Q3 2021 SpartanNash Co Earnings Call
Good morning, and welcome to the Spartan Nash company third quarter, 2021 earnings call.
All 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 at ICR. Please go ahead.
Good morning, and welcome to the Spartan Nash Company third quarter 2021 earnings conference call on the call today from the company are President and Chief Executive Officer, talking Tourism, and 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 spark Nash dot com boards.
Board Flash 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 Spartan massive earnings release from yesterday as well as the company's most recent SEC filings.
You'll see a discussion of factors that could cause the company's actual results to differ materially from the 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.
Company believes these measures provide investors with useful perspective on the underlying growth trends of the business and that was included in yesterday's earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
It is now my pleasure to turn the call over to Tony.
Thank you, Chris and good morning, everyone before I begin I'd like to wish our veterans, they're happy Veterans day.
Privileged say, thank you to all of America's veterans, including 750 veteran associates, who work at Spartan Nash.
Thank you for keeping this nation the land of the free in home of the Brave I'd also like to say, thank you to all of our associates for their incredible hustle during Q3.
Particularly busy summer for Spartan Nash and it was made more challenging by supply chain and labor issues. Our industry is facing despite this our team stepped up to take care of our customers and deliver strong results at the end of the quarter I was able to personally recognize several dozen frontline associates at our inaugural circle of excellence event.
Leaders from across the company nominated Associates who've gone above and beyond the call of duty this year to achieve results.
As events sparked a great excitement and passion across the company I'm looking forward to this new tradition.
Alright, turning to our third quarter financial performance I'd like to make a few comments.
We're pleased our results were up against steep prior year comparisons, but we managed to grow our topline and meet our profitability objectives.
We've had solid performance year to date.
We're confident in once again, improving our full year earnings guidance.
Looking to our segments, we saw retail topline growth on both a one year and two year basis, our fresh and pharmacy Department performance was particularly strong on a two year basis, our comps improved sequentially from 12, 1% to 13, 5% in the third quarter.
This improvement is a result of in store execution efforts increased traffic and continued demand for food at home.
In addition, we've made us like for like net price increase is that so far have had minimal impact on consumption.
In spite of our investments in wages, we manage our expenses carefully in a tight labor market, our retail segment labor rate improved by 30 basis points compared to the prior year quarter.
And our food and military distribution segments, where labor and supply chain pressures are most acute.
We're seeing some favorable tailwind.
Inflation increases have supported our gross profit improvement and partially offset the difficult headwinds. However, we must do more to mitigate the unprecedented pressures that we and the industry face today.
On them shortly but were already taken we've already taken several steps during the quarter to address these cost pressures. In addition, we're making upfront investments in our supply chain transformation initiative.
Which we're confident will position the company for improved profitability and long term success.
Now back to the industry pressures the global supply chain that are unprecedented pressure from the pandemic current labor conditions and inflationary pressures are straining suppliers. They are already operating in survival mode. Throughout this pandemic. In addition to the challenges posed by vendors.
Not fulfilling orders were also facing increased disruption from vendors not showing uptime.
We've seen the inbound service of our vendors declined by over 10% since the start of the year with some top suppliers declining by more than 20%. These types of disruptions are being seen across the entire food distribution industry.
As we navigate this new normal we are focused on three core capabilities people operational excellence and insights that drive solutions.
Starting with people <unk>, our associate hiring and retention rates are still not where we want them to be.
We have been primarily focused on improving wages and benefits to attract top talent I mentioned, our circle of excellence event earlier, which is one of several programs. We're implementing to foster a culture of recognition. We will continue to make investments in competitive wages essential training and tools that will make us a preferred employer of choice.
This over the long term.
Also tying into our people first culture is safety, we are performing well ahead of our internal year to date expectations I'd like to credit the entire organization for embracing process improvements, which provide us with a foundation to advance our pursuit of operational excellence.
And speaking of operational excellence, our supply chain transformation efforts are well underway and we've made notable progress if you recall our transformation initiatives broken down into the following five work streams.
Warehouse operations.
Sales and operations planning.
Inventory optimization.
Network strategy.
In procurement.
