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Distribution business spurs Q2 sales gain at SpartanNash

Fresh product recall, retail division impact results

SpartanNash Co. got a lift in the fiscal 2018 second quarter from growth in its distribution businesses, but losses from a product recall at its Caito Foods unit bit into earnings per share, which fell short of Wall Street estimates.

For the 12-week quarter ended July 14, SpartanNash’s consolidated revenue rose 2.1% to nearly $1.9 billion from $1.86 billion a year ago.

“The food distribution and military segments completed another quarter of strong sales growth, and we realized sequential improvements in comparable-store sales at retail for the second consecutive quarter as we enhance and develop innovative solutions for our diverse customer base,” President and CEO David Staples said in a statement. “As a result, we remain excited about the opportunities to grow our business, despite a difficult operating environment.”

Food distribution sales grew 4.3% to $941.7 million in the quarter, while sales in the military segment were up 3.9% to $489.7 million.

Sales growth from new and existing customer programs fueled the increase for the food distribution unit, though a June recall of certain fresh-cut melon products because of possible salmonella contamination impacted results, SpartanNash reported. The recall, involving items made at Caito’s facility in Indianapolis, accounted for $2.9 million in pretax estimated losses, or 6 cents per diluted share after taxes.

“In early June, at the start of peak summer demand from produce and as we were generating record sales volumes in our fresh operation, Caito voluntarily recalled all of its fresh-cut melon product over a multiple-week period due to potential contamination with salmonella,” Staples told analysts Thursday in a conference call on second-quarter results. “As soon as we became aware of the potential issue, we immediately stopped production of fresh-cut melon products and took decisive action to look out for the safety of the consumers of our product. These actions include performing tests of our production facility and manufacturing processes by both third-party food safety experts and representatives of the FDA.”

More than 500 tests were conducted, and none indicated salmonella contamination, although Caito didn’t restart production “until we were confident that our facility was not the source of the issue,” according to Staples.

“Fresh food offerings remain a key strategic priority to us and are critical to today’s consumer. While the recall has delayed our progress in growing the top line and driving the efficiencies we believe to be there, we continue to see great opportunity with our fresh offering and are focused on innovating new product, developing our sales pipeline and continuing to serve our existing customers with exceptional fresh offers,” he said during the call.

In the retail unit, second-quarter sales fell 3.6% to $464.6 million, mainly due to $15.5 million in lost sales from the closing and sale of retail stores, as well as a 1.9% decrease in same-store sales (excluding fuel). SpartanNash now operates 140 supermarkets, primarily under the Family Fare Supermarkets, D&W Fresh Market, VG’s Grocery, Dan’s Supermarket and Family Fresh Market banners.

“Areas that provide challenges in the current quarter related to the pricing environment and margin within our pharmacy business due to the significant increase in direct and indirect remuneration, or DIR fees,” Staples noted.

“We remain very pleased with our new Family Fare brand positioning and executing key elements of our brand redesign in some test stores, as was felt last quarter. We have seen a very positive response to our effort. And in our latest customer survey, the overall customer satisfaction score has improved significantly. With four remodels and process scheduled to open in the second half of the year, we are excited to continue our rollout of our brand positioning and leverage it to drive continued improvement in our retail trends,” he said.

“Additionally, we continue to expand Fast Lane, our online ordering and pickup service, as well as other click-and-collect services,” Staples added. “Online ordering for delivery and curbside pickup are now available in approximately 55% of our retail locations, and we are continuing to expand the reach of these services to provide convenience to our customers.”

At the bottom line, SpartanNash posted second-quarter net earnings from continuing operations of $17.8 million, or 49 cents per share, compared with $21 million, or 56 cents per share, a year earlier. The results reflect the 6 cents-per-share loss from the product recall and higher interest expense, the company said.

Adjusted net income was $17.9 million, or 50 cents per diluted share, versus $22.6 million, or 60 per diluted share, a year ago. SpartanNash said adjusted earnings exclude net after-tax charges of 4 cents per diluted share in the prior-year quarter from restructuring, merger/acquisition and integration, and Caito Fresh Kitchen startup costs.

Analysts, on average, projected adjusted EPS of 57 cents, with estimates ranging from a low of 56 cents to a high of 58 cents, according to Thomson Reuters.

Going forward, SpartanNash will remain focused on its strategic objective of “developing a national, highly appealing distribution platform that serves a diverse customer base and is known for solving unique and complex logistical issues,” Staples told analysts.

“While the current operating environment may have it challenges, I’m excited about the customer base we are serving and the growth we are experiencing as a result. I expect our sales momentum to continue as we ramp up a significant program launched late in the second quarter,” he said. “We also remain focused on growing and growing profitability of our freshly produced offering, and we’ll develop products and services that our existing and future customers need to meet the growing healthy and fresh demands of today’s consumer. Our key objectives over the next few quarters will center on straining more of this growth to the bottom line.”

Chief Financial Officer Mark Shamber said SpartanNash has pruned its full-year 2018 adjusted earnings forecast to between $1.96 and $2.08 per diluted share. On a GAAP basis, the company expects diluted EPS of $1.69 to $1.84.

“We are updating our guidance for fiscal 2018 due to a combination of the product recall at Caito and slower-than-anticipated sales growth and productivity improvement at our food processing operation,” Shamber said in the call. “The slower-than-anticipated introduction of new private-brand product within our military segment and the slow ramp-up of a significant customer program within our food distribution segment presents additional headwind.”

Prior to the second-quarter report, Wall Street forecast SpartanNash’s fiscal 2018 adjusted EPS at $2.39, with projections running from a low of $2.29 to a high of $2.45, according to Thomson Reuters.

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