SpartanNash Company (NASDAQ:SPTN) Q4 2023 Earnings Call Transcript
SpartanNash Company (NASDAQ:SPTN) Q4 2023 Earnings Call Transcript February 15, 2024
SpartanNash Company misses on earnings expectations. Reported EPS is $0.35 EPS, expectations were $0.38. SPTN isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the SpartanNash Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to Kayleigh Campbell, Head of Investor Relations. Please go ahead.
Kayleigh Campbell: Good morning and welcome to the SpartanNash company fourth quarter and fiscal year 2023 earnings conference call. On the call today from the company, our President and Chief Executive Officer, Tony Sarsam; and Executive Vice President and Chief Financial Officer, Jason Monaco. By now everyone should have access to the earnings release, which was issued this morning at approximately 7 A.M. Eastern time. For a copy of the earnings release as well as the company's supplemental earnings presentation, please visit SpartanNash's website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company's website. Before we begin, the company would like to remind you that today's discussion will include a number of forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. If you will refer to SpartanNash's earnings release from this morning, as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially from these forward-looking statements. Please remember that all forward-looking statements made today reflect our current expectations only and SpartanNash undertakes no obligation to update or revise these forward-looking statements. The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business and it has included in the earnings release a full reconciliation of certain non-GAAP financial measures to the most comparable GAAP measures, which can be found on SpartanNash's website at www.spartannash.com/investors.
And now it is my pleasure to turn the call over to Tony.
Tony Sarsam: Thank you, Kayleigh and good morning everyone. Glad to be here. To start, I'm incredibly proud of our talented team of SpartanNash associates. We made huge drive in our long-term strategic plan in 2023. We delivered record profitability and consistently performed in line with our guidance despite a challenging macroeconomic environment. I want to extend the heartfelt banks to each of our associates who contributed to our success. The investments we've made in our People First culture are paying off. Before I dive into the financials, I want to highlight the progress we made with our People. In 2023 we improved our turnover rate by more than 9% and the momentum continued to build with sequential improvement in the second half of the year.
Our associate satisfaction helped us earn the prestigious Great Place to Work Certification and a spot on Newsweek's America's Greatest Workplaces for Diversity in 2024. In addition our overall rating on Glassdoor increased to 3.9 out of 5 in 2023 versus 3.4 in 2020. This puts our score at the top of our peer group and other major national retailers. We've also become a safety leader in our space which is one of our proudest accomplishments. Since 2020, we have reached the top quartile for OSHA safety performance by reducing our lost-time incidents by 78%. This includes a 20% improvement in the last year alone and as a byproduct of our genuine effort to protect our people we've reduced workers' compensation losses by nearly 30% since 2020. Together these improvements in turnover and safety have resulted in improved associate engagement and increased productivity.
Now, turning to financial highlights for the year. Starting with our top line, our 2023 net sales increased nearly 1% to $9.73 billion. The impact of our Amazon business reduced our sales by 2% over this period. This change in demand impacted our total company sales expectations for the year. However, we have continued to grow the top line and importantly the bottom line despite the Amazon volume pressures. Speaking on the bottom line, we grew profitability in 2023, while others in the industry were simply maintaining or declining. Our main performance metric, adjusted EBITDA was up 6% in 2023 and our adjusted EBITDA margin expanded 13 basis points compared to the prior year. Notably, with the exception of 2020, the last two years have seen the best EBITDA margin expansion in the 10 years since our merger.
The success of our supply chain and merchandising transformations contributed to these results. In 2023, we realized $55 million in benefits from these initiatives. Since launching our transformation work, we have improved our throughput rate by double-digits. Pass along benefits to our customers through the enhanced category planning program and captured $80 million in total gross benefits. We continue to build momentum in other parts of our business as well. Over the past year, one, continued renovating, rebannering and refreshing our stores, which represents 19% of our store base since 2021. Two, we grew our retail market share by 27 basis points and three, we increased our own brands retail unit penetration rate by 30 basis points. As we look ahead to 2024, our team is focused on growing top line, capturing additional benefits from our transformational initiatives and launching new cost savings programs.
Regarding top line growth, our new Chief Customer Officer, Amy McClellan is now at the helm. Her team has identified organic opportunities that include expanding our national account service models, leveraging our existing network for new opportunities through capital-light business development and accelerating market expansion opportunities as a result of last year's Great Lakes Foods acquisition. Amy has served on the executive team for two years and has leadership experience in retail, merchandising and marketing. Prior to SpartanNash, it was actually one of our wholesale customers. She understands the independent grocery business model and will be a great advocate for helping our customers to grow with SpartanNash. Other things we're excited about in 2024, include our continued transformation work.
