Q4 2021 SpartanNash Co Earnings Call
Good day, and welcome to the Spartan Nash company fourth quarter and fiscal year 2021 earnings conference call.
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I'd now like to turn the call over to Chris Mandeville Investor Relations. Please go ahead.
Good morning, and welcome to the Spartan Nash company fourth quarter and fiscal year 2021 earnings Conference call.
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 this morning at approximately six eastern time for.
For a copy of the earnings release as well as the company's supplemental earnings presentation. Please visit <unk> website at Www Dot Spartan Nash dotcom forward slash investors let's.
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 National's earnings release from this morning, 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 any forward looking statements. Please remember Spartan <unk> undertakes no obligation to update or revise these forward looking statements.
The company will also make a number of references to non-GAAP financial measures.
Company believes these measures provide investors with useful perspective on the underlying growth trends of the business and it is included in the earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures and with that it's now my pleasure to turn the call over to Kevin.
Thank you, Chris and good morning, everyone I'm excited review Spartan Nash as 2021 performance with you today and look ahead to our 2022 strategies first.
First let's talk about the year at a high level.
As of today, we are almost two full years into the pandemic. Despite the unpredictable nature of Covid and its variance Spartan associates again executed with excellence to serve our customers. In 2021 every person has been impacted by some way by Covid, Yes, our associates continuously ensure that our stores remained open.
Shelves were stocked products was safely delivered and our military heroes had the supplies they need it.
Through our pharmacies, we ensure that patients had access to medication and testing that was critical in keeping our communities healthy to date, we have administered over 150000 vaccines I'm incredibly proud of their efforts.
Our top and bottom results for 2021 are squarely in line with the guidance we provided at the start of the year and have reaffirmed throughout.
On a consolidated basis, we generated $8 $9 billion in revenues and.
And adjusted net earnings of $61 million or $1 70 per diluted share.
We also generated $161 million of cash flow from operations and paid down over $86 million of long term debt to significantly improve our leverage we did this while reinvesting in the business to support future growth and driving greater efficiencies. Our strong cash flow also enabled us to return over $34 million a share.
Holders in the form of dividends and stock repurchases.
Touching briefly on our segments fourth quarter performance, our retail segment grew top line with one year comps of seven 3%. We are continuing to see strength in food at home consumption and increased store traffic. Despite the acute labor challenges, we've continued to execute remarkably well at the stores, which drove <unk>.
Lastly, our select net price increases had minimal impact on consumption.
And our food and military distribution segments in particular, we continue to navigate through the industry wide labor and supply chain pressures. We remained focus on our supply chain transformation initiatives, which we believe will position the company for improved profitability and long term success, we are seeing some tailwind, including food inflation increases.
Which have improved our gross margin rates.
So despite facing steep comparisons to 2020 Covid demand, we're very happy with our 2021 performance as we grew our topline and met our profitability objectives.
I'd like to turn now to progress we've made during the year and executing against our strategic priorities.
Since joining the company in late 2020 higher focus on driving change through our strategy operating model and culture to enhance profitable growth and shareholder returns over the past year. We've continued to strengthen our leadership team, we welcome new executives and legal marketing merchandising supply chain strategy.
And communications our two most recent management team additions include aimed Mcclellan, our new Chief marketing officer and been at Morgan, Our new Chief Merchandising officer.
And going into 2022, we have a new corporate identity that sets the strategic direction for growth and stewardship of <unk> Nash last year, we engaged more than 1900 associates customers vendors and partners to help us establish this a dirty which we call our winning recipe. This identity. We will continue to guide the year.
Use of our time and resources.
Our new mission is to deliver the ingredients for a better life. This mission to express the difference we will make in the lives of our customers. We will get there by refining our signature strength, which is to be the most customer focused innovative food solutions company.
We made good on these promises to our customers by investing in three core capabilities people operational excellence.
And the insight that drive solutions.
