Q3 2020 SpartanNash Co Earnings Call
[music].
Good morning, and welcome to the Spartannash company's third quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Chris Mandeville, Managing director of Investor Relations at I see our please go ahead.
Good morning, and welcome to Spartannash company's third quarter fiscal year 2020.
This conference call on the call today from the company.
President and Chief Executive Officer, and Mark Shamber, Executive Vice President and Chief Financial Officer by.
By now everyone should have access to the earnings release, which was issued yesterday at approximately 430 P.M. eastern time.
For a copy of the earnings release, please visit Spartan Nash as well.
Website at Www Dot Spartannash Dotcom Ford slashing doctors, it's called being recorded and a replay will be available on the company's website proximately 10 days.
Before we begin we would like to remind everyone that comments made by management. During today's call will contain forward looking statements. These forward looking statements discussed.
Our land expectations estimates and projections that may involve significant risks and uncertainties.
Actual results may differ materially from the results discussed in these forward looking statements internal and external factors that may cause such differences include amongst others disruption associated with called the 19 pandemic competitive pressures.
True among food retail and distribution companies the uncertainties inherent in implementing strategic plans and integration operation.
In general economic and market conditions.
Additional information about the risk factors and uncertainties associated with Spartannashs is forward looking statements can be found in the company's earnings release most recent.
The annual report on form 10-K, and the Companys other filings with the SEC.
Because of these risks and uncertainties investors should not place undue reliance on any forward looking statements spartannash disclaims any intention or obligation to update or revise any forward looking statements.
This presentation includes certain.
Non-GAAP measures and comparable period measures to provide investors with useful information about the company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by regulation G is included in the company's earnings release, which was issued yesterday.
That is now my pleasure to turn the call over to Tony.
Well, thank you, Chris and good morning, it's a pleasure to be speaking with many of you for the first time as president and CEO of Spartannash I'm proud to be part of this organization and I'm energized to address the opportunity. We have ahead of us let.
Let me begin by thanking my predecessor, then is that right.
And his team have done over the past year, if you step back into the CEO role on an interim basis. His leadership through an extraordinary time in our country and our world is a legacy I plan to build on I look forward to working with him and the other members of the board of directors as he was doing his role as chairman.
Yes.
Keep like that my journey ahead, I realize what a privilege. It is to lead a fortune 500 company a top grocery distributor at a company that takes great pride as a leading supplier to our brave men and women in the military.
Throughout my career I've maintained a focus on building people first organizations and have maintained a strong commitment.
Transparent communications I believe that this combination build trust with our associates customers and suppliers and is imperative to our collective success.
During my first nine weeks from a job I've had the pleasure of meeting hundreds of associates at our stores and distribution centers and those bid.
My first objective was to listen and understand what drives their success and challenges on a daily basis I.
I'm inspired by the level of passion, we have within this organization and our unrelenting commitment to serve our customers.
I plan to share more specific objectives for the organization over the coming months. However, my meet.
Our goal is to ensure that we are leveraging our existing competencies to yield improvements in our operating performance. Our financial result of underwhelmed in recent years and I am confident that together, we can achieve more I will work to prepare the insight I have gained with the operational strategies to unlock the true potential.
So of our organization.
Among other areas of focus I believe that we need to act with certain level of urgency to make meaningful improvements in our supply chain, we will make investments in human capital in our facilities and our and other resources to ensure our supply chain has.
The support it needs to operate with efficiency and a high level of execution.
I've had the opportunity to be may find organizations in similar industries and withdraw found that experiences were as we work to make the most of the opportunities in front of us.
Three decades of leadership in the food industry.
Has developed a deep understanding of every facet of the consumer packaged goods and food distribution businesses over 35 years my experiences have ranged from packaging machine operator, the plant manager and a great. Many GM and functional leadership goals. My most recent role as the CEO of both board and dairy and ready Pac food.
Succeeded in developing people first culture and supporting our teams to renew our commitment to innovation and customer service.
Both roles I was able to lead our teams to be best in class operators in the industry.
In short I'm, no stranger to challenge.
As CEO here for NASA.
I intend to apply my supply chain and organizational development expertise to transform our company the world class, operator, and one that can deliver sustainable growth over the long term.
Let me end by thanking you for your well wishes and support I was thrilled to be here and very excited about the journey ahead with that I will now turn.
On the call over to Mark to review, our third quarter performance and provide an updated guidance for the remainder of the year.
Thanks, Tony and welcome to everyone joining us today on the call.
Net sales for the third quarter of fiscal 2020 increased by 3.1% or $61 million to $2.06 billion versus 2019 third quarter sales.
As of $2 billion our.
Our adjusted EPS for the third quarter came in at 70 cents per diluted share compared to adjusted EPS of 30 cents per diluted share in the prior year's third quarter, an increase of 133%.
