Q2 2021 SpartanNash Co Earnings Call
[music].
Good day and welcome to the Spartan Nash Company second quarter 2021 earnings call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone Swift draw. Your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Chris Mandeville with ICR. Please go ahead Sir.
Good morning, and welcome to the Spartan Nash Company second quarter 2021 earnings Conference call.
On the call today from the company are President and Chief Executive Officer, Tony <unk>.
Executive Vice President and Chief Financial Officer, Jason moniker.
By now everyone should have access to the earnings release, which was issued yesterday at approximately 430 P M Eastern time.
For a copy of the earnings release, please visit Spartan National's website at Www Dot Spartan Nash dotcom forward slash investors.
This call is being recorded and a replay will be made 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 Spartan Nash as the earnings release from yesterday as well as the company's most recent SEC filings you will see 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 to 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.
And it is now my pleasure to turn the call over to Tony Tony.
Thank you, Chris and good morning, everyone.
Q2 was a strong showing for spark Nash with both our top and bottom lines exceeding expectations like the rest of the industry. We have been challenged by the historic labor shortages strains on global supply chain and rising prices.
However, I cannot be more proud of how the team overcame these obstacles in our second quarter I am encouraged by our momentum heading into the second half of the year, which is reflected in our decision to improve our full year guidance.
Jason will provide details on our updated outlook, but first I wanted to cover a few highlights from the quarter.
I'll begin with food distribution, our warehouse labor and transportation costs remained unfavorable had worsened in recent months. Nonetheless, our supply chain team proved resourceful and agile taking swift actions to manage inventory and profitability the team strategically reduced inventory by over $60 million during the quarter. This inventory.
A reduction allows the distribution centers operating more efficiently and provides a solid foundation for the supply chain transformation initiative to begin I'll share more on this initiative shortly.
In the retail segment, our topline trends are proving quite resilient as we cycled last year's Covid lift.
Sales remained higher relative to 2019 levels on a two year basis, our comps have improved from nine 3% to 12, 1%.
The demand for food at home has persisted.
<unk> benefited from an overall increase in traffic compared to the prior quarter.
Regarding digital sales, we've seen over 100% growth since 2019 and to continue the expansion of our digital channel. We recently opened our first micro fulfillment center.
Lastly in our military segment, we continue to realize top line headwinds.
Domestic traffic across the Deca channel is down as shoppers is not yet fully returned to basis after leaving to shop elsewhere during the pandemic.
While these trends have caused the segment to trail expectations. Our team has been working proactively to leverage positive trends within exports.
Team is also executing gross margin initiatives, which have already produced favorable results.
With regard to our 2021 key performance indicators, we are making progress on many fronts. Our private label efforts are ahead of our expectations year to date, and we continue to build momentum through the year, notably we continue to make improvements within our assortment pricing and marketing specifically, we've taken steps to redesign our labels and launched new items.
And the fresh category.
We are also getting our private label products in more homes to the expansion of our locations that offer fast lane and ready to eat at home delivery.
We continue to see favorability within our gross margin profile and we're focused on our broader gross margin efforts across the company.
We're seeing exceptional cost increases some of which must be passed onto consumers. Meanwhile, our procurement team is actively negotiating the best possible terms with our suppliers overall, we are satisfied with the results even as we navigate uncertainties related to inflation and cycling pandemic trends.
Regarding our human capital indicators, we saw continued strong performance in safety, resulting in reduced incident rates due to our intense focus on safety awareness, our newly energized safety team is implementing a myriad of process improvements to strengthen our performance everything from the introduction of a universal stretching routines to prevent injury and for me.
Our wellness to.
So incorporating new safety discussions before all meetings. These small active safety helped to support our people first strategy. The safety team is also playing a critical role to implementing appropriate mitigating measures in response to a recent COVID-19 surge.
We are still quite challenged with the associate hiring and retention due to this highly competitive labor market.
To put the challenge of this unique labor market into perspective companywide. We currently have over 4000 open positions as you might imagine we have taken a number of proactive measures to help us maintain a pipeline of top talent to accelerate hiring we recently raised the starting wage for numerous positions, which has helped attract more candidates we have.
Also shorten the length of time required in position for associates to become eligible for benefits.