While all work streams will be executed in harmony. Some recent updates pertaining to our network strategy warehouse operations and sales and operations planning.
Beginning with our network strategy, we've already taken steps to optimize our operations during the third quarter, we elected to closed two warehouses in transition products to other locations better equipped to service our customers.
We also launched chill operations in our Southern Maryland distribution Center. This center will be better positioned to provide enhanced customer service, while reducing transport miles previously coming from other shipping points.
With these network optimizations, we've made progress on the 15% to $30 million savings goal, we shared previously.
It's worth noting that the execution of these programs started a little ahead of our expectations.
On the warehouse operations front, we focus on productivity improvements.
We are piloting new core processes and tools in one of our distribution centers. The initial pilot results have been encouraging so we've begun to deploy these tools and processes to several other warehouses in the network. Additionally, we continue to build capabilities that allow us to improve operational efficiency and better control labor costs.
Look forward to incorporating these best practices across our network.
As for sales and operations planning, we're currently revising our forecasting process to ensure to align operations with customer demand and product availability.
We're making progress to improve our supply chain planning and inventory management processes.
These efforts will allow us to reduce excess inventory improved warehouse capacity in our network.
Turning to our third core capability insights that drive solutions.
We are experiencing a very dynamic pricing environment and are seeing severe swings in cost for select products again. This inflation can be greatly attributed to the current labor market.
In spite of this we are encouraged by what we're seeing in our overall gross margin. The current inflationary backdrop has proven favorable to our distribution business. However, there has been a significant headwind from the labor standpoint as noted earlier, we are leveraging our customer and industry insights and negotiate with suppliers. So that we can continue to maximize value.
For the retailers we serve.
In our retail segment, we are managing costs quite well, we're striking a nice balance between capitalizing on the resilient food at home consumption trends and continuing to deliver great value to our loyal shoppers.
As part of our efforts to remain competitively priced in our stores, we continue to lean in on our own brands offering shoppers are attracted to our own brands due to product quality availability and competitive pricing, we're tracking with our year to date penetration goal and saw a nice sequential improvements and penetration compared to the second quarter.
We remain focused on optimizing our own brands marketing and fostering innovation, which we believe will pay dividends down the road.
Before I hand, it off Jason I'd like to provide an update on our planned investor day as I shared during our second quarter call. We plan to host the event in New York. This December.
Our goal is to provide investors with the opportunity to participate in a more in depth conversation on our strategy, including the supply chain transformation initiatives.
However, due to the challenges associated with Covid, we made the decision to postpone our investor day until sometime during the first half of 2022.
While we're disappointed to postpone the event, we look forward to gathering Safeway and discussing our progress in person this spring.
With that I'll now turn it over to Jason who will walk you through our 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 third quarter increased by <unk>, 6% or $12 4 million to $2 <unk> 7 billion compared to 2023rd quarter sales of $2 6 billion.
Despite the volatile external environment, we have continued to execute well.
This marks the first quarter in 2021 with a total company has exceeded the prior year's pandemic driven sales.
The sales growth can be attributed to increases in comparable store sales within the retail segment and continued growth within certain existing food distribution customers as well as inflationary pricing across our portfolio.
Our GAAP EPS came in at 42 per diluted share in the quarter compared to <unk> 56 per share in the third quarter of 2020.
On an adjusted basis EPS for the quarter of 43 compared to EPS of <unk> 70 last year.
The decrease in profitability from the prior year was due primarily to lower margins in retail and an increase in supply chain expenses.
Tight labor market conditions drove higher wages. Additionally, use of overtime and created additional reliance on costly or third party contractors.
Additionally, higher corporate administration costs decreased earnings compared to the prior year.
In our GAAP results. The decrease was offset by cycling a prior year impairment charge within the food distribution segment.
Increases in supply chain expenses were partially offset by an improvement in the gross profit rate, where we saw an increased to 15, 9% compared to 15, 8% in the prior year quarter.
Gross profit rate 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.
Now turning to our segments.
Retail net sales came in at $608 7 million for the quarter compared to $596 6 million in the third quarter of 2020, an increase of 2% or.
