Q1 2021 SpartanNash Co Earnings Call

[music].

Good morning, and welcome to the Spartans cash company first quarter 'twenty 'twenty 1 earnings call.

Okay.

Participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Chris Mandeville, Managing director of Investor Relations.

Please go ahead.

Good morning, and welcome to the Spartan Nash Company first quarter 2021 earnings conference call on.

On the call today from the company are Tony <unk>, President and Chief Executive Officer.

Jason Monaco Executive Vice President and Chief Financial Officer.

By now everyone should have access to the earnings release, because issued yesterday at approximately 430 PM Eastern time.

For a copy of the earnings release, please visit Spartan National's website at Www Dot Spartan Nash Dot com forward slash in this call is being recorded an average.

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 will refer to Spartan assets earnings release from yesterday as well as the Companys most recent SEC filings.

For a discussion of factors that could cause the company's actual results to differ materially from these forward looking statements.

Please remember Spartan Nash undertakes no obligation to update or revise these forward looking statements.

The company will also make a number of references non-GAAP financial measures. The company believes these measures provide investors with 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 to the most comparable GAAP measures.

Now my pleasure to turn the call over to Tony.

Thank you, Chris and good morning, everyone Q1 was an exciting and transitional quarter for spar Nash our front line associates continuing to perform heroically in spite of the challenges associated with the COVID-19 pandemic and we are taking steps to recognize that performance.

Part of this we raised the starting pay rates for our new retail associates by over 10%. We are doing a similar compensation review with our supply chain associates. This summer.

These increases represent the first of many steps we are taking to build upon our people first culture and improve the retention I think about the challenges of the current labor market.

Also during the quarter, we welcomed several new key leaders throughout to tell you a little bit more about shortly.

Alright, turning to a couple of highlights on our financial performance as I mentioned this was a transitional quarter for Spartan Nash.

Our overall profitability is on track with our expectations at the start of the year, although the results across the business segments were somewhat mixed.

This is going to be a challenging quarter on the top line as we cycled last year's pandemic surge that our industry experienced in March and April of 2020, despite the significant headwind our retail segment performed particularly well compared comparable store sales were down 7%, but they're up significantly on a 2 year basis at 9.3.

We were happy to see this trend continue consistent with how we ended 2020. In addition, we delivered gross margin expansion of 90 basis points for the company for our total company.

Which included improvements in each of our business segments.

Our team continues to seek and win new business within the food distribution segment, which we continued our company is growth in both the short and long term.

The performance of our military segment is trailing a bit behind our expectations due to the challenges on the top line. Our team has been working through significant initiatives to grow margins and operate more efficiently.

In addition to these financial highlights we made progress on our 2021 key performance indicators, which I introduced on our last earnings call. As a reminder, these initiatives include investing in our associate experience through programs related to safety and retention improving distribution service levels, improving our private label.

<unk> presentation and.

Taking action to sustained improvements in gross margin levels.

Regarding associates day debate and retention this quarter, we achieved improvement in both reportable safety incident rates and associate turnover.

We placed a renewed emphasis on hiring onboarding and training of New Associates. In addition, we've implemented new safety measures to raise awareness of the best practices and identify potential safety issues.

These actions combined with investments in processes and people are driving results on these people first initiatives.

While on the topic of making investments in people I wanted to ask.

On the hiring.

Many other companies we have been incredibly challenged with hiring due to the labor shortage just as an example in Pitofsky, Michigan 1 of our Spartan Dash markets. There was a job fairs held in May with 60 employers looking to fill a 500 jobs.

Only 4 candidates showed up.

Well it is our intention to win this war for talent and start and Nash are continuously renewing our compensation and benefits offerings to help us attract new hires.

Despite these challenges we have still been fortunate to make several key additions to our leadership team this year, including 3 executive leaders fixed Vice President and 11 directors. These talented hires bring outstanding new capabilities as far Nash Youll hear from our new CFO adjacent Monaco, shortly but first I want to offer some back.

Brown on the other 2 new members of the executive team.

Dave <unk> has joined as our Chief supply chain Officer day brings 25 years of supply chain and distribution experience. He most recently served as senior Vice president of supply chain for CNS wholesale grocers, among the largest grocery distributors in the country.

There he was integral to many of the initiatives that drove both sales growth and operational efficiencies.

<unk> also recently joined as Chief strategy Officer, which is a new position for the company.

