Private-Label Sales, Conversions Boost Spartan

GRAND RAPIDS, Mich. — Spartan Stores is making lemonade — among other private-label goods — to thrive during tough times.

The retailer-wholesaler here posted a 52.2% increase in net earnings and an operating earnings increase of 26.4% during the fiscal first quarter that ended June 21, the company said last week, attributing the results in part to experience with and preparation for challenging economic times.

“Economic cycles are nothing new to companies operating in Michigan,” Craig Sturken, chief executive officer, said in a conference call discussing quarterly results. “We have been operating in this environment for some time and have produced solid results despite the challenging environment, and we believe our management team has the experience to successfully adapt our business strategies to the economic conditions that prevail.”

That challenging economic climate — along with rainy weather in northern Michigan that slowed sales during the beginning of the summer touring season — held comparable retail sales, excluding fuel, to a 0.2% gain during the quarter. But an improved sales mix between the wholesale and retail divisions — due mainly to the addition of Felpausch stores to the retail store base — helped increase profits as a percentage of sales to 19.7% from 19.1% in the same period last year.

The Felpausch acquisition also sparked a 12.8% increase in overall sales, to $586.7 million, Spartan said. Sales in the distribution segment increased 5.6% to $298.1 million due to increased sales from new and existing customers. Quarterly retail sales improved 21.4% to $288.6 million, due mainly to acquired stores.

Officials in the conference call last week discussed how an emphasis on private-label goods and the repositioning of acquired stores helped boost results.

“Michigan has been a tough market for the past several years, but our organization is prepared to deal with these things. They are not new to us,” Sturken said. “Private label is one of the things that is really working for us. We've invested in it for the last five years, and I think it's one of the best private-label programs in food retail. And this is the time where a good, solid, robust private-label program will work. You could say that is sort of the star of our business plan.”

Private-label sales helped boost margins, although they contributed to lower overall sales, Karen Short, an analyst for Friedman, Billings, Ramsey & Co., New York, said in a research note. Overall, Short said, “We continue to see this as a strong company executing well in a challenging economic environment.”

Officials were also bullish on the performance of acquired stores from former regional independents D&W and Felpausch. Renovations and format adjustments at these stores have “dramatically improved” performance, Sturken said.

“We've been able to acquire businesses and make them far more productive than they were before we acquired them,” Sturken said. “D&W and Felpausch are working very nicely for us.”

Spartan completed major remodels at three Felpausch stores during the first quarter, converting them to the Family Fare banner, Sturken said. Another Felpausch store was converted to the more upscale D&W banner in late June.

Sturken said he expected the performance of the newly converted stores — as well as the addition of Felpausch stores to the comparable-store base — will increase comparable-store sales to the low to mid single digits, when adjusted for the absence of the Easter holiday during the current fiscal year. Easter fell during the first and fourth quarters of Spartan's fiscal 2008.

Spartan plans to complete remodels on three stores during the third quarter. Other projects planned include adding four fuel centers, completing construction of a new D&W store and one store relocation.

“We are just beginning to benefit from the performance potential of our Felpausch acquisition, and expect to continue making progress and improvements in their sales and profit performance during fiscal 2009,” Sturken said.