Participants

Kayleigh Campbell; Head of Investor Relations; SpartanNash Co

Tony Sarsam; President, Chief Executive Officer, Director; SpartanNash Co

Jason Monaco; Chief Financial Officer, Executive Vice President; SpartanNash Co

Ben Wood; Analyst; BMO Capital Markets

Scott Mushkin; Analyst; R5 Capital

Aaron Switalski; Analyst; Northcoast Research

Presentation

Operator

Welcome to the SpartanNash fourth quarter and fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. I would now like to turn the conference over to Kayleigh Campbell, SpartanNash, Head of Investor Relations. Please go ahead.

Kayleigh Campbell

Thank you, and good morning. On the call today from the company, our President and Chief Executive Officer, Tony Sarsam, and Executive Vice President and Chief Financial Officer, Jason Monaco.
By now everyone should have access to the earnings release which was issued this morning at approximately 7:00 AM Eastern time. For a copy of the earnings release as well as the company's supplemental earnings presentation, please visit SpartanNash's website.
This call is being recorded and a replay will be available on the company's website.
Before we begin, the company would like to remind you that today's discussion will include a number of forward-looking statements. These statements are subject to certain risks and asserts that could cause actual results to differ materially from those expressed in the forward-looking statements.
If you will refer to SpartanNash'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 these forward-looking statements.
Please remember that all forward-looking statements made today reflect our current expectations only, and SpartanNash undertakes no obligation to update or revise these forward-looking statements.
The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business, and it has included in the earnings release a full reconciliation of certain non-GAAP financial measures to the most comparable GAAP measures, which can be found on SpartanNash's website.
And now it is my pleasure to turn the call over to Tony.