Our previously served as the head of global strategy and business development at Whirlpool Corporation, where he was responsible for acquisitions prior to Whirlpool multi art was executive director at UBS, focusing on strategy mergers and acquisitions technology and transformational change.

Dave <unk> and our new CFO, Jason will work closely with the rest of the leadership team to identify analyze and resolve business challenges, while capitalizing on new business development opportunities.

As a people first organization improving our business results begins with having the right talent.

These new team members together with our existing leadership are essential to building a high performance culture.

Collectively our strength in exact.

Hey, good team will work to improve our performance, particularly in our supply chain, while we have seen favorable trends in fill rates throughput and other key metrics. We have work to do to realize these improvements on the bottom line and to meet our longer term expectations, we've already begun certain initiatives to standardize processes.

Streamline operations and drive cost out of the system as noted in yesterday's press release, we will be making additional investments for the remainder of this year to deliver further improvements in this area of our operations.

Although our plan is currently in the blueprint phase we expect these results to be transformative key areas of focus in his initiative will include enhancements to our network strategy procurement transportation efficiencies and improvements in our warehouse operations.

Our team is energized to get started with this transformation and we expect to provide you with updates along the way.

Shifting to our goal on private brands, we have continued.

We did make progress our assortment and penetration our own brands help us to win in the marketplace by driving consumer loyalty and improving margins I am personally delighted with the work that our team has done to develop new products and packaging.

There is growing consumer excitement for our own brands and we look forward to expanding these offerings throughout our retail footprint and among our independent customers.

Finally, as I mentioned earlier, we're continuing to see improvements in our gross margin rates with contributions across this segment. We are eager to carry on this momentum even as we navigate inflation challenging labor markets and cycling pandemic trends in the balance of this year.

Next I want to introduce Jason Monaco, who joined US as CFO in March Jason brings valuable distribution expertise from his leadership positions at Borden dairy and Kimberly Clark Jason. We are pleased to have you on board and I will now turn it over to you to review, our first quarter performance and discuss our expectations for the remainder of the year.

Thanks, Tony it's a pleasure to be speaking with you all on my first Spartan Nash earnings call.

I'm honored to have joined the company.

We look forward to providing you with quarterly updates on our results and progress now, let's dive into first quarter results.

Net sales for the first quarter decreased 7% or 199 million to $2.66 billion versus 2000, Twenty's first quarter sales of $2.86 billion.

While we saw unfavorable results lapping prior year sales searches caused by COVID-19, we're pleased with how well our retail sales have trended as Tony mentioned earlier.

Our GAAP EPS came in at 54 per diluted share in the quarter compared to <unk> 43 per share in the first quarter of 2020.

Adjusted EPS for the quarter was 56 per diluted share compared to adjusted EPS of <unk> 67 per diluted share in the prior year quarter.

While we made margin improvements in each of our segments. The decrease in our profitability from the prior year quarter on an adjusted basis was driven by lower sales volumes associated with lapping last year's pandemic related stock ups as well as an increase in supply chain expenses.

Turning to our segments net sales in food distribution decreased by $35 million or 2.6% to <unk> 3.3 billion in the first quarter.

In addition to the year over year impact of lapping. The pandemic sales were also lower due to the exit of our fresh production business, which operated for a portion of last year's first quarter.

The decrease in sales was partly offset by continued growth with certain existing food distribution customers and our growth pipeline of new business.

Inflation remains relatively steady for food distribution in the first quarter, but we have received notification of price increases from a number of our suppliers and anticipate further increases for the balance of the year.

As you know inflation generally has a positive impact on our distribution businesses, where we pass through price increases to our customers in both food distribution and military.

However, we will work closely with our vendors to minimize the impact of these price increases on our customers.

Reported operating hitting earnings for food distribution in the first quarter totaled $21.1 million compared.

Compared to $11.4 million from the prior year quarter the.

The increase in reported operating earnings for the segment was due to lower asset impairment and restructuring charges.

Adjusted operating income totaled $21.5 billion in the quarter versus the prior year's first quarter adjusted operating income of $26.3 million.

On an adjusted basis. The decline is due to increased supply chain expenses and lower volume, partially offset by the increase in margin rates.

Retail net sales came in at $739 million for the quarter compared to $783 million in the first quarter of 2020, a decrease of 5.5% or $43 million.

Our comparable store sales were down 7% for the first quarter due to the favorable effects of the pandemic in the prior year.