GAAP EPS came in at 56 cents per diluted share in the quarter compared to a loss of one cents per share in the third quarter of fiscal.
Thousand 19.
The increase in profitability from the prior year quarter was driven by higher sales volume improved gross margin rates and increased leverage our operating expenses, particularly in retail store labor in certain of our fixed costs.
Increases in incentive compensation and a higher rate of supply chain expenses served to partially offset.
To increase profitability.
Shifting to our business segments net sales into distribution increased by $73 million or 7.8% to $1.01 billion in the third quarter driven by the combination of continued sales growth with existing customers and incremental volume associated with the impact of covert 19th.
Inflation moderate.
Our weighted to 1.12% improved distribution in Q3, a significant pullback from both the second quarter rate of 4.43% in the third quarter of fiscal 2000, nineteens inflation rate of 1.68% as.
As meat prices were nearly flat in the third quarter following the significant sense second quarter increases while producing.
Relation levels nearly doubled sequentially.
Reported operating earnings for food distribution in the third quarter totaled $9.2 million compared to $11.7 million for the prior year quarter.
During the quarter, we made the decision to abandon a trade name to better align our transportation operations and provide a more integrated solution to our customers results.
Melting in a $7 million impairment of the trade name.
The decrease in reported operating earnings for food distribution was largely due to this and asset impairment charge as well as higher supply chain expenses from both a dollar and rate perspective, and a higher allocation of corporate administrative expenses.
These increases were partially offset by the incremental profit.
Billy from higher sales volume in the quarter.
Adjusted operating income totaled $15.7 million in the quarter versus the prior year third quarter adjusted operating income of $15.5 million.
Adjusted operating earnings exclude the asset impairment charges and other items detailed in table three of the food distribution segment in yesterday's press.
For the.
Retail net sales came in at $597 million for the quarter compared to $562 million in the third quarter of fiscal 2019, an increase of 6.2% or $35 million.
Our comparable store sales were 10.6% for the third quarter of fiscal 2020 comps.
Comparable store.
Really sales benefited from the shift toward food at home and also reflect our strong customer penetration. These.
These results also reflect increases of over 175% in our E commerce sales for the quarter and continued favorability in our private label sales, particularly compared to competitors.
We also continue to benefit from higher as sales.
Sales, although not at the same levels as earlier in the year.
Early in the fourth quarter, we held a grand opening for our new Martin store in Elkhart, Indiana, replacing a previously closed stores as part of the redevelopment of the city's River district, increasing our current store count to 156 stores.
Third quarter adjusted operating earnings.
Toward retail segment came in at $22.6 million compared to $7.3 million in 2000, Nineteens third quarter.
Retail reported GAAP operating income of $22.3 million for the quarter compared to $6.7 million in the prior years third quarter.
Our profitability improvement was driven primarily by the sales increased during the quarter while.
And then we also benefited from improvements in our margin rates, which include lower inventory shrink as well as favorable variance variances in labor rates.
Partially offsetting these items was higher incentive compensation due to the improved segment performance.
Military net sales of $452 million in the third quarter.
<unk> decreased by $47 million or 9.5% compared to prior year quarterly revenues of $499 million sales.
Sales continued to be negatively impacted by commissary restrictions and base closures during the quarter as many bases maintained a higher alert level the yield limited or did not allow visitors, thereby reducing the number of Shaw.
Shoppers, who could access the commissaries.
Military generated an operating loss of two and a half million dollars on both a reported and adjusted basis in the third quarter compared to a reported loss of $2.6 million in the third quarter of fiscal 19, and an adjusted operating loss of two and a half a million dollars for that quarter.
Improved margin.
AIDS were effectively offset by a combination of the lower sales volumes, an increase in allocated corporate overhead expenses and expenses related to hurricane Sandy.
Interest expense decreased $3.9 million in the third quarter fiscal 2000 $20 million to $3.5 million due to the combination of lower interest rates and lower average.
Debt levels, resulting from our increased profitability and improvements in working capital compared to the third quarter of fiscal 2019.
In the first three quarters of 2020, we generated consolidated operating cash flows of $224 million compared to an increase of $84 million over the same period in fiscal 2019.
In risk increase was largely due to our higher profitability in the improvements in working capital that I mentioned a moment ago.
These improvements resulted in free cash flow generation of $178 million in the year to date period compared to $93 million in the same prior period over the prior year.
During the third quarter, we declared $6.9 million in the fall.
Former cash dividends and Spartannash didnt repurchase any shares in the third quarter.
Our total net long term debt decreased by $145 million. During the first 40 weeks of 2020, ending the third quarter of $519 million compared to $664 million at the end of fiscal year 2019.
Our.