Our comparable store sales were up three 1% in the third quarter, while our two year comparable sales were up 13, 5% an increase of 140 basis points sequentially from the second quarter.
Our strong retail performance can be attributed to our consistent retail execution, along with the continued shift towards food at home elevated EBT benefits and inflationary price increases.
Third quarter reported operating earnings in the retail segment came in at $16 8 million.
Compared to $22 3 million in 2023rd quarter.
Despite an increase in same store sales and fuel sales. The operating earnings decrease was driven by lower gross margin rates due to lower fuel margins cycling favorable prior year inventory shrink.
<unk> reduced vendor promotional activity in the current year.
Retail adjusted operating earnings were $17 1 million for the quarter compared to $22 6 million in 2023rd quarter.
Net sales in the food distribution business increased by $19 $1 million or one 9% to $103 billion in the third quarter, driven by continued growth with certain existing food distribution customers and the favorable impact of inflation on pricing.
We saw an upward trend in inflation as the quarter progressed, averaging approximately 6% in the quarter.
This increase included steep hikes in proteins, while center store grocery product categories increased by about 3%.
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 and will be accretive overall.
Reported operating earnings for food distribution in the third quarter totaled $10 million compared to $9 2 million in the prior year quarter.
The increase in reported operating earnings for the segment was due to cycling the prior year's asset impairment charge related to the abandonment of a trade name.
As well as increased earnings due to growth in net sales and the gross profit rate.
These increases were mostly offset by the higher supply chain expenses in the current year that I discussed earlier.
Adjusted operating earnings totaled $10 1 million in the quarter versus the prior year's third quarter adjusted operating earnings of $15 7 million.
Adjusted operating earnings exclude the asset impairment charges and other items detailed in table three of yesterday's release.
Military net sales of $433 million in the third quarter decreased by about $19 million compared to prior year sales of $452 million.
The decrease was primarily related to a reduction in export sales as a result of cycling the prior year quarter's increased consumer demand along with supply chain challenges at international shipping ports in the current year quarter in.
In addition to the continuation of lower demand at domestic commissaries.
Third quarter reported operating losses in the military segment came in at $4 million.
Compared to $2 5 million in 2023rd quarter, reflecting the continued decline in volumes as well as a higher rate of supply chain expenses.
Really offset by improvements in gross margin rates.
The segment's adjusted operating loss was $4 4 million for the quarter compared to $2 5 million in 2023rd quarter.
Overall, our third quarter adjusted EBITDA was $51 5 million.
<unk> to $57 million in the prior year quarter.
Due to the reduction in our long term debt balance our leverage ratio improved to one seven times compared to two times as at the end of fiscal 2020.
In the first three fiscal quarters of 2021, the company generated $144 million of cash from operating activities.
Compared to approximately $224 million over the same period in fiscal 2020.
Looking at the third quarter alone, we generated over $70 million of cash from operations this year compared to $26 million last year.
The increase in cash from ops during the quarter relates primarily to earnings performance and working capital gains in the third quarter.
The strong cash flow performance enabled a net pay down of over $47 million of long term debt during the third quarter the.
The continued pay down of debt balances also resulted in favorable interest expense compared to last year's third quarter.
During the quarter. The company also declared $7 3 million of cash dividends equal to <unk> 20 per common share.
As covered in yesterday afternoon's press release, we are raising the low end of our 2021 EBITDA guidance range. Adjusted EBITDA is now expected to range from $205 million to $210 million.
Adjusted EPS remains in the same range of $1 70 to $1 80 per diluted share as incremental LIFO expense related to rising inflation widens the gap between EBITDA and EPS growth.
This update to our EBITDA profitability range recognizes the strong performance trends in the retail segment and gross margin expansions, we're realizing in the food distribution and military segments, but is tempered by economic headwinds. These headwinds include the continued impact of the availability and cost of labor. We have felt most sharply in our supply.
<unk>.
We are reaffirming our full year 2021 guidance as it relates to consolidated net sales however, with the continuation of positive results in the retail segment. We now expect that retail full year comparable sales will only be negative 1% to 2%, which is an improvement from our previous expectations.
