Spartan Stores Announces Fiscal 2009 Second-Quarter Financial Results

Spartan Stores, Inc., (Nasdaq:SPTN) today reported financial results for its 12-week second quarter ended September 13, 2008.

Second-Quarter Results

Consolidated net sales for the 12-week second quarter increased 4.8 percent to $626.8 million from $598.1 million in last year’s second quarter. Incremental fuel sales, retail comparable store sales growth of 4.1 percent (excluding fuel sales) and higher distribution sales to new and existing customers contributed to the net sales improvement.

Second-quarter operating earnings improved by double digits for the eleventh consecutive quarter, increasing 16.9 percent to a record high $22.5 million from $19.3 million in the same period last year. The operating earnings improvement was due primarily to higher retail and distribution sales, improved distribution margins, retail store efficiency improvements, and the expiration of the Michigan Single Business Tax (SBT) (replaced with an income tax January 1, 2008), but was partially offset by a higher LIFO inventory charge. The operating earnings include $0.7 million in start-up and promotional costs related to remodeling activity, while last year’s second quarter included $0.3 million of costs related to the Felpausch acquisition.

"We are very pleased to have achieved solid sales and profit growth during this challenging economic climate,” stated Dennis Eidson, Spartan’s Chief Executive Officer. "Our second-quarter operating earnings reached an all-time high, and net sales improved for the tenth consecutive quarter, demonstrating the effectiveness of our business strategy, execution abilities and the dedication of our management team and associates. We are also very enthused about our recently announced acquisition agreement. This acquisition will bring us a premier retail operator with 17 retail stores and 15 in-store pharmacies, expand our retail store base by 20 percent, establish our retail presence in eastern Michigan and provide us with a strong platform for future growth. Upon completion of this transaction, we will retain the VG’s name and maintain a regional office to support these operations.”

Second-quarter earnings from continuing operations increased 45.6 percent, reaching $12.0 million, or $0.55 per diluted share, compared with $8.3 million, or $0.38 per diluted share, in the same period last year. Last year’s second quarter included a $2.7 million non-cash income tax charge related to the previously disclosed change in Michigan’s state business tax structure.

Net earnings for the quarter increased 21.6 percent to $11.1 million, or $0.51 per diluted share, from $9.1 million, or $0.42 per diluted share, in the same period last year. Net earnings include a loss from discontinued operations of ($1.0) million, or ($0.04) per diluted share, compared with earnings from discontinued operations of $0.8 million, or $0.04 per diluted share last year. The loss from discontinued operations resulted from Pharm store exit costs and the finalization of the wind down of these operations, partially offsetting the net gain recorded in the first quarter of this fiscal year. Last year’s earnings from discontinued operations included a $0.8 million pretax gain related to the closure of five Pharm stores and one convenience store last year.

Second-quarter gross profit margin declined 20 basis points to 20.3 percent from 20.5 percent in the same period last year. The rate decline was principally due to a higher mix of fuel sales than the prior year, partially offset by improved margins in the distribution segment.

Operating expenses totaled $105.0 million, improving to 16.7 percent of sales, compared with $103.1 million, or 17.2 percent of sales, in the year-ago quarter. As a percentage of sales, the decline in operating expense was due primarily to the shift in sales mix noted above, improved operating leverage from higher sales volumes and the absence of the Michigan SBT of $0.6 million, partially offset by higher compensation, fuel, utilities and credit card fees.

Operating Segments

Distribution Segment

Net sales in the distribution segment increased 3.2 percent to $303.3 million from $293.8 million in the same period last year. The sales increase was the result of incremental sales volumes to new and existing customers and product cost inflation.

Distribution segment operating earnings reached a second-quarter record, increasing 30.8 percent to $10.0 million from $7.6 million in the same period last year. The improvement was the result of higher sales volumes to new and existing customers, better fixed cost leverage, improved gross profit margin rates and the absence of SBT expense, partially offset by increased compensation and transportation costs. The margin rate improvement was driven primarily by favorable purchasing opportunities and merchandising initiatives, which were partially offset by higher LIFO inventory charges.

Retail Segment

Second-quarter retail net sales increased 6.3 percent to $323.5 million from $304.2 million in the same period last year. The increase was due primarily to incremental fuel sales, a rebound in sales at stores located in northern Michigan due to more seasonal weather conditions and robust sales from stores benefiting from the Company’s capital program. Excluding fuel sales, second-quarter comparable store sales increased 4.1 percent.

Second-quarter retail operating earnings increased 7.8 percent to $12.5 million from $11.6 million in the same period last year. The operating earnings improvement was due primarily to increased sales and more efficient store operations, partially offset by the previously mentioned start-up and promotional costs related to remodeled store openings and higher LIFO inventory charges.

Mr. Eidson continued, "We are pleased to be achieving steady progress strengthening our market position as we confront challenging economic conditions. As anticipated, comparable store sales for the quarter improved due to more seasonal northern Michigan weather conditions and enhanced sales growth at stores that benefited from our capital program. During the second quarter, we completed major remodel projects at one Glen’s Fresh Marketplace and converted a Felpausch retail store to a D&W Fresh Market. Preliminary sales trends from these stores are in-line with our expectations and with the favorable trends achieved at other recently remodeled stores. We are particularly pleased with the remodeled Glen’s store because it represents a dramatic improvement in the conventional supermarket shopping experience to better match the expectations of customers located in that geographic market area.”