Our net long term debt to adjusted EBITDA leverage ratio fell to 2.3 times as of the end of the third quarter from 3.7 times as of fiscal 2000, Nineteens year end driven by the combination of our strong debt paydown as well as our 35% increase in year to date adjusted EBITDA to $190 million we.
Expect to make further progress on our leverage ratio in the fourth quarter.
As covered in yesterday afternoon's press release, we are updating and narrowing our fiscal 2020 earnings guidance for fiscal year 2020, We now anticipate adjusted earnings per share from continuing operations of approximately 2042 cents to tools and 52 cents per diluted.
Share compared.
Compared to our prior projections of 2040 cents chosen 60 cents.
Our updated guidance reflects the continued benefits of sales trends associated with Cove 19, and the related increases in consumer demand that we're experiencing offset by estimated noncash stock warrant expense of 6 million to $7 million.
Or 13% to 15 cents per diluted share in the fourth quarter associated with the issuance of warrants to Amazon as disclosed in our form 8-K filing in October.
For accounting purposes. This warrant expense will be reported as a reduction in sales and will negatively impact our gross margin rate in the fourth quarter of fiscal 2002.
20.
Reported earnings per share from continuing operations are expected to range from 2009 cents $2 $2.17 per diluted share compared to our prior projections of 213% to 41.
We now expect fiscal 2020, adjusted EBITDA to range from $237 million to 200.
And $42 million compared to our prior guidance of $232 million to $242 million concern.
Consistent with our projected increases in operating earnings.
Our guidance reflects capital and capital expenditures in the range of 80% to $85 million for the fiscal year.
Depreciation.
And amortization are expected to be $88 million to $90 million.
Interest expense is now expected to range from $18 million to $18.5 million.
Also our guidance reflects an adjusted effective tax rate of 23.5% to 24%.
While our reported effective tax rate is now expected to be 30% to 13.5%.
Yeah.
Before we open up the call for Q in a I'd like to take a moment to thank Dennis Hudson for his leadership of the company after jumping back into the CEO seat for the last year, plus and also to wish him. A happy retirement issue continues as chairman of the board and finally I would like to publicly welcome Tony the Spartannash and the executive team and I look forward to working.
Ship them as he leads us into our next phase of growth.
With that I'd like to turn the call back over to the operator and open it up for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone are using a speakerphone. Please pick up your handset before pressing.
Keys to withdraw your question. Please press Star then two this time, we'll pause momentarily to assemble our roster.
Okay. Our first question comes from Chuck Sarah.
And the cost cutting from North Coast Research. Please go ahead.
Good morning, everyone turning.
Morning, John.
Tony you mentioned the sense of urgency around improving the productivity.
Barton supply chain do you see any low hanging fruit there or can you talk about some.
Projects you want to.
Get too quickly to improve the operating margin within food distribution.
Well great.
Great question, and I want I want I'll caveat. This one and many others today with the notion that I've been here six and a half weeks I don't have absolutely everything figured out yet, but as I look.
And our R&D feed in our performance overall, it's clear that we have opportunities in.
At a high level, we have profit opportunity the way we run our DC, we have a I mean, we have some infrastructure opportunities we have.
Aging IP systems for example, so I know that there is a number of approach.
Activity areas. We can go hand, I don't think there's any one panacea, but there is certainly a number of areas, where we can go make improvement and get a turnaround there. So.
I'm in knee deep into that exercise right now figure out which ones take on first and how we go about them.
Okay.
The next question comes from Karen short from Barclays. Please go ahead.
Hi, Good morning, Nelson coal powered on for Karen first congratulations.
Great. Thank you.
I guess my first question.
Talk about how much of an impact lapping.
Production had on the distribution segment from year over year standpoint.
Yes, yes so.
It's helpful question Peyton its a little little misleading in the way we report the segments as to as to what that did to food distribution. So.
From an external standpoint, as we've had.
The press release, you know the food distribution segment was up about 7.8% for the quarter, but if you were to adjust out for the fresh production in some of the business either from a decision that went away last year that were lapping and.
We talked about at the end of the first quarter were exiting the fresh cut this.
Business.
I would say that.
The food distribution like the core food distribution without the cardio impact on it was probably 500 basis points higher so probably closer to a 12 712 eight for the quarter.
And when we talked last quarter about the.
Up 15 and a half.
We probably weren't clear enough is that that was the food distribution portion and it was not netted with title and the way we would externally reported so I would say that we did see some moderation during the course of the quarter in order to end up at that 12, eight and good distribution, but.
But we definitely were.
Next the title production business about 500 basis points higher.
Okay. Thanks, Thats really helpful and I guess kind of along those lines can you share.
Current trends to date are in both the distribution and and at retail.
Yeah, I mean, I think that we would see.
Well, we would say that we've seen a little bit of moderation further, but it's been choppy and so you know it's difficult to understand is just the way you know some of the different states reopening are impacting that or there are other factors at play but.
