SPARTAN ACTS TO IMPROVE SALES IN 2002

GRAND RAPIDS, Mich. -- Spartan Stores here said last week it hopes to see a pickup in sales over the next 12 to 18 months after experiencing a shortfall that is expected to continue through the end of its fiscal year in March.James B. Meyer, chairman, president and chief executive officer, said a series of unrelated factors have converged to create the shortfall, "but we are taking aggressive actions

GRAND RAPIDS, Mich. -- Spartan Stores here said last week it hopes to see a pickup in sales over the next 12 to 18 months after experiencing a shortfall that is expected to continue through the end of its fiscal year in March.

James B. Meyer, chairman, president and chief executive officer, said a series of unrelated factors have converged to create the shortfall, "but we are taking aggressive actions to improve our sales results, and we're in the early stages of tapping new potential to increase profitability.

"While we are clearly disappointed with the current sales trends, we are definitely in the early stages of implementing many major business initiatives, including our retail marketing network strategy, store remodeling program, new store development and efforts to consolidate and leverage our purchasing power across our network of owned and serviced stores.

"These programs have considerable promise and represent significant untapped growth potential."

Meyer and other Spartan executives spoke with securities analysts in a conference call to discuss the company's financial outlook. The call was scheduled a few days after the company disclosed the shortfalls.

According to Meyer, Spartan expects financial results to fall below expectations in several areas, including:

Sales for the third quarter ending Jan. 5 are expected to be $1.10 billion to $1.15 billion, below earlier expectations.

Sales for the year ending March 31 will be $3.5 billion to $3.6 billion -- about flat with last year's $3.5 billion and down from the 5% to 7% increase projected earlier in the year.

Comparable-store sales will drop 2% to 3% for the year, compared with earlier comp guidance in the range of 1% above or below last year's 6.5% increase.

Earnings per share will be flat to slightly up in the third quarter from the $1.33 per share reported a year ago.

Earnings per share for the year are expected to total $1.33 to $1.42, instead of the $1.46 to $1.52 per share predicted in company guidance earlier in the year.

Spartan said it expects to release third-quarter results on Feb. 5.

Meyer said the financial problems stem from separate challenges in each of its three marketing areas. "We didn't expect all these factors to converge at one time to weaken sales," he explained.

Those factors include:

Abnormally warm weather in northern Michigan, which has cut into the tourist business from neighboring states that the area depends on, "so we're not experiencing the same sales volume at this point in the season as we did last year."

Escalating unemployment in western Michigan resulting from a slowdown at three major furniture manufacturers, which has cut consumer spending -- compared with a year ago, when comp sales rose 11% in the area during the third quarter.

Ongoing competitive pressures in Ohio, where 10 new stores have opened against Spartan's Food Town corporate stores in the Toledo market in the past 12 months. Explained Meyer, "We've taken appropriate competitive responses -- including a new loyalty card program, a temporary price-reduction program and the beginnings of a store remodeling effort -- but the results have not always been immediately evident.

"But we expect our sales performance to improve over the next 12 to 18 months."

In response to a question, Meyer said the Ohio situation is posing the greatest challenges, and Spartan's management team is giving extra attention to that region. "Several senior-level executives who used to spend their time dealing with the entire network of stores are spending more time in the Ohio market assisting the management team there," he pointed out.

Joel Barton, executive vice president, sales and merchandising, said some promotional pricing in Ohio has been "insane," particularly the pricing of turkeys at Thanksgiving at 10 cents a pound. "But instead of giving away profits without building consumer loyalty, Spartan is trying to manage margins at its corporate stores and show good values in the items we promote," he said.

He also noted that consumer buying habits are shifting, with customers moving away from top-end products to more poultry and ground beef.

To take advantage of this trend, Spartan has initiated a program featuring Home Harvest -- its lower-tiered, private-label line -- on the front page of its weekly circular, "and it's been received quite well, and we will continue to do that because it's been an efficient tool as the economy has been changing," Barton said.

Dave Staples, executive vice president and chief financial officer, said the competitive situation in Ohio should begin easing off by the spring, with only two additional competitive openings scheduled in the state over the next five months. "Although there will always be openings of smaller-sized stores, we don't see a continuation of the magnitude of openings that we've experienced in the Toledo market," he said.

Staples said Toledo is likely to remain highly competitive in the short term, "but our plan is to target certain players there through our remodeling and promotional programs to recoup the market share we've lost and to make it very unprofitable for the other companies in the market."

Barton said, "Our Food Town stores, along with Kroger and Meijer, have been in Toledo for a long time. Farmer Jack [an A&P company] acquired three stores there and opened four, with one more to come, and they are unlikely to move out. But Giant Eagle came in with one store, then backed off on its plans to open more, and we understand the company is trying to sell that one store, though it hasn't found any takers."