Strike Anxiety Boosts Sales at Stater Bros. Markets

Stater Bros. Markets has been experiencing slight sales gains estimated at 2% or less as a result of consumer anxiety over a possible work stoppage at other companies by the retail clerks, according to Jack Brown, chairman and chief executive officer. Referring to the 141-day strike-lockout that occurred in late 2003 and early 2004, Brown said, Last time, people weren't prepared,

COLTON, Calif. — Stater Bros. Markets here has been experiencing slight sales gains — estimated at 2% or less — as a result of consumer anxiety over a possible work stoppage at other companies by the retail clerks, according to Jack Brown, chairman and chief executive officer.

Referring to the 141-day strike-lockout that occurred in late 2003 and early 2004, Brown said, “Last time, people weren't prepared, but even our own people have been filling their pantries a bit over the last several weeks with the products they like, and that's given us a slight gain in sales.”

One category in particular that has seen sales pick up is disposable diapers, “which people need to know they can get it when they need it,” he said.

Stater has been carrying a higher inventory level than normal, Brown added, “in case there is a strike, because we know [from three years ago] what kind of immediate rise in business that will create.”

Even without any disruptions in normal shopping patterns, Brown said Stater anticipates sales will pick up during the current quarter, after the company concentrated on boosting gross margin and operating cash flow during the second quarter ended March 25.

Net income benefited from the gross margin increases, soaring 227.7% to $13.5 million for the 13-week quarter and 147.7% to $23.4 million for the half, while sales rose 0.3% to $866.1 million in the quarter — which had one less sales day than the prior year because of how Christmas Day fell — and 2.3% to $1.8 billion for the year to date.

Comparable-store sales, adjusted for $12.1 million of sales on Christmas Day, rose 1.5% for the quarter and also for the six-month period.

Gross profit margin as a percentage of sales was 28.8% for the quarter, compared with 26.92% a year earlier, and 27.75% for the year to date, compared with 26.53% a year ago. The company declined to disclose earnings before interest, taxes, depreciation and amortization.

“We said we would concentrate on gross margin and EBITDA,” Brown noted, “and it was the right business plan for the quarter, though we knew it would slow sales increases slightly.

“This quarter, we're looking at pumping sales more while trying to hold on to the margin pickup.”

Phil Smith, executive vice president, finance, and chief financial officer and chief accounting officer, said Stater achieved margin gains because of decreased pricing pressure from competitors, more selectivity in promotional pricing, better controls over shrink and the buying ability of Topco.

In response to a question, Smith said he believes a gross margin exceeding 27% is sustainable, “because price competition has slacked off, though the market is still in flux; we can control in-store pricing; and the rebates we get from Topco contributed about 0.2% to the total.”

According to Brown, Topco's buying power is $90 billion, “so there are no deals Topco can't handle. And with competitors passing on increases in the cost of goods, so are we.”

Regardless of what the competition does, he added, Stater plans to maintain the historical price spread between itself and the next highest-price chain.

Brown said a slowdown in housing growth in the San Bernardino-Riverside area, in which Stater operates most of its 162 stores, has not affected sales. However, the closing of six or seven Albertsons stores in the area has benefited sales by about $25,000 to $30,000 a week at some Stater locations, he noted.

Brown said the company's new corporate offices in San Bernadino will open in September, though it will not begin shipping product from its new distribution facility there until February.

Brown said Stater has elected Ronald G. Skipper, a local attorney, to fill the board seat vacated by the death earlier this year of Dale Warman.

2ND-QUARTER RESULTS
Qtr Ended 3/25/07 3/26/06
Sales $866.1 million $863.8 million
Change +0.3%
Comp-store +1.5%
Net Income $13.5 million $6.2 million
Change +227.7%
Income/Share Not Available
26 Weeks 2007 2006
Sales $1.8 billion $1.8 billion
Change +2.3%
Comp-store +1.5%
Net Income $23.4 million $9.5 million
Change +147.4%
Income/Share Not Available