But I would say that from the numbers that we average.
The third quarter.
We're probably.
We sit here today, maybe 100 to 150 basis points off that.
Certain parts of retail sales are in certain geographies that are maybe more open than others might be off to a greater extent, but we're probably 100 150 basis points down.
Great. Thank you.
The next question comes from Scott Mushkin from RBC capital. Please go ahead.
Hey, guys. Thanks, Thanks for taking my questions and Tony Welcome I'm excited to work with you guys and we're prepared so I'm glad glad Dennis.
Found a great successor.
Anyway I just wanted to clarify what you just said Mark actually so you said that the sales are down about 100 150 from where they were running.
Well from an average for the quarter I mean in terms of form is.
Pirquitas from where they were running per se, but.
From the averages for.
For the quarter were down a little bit.
Okay.
So then maybe Tony don't have an answer could this yet, but I mean, obviously the military business has been.
Drag on the company for a really long time, and you put a stock into what to do with it.
Is there anything to do with it this is something that we need to stick.
With or how should we how should we think about that yeah. It's a great question. So.
Andrew It's obviously as you know it does have a long legacy business and a lot of that has a lot of history and pride in serving the military but.
But the military results are not acceptable and so that business will change it has to change and we're going to.
Two.
Harking back to my previous question to see how much of that is in operating efficiency I don't think we'll find all of it there, but that that's an appropriate place to start and find other ways to improve it but.
My my broad commitment here is to grow Spartannash topline and bottom line and military has to play and it hasnt. So there will.
He changes there are certain.
Sure. Then this is again more of a strategic question maybe is not fair because you have success second half weeks under your belt, but Spartans always been acquisitive.
I think you obviously.
And an incredible contracts with Amazon how are you initially thinking about the growth trajectory of the company.
Obviously, there is work to be done on on the operational side, which I think you frame, but kind of looking out a couple of years. How do you think this business grows.
Both.
From a maybe organically in and also through M&A.
Well, it's I mean, I think it will grow on both those weight and I think the we will be.
As we have as we said in our previous calls I believe will be.
Opportunistic if we have the opportunity to grow in retail, but the big thrust of our growth will be in distribution and we'll look for ways to expand that and expanded with the with the new customers are growing a growing some old ones and then look for that look for that to set up new a beachhead.
For growth than we have.
Of course, great opportunity geographically to do that so that it will be probably more.
Probably more.
Aggressive in looking at acquisitions in the distribution space, if that makes sense and probably more opportunistic on the retail space.
That's terrific.
Time for one more associated to get back in the queue.
I think we are paid at the moment, we're doing well and hot okay. So so then this is more of a shorter term question I mean, obviously Colgate is.
Escalating across the country.
So it's kind of a two part question number one are you seeing in places, where it's really starting to surge in the starting to close down are you seeing improved.
Movements in the sales trajectory.
Number one and number two is I wonder if you could give us a little look in to the independent grocer growth.
Obviously when co bid.
Start adopting and they were big winners in comparative like maybe a walmart or something like that if people flocked. There. So it's kind of a two part question then I'll yield.
Thanks.
Yes, so I mean I think.
On the on the overall trends and as you highlighted with some of the code cases rising back up.
I don't know that Weve seen anything really measurable that we could call out through the.
The last few weeks.
The trends that we have in certain geographies.
Have been relatively consistent there's been maybe a week or two where they were a little outside of the norms are outside the trends from that standpoint.
Right, but I don't know like let's say, if we set in Michigan. As example, I don't know that as Michigan suddenly had.
Has had a.
An uptick in cases that we've seen anything significantly changed but that may be part of the governor hasn't moved our protocols further and so that could be driving it or theres aspects, where the kids are still in school in many respects and so.
It.
As more and more schools shut down and go to a hybrid model working remotely macy.
Greater impact there, but it has been sustained and or clear enough to point to anything specific in that regard Scott and then as it relates to the second question look I mean, I think the independence.
They continue to benefit in this environment.
We look at we look at their numbers and even in a normal year right. There are some independents that are doing great in.
And there are some independents that are middling I wouldn't say that with the tailwind that's common to food at home and benefiting the independent.
They.
They're all benefiting but they're not all benefiting to the same degree and so just like we have in a normal year, where we could point to some books being off at some folks being down.
We have got folks being up but out to different degrees I think the one thing that that really hasn't been much in play.
Until maybe the last month or so maybe even the last two months.
Is that.
There were certainly a pause on competitive openings during during the peak of Covance folks weren't doing construction folks who are going out and.
And setting new stores opening new stores people are focusing on.
Running what they had and now that now that the country's reopened to varying degrees you are seeing that some of the competitive openings against independents in different geographies are now occurring that might be months later than they were originally planned so.
So I think thats maybe.