2 year comparable sales were positive 9.3% as the consumer shift towards food at home persists and our execution at retail continues to perform.

First quarter reported operating earnings in the retail segment came in at $14.2 million compared to $12.6 million in 2000, Twenty's first quarter.

Retail adjusted operating earnings were $14.4 million for the quarter compared to $15.3 in 2000 Twenty's first quarter.

While we saw an improvement in margin rates are slight decline in profitability on an adjusted basis was driven primarily by the decrease in sales volume as well as the resulting decrease in store labor productivity.

Military net sales were $500.584 million in the first quarter and a decrease by $120 million compared to prior year revenues of $704 million.

This was primarily due to cycling favorable sales attributable to increased consumer demand related to COVID-19 in the prior year quarter, followed by the ongoing impact of restrictions for domestic base access and commentary shopping which took effect after the first quarter of last year.

Lower foot traffic stemming from these restrictions continues to drive significant declines in domestic commentary sales and our military segment demand.

Military reported an operating loss of $5.1 million in the first quarter compared to a reported loss of $2 million in 2000, Twenty's first quarter. Adjusted operating loss was also $5.1 million.

Compared to a loss of $1.4 million in the prior year.

Although the segment saw improvements in margin rates. The overall decline in profitability was due to higher supply chain expenses and the decrease in sales volume.

Interest expense declined $3 million from the prior year quarter due to the Companys paydown.

Long term debt, resulting from strong free cash flow during 2020 as well as the rate cuts implemented by the federal reserve over that period.

For the quarter, we used $32 million of cash in operating activities compared to 129 million, we generated in the prior year quarter.

The decrease in cash from operating activities compared to the prior year relates primarily to changes in working capital and operating assets and liabilities during.

During the quarter, we built inventory balances in an effort to recover from the depressed inventory levels experienced during 2020 as well as to take advantage of selected favorable pricing opportunities.

In addition, our current quarter payout of 2020 incentive compensation resulted in a significant outflow.

As business activity begins to recover from the effects of the pandemic. We expect operating cash flows will normalize over the remainder of 2021.

During the quarter the company declared $7.2 million in cash dividends equal to <unk> 20 per common share.

The company did not execute any stock repurchases in the quarter.

Our first quarter adjusted EBITDA was $64.8 million compared to <unk>.

The $74 million in the prior year.

Combined with an increase in our net long term debt balance our leverage ratio increased to 2.2 times compared to 2 times as of the end of fiscal 2020.

As we continue to cycle the effects of the pandemic fuel 2020 earnings we anticipate full year leverage will continue to be comparably higher to what we observed at the end of 2020, but will remain below 2.5 times.

Moving to the outlook for the remainder of the year.

We are reaffirming our full year 2021 guidance.

However, we expect a shift in the segment performance from a sales perspective.

While total sales are expected to remain between 8.8 and $9 billion.

We now expect that retail comparable sales will be down from 5% to 7% to the prior year, an increase of 1% from our initial expectations.

Military sales are now expected to decline between 6% and 10% from the prior year a further decline from initial expectations.

We continue to expect that food distribution sales will be down 1% to 3% from last year.

These updates reflect both the trends observed in the quarter as well as our updated expectations for the remainder of the year.

Our guidance does not yet contemplate the impact of investments and earnings gains related to the supply chain improvement initiative referenced in the press release. However, we do not expect it to impact a range of profitability that we guided previously.

We will continue to update you regularly on this exciting initiative as it progresses throughout 2021, and now I'd like to turn the call back over to Tony. Thank you. Jason in closing we are pleased with our performance and the contributions of our team while continuing to deliver results during the pandemic we are.

Focused on expanding our customer growth within food distribution retail.

Retail the retail momentum, we acquired during the pandemic and making investments in people and processes that will position us for improvements in our operations.

We remain committed to our key initiatives and are excited for the contributions from our recently appointed leaders with that I'd like to turn the call back over to the operator and open it up for your questions. Thank you. We will now begin the question and answer session to ask a question you May Press Star then 1.

You touched on phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.

Our first question comes from Greg <unk>.

Canyon from Wolfe research.

Research. Please go ahead.

Good morning, Mr. Spencer Hanus on for Greg.

Can you guys talk about what comps are running quarter to date in the retail business.

And then margins were significantly better than we were expecting how sustainable do you think that the <unk> performance will be in the back half.