Now I'd like to turn the call back over to Tony.
Thank you Jason in summary, we were very pleased with our third quarter and year to date financial performance. Our industry continued to fight against tremendous challenges with labor supplier fill rates wage expansion and inflation. Unfortunately, we don't expect these pressures to ease up anytime soon we are determined to be proactive by focusing on our people first culture and.
Our supply chain transformation initiatives as we exited the year. We believe we will be very well positioned to improve operational excellence, which should provide us with multiyear benefits in earnings and customer growth 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 one on 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 two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from.
Chuck Cerankosky from Northcoast Research. Please go ahead.
Good morning, everyone.
Tony and Jason can you talk a little bit about.
Maybe more than a little bit about the labor challenge going into next year, how you see it.
<unk>, maybe even resolving to some degree and what Youre logistics operations.
Due to.
Offset either operationally.
Or maybe things of the industry as a whole.
Doing.
Yes, Thanks Chuck.
You said talk for a little bit I can talk for hours, perhaps on that topic. There is a lot going on in labor. So sorry for the headlines here, it's been enormously difficult labor environment with.
The number of people who've come out of the labor.
Workforce the people who are churning at the front end and just the overall tightness in supply of labor, we have like a lot of folks who have taken a price or cost increases on our frontline labor our entry level jobs as you may recall from the spring in retail in the summer in our in our warehouse operations are up over 10% probably closer to.
<unk> 12, or so and we're taking another some other increases on frontline labor here. This fall.
So pretty dramatic cost increases we are seeing better applicant flow, but we have not come anywhere close to closing the gap, we still have very significant openings across the network like a lot of our a lot of our peers are articulating as well. So so a few a few shard the sunshine there in terms of the applicant flow based.
<unk> slope in <unk>.
And while we see improvement everyday is still it's still a very difficult battle.
At the same time, we're taking those increases in K, obviously, our competition for labor is doing the same thing. So we see the the escalating pay I think will go on at least into the first part of 2022, we see that for our business.
The.
The other thing is on the horizon.
We have we are all dealing with trying to understand is that Etfs mandate and what it might do to.
Two of the Labor force.
So far we don't see any way that's going to help we think theres significant chances that may make things worse in the short going.
We are hopeful that we'll find that as an industry and as a society will find a way to actually mitigate some of those some of those potential risks that are on the horizon for that but that stands as sort of a.
As an immediate difficulties potentially on labor as we look forward and then your question on logistics.
We have like other parts of our business, where we are.
Working hard to attract the right talent there we are investing in wages.
But we are investing across our organization also in benefits, we're investing in programs and training and engagement activities that we think will make people feel like they found a home when they come to Spartan Nash all of those things are going to be critically important to win the war for talent.
There are some other technical things we're doing around looking at can we do can we do more work with dropping trailers and conserving the use of tractors and drivers while we're moving things across the country. There's a lot of activity in that space.
But the big headlines now just getting the right folks and getting them into the cabin.
And again gains stability in the logistics part of our business.
Will will.
Yeah.
Well the mechanism of Clos.
With higher grocery prices do anything to significantly offset the <unk>.
Your labor costs.
Yes, So we've got we've got obviously.
The totality of what we do when we have got we have this we have the one pretty significant headwind with labor cost.
The mitigating factor against that are going to be a combination of productivity and pricing.
Alright, thank you.
Our next question comes from Scott Most Ken from our five capital. Please go ahead.
Hey, guys. Thanks for taking my questions.
So I just actually wanted to follow on to something that was said Tony you said, it's improving every day.
But at the same time, you seemed really cautious so I'm just trying to make sure that to clarify that statement I think you'd be one of the first people to kind of say that and I just wanted to make sure I understood. It correctly. The first person to say, it's improving every day.
Yes, the labor and the labor delivery and everything I think you seem to say well, that's what I again trying to get clarity on you seem to say things were improving every day and I just wanted to make sure I understood that correctly, yes. Thank you for the clarification that I want to make sure that I don't.
Don't sound like Pollyanna here.
But I would say improving every day is something like this we may have we had 4000 openings yesterday and today, we have 3994.
Okay.