I introduce these three core capabilities in our last earnings call and these capabilities inform our five strategic priorities and those five strategic priorities are number one creating a people first culture to elevating execution to win the day three transforming the supply chain for acting on insights to all.
<unk> customer and product portfolios and five launching customer centric innovative solutions.
Take a few minutes now to discuss the strategic priorities in more detail.
So let's dive into our first strategic priority, which is creating a people first culture.
Last year, we made great strides to enhance our associate experience by investing in wages benefit safety recognition and communication.
We've provided an average of over 10% pay increases for all entry level roles in retail and supply chain. We shorten the length of time for associates to become eligible for benefits and we announced a new paid time off policy that provides associates with greater flexibility in how they use their time off.
We have made a new retail and supply chain training programs.
And we also made dramatic improvements with safety by improving our injury rate by 47%.
While we expect the labor environment will continue to be a challenge all the actions. We are taking are critical to attracting and retaining top talent.
Our second of our five strategic priorities as elevated execution to win the day. This.
This involves increasing the automation to focus on more value added activities and implementing winning technology solutions. In 2021, we made significant progress on our development of a comprehensive transportation management system. We will continue to invest in automation and technology to ensure we can execute more efficiently in 2022.
Two and beyond.
Moving to our third strategic priority transforming the supply chain.
To date, we have implemented sustainable supply chain improvements to drive savings optimize our network footprint and rationalize Skus in 2021, we closed two warehouses and opened a new distribution center in several Maryland, which represented our most significant addition to the supply chain network in many years. This.
This facility is a leaving the stress on some of our Dcs in the short term and will support our growth in the long term.
In addition, as you may have read a few weeks ago, we reached an agreement with coastal specific food distributors to expand our distribution footprint on the west coast.
Through our partnership we will launch operations out of cost of 500000 square foot multi temperature distribution center in Stockton, California. This facility will begin servicing our customers next month.
Having a west coast presence allows us to provide faster fresher and more cost effective deliveries to our customers. So they can ensure their shoppers have access to the critical food and household supplies they need.
The arrangement will also save roughly 1 million gallons of diesel fuel annually by helping us reduce fleet mileage by 10% or more than 7 million miles beginning this year. This agreement also advances our work in ESG by reducing our carbon footprint through lower greenhouse gas emissions by an estimated 10.
<unk> metric tons.
As of today, we are on track with our initial cost savings of $15 million to $30 million from our supply chain transformation efforts, we expect that those savings will accelerate and begin to be accretive in 2022.
Our fourth strategic priority is acting on insights to optimize customer and product portfolios. We.
We are focused on positioning our military segment for success through a variety of tactics, including portfolio diversification.
We are also working to expand customer profitability and services as a food solutions company with deep expertise across retail wholesale and distribution. We are uniquely equipped to provide more insights and services to our customers. We're also working to tailor our retail assortment to align with local community preferences and continue enhancing our app.
Market retail experience.
Our fifth and final strategic priority is launching customer centric innovative solutions, we will leverage data driven insights to help us grow our own brands and their own brands profitability.
And to increase our e-commerce sales.
We will also be offering new services through strategic partnerships that create the ecosystem of the future.
Alright, Thats, a summary of our five strategic priorities the foundation of our operational plan.
We're running Spartan Nash differently as we look forward to 2022, we're tracking metrics across these initiatives to continually measure our success and keep ourselves accountable.
Among these metrics our 2022 key performance indicators will focus on associate retention safety outbound throughput fill rate and adjusted EBITDA.
I'm excited about where we've been and where we're headed as a company as we continue to execute I believe will make Spartan Nash an investment that will yield meaningful long term return to all of our shareholders.
With that I'll turn it over to Jason to walk you through our financial performance in greater detail and provide you with our fiscal 2022 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 fourth quarter were $2 1 billion compared to 2000, Twenty's fourth quarter sales of $2 $25 billion.
Outside of the impact of the 50, <unk> week sales of $159 million, our fourth quarter sales grew $5 million.