On the retention side, we are heavily focused on associate recognition and we're excited to launch a number of new associate recognition programs for the frontline and for our leaders.
We're also investing in more diversity equity and inclusion programming as well as training and development for associates.
We are expanding our total rewards with additional discount days in our retail stores tuition reimbursement wellness benefits and more.
As I said in our Q1 earnings call. We are facing a war for talent and we are taking significant steps to win this war through our people first culture.
On to our final Kpis, improving distribution service levels. This ties directly to our supply chain transformation initiative that we announced last quarter.
Today I'll provide more detail on this initiative, which will address the short term challenges in the supply chain.
It will also allow us to capitalize on the growth of our network in the long term.
Based on the Blueprinting phase and recently completed we have organized this initiative into the following work streams warehouse operations.
Sales and operations planning inventory optimization network strategy and procurement.
Starting with warehouse operations, we're incorporating best practices across the network through process standardization and guidance for issue resolution.
The combination of these warehouse initiatives will ultimately lead to greater operational efficiency and enhanced control of labor costs.
As our sales and operations planning, we are implementing a more robust process that fully integrates all functions of the organization. This is the best way to ensure supply chain execution and excellence across the network improvements to sales and operations planning will help us capture changes to the business environment and bring those insights.
Our supply chain operators. This provides our teams with the lead time necessary to make adjustments to inventory labor and transportation capacity that match the current demand.
This process will improve our ability to respond more quickly to broader business issues in real time and best serve our customers' needs.
Regarding the inventory optimization work stream, we will focus on a couple of key areas.
We will leverage data and analytics to better manage inventory across the entire network. This will improve efficiency in our distribution centers and reduced excess inventory.
We will also evaluate capacity by warehouse and temperature class to allow data driven buying decisions in short. These actions will help us ensure that we have the right products and the right location at the right time.
To summarize where this project will take us from a financial perspective.
The supply chain transformation initiative is expected to provide 15% to 30 basis points of supply chain benefits on a run rate basis. We are eager to continue to make progress on our supply chain transformation and we will have more updates along the way.
Lastly, I've been with Spartan Nash now for almost a year and plan to update the broader community on enhancements, we've made to our strategy along with the leadership team I am pleased to announce that we will be holding a investor day. This December.
Look out for more information in the coming months I'm excited to share our refresh strategy as well as comprehensive updates on the status of our supply chain transformation.
I'll now turn the call over to Jason to walk through the financial performance in greater detail and provide you with an update on our full year outlook Jason.
Thanks, Tony and welcome to everyone joining us on today's call, let's jump into the detailed results.
Net sales for the second quarter decreased by three 6% or $77.5 million to $2.1 billion.
Versus 2000, Twenty's second quarter sales of $2.1.8 billion.
We are especially pleased with how well our retail sales trended in the current year compared to the prior year sales, which included surges caused by COVID-19.
Additionally, we've continued to see growth with certain existing food distribution customers, which partially offsets the decline from prior year.
Our GAAP EPS came in at <unk> 47 per diluted share in the quarter compared to <unk> 80 per share in the second quarter of 2020.
On an adjusted basis EPS for the quarter was 54 compared to EPS of <unk> 73 last year.
The decrease in profitability from the prior year was driven by the lower sales volume as I mentioned earlier.
These declines were partially offset by an improvement in the gross profit rate, where we saw an increase of <unk> to 15, 8% compared to 15, 5% in the prior year quarter.
Gross profit rate growth was driven by improvements within the food distribution and military segments as well as a change in our overall mix to more margin accretive retail and food distribution segment sales.
Lastly, our rate of supply chain expenses increased in the current quarter compared to the prior year quarter due primarily to tight labor conditions.
And incremental costs associated with health care as associates returned to pre Covid medical usage levels.
Turning to our segments.
Net sales in food distribution decreased by $33.3 million or three 1% to $1.6 billion in the second quarter driven by last year's pandemic searches.
The decrease in sales was partially offset by continued growth with certain existing food distribution customers.
Inflation was relatively steady sequentially, but we did see significant movements between categories within the quarter.
Further we also saw an upward trend as the quarter progressed and early into the third quarter at some of the price increases from suppliers have taken effect.
