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GRAND RAPIDS, Mich. -- Strong holiday sales and new business in its distribution segment helped boost Spartan Stores' revenue for the quarter ended Dec. 31, 2005, the wholesaler-retailer said yesterday.
The spike led to a sales increase of 2.8 percent to $642.3 million, from $624.5 million in last year's third quarter. Earnings from continuing operations, meanwhile, were $4.8 million, or $0.22 per share, compared with $5.8 million, or $0.28 per share in the same period last year. Spartan said this year's third quarter included net unusual after-tax benefits of approximately $0.5 million, compared with after-tax benefits of $2.4 million in last year's third quarter.
"We are very pleased with our third quarter results," said Craig C. Sturken, Spartan Stores' chairman, president and c.e.o. "We continue to gain distribution business through incremental product sales to existing customers, and by securing new accounts. Excluding the unusual items, third-quarter profitability improved on a year-over-year basis."
Third-quarter gross margin declined 80 basis points to 18.0 percent, compared with 18.8 percent, due primarily to a $2.2 million favorable supply contract settlement recorded in last year's third quarter, and a greater percentage of sales in the current year coming from the lower-margin distribution segment and fuel center sales.
As a percentage of sales, operating expenses decreased 30 basis points to 16.7 percent compared with 17.0 percent, thanks to better cost leverage from higher sales volumes and the change in sales mix. Operating expenses increased 1.4 percent to $107.4 million from $105.9 million.
Higher sales volumes in the distribution segment contributed to the dollar increase in selling, general and administrative (SG&A) expenses, as did approximately $0.8 million due to a provision for asset impairments and exit costs.
Also contributing to the increase were higher utility costs and bankcard fees of approximately $1.2 million, additional legal and professional fees associated with the completion of the strategic assessment process, and a contract dispute resolution of approximately $0.5 million. These operating expense increases were partially offset by the divestiture and closing of retail stores, continued retail labor efficiency improvements and a favorable adjustment related to the conclusion of a state tax audit.
As previously disclosed, last year's third quarter included approximately $1.0 million in favorable unusual items related to improved credit collection trends and a supply contract settlement.
Other expenses improved during the current year, by approximately $1.3 million as a result of a gain on the sale of real estate and lower interest expense due to reduced debt levels. In addition, the prior year included a charge of $0.6 million related to debt refinancing and a $1.0 million gain on the sale of assets.
"We are very pleased with our year-to-date fiscal 2006 performance, particularly given the intensely competitive industry environment in which we find ourselves," said Sturken. He added that the company expects to begin paying a quarterly cash dividend during the fourth quarter. "The change in our dividend policy demonstrates our continued financial strength and confidence in our long-term business plans."
Looking ahead, Sturken said, the planned acquisition of D&W Food Centers "presents attractive growth opportunities that will contribute to our continuing success and further strengthen our long-term future. We are very enthused about this transaction and are moving forward with our due diligence process. We remain on track to complete the transaction late in our fourth quarter or early in our fiscal 2007 first quarter."
Calling the upcoming fourth quarter "its lowest seasonal sales volume quarter," Sturken said Spartan's retail segment will remain under pressure "because of competitive supercenter openings not yet cycled, warmer than normal weather in the northern Michigan winter resort areas, and higher heating costs and gasoline prices, which may adversely affect consumer spending. Fourth-quarter year-over-year comparisons will also be challenged by the loss of the Easter holiday sales in the quarter. We expect favorable distribution sales trends to continue due to the addition of new customers over the past year and the increase in sales volumes to existing customers."
However, he added, the distribution revenue trends will be partially mitigated by the same factors affecting retail operations. "We expect fourth-quarter gross margin rates to be lower than the same quarter last year due to an increasing mix of lower margin distribution business and fuel sales, and a reduced number of new product launches in our distribution segment. The lower gross margin rate, however, will be partially offset by slightly lower year-over-year operating expenses as a percentage of sales."
"As a result of these factors, we expect earnings for the upcoming fourth quarter to be somewhat lower than the levels achieved in the corresponding quarter last year excluding the prior year's unusual items," summed Sturken.