Q4 2020 SpartanNash Co Earnings Call
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Good day and welcome to the spot the notch fourth quarter 2020 earnings conference call.
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I would now like to turn the conference over to Chris. Please go ahead.
Good morning, and welcome to the Spartan Nash company fourth quarter and fiscal year 2020 earnings conference call on the call today from the company are Tony <unk>, President and Chief Executive Officer, and Mark Chamber Executive Vice President and Chief Financial Officer.
By now everyone should have access to the earnings release, which was issued yesterday at approximately 430 PM Eastern time for.
A copy of the earnings release, please visit Spartan matches the website at Www Dot Spartan Nash Dotcom backslash investors.
This call is being recorded and a replay will be available on the company's website for approximately 10 days.
Before we begin the company would like to remind you that today's discussion will include a number of forward looking statements.
If you'll refer to the Spartan matches the earnings release from yesterday as well as the company. The most recent SEC filings, you'll see the discussion of factors that could cause of the company's actual results to differ materially from the forward looking statements.
Please remember of Spartan <unk> undertakes no obligation to update or revise these forward looking statements.
The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with the useful perspective on the underlying growth trends of the business.
And it is included in yesterday's earnings release, a full reconciliation of non-GAAP financial measures for the most comparable GAAP measures.
<unk> is now my pleasure to turn the call over to Darren Thompson.
Thank you, Chris and good morning.
For covering a few highlights on the quarter and offering some comments on our strategies for 2021.
Begin by giving it so moving to our dedicated and hard working team of associates, and our distribution centers and retail stores nothing about navigating the COVID-19 pandemic has any.
I am tremendously proud of our team's performance and our ability to serve our local communities.
Alright essential workers are truly heroes and I remain committed to supporting them with the safe working environment.
I had such a pleasure of gains and know many of these frontline associates over the course of the last several months and I'm excited to see how they will continue to contribute to our company's objective and growth in the coming year.
Turning to a couple of highlights in our financial performance. We are pleased with our top line results of 12, 5% growth in the quarter, which of course included the impact of the 50 <unk> week, although the pandemic has contributed to our overall increase in sales volume our team continues to deliver new business wins, which will contribute to our companies.
Growth for years to come.
With record demand across most of our businesses, mainly keeping the shelf stocked was no small achievement and I am proud of our team's tenacity and their ability to keep our communities debt.
We also generated substantial amount of free cash flow during 2020, mostly due to improve the profitability, which allowed us to pay down a significant portion of our long term debt balances.
As a result, we ended the year with a net debt to adjusted EBITDA leverage ratio of two times compared to three seven times to start the year.
Naturally this improvement provides increased flexibility it affords us the ability to reinvest in the business to support future growth and drive greater efficiencies.
It will also enable us to deploy capital for other projects as opportunities present themselves.
On our last quarterly call I promise of share strategies for 2021, and I spoke to the need to act with a certain level of urgency and making meaningful improvements to our supply chain, having visited the frontline and carried out of dialogue with the leaders at all levels of the organization.
Great insight into the area, which will require focus and of the same time I have gained an appreciation for our team is capable of achieving.
Despite the Trillium Valiant efforts put forth by our associates during the COVID-19, the pandemic has highlighted where we required investments in our efforts to grow sales and offering the efficiently in the coming years.
In the last few months many of our warehouses have been strained and the operating at or above capacity.
On top of that we have held our teams to heightened safety protocols and often been required to manage through staffing challenges associated with the pain of Debbie.
While we've been limited in our ability to make progress on improvement initiatives. During the pandemic over this period. Our team has identified several areas that offer potential for medical and process improvements.
As I learned during my long history of this industry the strength of the operator comments from having the foundation of great people processes and products. Our team will be laser focused on making sustainable improvements in certain key performance indicators in 2021. These area of include investing in our.
So it should experience through the initiatives related to safety and retention.
Improving distribution service levels.
Improving our private brand assortment in penetration.
And taking other actions to sustained improvements in gross margin levels.
These kpis will be utilized to measure ourselves internally and to evaluate our progress improvements in these areas requiring some operational investments in people and processes.
Along with a bit of El non res.
In addition to support our continued growth in the food distribution segment and the expanding the capabilities of our supply chain network. We recently opened a new distribution center in Severn, Maryland.
The strategic investment represents our most significant addition to the supply chain network in many years and will alleviate the stress on some of our other facilities in the <unk>.
Short term and support our growth in the long term.
In connection with our Kpis, we have renewed our focus on the training of our supply chain associates for their growth as efficient operators.
So the even example of newly hired border select or within our distribution center moves a significantly lower rate of cases.
Then the more experienced and trained counterparts.
Ensuring that we execute the appropriate training of these associates early on.
Ensure that day and achieve greater efficiency and longevity with the organization well.
We also are undertaking initiatives to refresh the flow of our distribution center and the support these associates.
And enhanced productivity in these facilities.
These initiatives along with many others and together with improvements in execution will support our supply chain and recovering from the demands of the pandemic.
Also result in improvement of our company's growth and profitability over the next several years.
