New Business Drives Spartan's Sales Growth in Q2

Spartan Stores last week said sales growth in its fiscal second quarter was driven by new business on both its retail and wholesale sides, but a tax-related charge dragged down net income for the period. The company said the acquisition of 20 Felpausch Food Centers earlier this year and comp-store sales growth of 2.8% (excluding fuel) helped drive second-quarter sales gains

Grand Rapids. Mich. — Spartan Stores here last week said sales growth in its fiscal second quarter was driven by new business on both its retail and wholesale sides, but a tax-related charge dragged down net income for the period.

The company said the acquisition of 20 Felpausch Food Centers earlier this year and comp-store sales growth of 2.8% (excluding fuel) helped drive second-quarter sales gains of 13.5%, to $627.1 million, compared with year-ago results.

Incremental distribution volume from sales to Martin's Super Markets and new wholesale business in the Detroit market, where Spartan's customers acquired 14 Farmer Jack stores, also helped drive sales, the company said.

Net income was down about 2.2%, however, to $9.1 million, following a non-cash charge of $2.7 million related to changes in the Michigan tax law, which the company said would also result in a non-cash gain of the same amount in the fiscal third quarter. Earnings from continuing operations for the 12-week quarter, which ended Sept. 15, were up 19.6%, to $11.5 million.

“Our second-quarter financial results continued to show substantial improvement in both sales and earnings growth, which marks our sixth and seventh consecutive quarters of net sales and operating earnings growth, respectively,” said Craig Sturken, chairman and chief executive officer, in a conference call with analysts.

Gross margin for the quarter increased 60 basis points to 20.6% of sales, which the company attributed to an increase in higher-margin retail sales and an improvement in retail gross margin rates, partially offset by volume increases in fuel and pharmacy, which generate lower margins.

Retail sales rose 22.1% in the period, to $333.2 million. Comp-store sales were up 5.1%, including a 2.3% contribution from fuel. Retail operating earnings rose 17.4%, to $11.9 million. Spartan said Felpausch, which is slowly being converted to other Spartan banners, is expected to add $85 million in retail sales volume in the current fiscal year.

The company said it was pleased with its remodeling efforts, especially at its more upscale D&W stores. Also, the company last week opened a new 48,500-square-foot Family Fare prototype, a replacement store for an older location.

Spartan projected comps would be up in the “low single digits” in the second half, and Sturken noted that the employment picture could be improving in Western Michigan, where Spartan operates most of its stores, although the economy in the southeast portion of the state continues to lag. He said the company has not seen a change in customer shopping behavior attributable to economic conditions, although he noted that the company saw strong results from a private-label promotion in the quarter.

In Spartan's wholesaling business, sales rose 4.4%, to $293.8 million, and operating earnings were up 4.8%, to $8.1 million, compared with year-ago results. The additional sales volume to Martin's Super Markets, which expanded its supply agreement with Spartan earlier this year, was partially offset by the loss of Felpausch as a distribution customer when Spartan acquired that chain, and the loss of two other distribution customers. Sales to Felpausch had totaled $23.2 million in the year-ago quarter.

The company said it expects to add $120 million in incremental distribution sales this year. Nine of the 14 Farmer Jack stores that were acquired by independent Spartan customers in the quarter have been converted to their new banners, with five more on deck.

2ND-QUARTER RESULTS
Qtr Ended 9/15/07 9/9/06
Sales $627.1 million $552.6 million
Change +13.5%
Comp-store +2.8%*
Net Income $9.1 million $9.3 million
Change -2.2%
Inc/Share 42 cents 44 cents
24 Weeks 2007 2006
Sales $1.18 billion $1.07 billion
Change +9.7%
Comp-store N/A
Net Income $15.6 million $12.0 million
Change +30%
Inc/Share 72 cents 57 cents
* excluding fuel