yes. Included in our $0.03 is a few different factors. One we called out as well is the $0.50 comp benefit that we saw in the fourth quarter related to holiday shift. But it also positively impacted both our distribution and our military segments as well.

And the other component to it is really related to holiday pay, which in the prior year we incurred that expense in the fourth quarter. This year, we will incur that expense in the first quarter. So if you add up that entire mix, so it did impact both retail and distribution sales as well as our expense line. And when we quantify it, it's $0.03 a share.

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Chris Mandeville, Jefferies LLC - Analyst [47]

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Okay. And then I guess you guys had mentioned you had some higher gallon growth at retail for Q4. Can you maybe just help us understand the change from Q3 to Q4 and what you are seeing possibly quarter to date at the pumps? It's been quite the topical discussion in recent weeks.

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Dennis Eidson, SpartanNash Company - Chairman and CEO [48]

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Yes. So we did have positive comp tailings in the quarter. But we have been running positive comp tailings. Q2 and Q3 were also positive on comp tailings. We did have a higher price per gallon on fuel in Q4 than we had a year ago, just about $0.10 more a gallon, and we were slightly more profitable in cents per gallon versus prior year. So fuel was actually pretty good to us in Q4.

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Chris Mandeville, Jefferies LLC - Analyst [49]

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Okay. So I guess maybe it's fair to assume that, seeing how you did have a high retail in Q4, the gallon growth was still positive, but yet may be a little bit less, though, that what you observed in Q3?

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Dennis Eidson, SpartanNash Company - Chairman and CEO [50]

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You know, I don't have that statistic right in front of me what it was in Q3, Chris. I don't know if some --

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Chris Meyers, SpartanNash Company - EVP and CFO [51]

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Gallon growth was again positive in Q3 and positive in Q4. It was slightly less positive in Q4 than it was positive in Q3 on a gallon basis.

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Chris Mandeville, Jefferies LLC - Analyst [52]

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Okay, very helpful. And then just turning really quickly to the pilot for click and collect, I'm curious if you could help us understand the difference between what you are moving forward with versus the nine or so stores that already have a similar but somewhat different offering. And maybe specifically what type of fee you will be attaching to such a service within your pilot.

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Chris Meyers, SpartanNash Company - EVP and CFO [53]

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Yes. So let me compare and contrast. I don't know if I'm going to get into fees yet, because I don't really want to tip anybody's hand. But from a compare and contrast, I would say what we have in our other stores we picked up as we brought those stores on board. Right? So they are very different systems and they range the gamut from a rosy I didn't believe -- there's a couple of other different types. One is a little even more homegrown.

The good thing about that is it gave us a sense of at least what we needed to do to be effective. And a number of these systems have worked fairly well for us, and that's how a couple of those alternatives we're able to be good partners with our distribution customers on because we at least understand how they work.

But the key is they are really -- they are strong systems on a store or two or three or four basis. They don't necessarily take your website to another level or integrate an app with that or integrate a recipe offerings. And where we are going is a company called Unata. It really is an integrated solution that is not just focused on the click-and-collect in-store experience, but also how it dovetails in your website, how it can bring an app to play, how it can really bring you a holistic offering and really take your e-commerce presence up a notch.

And so that's really the decision we made to go with Unata versus using one of the ones we had is that this really takes us to a different level overall in the experience.

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Chris Mandeville, Jefferies LLC - Analyst [54]

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Okay. And then just thinking about private-label not specific to DeCA per se, but maybe just the grocery industry as a whole, where are we in terms of the cycle of penetration? Where do you think it could go ultimately?

Is there any area of specific emphasis possibly in better-for-you and/or organic? And if, in fact, it is being focused in those types of categories, are the margins any different versus their conventional counterparts?