The comps expenses. Thanks for the question. This is this is Jason Monaco again pleasure to be here with you. This morning.

When we take a look at retail comps, we continue to run kind of early into the second quarter similar to what we saw throughout the first quarter. Obviously there was there was a split in the first quarter kind of pre and post COVID-19. When you look at year over year splits, but stepping back and looking at the 2 year comps, we continue to run run strong high.

Single digits.

In the second quarter.

If you look at the margins. The second part of your question a lot of that a lot of that margin expansion came really extraordinary performance in our retail segment.

Some of the contributors that included the fact that we were better on revenue as Jason mentioned, we were we also experienced really good flow through from that revenue and good leverage from it.

Sold into a mix that was more favorable a little bit more fresh.

More of our own brands, which have again change the mix in a favorable way in terms of profitability and inner strength was lower and our strength is lower and driven at least in part by the better flow through so some of those some of those elements will soften perhaps as we as we forecast that the habits will return back to people buying a little bit more.

Other food needs from restaurants as opposed to groceries. It would go through the balance of the year. So we'll see I think we'll see some softening of that.

We're really happy with the way we performed in the first quarter versus your expectations.

Got it.

And then can you quantify where inflation was running in the first quarter and how rational have your competitors been with passing through through that inflation that you've seen thus far anytime day or holding back passing through inflation to improve their price gaps at all.

Yes Spencer. This is this is Jason again.

If you look back.

Inflation has been pretty modest in the first quarter I know, there's been a lot of discussion kind of in the public press and also and Thats kind of a forward looking space within the first quarter, we had relatively modest inflationary factors.

Stepping back and looking at at the competitive environment, what we've seen has been relatively.

Relatively stable competitive environment, the consumer is on and our view is on pretty solid footing.

And that said.

We still expect.

Uptick in inflation going forward as some of the price increases from our vendor community start to pass through.

The next question comes from Chuck Cerankosky from Northcoast Research. Please go ahead.

You May you mentioned safety quite a bit in <unk>.

As a focus, especially with new employees as they had been a problem.

In recent years has it impacted productivity at all.

Specifically your accident rate and the distribution centers.

Great question.

A number of facets to it so let me cover a couple of here so 1.

I firmly believe that you can never ever be too good and safety. So 1 of my mantras in any organization is that we're going to be the safest place to work and we're going to work hard towards that objective and so.

So that I think is a great way to unify the organization to great way to communicate your people first initiatives is that you are most concerned about their safety and their personal well being.

So we have we also experienced.

No.

Pretty.

Pretty high turnover here in the in the sort of the period really for for the pandemic really during the pandemic.

A lot of churn a lot of new people and new people are uniquely exposed to making mistakes and potentially getting heard so we wanted to actually focus on that where we're bringing a lot of new people into the organization. So I would suggest that it probably we certainly we have some efficiency loss, but not so much due to safety that was it just due to the turnover.

And those things work together, a little bit but.

As we look at this.

The difficulty in bringing new people in the organization and.

The burden of training a lot of new people, you're going to have some efficiency loss associated with that and Thats why we talked about in that first kpis in the spirit of people first we wanted to make sure that we focus on safety and on retention, we believe that the key to unlocking a lot of great performance for the company and.

It's been a very strong part of our focus share this first quarter of the year.

Tony is a follow on to that.

Actions, Ken Spartans management team take to reduce the turnover and is increasingly wages simply a big part of that.

Yes. It is.

It's a big part of it it's not the only part of it but it is 1 we have to recognize out there too.

The game has been changed now as our economy really not just as an industry and as a country is sort of has lightened capability to really.

Moving grow and we find a lot of businesses are struggling to get the people they need to grow their business and the and so it's been it has been a challenge getting great people and and so theres going to be a national Nashville.

Total offering if you will that we have to consider so for example, we have to consider pay increases I mentioned in the call a minute ago that for our frontline our entry level wages at retail we had.

Executed recently greater than 10%.

Kris in those in those starting wages.

We're looking at that price for our warehouses right now usually do that work from the late summer.

And so the total wages will play in that we think benefits place as people look at.

What are the other benefits that they need in terms of their work experience. We think the work conditions play and so we need to work on having predictable schedules and a great work environment. All those things work together to be what I call kind of a top quartile employer and dementia.

As I mentioned, we fully intend to win this win this war for talent and we're going to look at all those things together.