The only recent change in dynamic is that.
Competitive openings that have been paused for a significant period of time are either back on the calendar and or occurring but the.
The independents have all benefited just to varying degrees based on their competition as well as their individual execution.
Terrific. Thanks for thanks for the answers appreciate it.
Well.
Next question comes from Greg Badishkanian from Wolfe Research. Please go ahead.
Good morning. This is Spencer had us on for Greg Congratulations Tony on the new role.
[music].
So if we look at 2021, how well positioned do you think you are.
Sales and EBITDA gains from 2020, and then the consumers start to quit their baskets again, what are you seeing some of the biggest factors driving where they choose to shop.
Well I mean, it's a little it's a little early to be predicting 2021 simply because we're not sure what the sale.
Total trend will be coming out of the holidays and going into next year, but.
I mean, I think that you know to the extent that there is a.
A longer term shift of food at home and from food away from home and look we all take the news of a possible acting as a positive.
Positive, but you also get sort of a refresher that it's going to be six to nine months before that is widely available.
And so I mean, we've talked before the northern geographies, where we primarily operate.
It's quite likely that folks are not going to be going out to dinner as much as they were before because they will need to be indoors.
And frankly, if the number of cooler cases continues to spike occupancy levels that have been returned to 100 or maybe 50% capacity maybe cut back further and so that should help our numbers are going to 2021.
I'd like to think that we retain a good portion of the EBITDA and the sales that we.
Unrated, but honestly not willing to kind of put anything down as to a range until we get through the year end and see where the trends are as we start off with a new year. So.
I think you can understand that I mean, we've we've tried to to our Nash to to set some guidance and base.
Based on what we've seen for the expectations.
Women, we managed to sort of stay in the range and casually Phil.
In a little lighter than what we predicted but we're all trying to predict the future it's something we've never seen before.
And then I'm sorry to answer the second question was.
Second half of the question was.
While retaining the business value.
Yeah.
How do you.
Yes.
Yes, yes.
Yes, I mean, I think that I think that from our consumer perspective, we have brought folks into the store that may have previously shopped with us that have been.
So refresh.
Refreshed and getting to see how we've changed over the years and we are working very hard to make sure that those.
Customers retain we retain those customers.
I would tell you that what we've seen on the private label on owned brand side, where we have made some market share gains and we've been able to keep those I mean, our our owned brands growth in the third quarter with pretty much consistent with our comp whereas we.
Suffer a lot of our lot of our competitors you know.
That they were maybe two to 300 basis points lower than national brands have returned to the store and so I think we're doing a good job with that with the quality of the products that we're offering and the price points.
You know and I think that consumers are looking at what.
What their bottom line.
We sell purchases going out the door compared to maybe when they were shopping other competitor in saying that we're we're on par or reasonable difference.
So we're able to retain those customers and we'll have to keep working at it.
But I think we've been pretty successful to date.
Thats, great color and then on your.
Some centers can you talk about how much incremental volume you could put through your existing facilities before you need to add capacity just as you start to add new new customers.
Yes, I mean that that's really a function of the type of volume and where it comes right I mean, theres some distribution centers that could easily handle.
No a half billion of incremental volume based on their size and current capacity and what we've done in the past there are other distribution centers, where an incremental $50 million might need us lead us to go off site either because of the size of the distribution center or the types of orders that we received there. So it's not a one.
You want to answer fits all kind of response, but I would say that.
We've we've built out our infrastructure and we're looking at growing towards the future and a scenario that as we add additional capacity that it release capacity off of other distribution centers and so we we benefit maybe in two or three locations.
As we need to add space and so I think it'll be incremental builds that would not be that.
Significant of an increase on our capital expenditures.
Hopefully in many instances, we just be able to fit in with a normal year to year Capex, but.
But certainly if we had a big spike in one year.
It's not unreasonable to think that capital allocation. Good go from the roughly 1%. We generally have done to maybe one and a quarter 1.3, but I I think that thats more of a one year scenario versus.
I need to get into a cycles like that going forward I think that we can manage our growth within the capital plans that we have right now.
Great. Thank you.
You're welcome.
The next question comes from Kelly Bania from BMO capital markets. Please go ahead.
Hi, Good morning, Thanks for taking our question and also just want to express that congratulations.
And welcome to you as well Tony from all of Us here.
Thank you.
Wanted to just kind of go back to that comment I think mark that you made about about the 500 basis impact from Kato and can you just.
Walk us through how that same dynamic may have impacted.
Asked a couple of quarters in the food distribution segment.
Yeah, Yeah, I mean, I I can tell you I mean, it's it's.
It May take me a second just to be able to best answer for for the first quarter, but here.
He hears.
So just maybe as a refresher was.
It was at this time a year ago.
So that we.
Im not well, yes, I mean, no. So it's the second quarter last year, so I apologize but.