As we look to 2021, it will be a year that will undoubtedly bring uncertainty uncertainty related to the evolving consumer behavior and uncertainty related to the duration of the pandemic and the timing of the vaccine distribution amongst other things.
However, we are poised to focus on what we can control the fundamentals of our business and making efforts to streamline operations in order to be to best respond to any environment and the positions of our Nash for profitable long term growth.
With that I will now turn the call over to Mark to review the fourth quarter performance and provide our fiscal 2021 guidance.
Thanks, Tony and welcome to everyone joining us on today's call.
Net sales for the fourth quarter of fiscal 2020 increased by 12, 5% or $249 million to $2 25 billion versus 2019 fourth quarter sales of $2 billion.
Which includes the impact of the 50 <unk> week adjust.
Adjusting for the 50 <unk> week sales of $158 9 million, our fourth quarter sales growth accelerated to four five per cent compared to the third quarter sales growth of three 1%.
Our adjusted EPS for the fourth quarter came in at <unk> 43 per diluted share an increase of 87% compared to adjusted EPS of <unk> 23 per diluted share in 2019 fourth quarter.
GAAP EPS came in at 34 per diluted share in the quarter compared to <unk> 15 per share in the fourth quarter of fiscal 2019.
The increase in our profitability from the prior year quarter was driven by the higher sales volume, particularly from the higher margin retail segment.
Gross margin rate expansion across all of our business segments and increased leverage of our operating expenses, particularly in retail store labor and various fixed cost.
These positive contributions from partially offset by the previously announced non cash warrant expense of $6 $5 million related to the transaction with Amazon increased corporate administrative expenses, including incentive compensation and a higher rate of supply chain expenses, which were compounded by the effects of COVID-19, as a reminder.
For the warrant expense was recorded as the reduction to net sales in accordance with GAAP.
Turning to our business segments net sales in food distribution increased by $167 million or approximately 18% to one point of $11 billion in the fourth quarter driven by the combination of continued sales growth with existing customers incremental volume associated with the impact of COVID-19, as well as the contribution.
<unk> from the 50 <unk> week.
These increases were partially offset by the company's decision to exit the remaining fresh production operations in early 2020.
Inflation declined to 80 basis points in food distribution in the fourth quarter. The decrease both from the third quarter range of $1 one 2% in 2019, the fourth quarter installation rate of 139%, primarily as a result of inflation moderating significantly and produce while dairy shifted from inflationary in the.
Q3, two deflationary in Q4.
Reported operating earnings for food distribution in the fourth quarter totaled of $11 million compared to $10 9 million for the prior year quarter.
The increase in reported operating earnings for the segment was largely due to higher sales volume favorable margin rates lower asset impairment charges and cycling prior year losses in the fresh distribution of the French production business.
Largely offset by the previously mentioned noncash warrant expense the higher rate of supply chain costs and higher corporate administrative expenses, which were allocated to the business segments.
Adjusted operating income totaled $13 1 million in the quarter versus the prior year's fourth quarter adjusted operating income of $15 7 million.
The adjusted operating earnings exclude asset impairment and restructuring charges in both the fiscal years.
Losses associated with the fresh kitchen operations have also been excluded in 2019 fourth quarter.
Retail net sales came in at $627 million for the quarter compared to $548 million in 2019 fourth quarter, an increase of 14, 5% for $79 million.
<unk> the impact of the extra week.
Our comparable store sales were eight 7% for the fourth quarter.
Comparable store sales continued to benefit from the consumer shift towards food at home during the pandemic.
Consistent with our third quarter results. These results also reflect an increase of nearly 180% in our e-commerce sales for the quarter and the continued favorability in our private label sales compared to the overall industry.
Retail shifted to deflation of 14 basis points compared to inflation of 135% during the third quarter and inflation of one 3% in the prior year as most categories moderated in the fourth quarter and the grocery dairy produce and frozen categories all turned deflationary.
Fourth quarter adjusted operating earnings in the retail segment came in at $9 4 million compared to $3 million in 2019 fourth quarter.
Retail reported GAAP operating earnings of $6 9 million for the quarter compared to $4 $2 million in 2019 fourth quarter, an increase of 64%.
Our profitability improvement was driven primarily by the sales increase while we also benefited from improvements in our margin range, including lower inventory shrink as well as favorable variances in labor rates.
Partially offsetting these items was higher incentive compensation due to the improved segment performance.
<unk> sales were down almost 29% from the prior year fourth quarter due to a combination of fewer gallons sold and a lower average price per gallon.
Military net sales of $514 million in the fourth quarter increased by $3 million compared to prior year revenues of $511 million.
The contributions from the 50 <unk> week and growth in private label sales were offset by the continued impact of domestic base access.
And commentary shopping restrictions associated with COVID-19, which have led to a significant declines in defense Commissary agency sales as a whole.
Military reported an operating loss of $5 million in the fourth quarter compared to a reported loss of $3 $5 million in 2019 for fourth quarter.
While adjusted operating loss was $4 million compared to a loss of $3 5 million in the prior year.
These changes were driven by improvements in both gross margin and supply chain expense rates.