This growth can be attributed to increases in comparable store sales within the retail segment and continued growth with certain existing food distribution customers.
As well as inflationary pricing across our portfolio.
Our GAAP EPS came in at <unk> 62 per diluted share in the quarter compared to 34 per share in the fourth quarter of 2020.
On an adjusted basis EPS for the quarter was 18.
Compared to EPS of <unk> 43 last year.
The primary variance between our GAAP and adjusted EPS is related to the transition impact of the new paid time off plan that Tony mentioned earlier.
The transition resulted in a $21 $4 million reduction in our year end balance sheet accrual and a corresponding onetime gain.
During the fourth quarter the company elected to transition from a grant based time off policy to an accrual based policy, which resulted in a lower required accrual balance at the end of the fiscal year.
As Tony mentioned, the new time off policy provides more flexibility to associates and represents a greater ongoing benefit.
On an adjusted basis the decrease in profitability from prior year was due primarily to an increase in our supply chain expenses.
Labor market conditions continued to drive higher wages additional use of overtime and create additional reliance on costly third party contractors.
Also higher corporate administration costs, including incentive compensation decreased earnings compared to the prior year.
The increase in expenses was partially offset by an improvement in the gross profit rate, where we saw an increased to 15, 4% compared to 15, 1% 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 segment sales.
Inflation during the fourth quarter led to higher LIFO expense, which increased $9 2 million over prior year fourth quarter.
This incremental expense was equivalent to 19 and earnings per share.
Adjusted EBITDA was $43 million in the fourth quarter compared to $49 million in the fourth quarter of last year.
The 50 <unk> week in 2020 accounted for $4 million of the change year over year.
Now turning to our segments retail net sales came in at $613 million for the quarter compared to $627 million in the fourth quarter of 2020.
This decrease was primarily due to cycling of $49 million impact of the 50 <unk> week of 2020.
Beyond the impact of the 50 <unk> week retail sales experienced a solid increase.
Our comparable store sales continued to accelerate and were up seven 3% for the fourth quarter, while our two year comparable sales were up 16, 9%.
An increase of 340 basis points sequentially from the third quarter.
Comparable store sales benefited from the consumer shift towards food at home and rising inflation.
Fourth quarter reported operating earnings in the retail segment were $23 3 million compared to $6 $9 million in 2024th quarter, driven largely by the transition impact of the new paid time off policy increased comparable store sales and lower restructuring and asset impairment charges.
Retail adjusted operating earnings were $12 $3 million for the quarter compared to $9 $4 million in 2000, Twenty's fourth quarter.
Adjusted operating earnings excludes the transition impact of the new paid time off plan, the restructuring and asset impairment charges and other items detailed in table three of this morning's release.
Net sales in the food distribution segment were $1 <unk> 3 billion in the fourth quarter compared to <unk>, one 1 billion in the prior year.
This was driven by the impact of cycling 2000, Twenty's 50, <unk> week sales of $76 4 million.
This decline was partially offset by favorable inflation and cycling $5 9 million and stock warrant related impacts from the fourth quarter of 2020.
We continue to see an upward trend in inflation as the quarter progressed, particularly in our core distribution business averaging above 7%.
Certain categories, including proteins and produce continue to see the largest increases while core grocery categories increased in the range of about 5%.
We still anticipate further inflationary increases into 2022. However, as we previously noted we expect that these increases will be passed through to our customers.
Reported operating earnings for food distribution in the fourth quarter totaled $11 7 million compared.
Compared to $11 million in the prior year quarter.
This increase in reported operating earnings for the segment related to the transition impact of the new paid time off policy in the current year and lower restructuring and asset impairment charges.
These gains were partially offset by higher supply chain expenses, and a higher rate of inventory shrink.
Adjusted operating earnings totaled $4 8 million in the quarter versus the prior year's fourth quarter adjusted operating earnings of $13 1 million.
Adjusted operating earnings exclude the transition impact of the new paid time off plan and the restructuring and asset impairment charges.