So it is very slow.
And too slow so.
So we had when we took the furnace.
Pretty significant pay increase in some of our Dcs, we got the jobs filled.
But.
I would say it's been.
It's been extraordinarily slow.
Okay.
Appreciate that clarification. So then so the other thing I wanted to push that.
And I think you addressed the vaccine and mandates come in January 4th are you guys requiring that right now or is that something you are waiting to see.
Alright, we requiring all employees to be vaccinated correct no.
Yes.
And then if you would talk about.
The 20% you say kind of inbound.
Any stabilization there I mean, I know talking to CPG companies, because we cover them.
Some are a little bit more optimistic some are a little more pessimistic than and how are you thinking about holiday. We are hearing some hints that there could actually be outright shortages whats your view on that.
So as far as for the vendor community the collective vendor community has not been particularly optimistic they have.
So as an example, if you go back a year ago, we had significant outages and we asked our our vendor community.
What do you see happening they would've said and did collectively that hey, you know what six months or so we see that we see.
On a pretty steep path back to normal it will be back to normal sometime in 2021 net income close to being the reality and we asked that same question today and we're getting more of is we're not sure.
We don't we don't really see this thing popping back anytime in the next six to nine months. So that's not everybody. Some people are saying they are more optimistic but I think the collective is I would say is.
Is neutral or benign that best and probably a little pessimistic.
As far as the holidays go there are there are going to be some items that have pressure on them in a number of items. So we will have.
As you might imagine there is a there is.
In this in this world, where there's a lot of shortages, there's going to be unique holiday related shortages right ahead of us so.
We're working everyday to try to make sure we stock up on the things that debt.
That might be at risk.
And and I think others are doing the same thing so there is broad.
Broad questions, whether it be some shortages, yes, there'll be no duffy some shortages of holiday items.
And what's your fill rate right now to your customers on the distribution side.
Well when we look at is that the gap between what our what our manufacturing community sends US and then what we ultimately send out and we're closing that gap every day so.
We're too we're getting close to what it was.
A couple of years ago.
The problem of course is that it's not particularly satisfying to say that we are sending most of what we get because because the numbers are still low we're getting we're getting our fill rates.
That are down 70% ish.
And.
Even if even our best performance against that still leaves people with with gas versus what they want for their shoppers.
Perfect Youll take you guys nice job with such a such a tough environment and I'll yield. Thank you very much.
Thank you.
The next question comes from Kelly Bania from BMO capital. Please go ahead.
Hi, good morning, Thanks for taking our questions.
Wondering if we could just talk a little bit more about the net impact from the higher wages in the supply chain challenges.
<unk> to the tailwind of inflation that you're it sounds like you are passing through pretty pretty.
Well I think it was characterized as accretive but just as we think about these two kind of factors here.
Would you characterize this as a net tailwind or a net headwind.
Yes, it's a great question and very timely one for our dialogues we have all the time with other stakeholders. So it is a net headwind.
And what is sort of the nuance in this is that historically when there is inflation in this industry. The inflation comes from a number of different possible price shocks and those those shocks or not borne by everybody for.
Simple example, if there's a problem with the Coco crop in Cote d'ivoire. Then then there is inflation on chocolate in that choppy inflation gets passed on but I'm not actually dealing with farmers in Africa right. So in this case the inflation is being driven exclusively by by labor either through the combination of higher labor.
Costs were shortages caused by the lack of labor and so we bear those same exact inflationary burdens as our as our suppliers might so while theyre passing inflation on to US. We also have our own inflation as we're trying to offset that.
The net of those two things is negative for our business.
Okay. Thank you that's helpful.
And also just wanted to ask about retail.
Clearly the performance.
A little stronger there.
Can you just help us unpack as you look at the margins in the retail business versus 2019, just the drivers of how that settling out this year.
Relative to 2019.
And really the sustainability of that margin expansion and within that do you.
Are you at all consider reinvesting some of that margin.
To kind of help ensure that you keep that customer base that you've gained over the last year to two.
Yes.
And in a scenario, where maybe the consumer does become a little bit more value oriented.
Good morning, Kelly This is Jason Thanks for the question.