We still anticipate further increases for the balance of the year. However, as we previously noted we anticipate that these increases will be passed through to our customers.
Reported operating earnings for food distribution in the second quarter totaled $16.7 million compared.
Compared to $14.4 million in the prior year quarter.
The increase in reported operating earnings for the segment was due to favorable margin rates and lower asset impairment and restructuring charges.
These increases were partially offset by a higher rate of supply chain expenses and the impact of lower sales volumes.
Adjusted operating earnings totaled $17.4 million in the quarter versus the prior year second quarter adjusted operating earnings of $17.9 million.
Adjusted operating earnings excludes the asset impairment charges and other items detailed in table three of yesterday's release.
Retail net sales came in at $620 million for the quarter compared to $631.3 million in the second quarter of 2020, a decline of one 8%.
Our comparable store sales were down two 7% for the second quarter due to the favorable effects of the pandemic in the prior year. However.
Two year comparable sales were up 12, 1% an increase of 280 basis points sequentially from the first quarter as the consumer shifts towards food at home persists and our consistent focus on retail execution delivers.
Second quarter reported operating earnings in the retail segment came in at $12.7 million <unk>.
Compared to $24.5 million in 2022nd quarter in.
In addition to the sales volume impact I mentioned this decrease was primarily driven by a reduction in fuel margin rates higher asset impairment and restructuring charges and higher health care expenses.
Retail adjusted operating earnings were $15.4 million for the quarter compared to $24.7 million in 2022nd quarter again, adjusted operating earnings exclude asset impairment and restructuring charges.
Military net sales of $430 million in the second quarter decreased by about $33 million compared to prior year revenues of $463 million.
This was primarily due to the continuation of lower volumes at domestic commentaries following base access restrictions implemented in the prior year.
Reduced foot traffic continues to drive significant declines in domestic commissary sales.
Overall transaction count on a year to date basis is down over 12% from the prior year at domestic commissaries.
Second quarter reported and adjusted operating losses in the military segment came in at $3.5 million in the second quarter compared to $4.9 million in 2022nd quarter, reflecting continued improvement in spite of the significant decline in volumes.
In the first half of fiscal 2021, the company generated $73.6 million of cash from operating activities compared to $198.2 million over the same period in fiscal 2020.
Looking at the second quarter alone, we generated over $105 million of cash from operations this year compared to $69 million last year.
The increase in cash from operations during the quarter relates primarily to substantial reductions in inventory that had been strategically targeted in the second quarter.
The strong cash flow performance enabled us to pay down $75.8 million of long term debt during the second quarter.
The continued pay down of debt balances also resulted in favorable interest expense compared to last year's second quarter.
During the quarter the company declared $7.1 million in cash dividends equal to <unk> 20 per common share we also.
<unk> repurchased 265000 shares during the quarter at an average price of about $20 per share.
Our second quarter, adjusted EBITDA was $54.4 million compared to $59.2 million in the prior year quarter.
Combined with the reduction in our long term debt balance our leverage ratio decreased to one nine times compared to two times at the end of fiscal 2020.
As covered in yesterday afternoon's press release, we are raising the low end of our 2021 profitability guidance range as we continue our momentum into the second half.
Earnings per share is now expected to range from $1.56 to $1.69 per diluted share on a reported basis, while adjusted EPS is expected to range from $1.70 to $1.80 per diluted share.
Adjusted EBITDA is now expected to range from $200 million to $210 million.
This update to our profitability range recognizes the strong performance trends in the retail segment, but is tempered by headwinds we continue to feel in our military business and supply chain.
These include the continued impact of the availability and cost of labor. We have felt most sharply in our supply chain as well as domestic military commissary trends.
We've also made investments in wages across the supply chain similar to what we already executed within the retail business and discussed in our first quarter earnings call.
In addition, the guidance now includes the impact of investments and expected earnings gains related to the previously announced supply chain transformation initiative, which we expect to be modestly dilutive on a net basis for 2021.
As Tony mentioned, we will continue to update you regularly on this exciting initiative as it progresses throughout the balance of this year.
We are affirming our 2021 guidance as it relates to consolidated net sales.
However, we.
We do expect a shift in the segment performance from a sales perspective.