Military net sales of $445 million in the fourth quarter decreased by just over 13% compared to prior year sales of $514 million.
Which included an incremental $33 $4 million.
Due to the 50 <unk> week.
In addition to the 50 <unk> week, the decrease was related to the continuation of lower demand at domestic commentaries and a reduction in export sales as a result of continued supply chain challenges and international shipping ports in the current year quarter.
These decreases were partially offset by price inflation in the current year quarter.
The fourth quarter reported operating loss in the military segment was $1 6 million compared.
Compared to <unk> $5 million in 2000, Twenty's fourth quarter, reflecting.
The continued decline in volumes as well as a higher rate of supply chain expenses similar to what we have observed in our food distribution business.
These declines were offset by the transition impact of the new paid time off policy and improvements in gross margin.
The segment's adjusted operating loss of $4 $7 million for the quarter excludes the transition impact of the paid time off policy in the current year and is down from $4 million loss in 2024th quarter.
Our fiscal 2021, adjusted EBITDA is $213 $7 million.
Compared to $239 1 million in the prior year.
Due to the reduction in our net long term debt balance of $71 5 million, our leverage ratio improved to one eight times compared to two times at the end of fiscal 2020.
For the full year, we generated consolidated operating cash flows of $161 million.
Compared to $307 million in the prior year.
The decline was driven largely by cycling the prior year significant increases in sales volume related to COVID-19, which resulted in incremental earnings as well as a reduction in working capital in the prior year.
The strong cash flow performance in the current year enabled the continued pay down of long term debt, resulting in favorable interest expense compared to prior year.
In fiscal 2021, the company paid over $28 million in cash dividends equal to 80 per common share.
The company also repurchased 265000 shares during 2021 for a total of $5 3 million.
<unk> our focus on shareholder return.
As covered in today's press release, we are providing our initial guidance for fiscal 2022, which.
Which incorporates both the elements of our long term strategy and current expectations for the 2022 retail and supply chain environments.
Overall, we expect the strong results from this past year to continue into 2022 with consolidated net sales to remain consistent with fiscal 2021 with a range of eight 9% to $9 1 billion.
In retail we believe revenues will be stable and will result in comparable sales ranging from flat to 2%.
In food distribution, we expect sales to increase 2% to 4%.
We're projecting that trends in our independent customer base will be similar to that of our corporate retail segment.
We also expect to see growth in other areas of our portfolio.
Within our military business, we expect a continued decline in commentary demand, resulting in a 3% to 7% sales decline.
Our guidance also includes an increase in the companys profitability over the prior year, we expect fiscal 2022, adjusted EBITDA to be in the range of $214 million to $229 million compared.
Compared to 2021, adjusted EBITDA of $214 million.
As discussed in our earnings release, we will be revising the presentation of adjusted EPS beginning in fiscal 2022 to include an adjustment for LIFO expense or benefit.
We believe this change will better enable investors to evaluate our performance and reduce unnecessary variances between our non-GAAP performance measures.
Prior to considering the revised presentation, our fiscal 2022 adjusted earnings per share range from $1 75 to $1 90.
Compared to $1 70 in 2021.
The revised presentation, excluding the impact of LIFO.
<unk> 2022, adjusted earnings per share ranging from $2 10.
To $2 25.
This guidance compares to fiscal 2021 pro forma adjusted earnings per share of $2 eight.
Which was prepared on a consistent basis.
Profitability increases in both adjusted EPS and adjusted EBITDA are expected due to margin rate improvements across our portfolio and the positive impact of executing elements of our strategy, which Tony discussed earlier.
We expect some of the same challenges within supply chain labor and product availability will persist into 2022, partially offsetting the growth potential from our strategies.
However, we are reaffirming our expectations for run rate savings from our supply chain transformation initiative of $15 million to $30 million.
We expect to begin achieving savings within this run rate range by the end of 2022.
