Food Distribution Drives SpartanNash's Q4 Growth

Grocery retailer-wholesaler SpartanNash Inc. experienced growth in overall net sales during the fourth quarter of its fiscal 2018, although the growth was powered by only one of its three divisions.

During the period, which ended Dec. 29, 2018, consolidated net sales rose 0.6 percent to $11.3 million compared with the same quarter a year prior. The food distribution business' continued sales growth was behind this increase, although it was partly offset by lower sales in military distribution and retail.

Gross profit for the fourth quarter of fiscal 2018 was $245.4 million, or 12.9 percent of net sales, compared with $254.8 million, or 13.5 percent of net sales, in Q4 2017. As a percent of net sales, the change in gross profit was primarily driven by a higher mix of sales within food distribution as a percentage of total sales, in addition to the other factors.

Breaking Down By Division

Among the three divisions, food distribution was the bright spot during the quarter. There, net sales rose 4.7 percent compared with the same period a year prior, reaching $954.4 million. This was driven primarily by growth from existing and new customer programs.

Military distribution and retail didn't perform so so well during the period, however. For military distribution, net sales dropped 2 percent to $513.3 million compared with the same quarter a year prior. This was due mostly to lower comparable sales at Defense Commissary Agency (DeCA)-operated locations, partly offset by incremental volume from new business with an existing customer that began late in the quarter and DeCA's private label program.

For retail, net sales fell 4.8 percent to $429.1 million in the quarter. This was mostly due to lower sales resulting from store closures of $12.3 million and a 1.9 percent drop in store comps, excluding fuel.

FY18 Overall Performance

Altogether for fiscal 2018, consolidated net sales grew 1.3 percent to reach $8.06 billion compared with the prior year. Driving the net sales increase was sales growth in food distribution and military distribution of 4.3 percent and 1.1 percent, respectively. Partly offsetting were lower retail sales of 4.3 percent.

Consolidated net sales for the fiscal year ended Dec. 29, 2018, increased $100.8 million, or 1.3 percent, to $8.06 billion, from $7.96 billion in the prior fiscal year. The increase in net sales was driven by sales growth in food distribution and military distribution of 4.3 percent and 1.1 percent, respectively, partly offset by lower retail sales of 4.3 percent.

Strategy Going Forward

SpartanNash said the the next one or two years will be "conducive to its acquisition strategy," a key component of its long-term strategic objective to evolve into a growth company focused on developing a national, highly efficient distribution platform that services a diverse customer base via three complementary business units. The company has executed several corporate-level strategic actions to position itself to deliver on these objectives:

• Amending its current credit facility, allowing for additional capacity and enabling growth through acquisition
• Making strategic additions to its senior management team by hiring a new chief merchandising and marketing officer, former Albertsons executive Lori Raya, and a new CIO, former SC Johnson executive Arif Dar
• Beginning Project One Team, a companywide initiative to drive growth while increasing efficiency and reducing costs as a way to address the inability to translate top-line growth to bottom-line results, a concern that SpartanNash President and CEO David Staples addressed in the Q4 results statement.

"We are excited to see this initiative empowering our associates at all levels to drive sustainable improvements in our business as we take full advantage of the growth opportunities we expect to see over the next one to two years," Staples said.

While Project One Team is still early in its deployment, SpartanNash is focused on opportunities in all aspects of its business, including those that boost supply chain efficiency, leverage technology and improve the products and services offered to customers.

The company also took numerous actions at the segment level:

• In food distribution, it continues to see opportunities for new business wins and is leveraging strategic partnerships and its network to position it to realize these opportunities. SpartanNash further invested in its labor force, distribution fleet and technology in the quarter to improve its supply chain and food-processing capabilities and efficiency.

• Military distribution expanded its partnership with the DeCA and realized an increase in private-brand net sales and product offerings in the fourth quarter. In addition, a new fresh program started with an existing customer in the fourth quarter within this segment.

• In retail, the company continued the implementation of its new retail brand positioning initiative in select stores during the fourth quarter, with a more significant implementation planned for the first half of fiscal 2019.

• Finally, the company closed on its acquisition of Martin's Super Markets early in fiscal 2019. According to the grocer, Martin's has a complementary brand positioning and store footprint to SpartanNash.

"As we look forward over the next couple of years, we believe the landscape will continue to provide us with growth opportunities through acquisition, new customers and expanded programs with existing customers, Staples said. "That said, we still expect the operating environment to remain challenging during fiscal 2019."

He added: "Our top five objectives for fiscal 2019 are: Achieve mid-single-digit sales growth; drive adjusted operating earnings and adjusted EBITDA growth over the prior year; realize $15 million of savings over the next 24 months from Project One Team; strengthen our management team; systems and supply chain operations to further position the company for future growth; and reduce our debt levels and financial leverage ratios to facilitate achieving our strategic objectives."

What's Expected in 2019

For fiscal 2019, SpartanNash expects mid-single-digit sales growth, including the Martin's acquisition. By division:

• Food distribution should achieve low- to mid-single-digit sales growth, driven by existing customers and new business, partly offset by attrition in the independent retail base, excluding the impact of the elimination of intercompany sales to Martin's following the acquisition, of approximately $150 million to $170 million.

• In military distribution, new business, including continued private label growth, will offset the majority of the negative DeCA comparable-sales trend, although full-year sales are expected to be modestly down on a year-over-year basis.

• Retail sales should increase due to the acquisition of Martin's and the continued rollout of SpartanNash's brand positioning, partly offset by the impact of store closures through company rationalization plans. Martin's is expected to contribute $475 million to $500 million in incremental retail net sales in fiscal 2019.

Grand Rapids, Mich.-based grocery distributor and retailer SpartanNash is No. 35 on Progressive Grocer's 2018 Super 50 list of the top grocers in the United States.