Interest expense decreased by $3 million from the prior year quarter due to multiple rate cuts implemented by the federal reserve as well as the company's pay down of long term debt, resulting from strong free cash flow during the year.
For the full year, we generated consolidated operating cash flows of $307 million compared to $180 million in the prior year. This.
This improvement was driven largely by our increased profitability reductions in working capital the deferral of payroll taxes in connection with the cares act and increases in crude compensation.
These improvements collectively resulted in free cash flow generation of $239 million in fiscal 2020 compared to $105 million in fiscal 2019.
In fiscal 2020, Smart Nash declared $27 $7 million of quarterly cash dividends equal to 19 in the quarter cents per common share.
The company also repurchased.
860752 shares during 2020 for a total of $10 million at an average price of $11 62 per share.
Our higher adjusted EBITDA of $239 1 million.
Bind with the reduction in net long term debt by $198 million during fiscal 2020 resulted in the significant improvement in our net long term debt to adjusted EBITDA leverage ratio the.
The company's leverage ratio of finished fiscal 2020, and just under two times coming in at 195 times compared to three seven times as of fiscal 2019 CRM.
As covenant in Yesterdays press release, we are providing our initial guidance for fiscal 2021, which incorporates our current expectations as we begin to cycle the impact of COVID-19.
Overall, given market conditions and the uncertainty of the Covid to influence will have on fiscal 2021.
We expect consolidated net sales to decline by approximately 4% to 6% from fiscal 2022 of range of eight 8% to $9 billion.
In food distribution, we expect sales to decline 1% to 3%.
In retail, we expect first quarter comparable sales to decline by 7% to 9%.
Our full year comparable sales are expected to decline by 6% to 8%.
Within our military business, we expect the continued decline in the deca comparable sales trend, which will be partially offset by growth in decades private brands, resulting in a net 3% to 5% sales decline.
We expect the Companys profitability decreased over the prior year with fiscal 2021 adjusted earnings per share from continuing operations to range from $1 65 to $1 80 per diluted share compared to $2 53 in 2020.
Excluding the estimated restructuring and asset impairment merger acquisition and integration organization realignment of severance expense is provided in table eight of today's press release.
We expect fiscal 2021, adjusted EBITDA to be in the range of $195 million to $210 million compared to 2000, Twenty's adjusted EBITDA of $239 million.
Consistent with the company's projected decrease in operating earnings.
From a GAAP perspective, we expect the reported earnings from continuing operations will be in the range of of $1 48 to $1 67 per diluted share in comparison to earnings from continuing operations of $2 12 in fiscal 2020.
Our guidance reflects assumptions that healthcare costs health insurance costs will increase and return to pre pandemic levels, while incentive compensation will similarly moderate to historical levels of achievement in fiscal 2021.
Our fiscal 2021 guidance also reflects the capital and capital expenditures in the range of $80 million to $90 million for the fiscal year.
Depreciation and amortization of $90 million to $100 million.
And the interest expense of $14 million to $15 million. Finally, we expect our reported and adjusted effective tax rate to range from 23% to 24, 5%.
And now I'd like to turn the call back over to Tony.
Thank you Mark.
In closing we are pleased with our fiscal 2020 performance at our teams' contribution while continuing to deliver results during the COVID-19 pandemic.
However, as we emerged from the impact of the pandemic in 2021, we recognize that there are many opportunities you'll need to capitalize on in order to live up to our potential.
I look to it of uncertain 2021 environment and think about the focus areas of the outlined earlier I realize that the benefits will not come overnight. However, I am confident that we will make the right investments and better positioned our platform for more prosperous growth in the years ago.
With that I'd like to turn the call back over to the operator and open it up for your questions.
Thank you very much.
We will now begin the question and answer session.
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At this time, we will force momentarily to assemble our roster.
The first question comes from the line of accounting Scott from Barclays. Please go ahead.
Hi, This is Pete on for Karen Good morning.
Hi, Christian just hoping to talk about the competitive landscape and what you saw during for Q.
Can you perhaps teams the post holiday and thoughts on the moving into 2021.
And Kate just to make sure we're answering the question here.
Jim you're referencing at retail on the wholesale front.
E channel, but if you could give color to both that'd be great.
Sure. So I mean, I think on the retail front.
We've seen that as 2020 has progressed.
The folks have started to work their way back towards say pre COVID-19 promotional levels.
I don't think that everyones, all the way back but the holiday period is usually relatively heavily promoted in general by retailers and so I would say that maybe.
Maybe a little bit lighter than what might of been historical but it was much closer than it might have been say in the second or third quarter.
And I don't know that we've seen anything.
Year to date in the first six or seven weeks of the year that would say anyone's deviating significantly.
Certain categories, where maybe certain items in a given week, but nothing broad based.
And then on the wholesale front I think that we're starting to see.
We're starting to see customers, who maybe were contemplating making a change before having those conversations again and we're optimistic that there is some market share out there to be gained on our end.
Great. Thank you and then.
The kind of the.
Comment on the drivers of inflation, turning negative that reach out could you maybe repeat the kidney.