With the continuation of positive results in the retail segment, we now expect that retail comparable sales will be down from 2% to 5% an increase of 2% to 3% from our previous expectations.
Military sales are now expected to decline between 9% and 13% from last year, a further decline from our previous 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.
And now I'd like to turn the call back over to Tony.
Thank you Jason in summary, we are very pleased that our overall financial performance and the progress we have made this year.
Not yet satisfied we will work diligently to deliver upon our kpis that will position us for success, regardless of the industry backdrop.
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.
Ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Peter Silly with Pete with BTG. Please go ahead Sir.
Great. Thank you.
Jason could you just elaborate.
The SEC.
Apply chain transformation I think there was a margin benefit that Tony mentioned, 15% to 30 basis points.
When should we start to see that as the second half of the year and is that on I believe you mentioned that was ongoing so just some more details around that and does that also include some of the.
Inventory.
Work that you guys have done this quarter. Thank you.
Morning, Pete Thanks for the question and Great to have you here this morning.
We're super excited about this the supply chain transformation program.
And where it's at where it's going to take US a few a few headlines to build on what Tony talked about just a few moments ago.
The program itself has started with a blueprinting just as a reminder, the blueprint that we talked about and announced last quarter that blueprint and completed within the quarter and we've been laid out a specific transformation program and begun work on that program as.
As you can imagine that the changes.
For that can be can range from very quick two very long ranging.
What we're expecting is that the seeds of those.
Of those improvements will begin late this year early next year and what we've included in our guidance is a small amount of benefit within this year with an expectation that we'll be building towards a run rate.
Into 2022, and we'd love to give you more color on that as the year progresses, and we will share more detail about the program and how it is progressing at the Investor day that just that Tony talked about as well.
Great and then just on the on the inventory the $60 million.
The benefit that you guys saw this quarter can you just give us a little bit more color on should we expect that to continue into the back end of the year or is that more of a onetime in nature. Just details there would be really helpful. Thank you sure sure. Thanks Pete.
The inventory was strategically targeted so the way I would suggest you think about it is that.
We had built more inventory than we needed in Q1, and then we also took a step back and assess what inventory we needed and what locations and began work on that program.
That effort concluded with with a reduction in inventory in the quarter by the way to think about that is it's partially a catch up or a recovery from from carrying a little too much out of the first quarter.
And I would expect that our inventory levels will stay relatively close to where we are through the remainder of the year. However, they will vacillate up and down based on forward buy opportunities and.
The potential to create value on that front. So I'd think about this as a base from which there will be some variability up and down but generally I would expect to keep the working capital in check.
Thank you very much very helpful.
Thanks, Steve The next the next question will come from Scott My skin with <unk> capital. Please go ahead.
Hey, guys. Thanks for thanks for taking my questions.
I think I wanted to focus a little bit short term.
You guys alluded to some forward buying opportunities and I was just wondering as you look through the rest of the year the inflation outlook how are you.
Are you thinking about it.
And do you think is going to be a lot more opportunities potential upside.
Two.
The guidance.
And then the.
The other question has just around we're seeing COVID-19.
There's a little bit.
Are you guys seeing any.
Uptick in sales because of that.
Sure.
Hi, Scott good morning.
Here.
Let's maybe start with with inflation.
Inflation overall.
I spoke about earlier it was was relatively modest within the quarter, but theres kind of the story within the story that.
That a lot of share a little bit with the group here.
Just as a reminder, food at home inflation from a CPI standpoint was running about one 4% in the second quarter.
And when you kind of step back and we look at our wholesale business for us food.
Our inflation ran at.
At relatively modest levels kind of half a percent ish for the quarter. However, there was a pretty a pretty big acceleration throughout the quarter from beginning to end and there was also an impact from the year over year impact of lapping the huge protein inflation spike in Q2 of 2020, so you've got a little bit of Nord.
And the data there.
Importantly by the end of the quarter, our inflation in the food distribution business was running around 3% and.
That increase was really split between two kind of primary areas.
Grocery business was running close to the CPI rate that the CPI food at home right.
That's publicly available through BLS with meat running kind of high single digits.
As you know that meat protein and produce itself is much more variable and runs on a much shorter cycle, so youre going to see more ups and downs in that.