Thank you very much.

The next question comes from Peters <unk>.

From <unk>. Please go ahead.

Yes.

Great. Thanks.

Jason I wanted to ask on just.

Overall.

Our capital structure.

Any sort of changes you're anticipating over the coming years that you've been in the seat for a very short period of time, but.

Anything we should be expecting on the capital structure changes to the dividend or the way you guys are thinking about capital structure.

Good morning, Peter Thanks for the question.

At this stage I don't anticipate any significant changes to the broader capital structure, we continue to focus on investments, which improve the efficiency and productivity of our supply chain and our operations and prevent prevent present opportunities for incremental growth and performance in a retail environment.

We'll continue to evaluate those alternatives and do so within our current capital structure design and strategies.

Great and then can you guys give us.

Update on the partnership with Amazon is it meeting your expectations any sort of changes there.

New leadership.

In place at this point.

Yes. So we as you know, we're just into a new a new contract with Amazon and we have we think we're developing a really great partnership with Amazon.

A lot of change for us over.

Over the last several years, we've picked up additional business with this new agreement.

As you May have seen we also opened up a distribution center in Maryland that will be focused on Amazon business in the northeast and so we've got a lot going on with Amazon right now.

And I think we're still early in this new agreement and learning about.

2 how to grow into that and again, it's an exciting part of our future. So the new leadership team is obviously also very excited about their role in driving that business.

Alright, Thank you very much.

The next question comes from Scott <unk> from <unk> capital. Please go ahead.

Hey, guys. Thanks for taking my questions. So my first 1 is regarding inflation in the distribution business I mean, historically, that's been very good for distribution.

And as you see a lot of it coming through the pipeline forward buying in that type of thing. So why shouldnt, we think as the year goes on that the distribution business could really start putting up some solid results, even with the volume maybe coming in a little bit.

Yes, I think it is Tony Scott.

Net on.

We have we.

We have a history of being very effective in passing through inflation and of course, it has positive leverage effects on the overall business. So so.

While we are still learning about that with those inflationary.

Measures would be they are they are.

Not insignificant and we believe will be a net positive for the business.

Yes, adding to Tony's commentary there.

1 of the things I highlighted and you've probably seen this in the broader marketplaces, many cpg's are announced.

Proposed increases some of those have exceeded 5% increases which would be well ahead of the food CPI, which as many of you know has been running at kind of 1 ish percent over the last 12 months.

As a consequence, our outlook reflects an inflation factor of kind of 2% to 3%, which we believe is taking a conservative approach and also reflects our historical ability to pass through that pricing on onto our customers through our distribution model.

That said, we will continue to look to capitalize on opportunities for from.

For margin enhancement through that change.

The military business I mean, obviously continues to be a real real struggle.

What can you do with that business and I think you've been putting some of the distribution together is there. Some deleveraging if you were to exit or true.

Now to figure out how to get out.

Well first and foremost our primary focus is to make that business strong and we've taken some some I think really.

Encouraging steps in the late in the first quarter you Wouldnt see them in these current results but.

What youll see in the balance of the year as some improvements in efficiency that will make that business more profitable.

And so that is our that's our first play is to is to look to how do we make that a profitable and a sustainably profitable business there has been.

We've had we've had sort of a.

Rough go of it as you've mentioned.

In the last few years.

I'm optimistic with some of the measures. The team has taken here very recently that that we're going to have we're going to have a good outcome. This year and the turnaround in the military business.

Perfect and then actually I'll yield I have a couple more questions, but I'll yield maybe take those offline. Thanks guys great. Thanks Scott.

Our next question comes from Matt Fishbein from Jefferies. Please go ahead.

Hey, good morning, Thanks for taking the questions and welcome aboard Jason.

Just wanted to ask about the food away from home.

Channels reopening and how that impacts.

Retail business going forward, what are some of the initiatives you retail unit and perhaps even the food distribution category managers are working on kind of offset some of that reversal and keep some of the gain share that you've seen over the past year, maybe in terms of planted gram changes or renovation upcoming.

Great.

So I think.

We have anticipated as we've talked to previously that as the as the company the country Reopens and people go back to restaurants and other elements of their previous habits that.

And that will have a dampening of the of the growth that we saw in 2020.

So for starters, we're really pleased with the way things worked for us in the first quarter.

Would conclude that many of those.

Habits, where stickier than we may have thought.

