Dallas-based distribution giant Fleming yesterday [Monday] updated the earnings guidance for its 2002 and 2003 fiscal years.
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Total earnings per share are anticipated to range from US$2.65 to US$2.75 in 2002. This represents net earnings growth of approximately 18% compared to 2001. The fully diluted average share count for the year is anticipated to be 52 million shares, up from 48.9 million for 2001.
In assessing updated guidance, Fleming incorporated the loss of sales related to Kmart’s store closure plan, assumed lower sales going forward for Kmart’s remaining locations, and costs associated with the shutdown and start-up of sales to Kmart that occurred in January 2002. The net impact of these was a reduction of approximately US$0.20 per share from Fleming’s previous earnings guidance.
“Despite the sudden bankruptcy of our largest customer, I am very pleased with the strong earnings growth we are anticipating for 2002,” said Mark Hansen, chairman and CEO. “It is a tribute to the focus and adaptability of our associates throughout the organization.”
Commenting on Kmart’s announcement to close 284 stores, Hansen said, “We applaud the move by Kmart to quickly address store closures. By closing the least productive stores, both Kmart and Fleming are in a better position help move the remaining business forward.”
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By GlobalDataLower Sales from Kmart: US$0.15 Per Share
Lower Kmart sales volumes attributable to the announced 284 store closures will reduce annualized revenue by approximately US$400m. Additionally, due to consumer uncertainty and the generally lower sales levels that most retailers experience as a result of a Chapter 11 filing, Fleming is assuming annualized volume at the remaining Kmart stores will be lower by up to an additional US$500m, with an aggregate 2002 annual earnings impact of approximately US$.15 per share.
Business Disruptions Related to Kmart Shutdown and Start-up: US$0.10 per Share
Fleming suffered significant disruptions to its business in the first quarter with the sudden shutdown and startup of business to Kmart because of their bankruptcy filing. These disruptions included stopping and re-starting shipments in a five day period in January after Kmart failed to pay their receivable; re-routing approximately US$200m of merchandise through the system; absorbing or re-directing perishable products to other customers; working with vendors to re-establish supply to Kmart; and, forecasting supply levels for Kmart as they began to replenish shelves after the bankruptcy filing. In total, these measurable disruptions cost the business approximately US$0.10 per share in lost earnings.
Mitigating Efforts Earn Back US$.05 Per Share
Fleming mitigated a substantial portion of these costs by reducing inventories by approximately US$65m on top of significant inventory reductions in the Q4, further reducing SG&A expenses, and eliminating temporary warehouse space. The benefit of these mitigating efforts will be approximately US$0.05 per share.
“When a retailer files for bankruptcy, there are always uncertainties regarding disruptions within the supply chain and sustainable sales levels,” said Hansen. “I am proud of the fact that the Fleming organization was able to mitigate a substantial amount of the effect of the Kmart disruption in order to minimize the impact on earnings per share.”
Fleming has a number of significant initiatives in process that will help drive sales and margins going forward, further mitigating the costs noted above. Fleming’s technology roll-out is showing early benefits that will progressively grow throughout the year; important sales prospects appear imminent that will begin to fill the void resulting from the Kmart store closures; and, strong prospects in other new retail channels will continue to diversify the Fleming customer base.
“Fleming has a number of powerful initiatives and programs underway that, in our opinion, will help us recover much of what was lost from the Kmart business,” noted Hansen.
FAS 142: US$0.40 Per Share
In 2002, Fleming is implementing FAS 142 (“Goodwill and Other Intangible Assets”), which eliminates amortization of goodwill to earnings. Goodwill amortization in 2001 was US$21.2 million. The company’s 2002 guidance reflects a positive impact of about US$0.40 per share attributable to the new accounting rules.
First Quarter 2002 Guidance
First quarter 2002 earnings will range from US$0.50 to US$0.54 per share, with subsequent quarters growing approximately 15% above 2001 levels excluding the amortization of goodwill. Fleming’s Q1 guidance, which incorporates the impact of lower Kmart sales and business disruptions (estimated to be approximately US$0.08 in the quarter), represents net earnings growth of approximately 6% for the quarter. The Q1 2002 fully diluted share count, assumed to be 51 million shares, is up nearly 21% from the Q1 of 2001, which totaled 42.2 million shares, resulting principally from the company’s convertible bond issuance in early 2001 and the issuance of shares in a private equity transaction.
2003 Guidance
Earnings guidance for 2003 is in a range of US$3.40 to US$3.50 per share. In preparing its guidance, Fleming has assumed Kmart sales remain flat at US$3.6bn annually.
Kmart Quantified
In its financial review, Fleming identified the total value of the Kmart business on Fleming’s earnings. “To put this in context,” said Hansen, “the total effect of the Kmart business is currently approximately US$0.50 per share in the overall Fleming results, but will increase over the life of the contract with the growth of anticipated synergies.”