Due to our improved leverage we have revisited our capital allocation for 2022.
Our fiscal 2022 guidance reflects total capital expenditures in the range of $100 million to $110 million for the fiscal year, which is an increased investment in our core operations and growth initiatives.
In addition, we plan to increase our share repurchases in connection with a recently approved $50 million buyback program.
In 2022 share repurchases will be balanced with other value creation opportunities to deliver the best value to shareholders.
We will also continue to provide our regular quarterly dividend.
Depreciation and amortization is expected to be in a range of $90 million to $100 million in interest.
Expense for $15 million to $17 million.
We expect our reported and adjusted effective tax rate to range from 24 to 25, 5% and now I'd like to turn the call back over to Tony.
Thank you Jason before I turn to my concluding remarks, I want to briefly address the announcement. We made earlier this month about the three new independent directors. They are appointed to the Companys Board of directors last summer, we began a comprehensive board refreshment process with the assistance of a leading executive search firm.
We are delighted to welcome Julian <unk>, Jamie Battelle and Dr. Pamela per year to the board I am certain spire natural benefit from their technology distribution and retail consumer brand and human resources expertise. We also announced that current board members, Frank Gambino <unk> Jackson and those with Nichols will not be seeking reelection.
As far as Nash directors at this year's annual meeting on behalf of the board and the company I want to thank them for their years of guidance and dedication to <unk> and its shareholders.
Alright, so in closing, we're very pleased with our fourth quarter and full year 2021 financial performance, we're in a solid position heading into 2022.
We are navigating industry wide labor and supply chain challenges, we are focused on our five strategic priorities, which include improving operational excellence and our supply chain transformation initiatives. We are confident that we are very well positioned to deliver value for shareholders. This year and in the long term.
We are eager to share many more details around our achievements and strategy. We are still working toward hosting our investor day, which is likely to be virtual due to COVID-19 details on this meeting later this spring will be forthcoming we hope youll be able to join us.
With that I'd like to turn the call back to the operator and open it up for your questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the key.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yes.
The first question comes from Chuck Cerankosky from Northcoast Research. Please go ahead.
Good morning, everyone.
If you could Tony and Jason.
Could you talk about labor supply and supply chain issues.
Over those called the first two months of the new year versus how things progressed in the fourth quarter.
Great happy to Chuck so the.
I would say the year has started in a similar way that left off at the end of last year.
The labor market is still very tight.
Have made.
We noted here in our comments earlier, a number of improvements to our offering for particularly for frontline and entry level jobs, we've seen improvement there, but it's still been there.
Difficult sledding, there is still a quite a bit of tightness in the labor market and even though we have seen a waning of some of the highest level of turnover. We may have seen back in Q2, and three still it's still very highest still very challenging, but improving modestly I would say kind of every week in week out.
On the overall supply chain inbound.
I would say candidly, we're not we have not seen any real improvement there. We're seeing the same type of of disruptive effects and.
As you think about what's going on there the labor that we just talked about here has impacted all of our manufacturing community. There is still struggling.
Produced.
The orders that we make.
<unk>.
That is actually it hasnt changed much naphtha has probably got a little bit worse. Since this is the middle of the fourth quarter.
The headline I think is that with the labor.
Issues and challenges there is lesser surge capacity and the overall supply chain. So whether it's from agriculture manufacturing trucking, even the inventories that are held at store level. All of those all of those capacities are more limited so something like a normal disruptive effect.
A snowstorm in the Midwest will cause.
So cause outages to be more significant than linger for a little bit longer and so so we don't see a snap back on the overall supply chain.
Issues kind of on our inbound service and we're optimistic that we're seeing some good progress on labor, although again still very difficult.
Can you give us some numbers on.
Your fill rates.
Where they've been.
Are they ours.
Over the past six months and maybe also kind of out of stocks you are seeing on the inbound side, yes, great question. So.
Rough numbers of course the.
We saw if you go back to right about a year ago, we had gotten up to numbers that are around 70%.