Jason mentioned, a moment ago, we beat our retail Corp, retail number by about 1%.

And we think that we think that in the midst of the timeframe when when restaurants argument reopening.

We're seeing a little bit about a little bit more.

A little bit.

Slower return I guess in a way to those those habits.

We have in the timeframe that we were in the midst of the pandemic, we worked pretty hard on improving our offering in our store as well and we've worked hard on our own brand penetration, we improved our assortment of our own brands and got really nice lift there.

I mentioned, a moment ago, we were we experienced better margins with those products and overseas still seen good uptick on that we're seeing.

People are still are buying more online.

Our E Commerce business is still doing very well.

Let's continue to do well and continue to grow even in this period of time when when the.

And then make it is waning so to speak so so some of the things we did to strengthen our business in the in the midst of that pandemic or actually we believe it will stick and amongst them as I mentioned the owned brands.

Our improved offering in our in the fresh part of our business and some other elements like E. Commerce I think all those things will work together to help keep some of those habits as I mentioned, a little stickier than we might have forecasted.

Alright, thanks very much.

The next question comes from Damian <unk> from Deutsche Bank. Please go ahead.

Good morning.

I was wondering if you could provide a little bit more color around the supply chain improvement initiatives.

Starting to put in place in <unk>.

Where is your areas of focus.

Cadence around investment versus when you're going to start seeing benefit. So just just around that would be helpful. Thanks.

You bet, it's Tony again.

<unk>, we're just on the brink of making some of those investments they are primarily around process.

There will be some investments and upgrades, but a lot of the emphasis is going to be on strengthening our process and the way. We go about that work as we mentioned earlier it will cover transfer.

Transportation will cover the way, we think about our network and recover the way we think about inventory in.

We're creating a sales and operations planning process.

The thing that I should say and we're looking hard at the way, we manage our warehouses warehousing overall in thinking about how we make our warehouse labor more efficient and more effective in that space. So.

Just getting on that it is a it is not something that we've got.

Push the button and it's done in a week or a month or even several months. We think this is going to be a.

A multi year endeavor.

But it's absolutely critical to what we do into having a strong business as being both efficient and effective in our overall supply chain.

Yes, adding to Tony's comments and Dana and thank you for the question.

I guess, maybe to put a finer point on when the benefits should begin to accrue and they give you some color as you think about the outlook.

We would expect that the benefits will commence in late 2021.

That said I expect those benefits will be more than offset by some of the initial investments in this project.

As Tony alluded to and as I highlighted in the in the outlook section of my comments earlier this morning.

Kind of thinking about the savings impact and where the where the savings goes from the network strategy work the transportation efficiency the warehouse operations work in procurement.

I would expect that longer term.

Would generate somewhere between 25, and 50 basis points of improvement in our supply chain expense rate on our distribution businesses.

We're confident in that we're excited about the the transformation that we're about to kick off here.

Only for the cost savings and efficiency benefits, but becoming a more effective operator and better service to our customers.

Thank you. The next question comes from Kelly Bania from BMO capital markets.

Please go ahead.

Hi, Good morning, Kelly Bania here from BMO, Thanks for taking our question.

I'm curious if you can elaborate.

More on the pay raise at retail.

And what is the dollar impact of that on an annual basis when does it take effect.

Or do you think that puts you relative to competition.

I believe you mentioned.

Thinking about some on the distribution side.

Just curious if you could help.

Frame these investments and wages for us.

That was already part of your guidance or is that part of your guidance.

Today.

Yes. So this is Tony.

The cost of that those increases are are contemplated fully in our in our guidance. So there is there'll be no change because of those.

Investments the total cost for retail in the neighborhood of $7 million and about 5 of that will be realized this year.

And we have we're still doing the work on supply chain I don't have I don't have a number for you there.

We normally do our our re look at our wages in the summertime and so we're knee deep into that exercise right now.

And I think I think we're at a point in time now in this current phase of our of our <unk>.

Economists and the labor market, where we have to be very serious about.

The way, we think about wages, maybe think about people getting talented.

Multiple levels into the organization.

So this will be a.

It really core part of our people first offering is how we think about it and make those offers for wages and benefits.

Okay. That's helpful and then going back to the comment on the savings from the supply chain initiatives.

25 to 50 basis points would that be.

Across the wholesale and military businesses or just just wholesale and <unk>.

And can you help us think about the cost for implementing these initiatives.