Can you talk about what Youre thinking.
In terms of cost inflation.
Retail inflation for 2021.
Yeah. So.
As it relates to retail of what we're saying is that.
In the third quarter, we had about 135 basis points of inflation in the fourth quarter, we went to 14 basis points deflationary, but specifically as it related to certain categories grocery and produce dairy and frozen all went from being at varying levels of inflationary to deflationary.
In the quarter and then some of the categories that were already deflationary in the example, like seafood got more deflationary in some of the categories that had.
Higher inflation such as meat.
They're they're inflation cut in half from the third quarter two of the fourth quarter.
And so as we look at things right now.
When we look at both the food distribution on the wholesale side and retail.
We've seen the inflation in the case of food distribution declined further in the first period of fiscal 'twenty one.
And we've seen the deflation that we're experiencing retail worsen.
Not much maybe another 10 to 15 basis points, but it did it did worsen slightly from Q4 for Q1.
So our numbers.
Our numbers are probably closer to 1% as we're looking at FY 'twenty. One I know there's been reports of the CBD is back half of the year looking at some more significant price increases coming out of Cagny in some of the other conferences, but.
That's what we're expecting today and as to the extent that that needs to be updated we'll we'll do that as the year goes along.
Okay.
Great. That's really helpful. Thank you and then just last one from me can you talk about how you're positioned from a wage standpoint.
The force Steven tune back given the.
The backdrop in certain retailer now.
Recent.
Yeah, Great question and there's also of course the.
The the minimum wage legislation they are paying very close attention to we have we have in this.
Budget, we have not contemplated the minimum wage change as you can imagine of of what you've seen that.
We have a number of associated debt.
Net debt who.
Whose earnings are are between 12 and $16 an hour and even in the early phases of the minimum wage change would have compression effects that we would have to take into consideration.
We have as we have sort of a standard of wage inflation planned in our current budget.
We're obviously very watchful of the of both of the legislation and other actions of the marketplace. So we can stay competitive but I think that that is certainly part of the uncertainty I mentioned a few minutes ago.
We will stay vigilant on that front.
Thank you very much.
Thank you.
The next question comes from Greg about the scanning from Wolfe Research. Please go ahead.
Good morning, guys, just the Spencer hanus on for Greg.
My first question was on retail I was just hoping you guys could provide a little more color on from what led to the sequential change in retail EBITDA margins during the <unk> and how should we think about the cadence of margins in retail during 2021.
Yes, so I mean, there's co.
A couple of items, there and I think.
As we look at the change from the third quarter fourth quarter, Yes, I mean, there is certainly was the.
A step back when you look at it from an EBIT and EBITDA perspective.
Some of that is associated with the allocation of corporate expenses and adjusting for incentive compensation as we get to the end of the year. But then there also were some were not calling them other onetime but there are some expenses that were incurred in the retail business in the fourth quarter as we align some of the benefits.
For the Martin Martin portion of retail that we had acquired two years ago to the rest of our business and so there were some onetime expenses in the forms of accruals to record for vacation and sick pay and align those policies.
And then the last item was the during the course of the year we have been.
Crewing for.
We've allowed folks by virtue of what was going on with Covid to carryover of some of the vacation from one year to the next because it was difficult for people to take vacations or go anywhere I guess I'm taking vacations.
So we had some incremental expense there so I would say look at it youre not going to see the levels that you saw over the course of fiscal 'twenty as we're not going to get some of the benefits of the.
The levels of shrink the benefits that we got in the fiscal 'twenty, we will start to moderate in 'twenty, one health insurance costs will be higher in 'twenty than our expectation will be higher in 'twenty one than they were in 'twenty as folks go back and have more of the elective procedures.
But I would say the for the fourth quarter, specifically with some of the items that I just mentioned that really drove the sequential decline in EBIT and EBITDA in retail as for the cadence I mean, essentially its a tough question simply because.
We're forecasting an RN.
That the sales lift that we're getting from Covid will moderate during the course of the year, Although we will still retain a portion of that as of the end of the year and how accurate we are about the cadence will dictate how much the.
Retail.
Margin will be.
Above what they might have been say in 19, so I don't know that I can answer that and give you something commodity easily.
Other than we've tried to set of cadence on the topline that we think will correspond.
Two the operating margins.
Okay got it that's helpful. And then you guys outlined some of <unk>.
The initiatives you guys are going to be rolling out this year, how should we think about the amount of reinvestment back in the business to implement some of those.
And what is some of the what are some of the limiting factors for determining when that will start to show up in the P&L.
In terms of improved margin and better flow through of the business subsidiaries of the shifts.
Great.
So the the.
The investment and we are still putting that together, but it's a multifaceted approach to improving our overall operations.
There are a lot of investments that will come in the form of increasing increasing or improving the talent in the organization and in breaking spans and adding some technical expertise.
And we're very confident that there's a there's a terrific payback on that we will see relatively little of it in 2021, though these are mostly 22 of 23 paybacks.
So the.
We're still in the midst of putting that together, but we've got the we've got a handful of those components in place it will be.
