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GRAND RAPIDS, Mich.--Despite intense supercenter and warehouse club competition in its core market, officials at Spartan Stores here, said they were able to hold the line on performance in the second quarter, with sales and earnings basically comparable to the year ago period.
Net earnings for the 12-week quarter ended Sept. 10, were $6.9 million, or $0.32 per share, compared with $7.0 million, or $0.34 per share, in the same period last year. Net earnings from continuing operations were $7.1 million, or $0.33 per diluted share, compared with $7.1 million, or $0.35. Second-quarter earnings were comparable to last year despite the inclusion of a pretax charge of $0.6 million for advisory fees related to the company's recently completed strategic review process, the retailerwholesaler said.
"Earnings for the quarter exceeded our expectations as we maintained solid profitability, despite the cycling of the one-time contract termination payment received last year, and the charge related to the conclusion of our strategic review process," said Craig C. Sturken, Spartan Stores' chairman, president and c.e.o. "We are pleased with these results, because it demonstrates our ability to withstand the significant increase in new supercenter competition in our markets."
During the past 12 months, eight additional supercenters and two Costco warehouse clubs have opened in markets that directly affected sales at Spartan's corporate stores, Sturken said. "Yet we have made steady financial progress during this period. We are performing well during a period that we believe constitutes the peak of the supercenter opening environment for the next eighteen months. Our financial performance has placed us in our strongest financial position in many years."
Last year's second quarter included a non-recurring $1 million payment received from a former customer, recorded as a reduction in operating expense related to the termination of a distribution contract. Second-quarter net earnings this year were favorably affected by an increase in distribution segment sales, continued productivity improvements and a decline in interest expense due to lower outstanding debt.
Consolidated net sales for the 12-week second quarter of $485.5 million were comparable to the prior year, as significant sales increases in the distribution segment were offset by the sale and closure of three retail stores previously disclosed, and by the effect of new retail store competition.
Second-quarter store labor costs continued to decline in the quarter due to the company's productivity improvement initiatives. As a percentage of sales, operating expenses decreased 10 basis points to 16.7 percent compared with 16.8 percent in the corresponding quarter last year. Second-quarter operating earnings were $12.2 million compared with $13.2 million.
Second-quarter retail net sales declined to $221.9 million from $232.2 million, due primarily to the sale of a retail joint venture and closure of two underperforming Pharm stores ($7.2 million), and retail competition. The sales decline was partially offset by higher incremental sales from the company's fuel centers.
Same store sales at the company's supermarkets declined 2.3 percent during the second quarter. Pharm stores comparable store sales declined 0.4 percent, while total retail comparable store sales declined 2.0 percent for the second quarter, including sales from two fuel centers, which contributed a positive 1.2 percent. Despite the increasingly competitive environment, retail operating earnings remained comparable to last year, declining by $0.3 million to $6.5 million for the quarter.
Spartan's distribution business fared better, with second-quarter distribution net sales increasing 3.6 percent to $263.7 million from $254.5 million in last year's second quarter, which the firm attributed to the addition of new distribution customers and the expansion of sales to existing customers. The new supply relationships increased Spartan's net distribution base by 27 locations.
Operating earnings for the segment were $5.7 million compared with $6.4 million in the corresponding period last year. The decline in operating earnings was due primarily to the absence of the previously mentioned contract termination payment recorded in last year's second quarter and the advisory fee charge.
Spartan continued to pay down outstanding borrowings during the second quarter. Long-term debt at Sept. 10, 2005 (including current maturities) declined to $81.5 million, or 14.0 percent, from $94.8 million as of March 26, 2005. The debt reduction is the result of the company's continued solid profitability and benefit from a federal income tax net operating loss carry-forward.
Sturken also mentioned the company's just-ended attempt to find a buyer or other strategic move to increase shareholder value. "During a ten-month period, we thoroughly assessed several strategic options with the potential to enhance long-term shareholder value," he said. "Our board of directors and management team were actively involved in evaluating these options along with a number of advisors. We thoroughly evaluated the possible sale of the company and/or pursuit of a significant retail acquisition and we concluded that, at this time, it is in the best long-term interest of our company and shareholders to continue to build on the strong foundation that we have created. Although we have ended the formal strategic evaluation process, we have not eliminated any strategies that have the potential to improve long-term shareholder value," Sturken noted.
"We continue to make solid financial and operational progress," Sturken said, pointing to the building of "a fundamentally sound retail and distribution business during the past several years by making category management a way of life at our company. Our investments in information technology and in improving our facilities, as well as intensifying our focus on our core operations, have facilitated this transition."
Sturken tried to paint a positive picture of progress for the remainder of the year. Commenting on what he termed Spartan's "value-added distribution strategy, which has resulted in a solid and recently expanded base of distribution customers," Sturken said the company's consumer-centric retail and distribution strategy continues to favorably evolve, "as we are the leading conventional supermarket operator in Grand Rapids and northern Michigan offering an award winning private label program. By the end of this fiscal year, we will have reset, remodeled, or re-merchandised the majority of our retail grocery stores since we began this process in the spring of calendar year 2003. With the success of our business turnaround, we are ready to move on to the growth phases of our strategic business plan and are confident we have the management team and associates in place that will help ensure our continued success."
Sturken said he expects the favorable distribution sales trends to continue in the second half of fiscal 2006, "As we believe our customer base is well positioned to capitalize on evolving business conditions in their markets. We expect continued pressure on retail sales growth due to the competitive openings that have not yet cycled, the challenging economic environment, as well as the shift of the Easter holiday from our fourth quarter. However, we expect our retail sales run rate to improve as we cycle one supercenter opening in the third quarter and as sales at our Pharm stores continue to stabilize."