Those are the costs and the benefits are outside the guidance at this point.

Is there an expectation that those will be adjusted out are they 1 time ish or.

The magnitude is still not yet determined just help us understand how you're thinking about that.

Sure. Thanks, Kelly this is Jason again, I'll kind of take these on kind of 1 by 1 to make sure we answer all the questions here.

I guess first and foremost the 25 to 50 basis points is both on the food distribution and military business. So you should think about.

Touching both pieces of the business.

And this is this program is also reflective of the change in management practice that we've had with the addition of Dave Pet co to the team.

And Dave's responsibilities span all of our supply chain responsibilities across the warehousing businesses and as a result, we'll be focusing on on both of those businesses there.

With respect to the.

The expense load and the impact to outlook.

I would expect that it will be the net impact in 2021 will be modestly dilutive. However.

I don't expect that the impact will change the range of profitability that we got it I got it earlier this morning.

No.

Within that range and it would be modestly dilutive. However, we're pretty early in the blueprinting process and a few things may move around with respect to the timing and sequencing of the programs within this within this initiative, but net net we fully expect to be within the range of profitability that we guided today.

Okay.

That is helpful.

Just another 1 on the inventory so I think you mentioned.

Maybe building some of the inventory given the inflation and the benefit that you can see there.

So just curious are you still building inventory ahead of some of the <unk>.

Price increases that you are hearing from your vendors.

And is the benefit of what you anticipate from that already built into your guidance at this point.

Yes, if you think about the forward looking inventory profile I would expect that we will see.

It will be likely a little bit lumpy in.

And that will be targeting specific opportunities to create incremental margin through the through the.

Through the distribution process.

That said at the same time.

1 of the pieces of work, we'll be doing with respect to the supply chain improvement initiative is is tightening our belts with respect to the inventory required for the ongoing operations of the business and pressure testing that so I expect we'll be pulling inventory out in some places and reinvesting in others, but it may be a little lumpy as.

As we go through this price increase cycle.

Okay, and then just 1 last 1 from me.

If you don't mind, so in terms of the gross margin so that was quite strong for the quarter.

And I believe that sounded like it was mostly driven by the retail business, but that all channels. It sounded like it did contribute to that so just curious if you could explain how at military in particular, the gross margin is increasing and also at distribution, what's driving the increase in gross margin.

Yes, Kelly and happy to answer the question. So yes margins are expanding.

Lending in all 3 gross margins are expanding in all 3 business units.

We've talked a little bit about the retail piece from speaking to.

Military and food distribution.

We've been taking actions to enhance our margin per our margins by targeting specific sub segments and growth areas, which at which allow us to expand and widen our margin profile in those spaces. We've also taken initiatives in our businesses too.

To create pricing opportunities, where we can and and.

And capitalizing on those opportunities I would expect going forward that will continue to target those while balancing it with growth needs of the business.

Thank you.

Again, if you have a question. Please press Star then 1.

The next question is a follow up from Chuck Cerankosky from Northcoast Research. Please go ahead.

Thanks, guys.

Like to return to the comments you made about the stickiness of food at home dining.

You compare your retail stores in Michigan.

It seems the restrictions on.

The COVID-19 restrictions lasted a little longer.

To say your stores in greater Omaha can you draw any conclusions from that where there are great differences.

In the food away versus food at home trends.

Yes sure this is Tony.

And you take probably the 2 best endpoints in our business. So we had really strong performance in Michigan.

In the first quarter.

And not quite as strong in Omaha and the.

The rest of our geography, though candidate was more mixed than that there wasn't there wasn't as clear of a correlation across the rest of the support Nash between.

Between constrictions in.

And in restaurant service or other elements of the pandemic and the sales in our stores, but but clearly we performed better mission for better than northern part of Michigan. In particular, we have where we serve a lot of smaller communities.

Is that was that was where our business was strongest.

Thank you.

There are no more questions in queue.

<unk>.

This concludes our question and answer session I would like to turn the conference back over to Tony <unk> for any closing remarks.

Alright, well I just want to thank everybody for their participation today and I. Appreciate all the fine question. They've got we look forward to speaking with you again, when we reported second quarter results and and we're looking forward to a great quarter. So Martin wishing you all a great day with that thank you.

The conference has now concluded thank you for attending today's presentation.

You may now disconnect.

Okay.

[music].

Yeah.

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Sure.