So thinking about the retail segment, our gross margins in the segment are up about 65 basis points from 2019, So youre dead on that we are seeing margin accretion in this space.
As we think about.
As we think about the business.
There's obviously a lot of noise with COVID-19, but I wouldn't want to overlook the execution improvements that this team has made on our retail organization has made over the last couple of years to put us in a great position to make to.
To make margin enhancements and sales growth more sustainable than you might've seen in the past.
As we think about the margin structure of the business and how we deploy that we have.
We want to make sure we're turning the flywheel of growth and continued margin enhancement over time. So we will always be looking at opportunities to invest in that business and ensure that we're leveraging it for long term sustained growth.
Okay. That's that's helpful and then with the discussion of the distribution business. There's a comment about certain customers growing can you just help us understand a little deeper level, how some large customers are kind of filtering in and out.
Versus how the core kind of independent.
Grocery customer is performing.
Within that independent within that distribution growth.
Yes, absolutely so.
Maybe starting to to decouple this a little bit.
Within the food distribution business our.
Core independents are growing approximately at the same rate may be slightly slower than our retail business. So in that kind of a two year stack that's low double digits. So when you look at that piece of the business is running similarly.
We also have some other national account customers within the food distribution segment and Thats, what were referring to when we say.
Certain other specific food distribution customers, but one in particular that I'll call out.
Is dollar general who've had a great partnership with dollar general.
As.
<unk> in sourced a portion of their fresh business a significant portion in a subset of their stores thats been winding down over the last 12 months or so.
It's it's really I would characterize it as hitting kind of hitting the bottom at this point.
We continue to service a number of their stores and have a significant piece of business and partner really well with them, but there's been some noise on that front with.
They're in sourcing of a portion of their business.
And then obviously, we've got our Amazon business and in a couple of other national account activities within this group that contributes to the growth profile.
The next question comes from Greg <unk> from Wolfe Research. Please go ahead.
Yes.
Good morning. This is Spencer hanus on for Greg.
Can you talk a little bit more about your fill rates.
And how those compare with your peers and then I think you mentioned that it could be another six to nine months before we really start to see the supply chain and get better. What do you think are the factors that lead to that getting pushed out even further than that or potentially being pulled forward and is there more downside than upside to that.
Sure My understand I guess.
Yes.
So sorry, I don't have perfect visibility to what my peers are getting on fill rate, but we do have we are in some industry groups, where we talked about this in broad strokes.
I would say that our our numbers sound like the numbers that other folks are experiencing broadly and there's different ways of measuring as you can imagine there is.
We're taking a tougher measure against that in terms of what do we believe the market wants and what they can get a hold of there are other folks who are looking at it as a as percentages of what's being offered by the manufacturers. So a lot of case, David as you know kind of items or stop or discontinuing to put a hold on some items rider, but to cap. So there's a lot of ways to cut and slice and dice it but.
Our numbers stack up similarly to what the broader industry.
As the saying that they're seeing.
As far as the.
Yes.
What things might impact that.
The turnaround.
With the everybody has been quite consistent it's just all about health.
It's all about can I get people into our into our factories to work can I get consistency of supply of those folks.
We are a supplier for one of our.
But for a number of our own brands for example, who have gone to a modified manufacturing scheduling has cut back their supply to us even a little bit more because thats, because theyre shutting down now and additional shifts a week just for lack of folks in the manufacturing plants that sounds pretty common to me. We are hearing that from just from a lot of folks so.
It will.
They won't give back in good shape until they get it get in good shape on their staffing.
It's not that simple.
The pace of improvement right now would suggest that it's going to be longer I think that's the reason why people are saying that they're going to they don't they don't want to I don't want to Overcommit to hey, we're going to be back in good shape in six months remember for those folks if I'm buying something like.
Candy bars. The last example.
They may get back in good shape against what the Guy the Guy who is doing that.
The roasting or their peanuts somewhere is in good shape. Yes. You had is this long tail of supply chain issues that while they want they want someone who thinks they are in good shape on labor. They don't know for sure. There are other ingredient suppliers are also can be in good shape.