We expect to capture an additional $50 million to $60 million in benefits from our supply chain and merchandising transformation, as well as our go-to-market plan. This puts us on target to hit our gross benefits range of $125 million to $150 million a whole year earlier than initially communicated. We're also in the process of launching several cost savings initiatives. These include automation and AI programs, such as the expanded use of Tally, our in-stock robot which will appear in 75 stores this year. We're also implementing an automated workforce planning tool and inventory validation warehouse drones. As part of our ESG work, we are introducing operational shrink initiatives to help us reduce food waste across our total value chain. These are all capital-light projects that will add value for years to come.
We look forward to providing updates as the benefits of these programs materialize. Okay. So we have talked about our 2024 plans to grow the top line, capture additional benefits from our transformation initiatives and new cost savings programs. We're also actively evaluating inorganic growth opportunities. Over the past couple of years, we have refined our organizational structure to enable efficient and effective acquisition integrations. And we have demonstrated our ability to integrate new assets into our existing network through the retail and wholesale acquisitions we made in 2022. During the same two-year time frame more opportunities have presented themselves in both of our segments. We continue to evaluate these opportunities using a disciplined approach.
We remain good stewards of capital and we'll only pursue those opportunities that we believe will enhance long-term shareholder value. Before turning the call over to Jason, I want to provide some context on what has changed in our industry over the past couple of years. Volume headwinds are higher than the industry initially anticipated following the unprecedented food inflation spike of 2022. We experienced a drop in demand within our Amazon business, as they develop a store format that better resonates with their customers and we're seeing more inorganic growth opportunities. While our long-term strategic plan has consistently captured benefits, we will continue to reassess and adapt our strategy in response to industry headwinds and opportunities.
To summarize our overall view of the business, there are many opportunities to win in any dynamic environment. I'm excited about the progress we'll make in 2024 and the value that our transformation work continues to create. All right. I'll now turn the call over to Jason to walk through the quarterly financials and 2024 for our outlook in greater detail.
Jason Monaco: Thanks Tony and welcome to everyone joining us on today's call. I want to highlight some of our key successes from this past year, before jumping into the detailed quarterly results. These highlights include: one achieving a record adjusted EBITDA of $257 million, growing 6% compared to $243 million in the prior year; two, expanding our adjusted EBITDA margin by 13 basis points compared to the prior year; three, increasing our reported net earnings by 51% to $52.2 million compared to net earnings of $34.5 million in 2022; four, expanding net margin by 18 basis points; five, returning more than $48 million to shareholders through share repurchases and dividends; six, generating more than $89 million of cash from operating activities; and seven, maintaining strong liquidity, giving us flexibility to support our long-term strategic plan that include both organic and inorganic investments.
This past year we also made significant progress on our margin-enhancing initiatives, the supply chain and merchandising transformations. We realized $26 million in cost savings during the year from the supply chain transformation, which is in line with the $20 million to $30 million range we previously provided. To echo Tony's comments, since launching the supply chain transformation in 2021, we've improved our throughput rate by double-digits. We are still capturing synergies from this program and expect additional cost savings in 2024, which I'll discuss momentarily. We're also incredibly proud of our success with the merchandising transformation which is still in its early innings. This past year we captured $29 million in benefits. These benefits were again in line with the $25 million to $35 million range we previously shared.
Now turning to our fourth quarter results. Net sales in the quarter decreased 2.8% to $2.25 billion versus 2022's fourth quarter sales of $2.31 billion. The decline versus the prior year period was due to decreased unit volume in the Wholesale and Retail segments, which is consistent with industry trends and headwinds in our Amazon business. Gross profit for the fourth quarter was $339 million or 15.1% of net sales compared to $341 million or 14.8% of net sales in the prior year's fourth quarter. Our gross profit dollars were flat due to the lower volume I mentioned, while the margin rate increase was driven by reduced LIFO expense consistent with inflation trends and benefits realized from the transformation programs. The increased rate was partially offset by cycling the inflation-related price gains from the prior year quarter.