And that piece of the business you, obviously also see less for refi opportunity because of the short cycle inventory.
So kind of stepping back on inflation. We saw we saw inflation look similar to publicly available data with some variability on proteins also.
Impacted by the big Spike in beef prices last year Q2.
So what does that mean for forward buy we continue to to set ourselves up to be successful for <unk> by one of the goals of our inventory correction was ensuring we have the right space and the right ability to capitalize on forward buy should product be available.
As you know, it's not it's not a push button exercise.
And obviously there are some products that.
There isn't availability and thats part of whats driving that.
Price increase from the vendors themselves.
So we will continue to pursue opportunities for for forward buy in for for capitalizing on that price change, but I wouldn't build a ton of upside into the back half of the year.
We're seeing a big bulge in inventory now and into the third quarter.
It remains to be seen what that will look like into the fourth quarter and we continue to hold to an inflation rate of 2% to 3% for the year.
I'd like to maybe hand, it over to Tony to talk a little bit about the broader inflation environment. Because this is a different cycle, where it's not just food, but getting into a big change in the labor market. Yeah, I think hey, Scott This is Tony.
Yeah.
Telecom as I get to your Covid question as well so on the inflation piece one discussion we've been having here.
Around the historical indications of inflation.
And versus the current inflation, we're experiencing in our forecasting and historically.
Yeah.
<unk> been pretty efficient at passing through inflation, particularly in our wholesale business.
And so there are benefits there I think.
We will pass that through very efficiently in this case as well.
And we and we believe that between the wholesale and our retail business. The elasticity will be relatively low on that inflation. So I think that.
That's positive the one thing I just want to note is that the.
The causal for the inflation is more significantly just face labor than it has been in some of the last couple of inflationary cycles and we are also subject to the base labor inflationary elements. So while we have the advent of inflation coming from our suppliers that will pass through and then we will find some efficiency in that.
We also are subject to cost the same cost that they have and that will offset some of those some of those upsides.
It's a pragmatic reality and four.
I'm showing another question that I have today, we will talk more about about labor has been a very very big topic for us and for other business in this environment.
Under the Covid I think it's probably a little early to say what the implications of the current surge or.
We saw our retail business taking some.
Some really positive gains ahead of the sort of the the.
The discussion about the Delta drains and other things kind of in the in the early part of the summer holiday season and so.
And that continues.
There is some of that is mixed with some concerns about the about the resurgence.
But we our businesses start really picking up I think on the strength of some sticky habits and people want to get out and do some theres number of things.
Could do this year and maybe you Couldnt do last year.
So we're being very very visually theres a lot obviously, a lot going on in that space and four are owned.
Our own policy and our own team as well as how that impacts consumers.
We say, we stay vigilant on that but we believe there'll be some there'll.
Likely to be some some benefits from the current the current behaviors as well as the most recent government action to extend.
Snap benefits so.
All mixed in there there'll be I think it would be some upside.
Perfect guys. Thank you very much.
The next question will come from Greg <unk> with Wolfe Research. Please go ahead.
Good morning. This is Spencer hanus on for Greg.
You mentioned that youre going to be building to a run rate in 2022 for supply chain savings what are the biggest factors driving that timeline and could you see improvements sooner.
And then I guess is there a scenario where margins can get back to 2000 to 2018 levels.
Great Great question, and I'll take a crack of that and then Trevor adjacent for detailed well so on the.
This project is very comprehensive project is there are there are five key components of it added <unk>.
Fair amount of detail in terms of training and process optimization and new tools. So that process work will take place over the course of about a year and so we will see as Jason mentioned earlier, we'll see some benefits coming in.
Kind of towards the end of this year and more of the benefits coming in next year as we really refine those processes across our our network. So.
We will have that spread but the work so far with early work with the work so far as it looks terrific.
I think we'll start seeing some of those benefits towards the end of this of this year.
Okay.
As far as getting back to 2000.2018.
It's certainly our objective to make this a continuous improvement idea that continue to build on itself. So once the project is through.
We will also establish.
Additional processes, we continue to sharpen that saw it and I think that will involve likely involve more technology and more and more process improvements that come from technological implications in years to come so certainly our objective to get back to that to that place.
And there are some there are some mixed implications of that are.
