Quarter Mixed For Spartan

May 15, 2006
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GRAND RAPIDS — The good news for Spartan Stores Inc. is that the first quarter of fiscal 2007 will benefit from a whole lot of ham, lamb and Peeps revenue, as the Easter holiday this April fell beyond the March 25 end of the company’s fiscal 2006. Unfortunately for Spartan, the discrepancy between the fiscal and liturgical calendars resulted in lower-than-normal fourth quarter sales. That religious-retail disconnect was just one of several factors that made the end of Spartan’s fiscal year a nominal success, though a complicated one.

The past several years have represented a period of major change at Spartan. The company, historically a grocery wholesale distributor, got into the retail business at the beginning of the decade. After some quick growth in store count and shrinking income, the company went about “right-sizing” its retail-to-wholesale mix. Fiscal 2005 proved to be a turning point, as the company swung back to healthy profitability. However, the changes and realignment weren’t over. In fiscal 2006, the company closed two of its discount drug stores, added several fuel stations, and, most notably, began the acquisition of assets from the D&W grocery chain.

Meanwhile, a faltering economy and increased energy costs weighed on the company’s performance in both its retail and wholesale operations. Streamlining operations and tightening up category management procedures have kept the company’s ongoing operations running profitably. But the ongoing capital investments associated with “smart” expansion have tempered those earnings.

The fourth quarter of fiscal 2006 is a prime example. Sales decreased by just over 1 percent from the same quarter in 2005. Part of that decrease is associated with the closure of the two Pharm stores. In fact, retails sales decreased by more than 3 percent, while wholesale revenue grew by 0.7 percent.

Despite the lower revenue, Spartan enjoyed a 31-percent increase in operating earnings. However, higher income taxes and a $399,000 loss from discontinued operations resulted in lower net earnings. The company earned $5.3 million, or 25 cents per share, in the final quarter of 2006, compared with 2005 fourth-quarter earnings of $5.8 million, or 28 cents per share.

There were a few unusual one-time items that made numbers from the fourth quarters of 2005 and 2006 somewhat deceptive. Spartan CFO Dave Staples mentioned some of those items in a conference call with investment analysts. For example, the fourth quarter of 2005 got a boost from a $1.3 million tax benefit. Likewise, the final quarter of 2006 saw positive results from an adjustment in insurance reserves and the termination of a contract with a vendor.

And what was true of the fourth quarter was largely true of the entire year. Revenues and expenses were relatively flat across the board, despite the pressures of expanding operations. Overall revenue declined slightly, but stayed above the $2 billion mark.

One bright spot — for the quarter and throughout the year — was earnings from continuing operations. The fourth quarter’s $5.7 million in that category was up more than 8 percent from the previous year’s final quarter. For the year, earnings from continuing operations were up 2.5 percent.

Looking forward into 2007, the company expects more of the same. Spartan Stores Chairman, President and CEO Craig Sturken took heart in the strength of the company’s continuing operations as a sign of its future success. Although 2006 was a year of “permanent and fundamental changes” in the company’s operations, it remained profitable and laid groundwork for greater earnings in the future.

Spartan added 51 wholesale distribution customers in 2006. By adding 16 stores in the D&W acquisition, it not only took on new retail responsibilities, but it gained those stores as distribution customers, as well. Spartan-controlled D&W sales began at the end of March and will go on the books for Spartan in the first quarter of fiscal 2007.

“This transaction significantly strengthened our retail market position and provides opportunities to improve our retail sales growth and operating efficiencies,” Sturken said in a statement released with the quarterly and annual financials.

Later, Sturken discussed with analysts the opportunities that D&W represents.

“The first half of this year is going to be fraught with investment on our part to get these stores back to where they should be — to the glory days when D&W was the king of the high end,” he said.

He also mentioned roughly $3 million in other restructuring plans that Spartan is considering for the first quarter of this year. Chief among them is the discontinuation of the Family Fare central bakery, returning the production of baked goods to individual stores. That focus on freshness, Sturken said, is “a continuing point of differentiation for a neighborhood grocery store like us,” in the ongoing competition with big-box super-center stores.

Although he does expect to face challenges from increased fuel costs, an increase in lower-priced generic prescription pharmaceuticals and increased selling, general and administrative expenses, Sturken said that new big-box competition is one thing that Spartan won’t have to worry about in fiscal 2007. There are no super-center openings planned for any of the markets served by Spartan-owned retail operations.    

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