Tony Sarsam

Thank you, Kayleigh, and good morning everyone. Glad to be here.
As we normally do, I would like to start today's call with a focus on our people. SpartanNash is harnessing the power of both our people first culture and our performance culture to win in grocery.
During a recent company-wide town hall, we provided our associates with details of our 2025 master action plan.
We are working cross functionally with a discipline focused on finishing every mission within our strategic plan. Finishing every mission requires the imagination to explore new possibilities, the desire to say yes, the discipline to get things done with haste and the sheer will to overcome obstacles and drive results.
One proof point that reflects our progress with our people first culture has to do with safety. Since 2020, we have improved our safety KPIs by a remarkable 83%, and in 2024 we also improved our 90day new high retention rate by nearly 5% exceeding our goal for the year.
Before jumping into our financials, I want to provide some color on the overall grocery industry.
Inflation has largely returned to pre-pandemic conditions at around low single digits, and promotional rates are about what they were in 2019. Overall, we expect the grocery industry to grow at around 1.5% in our geographies in 2025.
SpartanNash sits at the center of this essential industry, providing food solutions through innovation.
One key element of our master action plan is capturing market share. Our team is leveraging the unique insights of having two complementary, highly synergistic segments, wholesale and retail. This is the core difference between us and others in the space.
We've done a ton of work but still have many opportunities ahead, and I want to thank all of our associates for being part of this incredible journey.
Okay, shifting gears to our results, we finished the year strong, delivering our third consecutive year of record adjusted EBITDA.
So, our full year net sales are down a little less than 2% to $9.55 billion. We returned to growth in Q4, with sales increasing to 70 basis points compared to the prior year quarter.
The acquisitions we made contributed to our sales momentum at the end of the year. In retail, net sales increased over 100 basis points to more than $2.84 billion. Incremental sales from the acquired stores in 2024 more than offset slightly softer demand we experienced within some of our existing stores. We are very pleased with the early performance of our newly acquired stores.
From a retail comparable sales standpoint, we've seen a positive progression in comp sales throughout 2024, ending the year with a decrease of 0.7% [comp] sales in Q4.
Notably, our largest market, Michigan had positive [comps] in the last two quarters.
[Train to] wholesale. Net sales for our wholesale business, which includes independent grocery customers, national accounts, and military channels were over $6.7 billion.
Speaking of the military business, we continue to be very pleased with this channel's performance. Military sales have grown for 12 consecutive quarters. This is a unique sales channel that our team was able to turn around, and it is now consistently generating accretive results.
Along with having a great sense of pride in serving our armed forces and veterans, we also see this channel as an avenue for additional organic growth.
Okay, pivoting to the bottom line, we accomplished our third consecutive year of record adjusted EBITDA coming in at $258 million. Notably, we exceeded our expectations in Q4 with adjusted EBITDA increasing more than 9% compared to the prior year quarter.
We generated higher profitability in 2024 due to the improvements we made in wholesale margins, new efficiencies in our DC network, and the contributions from our recently acquired retail stores.
And to give you a little more context of our results, relative to 2019, we have; one, increased net sales by over a billion dollars; two, improves it as an EBITDA by $80 million; and three, expanded adjusted EBITDA margin by more than 60 basis points.
Before I turn the caller to Jason, I want to provide an update on both our retail strategy and M&A.
As you saw in this morning's press release, we took a goodwill impairment charge in the quarter. Jason will discuss the details, but I want to focus on the opportunities within the retail segment.
We're implementing a platform to capture growth in our retail business through organic and organic initiatives.
These growth factors will focus on; one, expanding our remodel of capital deployment into select conventional and upmarket store; two, leaning into the attractive convenience store sector; and three, leveraging our capabilities in the expanding food markets by growing our ethnic store footprint in 2025.
As you may recall, last year we launched our customer value proposition. We are now taking some of the learnings from our CDP pilot and implementing program components into other retail stores.
Also, as you may recall, I introduced our new Chief Retail Officer, Djouma Barry on the last earnings call. Djouma brings a wealth of leadership, experience and knowledge in retail operations and strategy. We look forward to providing more details about our retail segment's transformation in the coming months as Djouma begins to implement his plan.
Now on our recent retail acquisitions, as I mentioned a few moments ago, we were very pleased with the performance of the grocery and convenience stores we acquired in 2024. In fact, these stores outperformed our forecast in Q4. Looking ahead, we will continue to evaluate M&A opportunities, both large and small, based on our M&A framework to continue to improve the retail segment overall.
We are taking a balanced and methodical approach to organic and inorganic growth initiatives which are all designed to improve results and maximize shareholder value.
With that, I'll now turn the call over to Jason to walk you through the quarterly financials and 2025 Outlook in greater detail.