That have changed are our numbers there, but thats our biggest focus is getting the getting the organization in the supply chain world to be as efficient and effective as possible and that's not just a one year project.
Yes, Spencer building on Tony's comments, a couple of things I'd highlight just for reference here as.
We've made great progress on the gross margin side and the food distribution business.
Our margins our gross margins are up in the second quarter.
About 100 basis points from where that gross margins are up about 100 basis points from where they were two years ago. So pre COVID-19.
<unk>.
To be fair at the supply chain expense is largely swamp that that margin improvement and Thats why we are tackling supply chain and that's kind of the first stage of phase of that supply chain improvement is 15 to 30 basis points.
We expect that to be kind of phase one of multiple phases to continue to build back and capture that margin enhancement.
And push it to the bottom line.
Got it that's helpful.
I could switch to military for a second what do you think needs to happen at deca for them to win back customers.
At what point do you think it's time to potentially exploring some strategic alternatives there and just refocus your time on retail and food distribution that is just a little bit more in your control.
Sure.
Well I think there is.
Very complicated circumstances that deca is facing.
And I have a lot of it they are very desirous of getting them, making progress a lot of confidence in the in.
And the team there and I think they have a big chore ahead of him right. They've got you got the base closures.
And closures and openings and closures and openings that happened last year and a half I think has has moved some folks it might've been loyal commentary shoppers to other alternatives and I think those habits have been sticky as well and we're seeing some of that in the numbers. So so they've got they've got their work cut out for them to get to claw that back until they've got a lot of a lot of ideas that they are working on from our perspective I think a couple of things. One is we think we can we can actually.
We are fully engaged in partnering with them on ideas on what they can do to bring to bring those customers back.
Also we are fundamentally they're there they are.
There is a need and a customer out there that can that can be served I think theres room for better profitability for all the players involved in that supply chain. So that we remain confident that there is better profitability in that net world and.
And our team is working hard on that everything from how we think about mix.
Mix and how we think about products and certainly.
Related to that as the supply chain, where we just mentioned there is a lot of there's a lot of cost.
<unk> and supply chain specific to MTV at that network has changed.
We have the opportunity to change our network to better to better serve what is now a different business than it was just a few years ago.
So our job one is to figure out how to make that business work and make it and make it profitable and that's our primary focus.
Yeah.
Okay.
Got it and then I just wanted to follow up on the labor commentary that you guys have made you mentioned a few times about.
Wages, how should we think about the size of those investments that you guys made in distribution. This quarter and then for the investments that you've made in retail last quarter are you seeing signs of better retention, there yet or is it still sort of too early to know.
Yeah, Great question so.
It's probably a bit too early yes, it's been about a couple of months and retail is just a month in supply chain, we're seeing better African flow.
We are seeing we believe the better candidates that have come from that.
And Kevin mentioned the numbers, but the entry level wage increases were north of 10%, so pretty sizable increases by our measure I believe we're going to come back even this year and make some additional adjustments in retail and some selective increases as well as we believe we need to strengthen that number even better.
So, but the early the early high dose components of Hayward, we're getting we're getting better Africa again, a little better stick ability with African so we're confident that this work is actually going to get us.
Yet at that place I.
I think importantly, also because the labor environment has been so challenging.
And.
And the costs associated with that have been pretty extraordinary everything from the amount of over time that we've had to experience because people are working longer shifts to cover openings.
And in some cases, we have third party contractors working at the also costly.
I think we have we have room to make increases in our base pay.
We have to have a payback because it gets stabilized. So so so we feel bullish on on being thoughtful.
Aggressive and pay and use that as a tool to help windows. When this war on talent.
Okay.
Got it thank you.
The next question will come from Matt Fishbein with Jefferies. Please go ahead.
Hey, good morning, Thanks for the questions just to follow up on the labor shortage situation.
Can kind of break out for us where you are seeing more pressure, whether it's retail versus wholesale and also just on the wage pressure you're seeing how is it I guess different relative to other <unk>.
Since as of wage pressure that you faced in your careers.
Having battled this for a few months now are there any flag posts that you see in the future like like Labor day. For example that can create some type of catalyst for this to unwind a bit from a macro perspective.
Let's start with that.