Operating expense versus capital largely it'll.
It'll be largely around people that will include the processes of our of our distribution centers and our transportation operations.
Okay, great. Thank you.
Operator.
Okay.
Okay.
Operator, we're ready for the next question.
Okay.
Alright.
Hey, guys it looks like for how they can issue connecting with the operator could you give us some of them in here. Thanks for your question.
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The next question is from the line of David for the students from Deutsche Bank. Please go ahead.
Yes.
Good morning.
I'm wondering if you're correct.
The quarter day trends Youre seeing.
In retail.
And food distribution.
And within that the speak to as vaccines rollout in the various regions you operate if youre seeing a difference.
Regions.
Yeah, you know Damian, we typically don't comment on intra quarter trends as to what we've seen today.
However.
I guess I would say in providing our FY 'twenty one guidance.
The.
The what we've experienced the data is in line with with what we're guiding.
So if we're referencing.
The 7% to 9% in the first quarter for our retail once we cycle COVID-19 starting in the <unk> 10.
I think that would imply that we're still on track.
There is the big unknown that comes when we start to cycle of things, but as we sit here today, that's our current expectations.
I think thats, probably the best that I can provide in that regard as debt.
The guidance that we gave we're tracking towards that through the first seven weeks of the year.
And then can you just understand the kind of gross margin dynamics.
2021, the puts and takes there we should be thinking about.
Yes, I mean, I think look so as we as we focused specifically on gross margin and we go to the retail business and in the distribution on the.
On the distribution side.
Really a lot of the benefit we saw in the margin as improvements in shrink in some regards where.
During the surge and the the March April may timeframe, where.
We're north of 20% during those weeks.
Your shrink really decline significantly because you are selling everything you had certain categories of in the warehouses. The wood product that wasn't coding out and perishable product you were going through that similarly at a rapid rate.
So shrink levels.
We're much lower which then in turn helps the gross margin and that's a similar case at retail right. We take we take for perishable fresh inventories every month.
Getting a lot less shrink during those inventory simply because the greater consumption.
And so debt that carried on for all of fiscal 'twenty, but as the levels went from being.
We did it was only for a few weeks right, but we did that.
15% of the first quarter then.
We saw an acceleration in Q2 up to 17, and then we went to the 10 I mean, you're you're seeing that and improved shrink of retail I think the other portion of it which I think we were maybe a bit less of some of our competitors is that we kept running an AD and maybe we weren't as promotional as we might of been but we still I think were more promotional than many of our peers.
Yes.
And so I think you got some benefit there because you werent discounting to the same extent simply because you didn't have some of the products.
So I think you'll see some of the come back in 'twenty one because.
When your when your comps at 17 versus your comp set.
On the two year stack basis of maybe mid single digits, you're going to have modestly more shrink.
Understood. Thank you.
Thank you.
The next question comes from Chuck Cerankosky from Northcoast Research. Please go ahead.
One.
Tony can you talk a little bit about the broader retail strategy at spark Nash.
If you're focused on.
But a lot of the things you want to do on the.
On the food distribution segment, but retail is the number of banners different geographies.
And the different ways to go to market and I was wondering if <unk>.
Some of that might be simplified going forward.
Sure.
On retail so I'll take it a couple of a couple of ways.
Question on one of the operating.
Strategy overall also strengthens our retail I'm guessing for important to note that we are.
Our our biggest customer.
So as we get better at it fill rates and better at providing great service and great costs overall, it actually strengthens our overall retail offerings.
We have.
In the strategy of the stores, we are looking at.
Continuing our performance and focus on our own brands and believe that there is of great upside there we saw significant growth in the in 2020. We believe we can continue that pace and we're looking to make offers of new products and new categories and in.
Frankly, looking at getting a more.
The simplified representation of our brands to our to our consumers and we see great growth there.
We have a we also the or the number of ways to strengthen our overall e-commerce for of our stores. We think that's going to also be of great growth for us for the future of there was terrific.
And that for us.
In 2020, as well and then as far as the banners go because there's no definitive plan right now to change any banners to consolidate those we're always looking for ways of strengthened our business and as I mentioned earlier, we will be opportunistic growth in terms of the way we look at potential acquisitions.
As you know there are periodic store closures.
There may be some of those.
As he moving along here, but there's no there isn't a holistic view of.
The consolidated banners at this point.
Thank you.
Thank you.
The next question is from the line of Kelly Bania from BMO capital markets. Please go ahead.
Hi, good morning.
Wanted to ask just about a little bit about the distribution channel.
And if you are expecting most of your independent customers to experience more of a similar decline on a year over year basis as your own retail business and I guess the difference there would that be made up from growth of larger customers or is there any assumption of new business wins there.
Yes, I mean, I would say, let's say, there's a bit of all of the above so I mean, I think that we do expected.
Our independence will probably move in the same direction that we have there may be some nuances as we look at folks that hey, maybe they've they've done a little bit better maybe there are some that are down a little bit worse.
Instead of taking that trend and playing it out during the course of the year.
I would say that to the to the.
The last part of the question about new business, Yes, there are certainly some new business wins there.
