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Smart & Final upbeat on foodservice, online sales growth

Third-quarter results get lift from store, e-commerce investments

Smart & Final Stores Inc. got a lift in the third quarter from rising sales at its foodservice banner, helping the warehouse-style food retailer beat financial analysts’ earnings projection.

For the 16-week quarter ended Oct. 7, Smart & Final reported revenue of about $1.50 billion, up 2.8% from $1.45 billion a year earlier. The Commerce, Calif.-based company said the increase stemmed from an 0.6% uptick in same-store sales and business at new stores.

Comparable-store results reflect a 1.9% gain in average transaction size that was partially offset by a 1.3% decrease in transaction count, according to Smart & Final, which added that the product pricing deflation rate year over year was -0.7%.

At Smart & Final and Smart & Final Extra! stores, third-quarter sales totaled $1.14 billion, a 2.6% gain from nearly $1.12 billion a year ago. Comp-store sales inched up 0.2%. The Smart Foodservice Warehouse unit, meanwhile, saw sales climb 3.3% to $353.6 million from $342.1 million in the 2017 quarter, with same-store sales edging up 2%.

“In the third quarter, our financial and operating performance was solid, with year-to-year growth in overall sales, banner comparable-store sales, banner merchandise and gross-margin rates, and strong growth in online sales,” President and CEO David Hirz told analysts in a conference call yesterday after the market close. “We achieved this sales growth despite increasing deflation in a couple of key categories, which was a bit of a surprise after experiencing inflationary trends in many categories earlier in 2018. Our comparable-store sales, net of inflation and cannibalization, was up 1.6%, our strongest quarter of the year and stronger than our fiscal-year 2017.”

E-commerce sales for the quarter doubled for the Smart & Final banner and surged 500% for the Smart Foodservice stores, according to Hirz.

“We’re investing in both our delivery and buy-online-pickup-in-store offerings. Across both banners, we're seeing strong adoption rates for our e-commerce offerings,” he said, noting that Click & Carry store pickup service helped drive results. “And after a successful pilot in the San Francisco Bay Area, we recently added a second delivery pilot for our Smart Foodservice banner in the Portland, Ore., market. With this third-party delivery option, we're serving small businesses and restaurant customers with temperature-controlled vehicles up to a 50-mile radius from our pilot stores.”

At the bottom line, reported net earnings for the third quarter were $10.2 million, or 14 cents per share, compared with $5.1 million, or 7 cents per share, a year ago. Smart & Final said the net income result reflects charges of $24.6 million from new-store pre-opening costs, noncash rent from stores, share-based compensation expense and store closing costs.

On an adjusted basis, net income was $16.9 million, or 23 cents per share, versus $12.9 million, or 17 cents per share, a year ago. Analysts’ consensus estimate was for adjusted earnings per share of 17 cents, according to Zacks Investment Research.  

Smart & Final reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $62.3 million for the third quarter, down 1% from $62.9 million in the prior-year period.

During the quarter, Smart & Final opened three new Smart & Final Extra! stores, relocated and converted one legacy Smart & Final store to an Extra! format store and closed one legacy Smart & Final store.

For fiscal 2018, the company expects unit growth of four new Smart & Final Extra! and three new Smart Foodservice Warehouse stores. Plans call for three legacy Smart & Final stores to be relocated and/or expanded to the Extra! format.

Hirz said in the call with analysts that Smart & Final also is keeping up its investment in online operations.

“We're supporting this continued growth over e-commerce and delivery channels through measured investment in our back-end infrastructure and more aggressive online and print promotional campaigns. In particular, this year we've implemented new warehouse management and purchasing systems, upgraded our core financial backbone to SAP S/4 financials and strengthened our system security infrastructure, all of which are a stronger base for online commerce,” he explained.

“A key focus in our e-commerce investment strategy is greater capture and leverage of customer-specific information and purchase history so that we can serve our best customers even better,” Hirz continued. “We also continue to invest in our brick-and-mortar operations and believe the combination of our unique merchandising, value pricing and investments in customer-focused initiatives will continue to support customer traffic in today's environment.”

As of Oct. 7, the company operated 324 stores overall in California, Oregon, Washington, Arizona, Nevada, Idaho, Montana and Utah. The U.S. locations include 199 Smart & Final Extra! stores, 61 legacy Smart & Final stores and 64 Smart Foodservice Warehouse stores. The retailer also operates 15 stores in northwestern Mexico through a joint venture.

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