So it seems like every day is labor day nowadays, though.
Yeah, So first and foremost I guess I would say, we're seeing a little bit more pressure in our distribution centers I think thats it.
If you think about.
Retail kind of retail turnover.
Because of the nature of that work has to be a lot of part time a lot of young people getting their career started is it a fair amount of churn at the entry level and so historically you would see you would not be scared by 50% turnover in that business because thats just the nature of how people come on and come off seasonally.
In the retail space.
We're seeing kind of 60 ish percent turnover there on the warehouse side of the business the history and most of that is I've been in is that you would see something more like 25% turnover in that business that you have slightly higher paying jobs.
People are making careers and working warehouses, we're actually experiencing about 70% share over there. So we have worst turnover in a place and a part of our business that historically would have lower turnover. So I would say, that's where we're seeing more of the pressure is getting good consistent talent into our distribution centers and Thats, we're taking some of the larger increases as well.
What's different is in.
The last couple of labor pinch points were driven almost exclusively by by strong economy, and you think about one or more of Q1, we had a right around the end of the 20th century, when you add the dotcom phenomenon.
Congress growing like Gangbusters and there was a there was a lot of strain in getting people.
And the jobs, then as unemployment dropped down to 3% and lower income neighborhoods.
But it was based on basically based on the.
The economy. So it's one of those kind of as you think about it in a more comprehensive set sort of a good problem to have right. Our economy cranking in and people are wanting to get in with educated and fast enough and we can't find too fast and keep the gallery and growing.
This one has been have been significantly exacerbated by by by the government programs and I think the.
Practical reality is that that we have we have a latent economy thats pretty strong.
There's a lot of growth potential there is a lot of need for folks.
At the same time.
Very significant benefits for our folks to knock when the labor market.
Our states that we operate in.
The sum total of the unemployment and other benefits from the federal government have an imputed value of about $23 per hour.
That's not much different than the national number it's about the same and so so and that is really different for us as well.
Now we have a new competitor in the mix and.
That could stabilize more I think we'll get better on better footing and endless visits look more like some of the other labor crunch in the past, but but that wasn't particularly difficult.
We see that in the applicants, who who are and a lot of cases.
They are getting into the market that there is a little bit of a take it or leave it because they have a they have a best alternative to two working at a job that.
Maybe in our favor.
So anyway.
That's what's different to answer your question I think that that component is new for us as a business society.
Okay. Thanks for all that color that's really helpful.
I just wanted to also ask maybe longer term broader question on <unk>.
Next in Europe through distributions segment relative to the pre pandemic can you kind of walk us through the changes I guess, you've seen through the pandemic.
Where you were from a product mix perspective.
Prior to the pandemic.
Yeah.
Did it shake out by the end of last year, and where are you now and I guess, Tony the bigger question here is given your fresh distribution background, where should we expect that component to kind of shake out in terms of percent of sales and profit over the next few years.
Okay, great great questions. So as far as maybe I don't have that number handy on the mix change versus pre pandemic do you have that Jason.
Matt what I would highlight is that there was a naturally a cycle that move towards kind of HBC type products with the with the emphasis around cleaning and.
Well, what I characterize as pantry stocking or.
<unk>.
Cleaning goods.
And then there was there was a general decline in elements of the store that were fresh in nature.
In part because delhi's we're closing.
So we saw it kind of a downdraft there what we've seen recently.
Kind of the recoveries come into place as a return to that those fresh categories, both deli bakery, and what I would characterize as value add products and you'd see this both in food distribution as well as in our in our retail business.
And you didn't ask but maybe just a little bit of color on the retail piece.
We saw exceptional comps in Q2 really excellent results with a step forward sequentially in retail comps from kind of the mid 9% range to the mid <unk> and.
Part of that was the value added.
Growth in bakery, deli et cetera, as well as as well as our promotional.
And retail execution now we expect to continue to execute flawlessly going forward.
But our outlook also reflects a step down in Q3, and Q4 from Q2 levels not because of execution, but frankly more around uncertainty. We expect our Q3 Q4 to look more like a high single digit growth on a comp basis mid nines in Q3.
And 8% in Q4, so kind of a step down, but but still very strong and really supported by some of the kind of the updraft of those mix changes that you asked about it food, but then really flow through our supermarket.
