DISTRIBUTION CHALLENGES AFFECT SMART & FINAL IN 3RD QUARTER

LOS ANGELES -- Smart & Final here said last week it believes it has its distribution challenges under control and expects improved results in 2006.Etienne Snollaerts, president and chief executive officer, said the company's third-quarter sales were adversely affected by implementation of new distribution software that affected in-stock conditions. "We could have done better, but we fell short keeping

LOS ANGELES -- Smart & Final here said last week it believes it has its distribution challenges under control and expects improved results in 2006.

Etienne Snollaerts, president and chief executive officer, said the company's third-quarter sales were adversely affected by implementation of new distribution software that affected in-stock conditions. "We could have done better, but we fell short keeping the stores as well-stocked as we would have liked," he told analysts in a conference call following release of financial results for the third quarter and 40 weeks ended Oct. 9.

He said warehouse operations are "almost normal" in terms of throughput, "but we have not necessarily solved all our software issues or gotten our people totally trained in the new system. It takes time to adjust to new ways of doing things, and we don't expect our people to be up to full speed before the beginning of next year."

Because Smart & Final operates only a single distribution center, in Commerce, Calif., "when you change systems, there's no other warehouse to help smooth the operation" Snollaerts said. "As a result, when we stopped the old system and converted to the new system in July, there were some bumps in the road and service levels dropped 50% to 60% and then gradually increased as we got better controls in place. That's frustrating for everyone because it's been such a slow process, but we're now at service levels that are acceptable for the stores to have good in-stock conditions."

Snollaerts said Smart & Final has contracted with a third-party distributor to handle high-velocity items "that represent less than 10% of our stockkeeping units but a higher percentage of the warehouse cube." That facility will begin operations in December.

Net income fell 93% to $823,000 for the 16-week quarter and 53.4% to $12.1 million for the year to date, while sales rose 5.2% to $634.4 million for the quarter -- with comparable-store sales up 3.3% -- and 4.2% to $1.6 billion for the 40 weeks. Including a litigation charge after taxes of $11.4 million stemming from settlement of a class-action lawsuit involving overtime pay, income from continuing operations was $1 million; excluding the charge, income from continuing operations rose 2.5% to $12.3 million.

Snollaerts said distribution costs that have been higher than anticipated impacted gross margins throughout the year, with gross margins of 17.2% in the quarter, compared with 28% a year ago.

3RD-QUARTER RESULTS

Qtr Ended 10/9/05; 10/3/04

Sales $634.4 million; $603.2 million

Change +5.2%

Comp-store +3.3%

Net Income $823,000; $11.7 million

Change -93%

Inc/Share 3 cents; 39 cents

40 Weeks 2005; 2004

Sales $1.6 billion; $1.5 billion

Change +4.2%

Comp-store Not Available

Net Income $12.1 million; $26 million

Change -53.4%

Inc/Share 39 cents; 86 cents