So I think people are very nervous about that because they are seeing not just their own struggles with seeing the income the inbound ingredients and.
And other even second and tertiary items they need to run their business are tough to get so I think people are being very cautious about.
Saying, hey, well being will be in good shape by June or by September or something because it's been more difficult I think anybody anticipated coming into this year.
Okay got it that's helpful. And then if I could just turn to retail margins for a second you mentioned 65 basis points up versus 2019, how much of that is driven by changes in your promo strategy or pricing versus some more transitory benefits from better sell through could you just help us unpack that that change in.
Gross margins a bit.
Yes, great question the way I would characterize it is.
There is a little bit of all of the above.
In the last two years. So if you kind of look at a two year cycle. A lot has changed and a lot has occurred particularly with COVID-19 sitting in the middle of it.
We have had changes to our promotional strategy and our pricing at various times over the last two years and we've seen improvements as a result of the strategic changes both the way that we price the way that we promote in a way that we go to market and importantly, the execution and product portfolio that we are pursuing is also.
So, enabling a richer mix of revenue and margin along the way.
Got it and then my last one was just sort of on dollar general I think you've.
You mentioned that they're in sourcing part of their fresh business do you think that spreads to other categories and if so how does that sort of impact you or your distribution capacity to maybe absorb some incremental incremental sales from other other large customers that you have done that are definitely growing in the business.
Yes, I would characterize it more as a trailing issue. So this is something that's been in the market for some time.
And it's been public with that customer.
And so for US we've reached the end of the tail on that process and any capacity that would've been opened up is already opened in our network.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Cristina <unk> from Deutsche Bank. Please go ahead.
Hey, guys. Good morning, I guess I just wanted to follow up one more time on the labor situation.
Just wanted to get your thoughts on how you think you're positioned right now relative to your current markets and how you think about the size of any potential labor investments that you could potentially make here as you know lately, we have been seeing a lot of headlines for retailers moving their starting wages higher and in addition to the rate pay that you give.
Louise hourly are there any other considerations to ensure that you stay competitive is it seems that quite frankly are looking for more than just a job.
Looking for more than just pay in a job yes.
That's great question so.
As far as how we are positioned we pay very close attention to that and to make sure that we are competitive in the in the outward facing part of the offer and the outward facing probably offers typically.
Right, So that's sort of the window.
He believes that that that's a big that's a big important consideration that kind of opening day for somebody when they want when they want to apply for a job. So we don't get people into the window. We don't believe you have to be the highest the highest pay or do you think to get the best talent that you have to be in and some range of acceptability for what people can can achieve so hence.
The reason why there has been there has been escalation because.
The industry collectively doesn't believe that they are in that in that in that place yet. So so thats. The reason why the base wages go up we believe that base wages next year will go up at least more than they historically do in an average year. So I'm not sure what that number would be right now, but we're planning on higher and planning on productivity offset.
It will help us to fund those investments.
On the on the balance of the.
The job you are precisely correct.
The story only begins with base wages and then it goes to what are the working conditions.
Kind of work I enjoyed it.
Do I have a respectful and and productive relationship with the company and with the Supervisors in this new business that I've joined all of those things. We think are really important and working very hard on as I mentioned in the opening here today. This this idea of people first we think that is our absolute first.
First focus our first filter of what we do as a business is ensuring that we get the right talent and getting the right talent and getting them in the door and it means it means train them well it means providing their engagement tools that allow them to feel great about their sense of purpose at work and providing for recognition and training for supervisors. So they can do a good job and can create that environment.
Are there people can do their best work.
There's a lot going on in that space here now and I believe that we will be well positioned to get the best talent in the industry and to win the war for talent, because we're combining all of those events and not just trying to solve it by throwing money at people.
Got it that's very helpful. Thank you.
Okay.
Our next question is a follow up from Chuck Cerankosky from Northcoast Research. Please go ahead.
Tony you mentioned, giving people the tools that goes beyond in wages and benefits could you give us some examples.
I imagine some of this has better technology, but things that.
Allow your new employees and veteran employees to remain engaged and be more productive.
Especially in the light of higher overall employment costs.
