With tough year-over-year comparisons to last year’s pandemic-fueled gains, SpartanNash saw sales decline across its distribution and grocery retail businesses in its fiscal 2021 second quarter.
The Grand Rapids, Mich.-based grocery wholesaler and retailer, however, topped Wall Street’s earnings-per-share forecast despite a 26% decrease in adjusted net income.
For the 12-week quarter ended July 17, net sales totaled $2.11 billion, down 3.6% from $2.18 billion a year earlier, SpartanNash reported after yesterday’s market close. That compared with a 9.4% net sales increase in the 2020 second quarter, when consumer demand for groceries and other supplies remained elevated following the early weeks of the COVID-19 outbreak.
Continued growth with some food distribution customers partially offset the 2021 quarter’s sales decline, but foot traffic at commissaries served by the military business segment remains below pre-pandemic levels due to domestic base-access restrictions, SpartanNash said.
“Overall, Q2 was a strong showing for SpartanNash, with both our top and bottom lines exceeding expectations,” President and CEO Tony Sarsam (left) told analysts in a conference call on Thursday. “Like the rest of the industry, we have been challenged by the historic labor shortages, strains on the global supply chain and rising prices. However, I cannot be more proud of how the team overcame these obstacles in our second quarter.”
Net sales in food distribution, SpartanNash’s largest business unit, fell 3.1% to $1.06 billion in the second quarter from $1.09 billion in prior-year period, when sales surged 17.1% gain. On a two-year stack, however, sales are up 13% from the fiscal 2019 second quarter of 2019, the company noted.
“Our warehouse, labor and transportation costs remain unfavorable and worsened in recent months,” Sarsam explained. “Nonetheless our supply chain team proved resourceful and agile taking swift actions to manage inventory and profitability. The team strategically reduced inventory by over $60 million during the quarter. This inventory reduction allows the distribution centers operate more efficiently and provides a solid foundation for [our] supply-chain transformation initiative.” Announced last quarter, the effort aims to improve warehouse operations, sales and operations planning, inventory optimization, network strategy and procurement.
Inflation varied between product categories during the quarter but turned upward heading into the third quarter as some price hikes from suppliers took effect, according to Chief Financial Officer Jason Monaco. “We still anticipate further increases for the balance of the year. However, as we previously noted, we anticipate that these increases will be passed through to our customers,” he said in the call.
The grocery retail unit’s net sales dipped 1.8% to $620.0 million from $631.3 million a year ago, when SpartanNash reported a 10.8% increase. Same-store sales fell 2.7% — versus a 17.1% jump in the 2020 quarter — but were up 12.1% on a two-year basis, the company said.
“In the retail segment, our top-line trends are proving quite resilient as we cycle last year’s COVID lift. It doesn’t mean higher relative 2019 levels. On a two-year basis, our comps have improved from 9.3% to 12.1%,” Sarsam said. “The demand for food at home has persisted, and our stores benefited from an overall increase in traffic compared to the prior quarter. Regarding digital sales, we've seen over 100% growth since 2019 and, to continue the expansion of our digital channel, we recently opened our first micro-fulfillment center.”
Announced last month, SpartanNash’s 55,000-square-foot micro-fulfillment center in Caledonia, Mich., processes pickup and delivery orders from 24 stores in West Michigan for the Fast Lane online grocery service.
Currently, SpartanNash operates 148 corporate-owned supermarkets in the Midwest, mainly under the Family Fare, Martin’s Super Markets, D&W Fresh Market, VG’s Grocery and Dan’s Supermarket banners, down from 154 locations at the end of the 2021 first quarter and from 155 stores a year ago.
“We are especially pleased with how well our retail sales trended in the current year compared to the prior-year sales, which included surges caused by COVID-19,” Monaco told analysts. “Our comparable-store sales were down 2.7% for the second quarter due to the favorable effects of the pandemic in the prior year. However, two-year comparable sales were up 12.1%, an increase of 280 basis points sequentially from the first quarter, as the consumer shift towards food at home persists and our consistent focus on retail execution delivers.”
Military distribution net sales dropped 7.1% to $430.1 million from $463 million in the 2020 quarter, when the business unit recorded a 5.6% decrease. SpartanNash reported that military sales are down 12.3% on a two-year stack.
“In our military segment, we continue to realize top-line headwinds. Domestic traffic across the DeCA [Defense Commissary Agency] channel is down as shoppers have not yet fully returned to bases and are leaving to shop elsewhere during the pandemic,” according to Sarsam. “Our team has been working proactively to leverage positive trends within exports. The team is also executing gross margin initiatives, which have already produced favorable results.”
For the 28-week first half of fiscal 2021, consolidated net sales fell 5.5% year over year to $4.76 billion. Food distribution declined 2.8% to $2.39 billion, and retail segment sales were down 3.8% to $1.36 billion. Military distribution sales sank 13.1% to $1.17 billion.
Sarsam cited private brands as a bright spot for SpartanNash. “Our private-label efforts are ahead of our expectations year-to-date, and we continue to build momentum through the year,” he said in the call. “Notably, we continue to make improvements within our assortment, pricing and marketing. Specifically, we’re taking steps to redesign our labels and launch new items in the fresh category. We are also getting our private-label products in more homes through the expansion of our locations that offer Fast Lane and ready-to-eat home delivery.”
At the bottom line, SpartanNash had 2021 second-quarter net income of $16.8 million, or 47 cents per diluted share, compared with $28.5 million, or 80 cents per diluted share, a year earlier. Excluding $3.3 million in restructuring and asset impairment charges and other items, adjusted net earnings (continuing operations) were $19.4 million, or 54 cents per diluted share, versus $26.1 million, or 73 cents per diluted share, in the year-ago period.
Analysts, on average, had forecast adjusted EPS of 48 cents, with estimates ranging from 38 cents to 55 cents, according to Refinitiv.
Looking ahead, SpartanNash upheld its previous fiscal 2021 earnings outlook of reported EPS of $1.48 to $1.67 and adjusted EPS of $1.65 to $1.80. Analysts’ consensus estimate is for adjusted EPS of $1.77, with projections running from $1.69 to $1.93, according to Refinitiv.
“We are reaffirming our 2021 guidance as it relates to consolidated net sales. However, we do expect a shift in the segment performance from a sales perspective,” Monaco said. “With the continuation of positive results in the retail segment, we now expect that retail comparable sales will be down from 2% to 5%, an increase of 2% to 3% from our previous expectations. Military sales are now expected to decline between 9% and 13% from last year, a further decline from our previous expectations. We continue to expect that food distribution sales will be down 1% to 3% from last year. These updates reflect both the trends observed in the quarter as well as our updated expectations for the remainder of the year.”