But in the second quarter of last year, we announced that we're going to exit the fresh kitchen business and that we are considering disposition of fresh kitchen in fresh cut.
And at that point in time, we talked about the fresh kitchen business being maybe.
$50 million zone on a run rate and we won that down during the course of the third quarter and there may have been a little bit into the fourth quarter.
And so you know that.
That that took away a portion of the business, but then as we mentioned on the first quarter earnings call.
Were we were in the process of.
Growing the Prescott and shifting some volumes around when we lost a significant customer and based on that customers volume within the press kind of business. We just couldnt make the fresh cut business profitable quickly enough to sustain that customers loss for and try to rebuild and so we made the difficult.
Decision to exit fresh cut.
And so as we look at where we are right now.
So the numbers earlier in the year are probably that were down.
You know, if we're down probably $35 million to $40 million on a year over year basis in both the second quarter and third quarter and.
Sales.
From those portions of the title that there's probably a little bit thats in there on the distribution side because they do some foodservice business in the foodservice business has been softer.
In the first quarter that numbers, maybe down $30 million to $35 million because we did operate.
The fresh cut business for them.
The bulk of the first quarter, we wound down starting in like the March timeframe. So almost around the timeframe that covert started giving a significant sales lift.
We started to see that go down so when you when you look at it in the numbers that we're putting up in food distribution first quarter second quarter really didnt.
Really didnt kind of factor into the call out.
And we just kind of reported the combined numbers, but.
As we've talked about there were some questions that we in the earnings release last night.
Not mentioning it in the third quarter makes it seem as if our.
Ongoing.
In food distribution business had greater weakness than maybe others in the space are reporting and so thought it'd be helpful to clarify that particularly when we got the question. This morning.
Okay.
That's helpful.
I guess Tony.
You had mentioned just investments in capital I think you called out some IP.
That is a little dated.
I guess, how should we think about maybe.
Spartans shifting a little bit more into an investment phase here because it feels like theres been some focus on just cost cutting.
Over the last couple of years.
Just curious how you think about that dynamic if you can elaborate on that at all.
Sure well.
Well I.
Yeah.
Having having a comment on the path to investment that looking forward.
Just pure cost cutting I don't think is an appropriate way to think about how we're going to make our investments.
We will make certainly make investments that make us more productive that protiviti gives us the yes. The license to go grow our business and Thats kind of I think I think anything is a virtuous circle, if you will and and so I think as we will look to balance those investments bouncing between things that make us more productive and things that make us a more capable sir.
Serving our customers and think that give us greater capacity as Mark mentioned, a moment ago funny I think those things will all work and balanced and that's the way I think about our investments going forward.
Okay, and I guess the.
The Amazon announcement last month.
Lots of questions. There I don't know how much you can say.
Hey, if at all but how should we think about modeling that in you know over the next couple of years.
And that's really what's the driver behind that I mean, what what what happening for Amazon that we should think about that drives the growth there for you.
Well I think I think that last question.
No is probably a better question for Amazon than for Us I'm not sure that.
Not sure for any customer that we should sort of be discussing what's driving their growth but.
Look I think we we would be shocked if we didnt get a question about Amazon on this call right and so given the announcement last month.
I would say look we have been doing business with Amazon since back in 2016, when dentists within the CEO season day was the CFO seat and we talked then about how we were doing grocery with them. Some showing some frozen and you know that we are working with them and within the Amazon fresh and prime now parts of the business.
Business.
And that relationship has continued over the last four and a half almost now five years.
And I think that.
The announcement.
Certainly indicate that we're going to continue to work with them and Theres, an opportunity for Amazon with which we hope to.
Fully take advantage of.
To purchase up to 8 billion over the course of seven years or less in order to.
Get the warrants to be able to exercise in our stock.
And the cadence of that we wouldn't necessarily discuss we wouldnt share.
You know if Amazon.
Never become significant enough of a customer where they'd be north of 10% of sales, we'd obviously disclose that we haven't disclosed that previously.
But if you do the math if there is $8 billion in purchases over seven years to fully.
Best the exercise ability of all the warrants that would average out to north of one.
Billion won and sales over that seven year period. So we we hope they do that.
Over that timeframe and if they'd like to get that done even sooner that would be welcome benefit or an hour. So we've worked with them for a number years continue to work with them they've been a great customer and we look forward to continuing departments.
Thank you.
You're welcome.
The next question comes from Damon Postini from Deutsche Bank. Please go ahead.
Good morning, guys.
Thank you.
Yes. So can you just speak to kind of the promotional environment, you're seeing in retail how it's changed over the last couple of months compared to.
Yes.
Editors.
Come on production.
I don't know that we've seen I think couple.
Couple of things, there, Dave and I would.
Days ahead.