Yes, I think it's a great question, Chuck So I think.
The headline is around training and around communication or visibility.
So as an example.
Have a task to do everywhere in our company. So the task in the warehouses actually ship a certain amount of goods.
<unk> and the shifts right and that's what matters of that shift supervisor into the team of employees that that he or she is supervising and.
And so so there is some of the steps that we're taking is one is working with folks on technique that allows them to be more efficient and more effective in their work and importantly, providing real visibility real time visibility about whats going on in that shift and keeping you up to date on did we have a good hour what are we doing next hour it actually.
Our goals as a team and.
The company was a little a little behind in my opinion on that so the combination of training and visibility that allows people to stay engaged and do their best work is a big big part of what we're doing.
Great.
We have rigorous communications with our entire team of associates on how we're performing obviously I just mentioned the hours in the shifts we have weekly numbers in period numbers in quarterly numbers that we share and we share them live and we share them at a number of other tools.
That's sort of that collective sense adheres to ensure we have ahead of us lets make sure were trained and ready to do that and I'll focus on the same types of things are going to make us successful.
Theres, a big pay off in that if a company can do that well in there and we're working really hard on that right now.
Thank you.
Our next question is a follow up from Scott <unk> from <unk> capital.
Please go ahead, hey, guys.
Maybe I missed this.
But I did wanted today, we talked about the customer and what's going on in the retail segment I know there's been some noise.
About trading down because of the inflation, although I'll hold said overnight yesterday.
They are really not seeing anything that some people are trading down some people are trading up so net net it's fine I just wanted to see if you guys had a view on that I don't know if I missed it but I just wanted to see if you had a view there.
Yes, Scott this is Jason Great question.
Thus far.
<unk> and the strength of the consumer has been relatively robust and we haven't seen significant trade down to date.
That said.
Something that we're keeping an eye on and we're watching out for it because as you think about inflation and how inflation passes through you.
No that theres, a theres, a PPI and CPI story here, particularly as a wholesaler with many of our customers running through the warehouse operation. There's a time lag that happens from a from an inflation standpoint, so I would expect that the inflation at.
Wholesale is starting to roll through retail and.
And that's something we're keeping a close eye on to determine a trade down occurs but to date, we haven't seen anything significant.
And then as a second follow up thank you second follow up.
We're hearing more and more about a.
Wanting to automate much more quickly in those distribution centers.
And.
Amazon talked about what other people have talked about not just Amazon or hold how are you guys positioned through an automation perspective, but this is something you are looking to in 'twenty two to two <unk>.
Increased investments there I mean, maybe we'll hear more about that at the Investor day, but I just thought maybe look now.
Yes, that's something we would probably talk a little bit more of the investor day, but just.
I think the automation.
The pursuit of tools and technologies that allow us to do work in a more again in a more efficient and effective way our forgone. If people are going to have to do that to survive.
And.
The.
The advent of the higher wages are going to make some of those technologies more affordable a lot of the and you probably have seen this where theres a theres a warehouse automation package that somebody will put in your plan and you look at that.
I'm doing the math here it just doesn't work.
I'm going to spend.
I'll say.
The illustrative with $50 million a year to save 30.
Where those numbers are.
We are getting are different now and I think there'll be a lot more focus on that so our first focus is going to be on.
Sort of process tools, so things like technologies and tools that will allow us to be more effective than we might've been in the past and those are.
More readily accessible than some of them with some of the items like automated cranes in robotics.
As you also probably know there is a pretty big backlog on technology on that kind of hard technology as well. So we're looking at what we can do.
And where it makes sense.
The <unk>.
Practical reality.
There's not a there's not 2022 deployment of that just because of the just kind of practical lead times. So so our first focus is going to be more on again on process and tools that will have the impact of automating some of our processes.
Okay perfect guys. Thanks, very much again.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Tony <unk> for any closing remarks.
Sure. Thank you and thank you all for your participation day, a lot of great questions. We really appreciate your work and your thinking through those we look forward to updating you all on the timing of our planned investor day that'll be coming sometime in the coming months and we will speak to you again, when we report our fourth quarter 2021 results in February you all have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Sure.
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