Jason Monaco

Thanks Tony, and welcome to everyone joining us on today's call. I want to highlight some of our key successes from this past year before jumping into the detailed quarterly results. These highlights include one, achieving a record adjusted EBITDA of $258.5 million with net earnings of nearly $300,000; two, returning $45 million to shareholders through share repurchases and dividends; three, generating $206 million in cash from operating activities, which represents a 130% increase compared to fiscal 2023; and four, maintaining strong liquidity, giving us flexibility to support our long term strategic plan that includes both organic and inorganic investments.
This past year we also made significant progress on our margin enhancing initiatives. These programs, the supply chain transformation, merchandizing transformation, marketing innovation work, and go to market plan drove approximately $50 million in benefits in 2024.
Notably, since launching our strategic plan in 2021, we have generated almost $130 million in total benefits, achieving our plan target of $125million to $150 million a year ahead of schedule.
We still have plenty of runway ahead with our margin enhancing initiatives. In fact, we recently implemented a new cost leadership plan.
Following a successful pilot, we are already in flight implementing an inventory selecting system using robots in our largest distribution center. This innovative automated solution is streamlining certain processes and removing manual labor hours.
Now turning to our fourth quarter results, we finished the year strong by pivoting back to growth. Consolidated net sales in the quarter increased by 73 basis points to $2.26 billion versus fourth quarter 2023 sales of $2.25 billion.
While we experienced lower volumes in our wholesale segment, we more than offset those trends with incremental sales in our retail segment.
Gross profit for the quarter increased to $365 million or 16.1% of net sales compared to $339 million or 15.1% of net sales in the prior year's fourth quarter.
The 102 basis point margin increase was driven by pricing, merchandizing transformation benefits, and reduced shrink expense.
Our reported operating expenses notably included $45.7 million related to the retail goodwill impairment charge that Tony mentioned earlier.
I wanted to take a moment to provide more cover on the impairment charges. While the recent acquisitions contributed to our goodwill balance and subsequent impairment, the underperformance that led to the impairment is driven by our legacy retail business.
We believe that the acquisitions will help us scale our retail operations and grow profitably. Along with acquiring assets that have improved our retail portfolio, we are continuously evaluating the performance of our existing stores. To further improve the portfolio, we are in the process of closing some underperforming stores.
Okay, turning back to our quarterly results, compared to the prior year quarter, interest expense increased $1.2 million to $10.9 million due primarily to an increase in borrowings related to our recent acquisitions and capital investments.
On a reported basis, our net loss was $35.1 million or [$1 per diluted share]. This is compared to net earnings of $0.30 per diluted share in Q4 of last year.
On an adjusted basis, net earnings increased $2.4 million to $14.4 million or $0.42 per diluted share compared to $0.35 in Q4 last year.
And notably, we finished the year strong with adjusted EBITDA and Q4 of $58.6 million increasing 9.2% compared to the prior year quarter. This increase was driven by higher gross margin rates in both segments, including benefits from the merchandizing transformation, contributions from the recently acquired retail stores and lower health insurance costs. The increase was partially offset by lower case volumes within the wholesale segment as well as higher corporate administrative expenses.
Now turning to our segments, compared to the prior year quarter, net sales and wholesale decreased 2.1%. This is primarily due to reduced case volumes with national accounts and independent retailers. This performance includes the intercompany elimination of some revenue related to the recent fresh encounter acquisition, which was previously reported in our wholesale segment.
These components, the decline in a certain national account's customer and the movement of a former wholesale customer to the retail segment represents approximately 3% of wholesale sales.
Wholesale adjusted EBITDA was $43.8 million, an increase of 7.7% compared to last year's $40.7 million.
The improved results were driven by a higher gross profit rate and benefits from the merchandizing transformation initiative.
Wholesale reported fourth quarter operating earnings were $18.3 million, a decrease of 15.6% compared to $21.7 million in the prior year's fourth quarter.
Now, moving to the retail segment, as Tony mentioned, we've seen a positive progression in [comp] sales throughout 2024, concluding the year with a decrease of 0.7% for the quarter.
The retail segments sales grew 7.7% to $697 million versus the prior year quarter. And our supermarkets ex fuel centers were up 8.5% compared to the prior year quarter.
As mentioned, the sales contributions from the stores we acquired in 2024 more than offset softer consumer demand in the quarter.
Retail adjusted EBITDA increased to $14.8 million compared to $13 million in the prior year's quarter. The improvement was due to higher sales volumes, improved margin rate, and lower health insurance costs.
Retail reported an operating loss of $46 million compared to earnings of $1.9 million in the fourth quarter of 2023.
With that, let's turn to our balance sheet. Our leverage ratio of net long-term debt to adjust the EBITDA increased in the fourth quarter to 2.8 times compared to 2.4 times at the end of the third quarter.
The increase was due to the acquisitions we made in the fourth quarter. As I mentioned earlier, we generated nearly $206 million of cash from operating activities during the year. The 130% increase was due largely to working capital improvements and has been integral in funding in organic growth.
Our liquidity at the end of the quarter was about $300 million giving us capacity to fund our strategic growth plan with the flexibility to pursue M&A opportunities.
Following a strong finish to the year, we feel confident that our plan will continue driving results as covered in today's press release, we are providing our initial guidance for fiscal 2025, which incorporates several items that include the challenging market conditions in the grocery industry, which have been partially offset by our operating performance to date and the ongoing benefits we expect to realize from our transformational initiatives. As a reminder, our outlook [includes acquisitions] and the impact of an additional week in fiscal 2025. To execute this plan, we continue to invest in our capabilities and initiatives that deliver long term shareholder value.
As I previously mentioned, we recently launched a new cost leadership plan that will build on the success of our margin enhancing programs. Our focus on cost leadership enables us to invest in growth and expand margins. This year's investments have already begun, and we expect them to continue throughout the year. We did more in the first half. We expect Q1's bottom line to be about equal compared to last year's Q1 as we invest in this new round of margin enhancing programs to maximize run rate value exiting 2025.
Turning to the guidance ranges, consistent with the 2025 preview we provided in our third quarter earnings released back in November, we expect net sales to be $9.8billion to $10 billion with a midpoint of 3.7% growth and adjusted EBITDA is expected to be $263million to $278 million with a midpoint of 4.6% growth.
For your models, non-cash expenses, primarily [DNA] are expected to have about a [$0.30 drag] on EPS.
We expect adjusted EPS to be [$1.60 to $1.85] per diluted share.
The [DNA] impact is driven by acquired assets and our deferred capital investments we've made as part of our growth strategy.
Our CapEx is expected to be in the range of $150million to $165 million inclusive of ongoing capital requirements for recently acquired assets, and we expect food inflation to be about 1% for the fiscal year. Achieving this outlook would deliver an adjusted EBITDA compound annual growth rate of approximately 7% since 2019.
On a reported basis compared to 2019, net earnings decreased by $5.4 million while net margin was essentially flat. However, we've been pleased with our results. To reiterate Tony's comments earlier, relative to 2019, we have increased net sales by over a billion dollars, improved adjusted EBITDA by $80 million and expanded adjusted EBITDA margin by more than 60 basis points. And with that, I'd like to turn the call back over to Tony.