We always have a portion of our growth that we think will come from new business.
But at this point in the year as we've got some more firm.
The customers coming on the Horizon I think that is maybe a little bit bigger than it might be in some years <unk>. We're lapping some business that we took on in the back half of 2020 that'll be helpful. But one other thing that I'd call out Kelly as debt.
We've started to see.
In the fourth quarter and continuing into the the first few weeks of FY 'twenty one.
That we're starting to see some nice gains within the fill rate.
Some of the category of some of the products that have been out for extended periods of time.
We're starting to get more fill in those areas either either allocations of being reduced the products that you couldnt get are now being on allocation.
And so as a result, I mean, there is some fill to occur on the on the customer shelves, where they might have been covering or filling in or maybe not.
Stocking is deep.
Where we think there'll be some lift and some continued gains on that front as well.
And then I think to the last to the other part of your question. The I mean, I think some of the larger customers, we expect that there'll be some outsized growth there.
And so when you put all of that together I mean, that's what's giving us the.
The confidence around the guide that we've made and I would say on February well, it's been nice progress I mean, we're still not back to where we were say pre pandemic, but we think that we've got a trajectory of that'll get us there.
Later in the fiscal year.
Okay. That's helpful.
Couple of more questions just curious on co.
All of it kind of related costs, and where that ended for the year and what you are planning for in 2021.
Yes.
We stopped kind of guiding after the second quarter trying to call. It out because now it's just the cost of doing business in the operating.
So I mean, I would say based on what we talked about in the first quarter and said in the second quarter.
Probably somewhere between 15% and $20 million during the course of.
FY 'twenty, just because we were saying 6% to eight for the first each of the first two quarters.
So I think that's probably in the range of where we finished the year because we took some of the items in house that were paying for a lot of third party services and then some of the PPE that you were buying during the day.
During the spring phase one of the prices were astronomical the those prices have come back in and a lot of folks are opting.
For sort of permanent versus disposable personal protective equipment. So I think yes, I think with all of that said thats probably in the range of where we finished for the year, but we.
We've stopped tracking and calling it out on our end because it's just the cost of doing business now.
Yes.
Okay. That's that's helpful. And then in terms of the new DC that you referenced can you just talk about the capacity of that that will provide you and if theres any startup costs, we should be thinking about I guess in Q1.
Okay.
Yeah I mean.
The startup costs, we've incorporated into the guidance, so I'm not sure that the calling anything out or were calling anything else specific in that respect so it's in the numbers.
The capacity.
I think I.
Want to be a little careful there just by virtue of how that that's coming onboard because we've started shipping already in the ambien.
But there is another tenant that's leaving later in the calendar year.
That will give us the full control of the building and our capacity will go up significantly at that point, but.
Suffice to say its a few hundred million dollars.
Okay, and then one more if I can.
Just curious the the guidance so you gave the.
The full year kind of sales declines by channel. But then you also gave the the outlook for retail comps in Q1, but not the other segments and I was just curious what the thought process was there if theres anything you know relative to consensus that that made you kind of the call that out for retail in Q1 or just anything you are seeing just.
Just thought process there.
Yes, I mean, I think I think we generally try with retail to give folks a little bit of an idea on the cadence.
For the quarters as to what were so what we expect to see what we're seeing and obviously this year.
With it being particularly challenging we thought it would be helpful to have a starting point.
And then I think one of the folks asked before about the cadence of.
Of things I mean.
I think I'm comfortable with where Q1 is but quite honestly in two weeks, we're going to find out.
Well, we as the company forecasted from that standpoint.
But we wanted to try to at least set some of the direction, there and I don't know that.
It is easy to do on the on the other segments, where the retail side with how we've tracked it.
It's a little more straightforward, even if it's difficult with the distribution businesses, particularly with the military where they've got different levels of locked down I mean.
Going from threat level of Charlie the threat level of profit flow can make a pretty big impact on the sales for the remainder of the quarter and so retail we felt we could we could get a relatively good range. The other parts of the business, maybe a bit more difficult.
And it's kind of like an EPS right I mean.
You can look at the full year guidance and take it on a 52 week or 53 week basis, and say Hey, you know the the ranges have us down somewhere around 29% to 35%.
Trying to put of cadence there in the first quarter is the first quarter of less or more than that.
It's it's a bit challenging in that regard.
Okay.
That's helpful. Thank you.
Youre welcome.
Thank you.
The next question is from Scott <unk> from RFID for capital. Please go ahead.
Yeah, Hey, guys. Thanks for thanks for taking my questions.
So I actually wanted to go back to something that was talked about earlier.
For short term in nature of the and I'm going to get the strategy step. So I just want to make sure I understood. The inflation comments I think Mark you said about of 1% increase for 'twenty one.
Or maybe it was off of there maybe the decrease I didnt catch that.
I think also I wanted to understand.
The government through the CPG companies are reporting.
The <unk> inflation to come from.
I am correct and you guys are talking about deflation so I wanted to understand.
What you think the difference is.
Clean that especially even the Nielsen data would imply or the IRI data with plenty of some inflation going on.
