Wholesalers & Distributors

SpartanNash CEO Assesses the Post-COVID World

Q2 sales increase 9.4%, earnings top estimates
Photograph: Shutterstock

The big shift to food-at-home that came with the pandemic powered strong sales results for SpartanNash’s retail and distribution segments in its fiscal second quarter, more than offsetting the COVID-related closure of some military commissaries that adversely impacted the distributor’s sales to that channel.

For the period, which ended July 11, the Grand Rapids, Mich.-based distributor and retailer saw consolidated sales climb by 9.4% to $2.2 billion, and net earnings swing from a $6.8 million loss in last year’s second quarter to a $28.5 million gain. Gross margins as a percent of sales improved to 15.5%, a 100-basis-point gain reflecting a greater share of high-margin sales at retail. Private label sales increased by 24% and e-commerce sales grew by 300%, officials added, but they did not specify a sales total for those parts of the business.

SpartanNash officials said the financial results exceeded internal expectations, using part of the $69 million in cash generated in the quarter to pay down $40 million in debt. It also raised its earnings guidance for the fiscal year to a range of $2.40 to $2.60 per share, vs. a previously announced range of $1.85 to $2.

Wall Street appeared to have a circumspect view, with sales falling short of high expectations and despite the earnings beat, SpartanNash stock was down by more than 11% on the morning following Wednesday’s after-market announcement.

In a conference call discussing results early Aug. 13, interim President and CEO Dennis Eidson said the chain’s retail comps were positive in all categories but for deli and bakery, where COVID restrictions negatively affected sales, and put the company to work on more prepackaged items.

“We’re trying to think about that in a different way, [and] being prepackaged is something that everybody is working on,” Eidson said, according to a Sentieo transcript. “We’ve lost the sales from our salad bars, our soup bars, our olive bars, where we're not operational in those areas, and we’re trying to put together programs that are pick-your-components that the customer can take advantage of. So I think we have work to do there, but I think we’re on it, and it’s an opportunity for us to get some of that growth back that we kind of lost in the beginning of the pandemic here.

Comps moderated during the course of the quarter, Eidson added, going from 25% at the start to the mid-teens by the end of the period. But overall market share grew for a second straight quarter as consumers “have gravitated toward trusted brands,” the company said. “We are proactively working to maintain a new household we now serve by actively supporting consumers as their preferences evolve.

Asked about his thoughts on cycling this year’s sales boom, Eidson said he was optimistic the company would gain some efficiencies even as it encounters sales growth it won’t possibly top.

“We’re feeling the pain of trying to figure out how next year is going to play out. But there are certain things inside of the pandemic results that have caused us to be inefficient. And we’re going to gain some of that efficiency back, we believe, next year,” he said. “When you are growing the business 25% or 30%, it’s sometimes too much of a good thing. We became inefficient and had a lot of overtime that we had to digest, we had outside third-party labor in our system, the fill rates of the trucks that were getting from manufacturers were not optimal, so we were spending more labor there. So I think many of those things go away.”

And while retail comps won’t approach the 50% gains they saw in the early stages of COVID, “we do believe there's a sustainable tailwind to food at home,” he said.

“We may—we will—have negative comps. But against the long-term trend lines, it will really be growth in the core business, when you strip out the acute spikes that we got with COVID.”

The military sales unit—which accounted for $463 million in quarterly sales—declined by 5.6%, reflecting domestic base access and commissary shopping restrictions associated with COVID-19, which led to an overall decline of more than 10% for the Defense Commissary Agency as a whole, SpartanNash said. As a percentage of the business, military fell to 21.2% vs. 25.6% in last year’s second quarter. Distribution, with $1.1 billion, accounts for approximately 49.9% of total sales—up from 46.4%. Retail, with $631 million in sales and a 28.9% share of total revenue, increased from 28% a year ago.

Eidson noted the decline in military sales—which was a $6 billion business upon the merger of Spartan Stores and Nash Finch in 2013 and will account for about $4 billion this year—was “problematic,” in part because the Defense Commissary Agency, or DeCA, has ultimate control over those facilities. Eidson estimated U.S. defense commissary volumes were down by 22% overall, as nearly half in the U.S. were still subject to stringent restrictions. Export sales to military bases overseas increased in the quarter, he added.

“We are working with DeCA on ways that we can become more efficient with them,” Eidson said. “We’re also working with the supplier community to find ways where we can cut costs and potentially increase our margin rates. So I also think from a distribution platform perspective, there are some things we can do differently that can enhance the profitability of that space.

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