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May 10, 2002

USA: Spartan Stores sees Q4 net sales drop 11.7%, to focus on growth in 2003

Grand Rapids, Michigan-based Spartan Stores grocery chain has reported financial results for the Q4 and FY 2002, ended 30 March 2002. Consolidated net sales for the Q4 decreased 11.7% to US$764.8m, year on year. Excluding the effect of an early Easter holiday this year and the 53rd week of sales in last year's Q4, consolidated net sales would have been US$756.3m this year compared with US$800.6m last year, a decline of 5.5%. Adjusting for the early holiday and the extra week of sales in fiscal 2001's Q4, retail comparable-stores sales declined 6.6% for the quarter. Sales were affected by the competitive market conditions in the company's Ohio region, continuing difficult economic conditions in its Michigan markets, and unfavourably mild winter weather in its northern Michigan resort areas.

Grand Rapids, Michigan-based Spartan Stores grocery chain has reported financial results for the Q4 and FY 2002, ended 30 March 2002.

Consolidated net sales for the Q4 decreased 11.7% to US$764.8m, year on year. Excluding the effect of an early Easter holiday this year and the 53rd week of sales in last year’s Q4, consolidated net sales would have been US$756.3m this year compared with US$800.6m last year, a decline of 5.5%. Adjusting for the early holiday and the extra week of sales in fiscal 2001’s Q4, retail comparable-stores sales declined 6.6% for the quarter. Sales were affected by the competitive market conditions in the company’s Ohio region, continuing difficult economic conditions in its Michigan markets, and unfavourably mild winter weather in its northern Michigan resort areas.

“The sales trends reported in our Q3 results continued through the Q4,” said Spartan’s chairman, president and CEO, James B. Meyer: “We are, however, encouraged by recent measurable improvements in our Ohio region’s retail operating metrics. Late in the Q4, our Ohio retail operations rate of sales decline slowed significantly, with an improvement in the gross profit margin. These recent improvements give us reason to be optimistic about the steps we have taken to strengthen our Ohio retail-store performance.

“As a result of these improvements and other steps taken, we expect Spartan Stores’ operating profitability to improve in each quarter of fiscal 2003, but do not expect our Ohio retail operations to produce meaningful financial improvements until late in fiscal 2003. Further organisational, structural and operational changes are anticipated.”

Gross margin for the Q4 declined by 20 basis points to 16.3%, due to large markdowns on seasonal items and high inventory shrinkage resulting from soft sales. Q4 selling, general, and administrative (SG&A) expense, including depreciation and amortisation, decreased US$6.2m year on year because of the extra week in last year’s Q4. The decrease was partially offset by higher deprecation, amortisation, and rent expense associated with the Prevo’s acquisition late in fiscal 2001’s Q4. As a percentage of sales, SG&A rose to 16.4% of sales compared with 15.2% of sales for the corresponding period last year. The SG&A increase as a percentage of sales was due to one less week of sales in fiscal 2002, a higher percentage of retail operations and the declining sales trend.

EBITDA fell to US$12.6m from US$23.8m in last year’s Q4. The net loss from continuing operations was US$3.8m, or US$0.19 per diluted share, compared to a net profit of US$3.3m, or US$0.17 per diluted share, in fiscal 2001’s Q4. The Q4 net loss, including discontinued operations, totalled US$5m, or US$0.25 per diluted share, compared to net earnings of US$3.4m, or US$0.17 per diluted share, in the corresponding period last year.

“In addition to improving our Ohio-region retail operations, we also reduced the outstanding balance on our revolving credit line by more than US$30m in the final periods of the quarter through inventory reduction efforts and use of operating cash flow, while making scheduled debt and interest payments of US$11m,” added Meyer.

For the FY 2002, net sales remained flat at US$3.50bn from US$3.51bn year on year. Gross margin improved to 17%, from FY 2001’s 15.6%, while the operating margin declined to 1.1%, from 1.8% in the prior year. Net earnings from continuing operations for FY 2002 fell to US$11.3m from US$23m a year earlier. Total net earnings for 2002, including discontinued operations, were US$9.8m, compared with US$23.4m, for FY 2001.

“Implementing a self-distributing retail chain business model has presented numerous operational, transitional and competitive challenges that require enormous management and associate effort,” continued Meyer. “This year’s results are a stark contrast to the exceptionally strong and industry leading performance we reported last year.

“A weaker-than-expected financial performance led us to re-evaluate our retail execution and distribution-marketing efforts more critically, concluding that certain marketing initiatives and operational elements were not meeting our performance expectations.”

The company intends to improve operational and financial performance by:

  • Executive and senior management changes in merchandising and store operations
  • Having direct weekly senior executive oversight of retail store operational and fiscals
  • Implementing tighter shrink reduction and monitoring programme for perishables
  • Changing the distribution-marketing program to focus on products in strong demand
  • Raising objective standards and control procedures for operational performance
  • Renewing marketing campaigns
  • Using POS system scanning data effectively to improve demand forecasting, procurement, inventory management, and pricing strategies

“During FY 2002, we accomplished many goals that are not visible in our financial performance, but are vital elements in building an efficient organisation with a solid foundation for future growth,” stated Meyer. “We remain firmly committed to our long-term strategy of developing an efficient network of neighborhood grocery stores, while partnering with our distribution customers to collectively improve our competitive positions.

“During FY 2003, we will focus primarily on improving our sales growth, increasing gross profit margins, and reducing our overall operating cost structure,” concluded Meyer.

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