Yeah.
Yes.
Look there's there's probably a couple of things of that so so yes, I mean truck for us.
We did sort of referenced that of a 1% number and I think thats, our our average for the year right. So I mean to the to the point.
<unk>.
<unk>.
It can it can be a variety of different things that come into it.
I think on our end.
We're seeing the deflation right there are some categories.
Net debt move significantly from quarter to quarter, you can see her right. So you can see.
As an example produce can shift by virtue of of growing season from being inflationary or deflationary and you can see.
Go back to years.
Well I think last year's second quarter, when all of the meat packaging plants were shut down and we saw huge inflation of the protein side.
Where I think we blended north of 6% for the second quarter of 2020, and so for us.
There is there is a bit of bid.
<unk> of some of the commodities that can move around from quarter to quarter and relative to what they are as a percentage of our sales that can move us versus what you might see in center store and some of the other packaging type products.
So I mean, I think there's that component.
Plus with our retail there's always a chance that as we're making different marketing strategies that can impact.
The impact of some degree, but again, that's going to be on the grocery and some of the other price points that we're setting it's not going to impact some of the perishable categories, but I mean look I can only give you the data and I can say that when we look at where we looked at where produce was both out of wholesale and on a retail perspective.
<unk> from the third quarter inch of the fourth quarter of more than 200 basis point move and bolt. It was its about 220 basis points in food distribution.
In retail it was almost 400 basis points.
Okay, that's great.
And when Youre referencing these numbers youre referencing year over year.
Or quarter to quarter.
Quarter to quarter. So so it is year over year, but from quarter to quarter right. So so produced in the third quarter of 2020 was a tick under 2% of it was 198% of inflationary, but in the fourth quarter. It was minus 2%.
Please go ahead from year over year.
Year over year, Okay, perfect. Okay, I, just wanted to make sure I.
Understood.
My next questions are really much more strategic in nature.
And just wanted to understand your guys' visibility.
For the B to B, Amazon and what they're doing I mean, do you guys have a line of sight to where they may be in 2022, 2020 threes for store count or do you not get that from them.
Yeah.
I appreciate the desire to have a greater understanding of one of our customers and certainly one of the bigger retailers out there, but it's not something we're really to the extent.
That I would even know I wouldn't be sharing.
I think look with all of our customers, we work closely with them to understand what they're doing and what their plans are and we're always <unk>.
Raphael for any additional information that they are willing to share that will help us plan in the near term out of the longer term so.
I'm not going to provide any specific customer details, but I would tell you that.
If customers are willing to share information to help us as where they've got plans to open new stores or other operating centers will always try to take that into consideration to help us better serve them.
So as a follow up to that question.
Yes.
Amazon were to open an additional 100 stores this year.
Would you guys have the capacity to deal with that type of thing or is that something that you really if the word happens it wouldn't have the capacity or are we kind of cause issues.
You know again, I mean, I think I've shared before when we talked about our distribution centers and supporting customers, whether it's new stores opening or new business that we win it's really a function of where thats based right I mean, we have of distribution.
In West, Virginia, and Thats, the only 40000 square feet, adding $100 million of volume to that DC would be difficult, whereas here in Grand Rapids, where we've got over 1 million square feet worth are almost a million square feet worth of distribution.
Could absorb a $100 million a lot easier so new business is always a function of where it's located.
And the type of business I mean doing it for a relative low number of skus versus the fall assortment of Skus also impacts.
How much volume can churn on it so I would say I mean, it's a non answer answer but its really a function of awareness the volume come and how how much SKU expansion is there and that dictates how easily we can assume it.
And Chicago share of debt of Grand Rapids, or no mark.
For the extent we of business in that area, yes, Okay alright.
Alright. So then my net my final question here.
Around the military business I mean, obviously.
It's been a little bit of a thorn in your guys' side, we've seen the margin has come down.
And some challenges of the revenues as well so so what are we doing with that business.
We talked about I know about a year or two ago about private label being kind of a potential.
Bullet in getting profitability up.
But strategically what are we going to do with that business as it kind of drag for the organization.
Well yeah.
Yeah, and you're correct. It is it has been I guess the store in the prior prior to me getting here in the even by recent time here just trying to really understand that and understand how we can make that business stronger first and foremost, we're very committed to actually making stronger out of a committed to figure out how to get that business in the situation where it is it's a profit going there for us the weed.
Do a great job of serving.
Our military.
Folks here and abroad.
There are are there there's a couple of things that we did it.
The focus on one is like.
Like other parts of our business the probably more acutely, though in military we have operational gaps we have we have the.
Our performance in terms of the way our efficiencies.
Do also provide some hampering to that to the overall profitability. So we're out of free at laser focus on that that's something we can't control of them we can.
Work on and fix.
And we will get after that.
There is.
If you compare to the very recent experience and I'd say, there's quite good news bad news in 2020, while 2020 also is not a particularly strong year for for our military business finished off a little better than it was performing in 'twenty and 2019 and that was the mid <unk>.
Not only the large number of base closures.
But also of the highly unpredictable when those closures of our.