Still right on inbound supply.
That that number has eroded over the last nine months, we're seeing right now or something closer to 60% overall and again as you know.
<unk> overall varieties of volume might be a little bit better than that in terms of the volume of it goes we're receiving but as manufacturers are struggling to fill orders there theyre cutting is to use our lower performing slower moving skus and that shows up as bigger cuts for us on the inbound so so somewhere in that neighborhood of probably about.
10 overall.
Percentage points of decline over the course of the last year.
And how about fill rates outbound.
So your bill rates.
<unk> actually got a little bit better than what they were we separately measure our performance in terms of what we have and how well we service where we can send going out of the building.
And we are we actually set that is one of our top five kpis. This year. It is to focus on that discretely.
And we are approximately on plan for that so we're fulfilling about 90% on the outbound roughly.
And Thats.
We believe there is there is there is with.
With our supply chain transformation programs and the other efficiency coming from that there'll be upside to that number as well. So the team's doing a pretty good job of managing inventory, we do have and that number has actually gotten better over the over the past several months.
Thank you.
Okay.
The next question comes from Greg, but each kania from.
Wolfe Research. Please go ahead.
Good morning. This is Spencer hanus on for Greg I, just wanted to talk about food distribution for a minute.
Maybe you could just walk us through sort of.
How are you guys get to the top and bottom of that 15% to $30 million cost savings target that you have there and then I guess more near term how much of a drag was incremental supply chain costs on profitability in food distribution during Jeremy <unk>.
Spencer This is Jason good morning, good to speak with you.
So starting with the first question on the 15% to 30% how do you get to the top and bottom end of that range.
Talked a little bit about our initiatives over the last couple of quarters and and really at the core of it is ensuring that we build momentum on our operational transformation and our warehouses that we continue to execute against our network optimization and you've seen a little bit of that already with with a couple of warehouse closure.
<unk>, one opening and then the west coast expansion with the coastal partnership.
And then also many of the kind of behind the scenes building blocks elements of supply chain performance.
For us to get to the bottom end of the range is really to build out those core those core components to move to the top of the range would really be exceeding our selling.
On some of the operational.
Improvements in the in the warehouses.
That said the reason you've got a range here is this is not.
This is not an overnight transformation takes time for these things to materialize and for the for the programs to be codified.
And this is all with the backdrop of the labor market conditions that Tony mentioned earlier, we're operating under a context of.
A tight labor market with a fair amount of.
Attrition not just its part national more broadly that that causes a longer lead time to make to make some of the changes stick that said, we're convinced and have a lot of conviction behind the 15% to $30 million and that's why you see it in our in our outlook. We believe that we've got real value creation opportunities here and we're running against it.
Got it and then could you just provide a little bit more color on the sales guidance for this year and what your underlying assumptions are.
For volume in particular, just given with inflation running at 7% I guess that would imply sort of a big decline in volumes. So just talk a little bit more about what sort of.
Guys build up to that sales outlook, yes, maybe starting from an inflation standpoint, we expect elevated inflation to continue into 2022, and frankly don't see inflation easing at least in the next few months.
That said.
If we look at the year in its totality, we're projecting a lighter inflation outcome than we saw at the end of 2021. So when you think about the.
The revenue outlook, you should think about it with a lighter inflation assumption and more flattish volumes remember that that we're still coming off of a post COVID-19 surge in food at home versus food away from home and then also the tailwind to some of the government stimulus that supported demand has support demand.
Going forward. So we have to think about it is kind of flattish volume with support from a 3% inflation on the year.
But really there's a lot of uncertainty in the market.
I'm sure you've heard this from many of the companies that you cover.
There is no perfect Crystal ball on what inflation is going to look like at this point and.
And we are predicting a like I said continued inflation early into 2022 and a bit of a moderation in the back half, but we will keep you updated as that develops.
Great. Thank you.
The next question comes from Scott <unk>.
With RFA. Please go ahead.