Balance Sheet & Cash Flow

Total long-term debt (including current maturities) declined to $149.9 million as of September 13, 2008 from $154.4 million at March 29, 2008.

Year-to-date net cash generated from operating activities increased to $23.3 million from $4.3 million in the corresponding period last year due to improved earnings, a continued focus on working capital efficiency and collection of customer advances related to new distribution business. In addition, the Company’s cash and cash equivalents balance increased to $28.5 million from $19.9 million due to proceeds generated from the sale of its Pharm operations and the general improvement in business operations.

Year-To-Date

Consolidated net sales for the 24-week, year-to-date period rose 8.5 percent to $1.2 billion from $1.1 billion in the corresponding period last year. The net sales increase was primarily the result of the Felpausch retail acquisition, fuel center sales growth, higher comparable store sales and additional sales to new and existing distribution customers, partially offset by the absence of Easter holiday sales in this year’s 24-week period.

Year-to-date operating earnings improved 20.5 percent to $37.6 million from $31.2 million in the same period last year. The improvement was primarily the result of higher sales volumes, better operating leverage and acquisition synergies. The current year-to-date period includes net pretax expenses of approximately $1.5 million for start-up costs associated with store remodeling activities, compared with $0.8 million in start-up and acquisition related expenses in the year-ago period.

Net earnings for the 24-week period increased 34.4 percent to $21.0 million from $15.6 million in the same period last year. Last year’s year-to-date period included the previously mentioned non-cash Michigan state tax charge.

Outlook

"For the remainder of the year, we will continue to focus on existing growth opportunities through our capital investments in store remodeling and relocation, new stores and additional fuel centers, as well as completing our recently announced acquisition and begin integrating these operations,” said Mr. Eidson. "In addition, we will work to optimize our marketing and merchandising programs at all of our retail operations, including pharmacies and fuel centers, to improve profitability, while continuing to refine our consumer value and service propositions. Collectively, these investments, programs, and strategies will help strengthen our overall retail and distribution market positions during this challenging economic cycle.

"Excluding the effect of our recently announced pending acquisition, we expect comparable retail store sales to increase in the low single digits during the second half of fiscal 2009 due to the cycling of remodeled and relocated stores and absence of Easter holiday sales in this year’s fourth quarter. During the second quarter, our distribution segment fully cycled the Martin’s Super Market business gained last year, as well as approximately 70 percent of the distribution sales related to customers’ acquisition of Farmer Jack stores in southeast Michigan. Consequently, we expect the year-over-year growth rate in distribution operating earnings to moderate during the second half of fiscal 2009.”

Mr. Eidson continued, "From a capital investment perspective, we expect to complete two or three additional store remodels and anticipate opening one new fuel center during the second half of fiscal 2009. In addition, we expect to complete a major store relocation project and begin construction of a new store. The new store should open in the first half of fiscal 2010. In conjunction with our capital investment program, we expect to incur approximately $1.0 million of additional costs for store re-positioning, start-up and grand re-opening related expenses during the remainder of the fiscal year.

"Excluding the effect of the recently announced acquisition, capital expenditures for fiscal 2009 are expected to range from $55 million to $60 million, with depreciation and amortization ranging from $26 million to $29 million and interest expense of approximately $11 million,” concluded Mr. Eidson.

Conference Call

A telephone conference call to discuss the Company’s second-quarter financial results is scheduled for 1:00 p.m. Eastern Time, Thursday, October 16, 2008. A live webcast of this conference call will be available on the Company’s website, www.spartanstores.com. Simply click on "For Investors” and follow the links to the live webcast. The webcast will remain available for replay on the Company’s website for approximately ten days.

About Spartan Stores

Grand Rapids, Michigan-based Spartan Stores, Inc., (Nasdaq:SPTN) is the nation’s tenth largest grocery distributor with warehouse facilities in Grand Rapids and Plymouth, Michigan. The Company distributes more than 40,000 private-label and national brand products to nearly 400 independent grocery stores in Michigan, Indiana and Ohio. Spartan Stores also owns and operates 84 retail supermarkets in Michigan, including Family Fare Supermarkets, Glen’s Markets, D&W Fresh Markets and Felpausch Food Centers.

Forward-Looking Statements

This press release contains forward-looking statements. Forward-looking statements are identifiable by words or phrases such as "outlook”, "plan”, "design”, "priority”, or "opportunities”; that an event or trend "will” or "should” occur or "continue” or that Spartan Stores or its management "anticipates”, "believes,” "plans”, "expects” or will "work” on a particular result. These forward-looking statements are subject to a number of factors that could cause actual results to differ materially. Our ability to successfully complete our pending acquisition, realize expected benefits of new relationships, realize growth opportunities, expand our customer base, effectively integrate and achieve the expected benefits of acquired stores, anticipate and successfully respond to openings of competitors’ stores, achieve expected sales and earnings, implement plans, programs and strategies, and continue to pay dividends is not certain and depends on many factors, not all of which are in our control. Additional information about the factors that may adversely affect these forward-looking statements is contained in Spartan Stores’ reports and filings with the Securities and Exchange Commission. Other risk factors exist and new risk factors may emerge at any time. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of future results. Spartan Stores undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date of this press release.