Over the last few months, we've seen but there was a period of time, where some competitors stuff running print ads and only when digital I would.
I would say that looking at the space promotions are down overall.
I don't know that competitors have gotten.
See more promotional.
Then maybe where they were pre co is but I think the promotion levels.
Our slowly inching their way back.
To normal levels and at what point or what date, we get there remains to be seen.
There are some challenges which is why.
Yes.
You just won't be back to normal levels, because there's some products that.
You can't even secure sale and if you were to secure and put it on promotion.
Would be gone in a flash in.
In that regard.
We need to make sure that have an ample supply of thing and trying to put it on promotion and if you can sell it all at full cost here some of the.
Things like the cleaning supplies and disinfectants those.
Those don't need to be promotional current environment.
So I don't know that there's been any significant change there, but I would say that the levels have risen from where they were during the spring, but there's still below where they were.
In the beginning of the.
First quarter 2020.
And then one more for me just on E. Commerce was up 175%. This quarter can you just speak to kind of the consumers.
Spots in your offerings and then.
Where you see.
That business.
Thing out too as far as percentage of the mix and then that kind of the profit below the levels of that business.
Yes, I mean I'll answer the last question first I mean, we we've spoken that our E. Commerce business is it profitable, but not as profitable as a consumer going into the store and shopping on their own.
So I mean, we've we've made great inroads over the last couple of years to increase the profitability of that business, but customer.
Customer going into the store and shopping versus us having a personal shopper.
The savings you get from not having the cashier does not equate to the time takes the personal shopper. So that's that's for sure.
As a percentage of our business I would say that in the case of the stores that have E commerce.
It's running a little bit north of 4% of sales in the third quarter and so pre coded that was closer to like two two and a quarter.
So that that does kind of match.
With the north of 175% that we referenced and we would say that.
Those consumers, we certainly are down from the peaks where people weren't willing to go into the store, but we've certainly seen that a great deal of the incremental volume that we picked up has been pretty sticky.
And that new customer that we got during that timeframe continue to utilize.
Fastlane offerings that we have in the other ecommerce offerings.
And then as you know as we've always seen with some of the Fastlane business that's a.
That they basically fill in during the week or they they go into the.
Stores for certain offerings. In addition to what they are buying for E commerce, and so we're getting an overall greater percentage of that consumers.
Basket.
By virtue of the E commerce offering that we have.
Thank you.
The next question comes from Peter Saleh from BTIG.
Please go ahead.
Great. Thanks, Dan.
Congrats Tony.
Sure.
I just wanted to come back to the comp.
Thanks around capital investment.
Tony when you think about next year.
Do you think you'll be making more.
Changes terms that will need more capital investment from were operational investments next year as you.
Maybe plan for increased volume from some new customers.
Yes.
Okay.
For your question, So you might say well the investments as we prepare for bringing on new customers, maybe more capital or process oriented is that is that the essence of it.
I understand here ill be making up a little bit more capital investments next year versus prior couple of years.
I don't think that it will be.
Measurable I mean again, I mean, any given year, we can be as little as 90 basis points of sale and maybe as it is and maybe as high as 1.1%. So.
I think we'll probably be in that range I don't know that it's a big shift and honestly this year more than any other year.
With all the delays associated with Cove. It is quite possible that some of the capital doesn't get spent.
Just because of the way the timing plays out and I'll give I'll give a very perfect example.
Is that we're looking to do some work in a distribution center right now and.
Were having trouble getting permit.
Imaging and the permits have been in for a number of weeks, but we haven't gotten it approved because the only.
Handful of people that handle that the office and.
It needs to go through two or three levels and more in that particular municipal office three of the folks that would be associated with getting approval are currently only covance.
And so that's a scenario, where we're going to be delayed spending the capital simply because.
World events, not that we would otherwise.
Not spend the money.
So I mean, I can see next year being a little bit higher, but it's more likely going to be because of things like that then.
If I heard.
Two of customer growth that we that we suddenly need to spend the next or $30 million.
All right. Thank you very much.
The next question is a follow up from Chuck Cerankosky from Northcoast Research. Please go ahead.
Thanks.
Thanks quick follow up and looking at the Amazon relationship.
So were focusing here on.
The share count going forward.
It's up to them when they hit certain.
Ah spending thresholds with you, which in turn allows them to exercise the warrant is is that.
Tied to any particular part of the year.
Is there any predictability.
Ah Ah.
In that process. So that we can have a better idea on where a share count is going to be and I understand you're going to use in the treasury method. So if you could comment on that a little bit mark would be helped.
Yes, so thats.
Very complicated question.
Hey, let me, let me try to explain it is simply as I can.
So the agreement allows for Amazon to have the ability to purchase up to 5.4 million shares subject to certain.