Hey, guys. Thanks for taking my questions I wanted to get back into distribution as well.
At least compared to our estimates the revenues were a little bit light and then looking at the.
The industry itself and what you did in retail.
I would have thought there might have been some outperformance there. So I just wanted to understand.
What may be driving that or there's some customer losses are the independents, just not performing as well. So anything you could shed light on that that'd be great.
Yes, Scott this is Jason again, and good morning, Thanks for joining.
Think about thinking about the distribution business.
Our core business, our independents have grown broadly in a similar a similar pace to two are our.
Our retail business.
But the important difference here is that I mentioned this last quarter, we hit the trough with with DG last quarter, but we're still lapping higher comps on that from last year. So youre seeing that money some of the comps overall.
Okay. That's great and then I know you guys gave a little bit update on the on the military business, but I thought maybe getting a little bit more detail on how.
You're trying to change that a little bit more granularity if you would.
Sure Scott This is Tony.
We had we.
We had a tough year in military onto the top line really the last two years.
No COVID-19 actually provided.
Surge for a retail broadly, but because of the base closures and other complications of the military business was the opposite and so we had we had declining sales that were greater than our expectations in 2021 with the military business.
We have we had done some really fine work and improving the variable margin in that business. They don't all show.
As a.
Sort of discretely because of the declining volume, but as we start settling in and where we think the longer run volume is there we'll be able to make some of the fixed changes to that business fixed cost changes were those those margins will manifest. So we are monitoring the base.
Base situations very carefully the most of the basins are back now and have fewer no restrictions for retire retirees to come on base and then buy the groceries.
But it's still we're still looking at that very closely.
We are also we did in the fourth quarter saw.
It's probably a little or slightly disproportional loss in the international business because of the difficulty with shipping lanes as youre well aware. So so we had a little bit more than a little bit more a higher ratio of that decline was on the international business then what if that represents for our total business.
So monitoring carefully the story here is going to be to continue to drive the efficiencies, particularly through the supply chain improve our overall cost.
Our efficiency and effectiveness there as we settle in on what we think the long run volume is going to be which we hope is going to get settled here pretty quickly there will be able to make other modification of the business and we think will have been on the right track from a profitability standpoint.
And perfect.
Slip one last one in and I just wanted to obviously the change in the way you're reporting EPS I guess youre, excluding LIFO I think thats, what I got.
What drove that I don't think other people are doing that in the industry. So I know, we look at EBITDA lot, but I was just wondering what kind of drove that decision and then I'll yield. Thanks.
Sure. This is Jason again, yes, what drove the decision was that the our adjusted EPS already excludes LIFO and adjusted EPS did not and so you had a divergence in the adjusted measures that was that we believed was potentially confusing. So what we've done is lined up those two measures with respect to the treatment.
LIFO.
We also took a step back to compare how other peers were reporting in this space both with whether they were a FIFO reporter already or how they adjusted for their LIFO expense and we wanted to make sure we aligned up consistent with what the predominant practice was which which we found to be adjusting the adjusted EPS.
Yes for LIFO.
Alright, perfect guys. Thanks for thanks for taking all my questions.
The next question comes from Kelly Bania with BMO capital markets. Please go ahead.
Okay.
Hi, good morning, Thanks for.
Taking our questions first just wanted to ask about the quarter and the gross margin at retail I think the other two segments were called out as drivers of supporting the gross margin expansion in this fourth quarter, but I'm curious what you are seeing at retail and how we should think about 'twenty two.
Gross margin at retail as well.
Hi, Kelly good morning could do good to have you on here this is Jason.
Our gross margin in the retail business was I would say down moderately.
Consistent with.
With what you would've seen the better performers in the retail space looking like.
In the comments earlier, what we talked about was gross margin improvement in the other two segments as well as the benefit of retail as a share of the total business driving total gross margin up so that the improvements of 15, 4% overall gross margin was was helped by unit level improvements.
In military and food distribution as well as the share of <unk>.