Piece of the business and of course those are those are two year numbers on the comp.
And our focus going forward is going to be it will be disproportionately on that on fresh we think thats, where as people come back to some semblance of the new normal I think that's one thing that really value and we think we've got great opportunities for growth around the perimeter of the store. So it will be there'll be more bias in more and more focus there.
Great. Thank you very much.
Yeah.
Again, if you have a question. Please press Star then one.
And our next question will come from Kelly Bania with BMO capital. Please go ahead.
Hi, good morning, Thanks for taking our question.
Wanted to first follow up on the supply chain initiative.
I believe last quarter, there was discussion of savings and that 25 to 50 basis point range and now it sounds like 15% to 30 I was just curious if that timing or if it's just the wage increases impacting that or any color you can help help us there.
Hi, yes.
15% to $30 million 25 to 50 basis points. So it's the same as last quarter. It was reaffirmed so if I misspoke my apology.
Got it no no no problem.
Another question just in terms of the retail comps coming in better than expected I guess I would've thought maybe distribution would maybe.
Kind of follow suit, maybe theres, some mix dynamics, but maybe just help us understand why that's not the case.
Yes, Great question Kelly, So if you kind of dig into the.
In the food distribution growth, we're seeing similar performance among our what we characterize as our core independent customer to what we're seeing in our corporate.
Corporate retail business now there are some underlying mix changes in pieces of the underlying business or the other food distribution business that are <unk>.
<unk> differently than traditional grocery and Thats, what you are seeing come out of that out of the aggregate food distribution results.
Okay.
Okay.
Maybe can you just help us understand where service levels are today, and where you're targeting.
To reach under the new initiatives.
Yeah.
Yes.
Service, though so the way we measure that.
Service levels that we are probably about I'd say about <unk>.
Roughly 2000 basis points lower than what we would normally have run two years ago right.
For the mid nineties.
Kind of the mid Seventy's in terms of our compliance to orders so to speak.
We actually we had with <unk>.
There was quite a bit lower a year ago.
Yeah.
Made progress in terms of our processes as well as we received.
Additional.
Gains from the manufacturing community as they improve their service to us.
And in that sort of hit that sort of stalled out a few months ago. We've been we've been getting about the same.
Actually a little bit worse supply from the broader manufacturing community in the last three to four months.
So we will refine our process.
Supply.
It can be as efficient as possible in getting that product out to our customers into our stores.
But the headline is that the manufacturers don't all the way back yet. They are also operating actually operating at a bigger delta versus their previous levels.
That's more of the.
The headline and one of the complicating factor in service right now.
Best we can tell as we survey.
What other what other people are experiencing where.
Where we have where we have side by side comparisons. We are we are outperforming.
Are there other like services and we get a really.
Pretty positive feedback from folks who actually get the chance to use multiple services. So we feel good about our internal process there.
And the next the next chore is frankly to get the.
Stabilized with the with the manufacturing vendors and get their supplier.
Yeah.
Okay, that's very helpful.
Just one more from me you made the comment about gross margin up about 100 basis points versus two years ago, but maybe some of the costs.
Eating eating into that gross margin upside, but just curious if you can unpack that gross margin strength for us and if you think you can sustain that.
Going forward.
Yes.
I expect that we can sustain the gross margin going forward.
And Kelly I don't want to assume but referring to the food distribution business, just just to be clear.
Yes, I expect that we can sustain it it's been it's improved based on a combination.
Product mix and customer mix.
And.
And really the key for us to get back to <unk>.
Prior margin structures is to deliver on the supply chain piece, which is lagged.
Frankly, the topline and profitability and gross margin improvements have been falling to the bottom line in part due to some of the challenges that Tony referenced in the fill of everything from the fill rates too.
Some of the challenges with the labor market as well as our own operational practices, which we're addressing through that supply chain transformation.
Yeah.
Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Tony sorry, Some for any closing remarks. Please go ahead Sir.
Alright, Thank you and thank you all for your participation on today's call. We really look forward to speaking to you. All again, we report out on our third quarter 2021 results in November and we hope to see many of you in December for the investors day, we're really looking forward to that so with that we'll conclude the call and wish everybody a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
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