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Dennis Eidson, SpartanNash Company - Chairman and CEO [55]

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Yes. There are a lot of moving parts to your question. You know, private brands have had a bit tougher time the last year or so nationally. Virtually all of the growth in private-brand penetration has been in the perimeter, not in the center store. And in our specific case, in the mass fringe part of the business, they did not have in their private-brand portfolio perimeter representation.

So Dave mentioned in his remarks today that we are happy with the Open Acres launch. We've got about 200 items that we've launched at Open Acres, and all of those items are brand-new to the Nash Finch wholesale and retail business that merged in with us.

So we think there's pretty big upside. We've got a long way to go with Open Acres. There are hundreds of items that we are going to e adding to that. So I think that's a big upside.

We also continue to grow organics across our portfolio consistent with the national trend. At our retail stores, we were up 13.5% in organic penetration in Q4. We have a private-brand organic program called Full Circle. It comes through our relationship with [Tapco]. We have over 330 items of private-brand organics, and Full Circle is showing dramatic growth.

Overall in organics, we are stocking over 3,000 items in our retail stores. And on our distribution volume on organics, organic items is up over 40% versus prior year. So I think, as you are thinking about that segment, the perimeter, private brand, we are very, very engaged in that.

And are really pretty optimistic about the results we are seeing in it. Some of it is like obvious when you say it's demographically driven and so you're going to get a better penetration. But we get considerably surprised when we look at store by store how some stores are really performing well with that kind of product that you wouldn't expect if you were just controlled by your bias about your thinking in buying the type of product.

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Chris Mandeville, Jefferies LLC - Analyst [56]

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Okay. And then last one from me, just on the M&A front. Are there any specific areas that you guys are focused, whether be a geography or an offering? And then in regards to what assets may be available, how would you characterize the quality of that?

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Dave Staples, SpartanNash Company - President and COO [57]

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I would say first that the market itself remains very active in terms of the M&A front, and we remain very active in that market. The focus of our M&A activities is more on the distribution front than it is on the retail front. We would be more optimistic on the retail front and more proactive on the distribution front in terms of how we look at things.

But we think the market is very active right now. We believe in the continued philosophy that the market will continue to consolidate, and we see that continuing to play out and think that is going to continue to play out over the next few years.

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Dennis Eidson, SpartanNash Company - Chairman and CEO [58]

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I think, when we did the merger with Nash Finch and we had talked day one that this really would give us a foundation for being a consolidator in the space, and three years later, our leverage came down just as we had prescribed it would.

We're 1.8 times net debt to EBITDA, and that's how we ended the year. We included it in the release that we expect to be under 2 1/2 times this year. And again, we will be purposeful on paying that down.

But I think what has happened here is by our ability to pay down debt, we are prepared to do the next transaction. And the pipeline is pretty robust. When you combine that with the fact that we put together a 9% earnings improvement last year, we performed at the high end of our guidance. The high end of our guidance this year is again 9%. We got the balance sheet in order. There are plenty of acquisitions in the pipeline. For the right kind of transaction, we will be at the table.

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Chris Mandeville, Jefferies LLC - Analyst [59]

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Thanks, guys. And best of luck in 2017.

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Operator [60]

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Ajay Jain, Pivotal Research Group.

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Ajay Jain, Pivotal Research Group - Analyst [61]

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In terms of Caito and Blue Ribbon, I know it's obviously early with the integration process. I was just wondering if there has been any aspect of the integration or with the conversion of the new Fresh Kitchen facility -- has any of that gone a little slower than expected?

So I'm just asking if there have been any initial unexpected setbacks? And also just wondering if the time frame to start shipping product from the new facility is still on track compared to what you were thinking around the time of acquisition.

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Dave Staples, SpartanNash Company - President and COO [62]

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From our perspective, nothing is slower than what we anticipated in terms of the integration. The integration process and the deal in general for us was very much about how do we grow and develop that business over a long-term basis. And that continues to be the focus.

