Spartan Stores struck a downbeat note when the US food retailer predicted that the trading environment would worsen over the next 12-18 months, leading to a decline in comparable retail and distribution sales during its fiscal year.

The company's sombre outlook came in spite of a 9.4% improvement in first-quarter EBITDA, which rose to US$24.9m, and an increase in first-quarter net sales, which climbed from $586.7m to $596m.

The company attributed these financial improvements primarily to the acquisition of VG's Food and Pharmacy stores.

First-quarter operating earnings were dented by lower procurement gains, costs relating to store closures, the introduction of the company's new loyalty programme and lower fuel margins. Nevertheless, Spartan said operating earning were up slightly on the first quarter of last year, rising to $15.1m compared with $15m.

"We are pleased to report steady operating profits despite the prolonged economic challenges and the incremental costs associated with this year's business and operational initiatives," president and CEO Dennis Eidson said.

Same store sales declined during the period due to "economic uncertainty", which is causing "changes in consumer purchasing behaviour", such as a shift to cheaper private label products and price deflation in high-volume categories, Eidson said.

Earnings from continuing operations for the quarter totalled $6.8m, compared with $7.1m last year as a result of higher interest expense associated with the VG's acquisition.

Margins increased 230 basis points to 22%, from 19.7% last year. The improved rate was due primarily to an increase in the mix of higher margin retail sales compared with the prior year.

Looking to the full-year, Eidson said the company expects the economic environment to "weaken further" and "continue to be a challenge for our customer base".

However, he added:  "We believe that refinements to our marketing, merchandising and pricing tactics, as well as our mix of quality products and services, capital investment program and integration of the VG's retail stores, will bring more value to our customers, while providing additional sales growth opportunities when we eventually emerge from the current environment. In addition, our continued focus on cost reduction and efficiency improvement efforts will create incremental operating leverage when sales improve."

Eidson said Spartan anticipates full-year comparable retail sales to be  "in the negative low single digit range", with comparable store sales for the remainder of the year expected to exceed the first quarter decline. Distribution sales are expected to decline relative to last year by "an amount similar to that of the retail segment", he added.

"These factors will provide additional pressure on earnings as the year progresses and we expect earnings from continuing operations to decline slightly relative to fiscal 2009, and anticipate growth in EBITDA for fiscal 2010."