You bet certain vesting conditions, approximately 20% or about $1.08 million of those warrants vested upon execution of the agreement those warrants could be exercised today or any day from now to the remaining six plus years on that on the agreement.
Additional.
Vertical vesting is occur with some requirements, which are not public and won't be public but.
Well certainly reflect weren't expense overtime as is.
The conditions of those investing our Matt and that will be in our numbers and be in our guidance as it relates specifically Chuck then to your question about the shares.
Yes, I mean without going into all the accounting.
It will be the treasury stock method.
Which basically takes says that for the proceeds you would get from the exercise of the warrants you would take that cash and apply that against.
Buying back the stock on the open market.
And so in a very in a very simple example, if.
If all if the stock doubled.
So you would only get dilution of 1.25% versus 2.5% simply because you could buy back half the shares on the open market because there would be a double the price.
So folks.
Yes, all the folks you know with your models or you know the information is out there publicly tend to do the math and see what the dilution would be but.
You know it's been the dilution varies based on where the stocks trading at that point, but it would be a fraction.
What's currently exercisable simply based on where the stock is.
Currently traded.
And further questions I can walk somewhat through it offline, but that's probably the most accounting talk anybody wants on an earnings call.
And then and then the timing of.
Additional vesting is now.
Not tied to anything but how much Amazon.
Purchases going forward after the.
Yes, I'm not going to not going to comment on what the best in criteria, but there are different.
Vesting criteria as to how they achieved that that was redacted from the document and so we're going to keep that keep that appropriately confidential.
Right. Thank you.
The next question is a follow up from Scott Mushkin from capital. Please go ahead.
Hey, guys. Thanks for taking my follow up question. So I just wanted to get some clarification on a couple things.
If you guys are fully engaged with a retailer.
What both dry and fresh how much of the store do you think you control or distribute to controls wrong word 60, 70% is at 80.
What would you say.
Yes, I mean I.
I guess I would say it is a function of what.
They are doing.
Yes, he but I mean, I I would say like a good penetration for us some retailers north of 50% would be a strong penetration, but probably a max penetration would be closer to 70% maybe 65, I mean again, it's all mix driven by how much shelf space from a center store, how they've got that broken out, but you know.
North of 70% would be unusual 60 to 65 might be a normal Max and there were some retailers depending on what they're carrying and where they are.
Where theyre devoting their space it could be lower.
And your expectation with Amazon is that they're going to be a full partner utilizing every.
When you guys do.
I wouldn't want to comment on that because I know I don't know I don't know that I know of no nothing about their relationships that I could comment as to whether or not.
Our penetration with weather.
Weather in any of the different areas that we serve them.
But mark maybe I.
You probably answer your going to service them with fresh and dry grocery or just dry we don't we continue fresh and draw yeah. I mean, we've we've done you know that would be some of the peripheral product that we referenced some case Cho.
Okay.
Sure so kind of taking a step back and looking at the relationship and Amazon plans I am struggling to understand why.
I think not in their interest.
To go way beyond if they're growing their their store base in their other capabilities in our consumables why they wouldn't want to blow through these targets and its clearly would help your equity a ton.
And so if they are growing this business.
I'm just trying to understand why it wouldn't be in there.
Vested interest too.
To exceed these targets.
Well again, you know those problems I mean that is probably a better question for them I would I would say that we would we would welcome that as long as it's not some.
Crazy level of growth that will be difficult for.
For us to support but yes.
Yes, I mean, that's that's a that's a question for them I mean, we're certainly here and ready to support them as a customer and all of our customers.
You know in any of their efforts to grow their business and Thats, we help our customers succeed with growth and we all succeed and so that's that's a win win on front and Thats no different.
From the single store independence to our largest customer so I mean I wouldn't.
I would not disagree, but I mean, it's the individual customers have the different reasons for making their decisions and we're there to support them as much as they want to work with us and we always like it to be more.
And you can support them.
Nationally.
I think yes, I think we feel comfortable in where we're supporting some of the customers on a national basis and.
As we continue to grow.
So depending on where our growth comes we are footprint may expand in it I think we can still fit within.
Our capital expenditures that we.
We've been asked about a couple of times, but yes, I mean, we were able to support folks nationally now we do that.
We have been doing that for a number of years for a handful of customers.
Great. Thank you for let me follow up Chuck.
Sure.
Okay and can you get gross.
Please press Star then one.
[noise] there are no more questions in the queue. This concludes our question and answer session I'd like to turn the conference back over to Tony Crosland for any closing remarks.
Great. Thank you so much and I just want to thank all of you for participating in today's call.
Great to get a chance to meet you then this fashion and looking forward to a to working with you in the future certainly appreciate the opportunity to share a little bit of my personal background as well as give you the update on the third quarter performance and again looking forward to the next time you a chance to speak so with that I wish you all a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
Okay.
Okay.
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Mm.