Total business at retail represented in the quarter, even though retail slipped backwards modestly in.
In gross margin.
Any color on what you expect there in 'twenty two.
Yes, we expect to.
Have relatively strong margins continuing going forward one of the other nuances to highlight and retailers the theres a little bit of variability with with retail gross margin related to fuel. So fuel as you know <unk> been up and up and down fuel prices themselves.
On a per gallon basis or are up more than 50% year over year. So you've got a little bit of noise in that overall retail margin. So I wouldn't read too much into the decline is a deterioration as much as a little bit of variability in the market and again the way I characterize it as.
Our performance on gross margin that we don't reported that the decline is modest and as is.
Is at or better than some of the other players that <unk> seen report recently.
Okay.
Okay and as we think about your guidance for 2022 is it fair to think about the majority of that or really all of that being driven by the supply chain initiative.
Reiterated that $15 million to $30 million target I guess, maybe being at that run rate towards the end of the year, but.
Is that really driving all of the improvement in EBITDA and can.
Can you help us think about how that impacts segment profitability as we go through 'twenty two.
Sure. So I would say that it's a it's certainly a significant component of the improvement plan, but it's not the only action out there I'd be remiss if I didn't highlight the fact that we can plan and the outlook continues to reflect increased labor costs in the wage environment that we're operating in.
A significant headwind.
That would be offset by the supply chain transformation.
Well as significant gross margin improvement programs that we have and we expect to continue going forward. So you've seen us build our gross margin in both food distribution and military.
<unk> seen us stabilize or improve in most quarters, the retail margin and we expect margins to continue to be solid and gross margin solid and growing.
Partially offset by that labor labor headwinds and supply chain headwind context.
Topped off with the supply chain transformation that we've talked about the last couple of quarters.
And are you are you able to quantify the labor cost inflation or your plans there for the year just to help us understand the magnitude of that.
Yeah.
Yes.
In round numbers.
Yes.
We're looking at somewhere in the neighborhood between 40 and $50 million overall and put that in context, that's probably somewhere between two and three times, we would normally see so.
The numbers we're up against.
Okay.
Great and just last one for me just as we think about the distribution segment is there still any noise from lapping the DG impact as we move through 'twenty two or is that.
Leveled out now.
Through the rest of the year.
We are still lapping higher comps.
Certainly in the fourth quarter. So what we talked about last quarter was we hit the trough or roughly the trough in the third quarter, but we still have four quarters of higher comps to lap as we as we kind of burn off those higher periods.
Okay. Thank you.
As a reminder, if you would like to ask a question. Please press star and then one to join the question queue.
The next question is a follow up from Chuck Cerankosky from Northcoast Research. Please go ahead.
Thanks.
If we take your inflation forecast G suite of about 3% three 5% I think you said what kind of LIFO number does that.
Give us.
Our LIFO expense this year just for color in 2021, the LIFO expense. This year was about 18 little north of <unk> of $18 million.
On a slightly higher.
Interest slightly higher inflation, so for color and perspective.
What you should expect is a number that's going to be in the teens, it's not perfectly precise and linear is going through this but it's going to be a number that's in the teens.
So, perhaps a little less than what we saw in 2021.
Yes, potentially less than what we saw in 2021 and what I mentioned in my comments earlier was on the on the prior.
The prior EPS method, we had a we had an EPS range that I noted in my comments that EPS range was was slightly higher from a versus 2021 than what the 22 ranges versus the new pro forma part of the reason for that differential is because.
The LIFO decline that we're projecting in 2022 versus 2021.
Alright, thank you.
This concludes our question and answer session I would like to turn the conference back over to Tony Firestone for any closing remark.
Alright, well. Thank you all for your participation on today's call really appreciate the thoughtful questions and the ability to spend time with you today and we look forward as always updating on our continued progress throughout the year. So thank you all again and have a great day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you.
You may now disconnect.
Okay.
Okay.
Okay.
Yes.
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