There will be synergies associated with the transaction. But first and foremost for us, it's about how we go to market together as one Company to realize the benefits out of that and how do we take advantage of that. How do we continue to grow that business. And we are focusing on cost synergies as well, but it plays a secondary -- takes a secondary position to the growth opportunities.

In terms of the Fresh Kitchen, I think we -- there's no delay in that, either. The building is complete. I think there's a lot of activity going on there. There's a lot of effort that is involved in getting that up and running and getting that to be operational. And I think that continues to be on track. And we continue to anticipate making that facility operational in the first half of 2017.

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Ajay Jain, Pivotal Research Group - Analyst [63]

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Okay, thank you for that. And I thought at the time that the Caito acquisition was announced, the revenue contribution, I think you indicated it was around $600 million annually, and you are assuming $550 million this year.

I would have thought the revenue impact would have been a little higher, especially since you've got the startup business that hasn't really kicked in yet. So is there any poor revenue softness at Caito that is assumed in the guidance, or is the issue just that you just that you've got a portion of the legacy business that you are not retaining for whatever reason?

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Chris Meyers, SpartanNash Company - EVP and CFO [64]

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The way I would say it is it's probably more the latter, to answer your question, than the former. We do anticipate growth from Fresh Kitchen. But the way I would look at it is $550 million is about what we anticipated the business to do when we closed the transaction in January.

We still feel optimistic about it. We still think it's a great growth opportunity for us, but $550 million based on the book of business that existed at the time we closed the transaction is what we anticipated, and there has been no change to that estimation.

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Ajay Jain, Pivotal Research Group - Analyst [65]

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Okay. And I know you're going to start to cycle a lot of the Gordy's accounts soon. I think you are -- or I guess you're cycling that in Q1. And your guidance still assumes growth in distribution.

But now that you are cycling Gordy's and you've got tougher sales comparisons and you are also dealing with the 2% deflation, I'm just wondering if there's a lot more distribution business that you've taken on recently. Or if there is new business that you expect to pick up that's assumed in the guide.

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Dave Staples, SpartanNash Company - President and COO [66]

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As far as new business, I think we've talked about pipeline and our thoughts. I think we just see a lot of good opportunities out there. And I think the team has done such a wonderful job of identifying and differentiating our offer that we see more opportunities as we go through it. So I think it's more what we see as opposed to what we've done.

I also think we have a healthy book of business that continues to grow as well. Despite the fact that there is deflation, we do have certain segments of our existing customer base that are growing and that we are very happy with as well.

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Ajay Jain, Pivotal Research Group - Analyst [67]

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Okay, and I had one final question. I know you can't give guidance on restructuring charges, so I'm assuming the difference between your GAAP and non-GAAP EPS guidance is mainly based on integration costs.

But I'm trying to get a better handle on where you are in terms of restructuring activities for retail overall. At this point, what percentage of the store fleet do you think is still subject to restructuring activities? Or, I guess, what percentage of the stores would you say are just disproportionately underperforming, if you can comment?

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Chris Meyers, SpartanNash Company - EVP and CFO [68]

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I'll take a stab at it. And Dave or Dennis, you can follow up there. I think Dave alluded to it in an earlier comment as well that we continue to look at our store base and continue to evaluate our store base and make sure it's the right fit for us as a company from a lot of different perspectives. And we continually to evaluate that store base and we will continue to do so over the next couple years.

I think we are not going to get specific about any particular activities, but we continue to evaluate it and we will continue to make decisions. I would say I think there's going to be some -- we anticipate that there will be a modification of the store base to some small degree over the next couple years yet.

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Ajay Jain, Pivotal Research Group - Analyst [69]

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Okay. Great, thank you very much.

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Operator [70]

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

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Dennis Eidson, SpartanNash Company - Chairman and CEO [71]

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Well, listen, thanks, everybody, for participating today. And that concludes our remarks for the quarter. And we will look forward to speaking with everybody next time at the end of Q1. Thanks.

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Operator [72]

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