As a percent of sales, our reported operating expenses decreased 36 basis points from prior year. The improvement was primarily due to a reduction in supply chain expenses driven by efficiencies from our Supply Chain Transformation Initiative and lower incentive compensation compared to the prior year quarter. Interest expense increased $1.6 million compared to the prior year quarter to $9.7 million, due primarily to an increase in borrowings and the higher interest rate environment. Now, turning to our segments. Net sales and wholesale decreased $33 million to $1.6 billion compared to the prior year quarter. The 2% decrease was primarily due to demand changes within our Amazon business. Moving to the bottom line, the wholesale segments quarterly adjusted EBITDA was $40.7 million, compared to $27.2 million in the same period last year.
The segments profitability increased due to, one, reduced supply chain expenses, two, benefits realized from the merchandising transformation, and three, lower incentive compensation. Wholesale reported fourth quarter operating earnings were $21.7 million, compared to $0.3 million in the prior year's fourth quarter. These results included $8 million in asset impairment charges related to continued supply chain network optimization in response to customer demand changes. Now, moving to the retail segment. Sales came in at $647 million for the quarter compared to $678 million in the fourth quarter of 2022. Our comparable store sales decreased 2.8% for the fourth quarter, while they remained strong on a two-year stack, increasing 6.1%. Similar to the last few quarters, continued reductions in EBT benefits offered to consumers in our retail geography adversely impacted same-store sales by approximately 2.7% this past quarter.
In addition, our fuel sales were down by more than 19% to the prior year quarter. The reduced fuel sales were primarily driven by lower price per gallon. Retail adjusted EBITDA was $13 million, compared to $19.9 million in the prior year quarter. Along with lower volumes, the decrease was also driven by a decline in the gross margin rate, notably from the pharmacy business, which negatively impacted gross margin by 100 basis points. Gross margins were also adversely impacted by cycling elevated fuel margins in Q4 last year. The decrease in gross margin was partially offset by reduced operating expenses, including lower incentive compensation. Retail reported operating earnings were $1.9 million, compared to $8.5 million in 2022's fourth quarter.
Turning to the balance sheet, our leverage ratio of net long-term debt to adjusted EBITDA increased sequentially in the fourth quarter by 20 basis points to 2.3x, compared to the third quarter of this year. And, as I said earlier, our liquidity remains strong, giving us flexibility to support our plan, including both organic and inorganic investments. As covered in today's press release, we are providing our initial guidance for fiscal 2024, which incorporates several items that include, one, our current expectations for the 2024 grocery environment, two, the demand outlook for national account customers; three, tuck-in acquisitions; and four, securing $50 million to $60 million in benefits from the supply chain and merchandising transformations as well as our go-to-market plan.
To execute this plan, we continue to invest in capabilities and initiatives that deliver long-term shareholder value. These investments are heavier in the first half of the year to maximize run rate value exiting 2024. It's due to the success of our transformational programs that we are offsetting rising industry headwinds. And we are well on our way to hit our original gross benefits target range of $125 million to $150 million a year earlier than initially anticipated. Overall, we expect our full year net sales to be in the range of $9.7 billion to $9.9 billion. We also expect our total planned capital expenditures to be in the range of $135 million to $145 million for the year, which includes continued investments in our strategic long-term plan.
Moving on to our main profitability metric. We expect fiscal 2024 adjusted EBITDA to be in the range of $255 million to $270 million, while continuing to invest in our transformational initiatives. This range is inclusive of tuck-in acquisitions. We anticipate interest expense to be in the range of $37 million to $42 million this year, reflecting the ongoing elevated interest rate environment and investments in our business. On a per share basis, we expect adjusted EPS to be in the range of $1.85 to $2.10 per share. I'm very energized about the year ahead and I believe 2024 is going to be our best year yet. And with that I'd like to turn the call back over to Tony.
Tony Sarsam: Thank you, Jason. Back on my previous comments, while we have been building our capabilities and optimizing the business, the macro environment has continued to change and we have a strong foundation to flexibly pivot with these changes. The plan we launched in 2021 sets us up to outperform the industry. The team's hard work has optimized our supply chain, provide ongoing value through our enhanced category planning and compelling offering, helped us gain share based on the insights from our marketing innovation work and enabled us to steadily grow profitability despite a dynamic changing environment. We've built a strong foundation and we are pursuing organic growth and evaluating inorganic opportunities giving us the confidence to achieve our 2025 profitability targets.
Before we open the call up to questions, I want to take one more opportunity to thank our associates. Their execution of our plan is the reason why we continue to win with our customers and shoppers. With that, I'd like to turn the call back over to the operator and open it up for your questions.
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