Occurred how long they last in the.
The fact that our team dealt with that and.
It was stable, although low profit because of some cough.
It's going to improve the operation will take effect.
And finally, we're off of we're working with our supplier there with decades of find ways to improve way, we go to market and the types of things we offer in the market.
They can also help the business.
Everything everything from thinking about the type of the number of items.
Dray rates the.
The to the route to market all of those things are being discussed now.
Again, as we intend to make sure that business can be strong in the part of our long term part of our future.
For 2000 is there a path back to 1% margins are or is the impossible.
It is down to zero.
Fish.
Well I think the the.
There's people here better version of the short answer is there are there was a flurry of.
New competitors in the marketplace that debt went to.
With pretty aggressive pricing over the course of call it.
For the last seven or eight years.
And that debt.
The price competitive offers from that from some folks that have since exited is change the overall profit profile of that business for the short term.
And the question is is there a path of 1% I believe in the past back of 1%.
Alright, thanks, guys.
Thanks Scott.
Thank you.
The next question is from Matt Fishbein from Jefferies. Please go ahead.
Hey, good morning. Thanks for the question just two quick ones for me for.
First on the Martin's accruals within the sequential retail margin step down I was hoping you can help us.
Of course out how many basis points that represented.
And second if maybe you can elaborate a little bit more on the the operational investments planned for 'twenty one.
The priorities that you've outlined all makes sense, but wondering if you have any incremental color you can give on specific initiatives maybe.
Particularly around the <unk>.
Increasing operational efficiency, what additional employee safety projects need to be worked on next year, just trying to get a sense of is the software or is it more trucks is it optimizing warehouse space any any help you can give there would be great. Thank you.
Okay I'll answer the first one and I'll, let Tony share as much as he would like or not like.
On the question on the investments as it relates to some of the benefit of alignment I would tell you that the impact for retail specifically in that area was probably in the range of 45 to 50 basis points I'm not going to have an exact but it.
It was in that range.
Just just associated with some of that benefit of alignment.
Okay.
Okay, and then just the operational investments any additional color there Tony.
Yeah.
I can't remember I mentioned this earlier, but in the opening I think I mentioned, the the fact that it will be a across our operating units.
The warehouse transportation.
We're looking at higher than that not only of hiring some additional expertise for looking at hiring more people to we believe we have a span of control.
Opportunity with the size of our hourly workforces side of the size of our first clients supervisor of work for us that will be adding people in the debt to that mix.
And that could be in the neighborhood of 35 to 45 frontline Supervisors for example that we're looking to actually look for it a profile that has a new tool and the new capability to actually run those.
Warehouses.
And the way that to consider some of it some of the new tools that are available for.
For better efficiency.
We are doing a transportation management system process, there's a lot of the investment in debt. This year. There's there's not payback. This year that will come later on the that'll also be a pretty big part of the investment piece.
We're working with.
The third party.
The consultant that's actually I'll also helping of helping with our training of our team and helping us uncover some opportunities that will also put.
Again put people resources against.
Additionally for some of the long term items, we're making investments in safety and employee safety.
With the.
The personnel and process that as you know is a little bit longer.
In terms of really getting those day, we think there's big opportunity there and.
We want we of it is our intention to be the safest.
Organizationally in our industry and we're working hard towards that we think that there is money that comes kind of more of a one to two years out in that realm.
Awesome Super helpful. Thank you.
Thank you.
The next question is from Chuck Cerankosky from Northeast Northcoast Research. Please go ahead.
Thanks for the follow up.
Tony when we look at the food distribution segment this year.
Assume that we have some.
Alleviation of the Covid cost pressures that hit.
The put some margin pressure on the business will.
Be about equal to the additional costs, you're bringing on to <unk>.
The improve the segment.
Or is there some hope for a little bit of margin expansion.
In 2021.
I haven't actually done the side by side of it as Mark mentioned earlier, we've got we've got both of those are contemplated in the guidance. So we had them. Both incorporated there there are some elements of some onetime costs, we had associated with Covid.
There was early on that we disclosed and we have some on the ongoing costs that we took in la.
Later, I believe are going to be ongoing costs for the balance of the year. So some of it.
I don't see of stepping back on some of those practices so there'll be some.
There'll be some upside out of that don't know the.
Safety of one for one day of that but there is a.
Theres certainly some cost that will come out.
And as costs going as I mentioned I am reasonably confident to say that there's more costs going in these investments and the cost is coming out for COVID-19.
Yes, I would I would.
Agree with that statement.
So that would be that would mean there'd be some pressure on margins this year in the segment.
Yes.
Well I mean, I think the sum.
I think theres some opportunities Tony as well I mean, there are some things that we talked about some of the investments that we had to.
We werent able to fully realize in 2020 and there may be some benefits there so I don't want to.
Say that say that Thats, the case, Chuck, but I mean, because we don't give guidance by Bu.
There is there's a mix of investments as well as some returns for both for what we're doing this year versus what we're cycling last year.
And you know.
Without knowing without having any good sense of how COVID-19 sales.
Thank you very much.
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Okay.
Sure.