Tony Sarsam

Thank you, Jason.
This past year delivered meaningful progress in tangible results in our transformational journey. We hit an inflection point and return to growth at year end. We also completed three acquisitions created new efficiencies in our distribution network, tested and launched innovative new retail programs, improved margins, and captured additional cost savings. Generated strong cash flow and accomplished a third consecutive year of record adjusted EBITDA.
The momentum we have going into 2025 gives us confidence that our strategic plan is working. A winning recipe will serve as our guide to drive results, capture market share, win new business, grow a bottom line, and maximize shareholder value.
All right, before we open the call for Q&A, I'd like to take a moment to thank our associates who are going above and beyond to finish every mission. I would also like to thank our leaders for their steadfast commitment to creating careers for a better life for our growing family of associates.
Thank you all. With that, I'd like to turn the call back over to the operator and open it up for your questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Your first question comes from the line of Ben Wood with BMO Capital Markets. Please go ahead.

Ben Wood

Hey, good morning guys.
Thank you for taking our questions.
So, can we start with kind of the cadence within the quarter and quarter to date from a sales volumes and inflation perspective, anything incremental happening with the customer behavior? I know you guys have some puts and takes with acquisitions and some national account pressure but trying to [parse] out if the underlying customer demand softened or was it stable, just any details you can provide around that.

Tony Sarsam

Yeah, just.
[Ben, and I'll ask Jason to add some color graphs] so from a customer standpoint in our stores, we saw broadly our foot traffic was roughly flat and over and better than most conventional groceries. So, we see that there's the story the last 18 months more of a migration to the really deep discounter. So, we've seen sequential progress on traffic, sequential progress on our comps. So, we feel good about the overall direction of where we're going. So, the customer, we feel great about the shopper in our stores, and we feel good about the progress also with our primary independent grocery customers. So, we're seeing a movement there and the movement in the right direction.

Jason Monaco

Yes, Ben, this is Jason. So maybe within the [corridor] to build on Tony's comments was pretty stable within our retail business. Tony called out a few minutes ago that we had really nice strength in our Michigan business, which represents more than half of our stores where we saw positive comps and we were really pleased with that outcome. Underlying that that performance was, as Tony said, not only solid traffic but continued progress on our private label owned brands penetration which finished the quarter [north] of 27%. So, overall solid quarter, solid cadence, and maybe I'd even add to that the completion of or the closure of our two acquisitions in the quarter delivered solidly in the in the last kind of handful of weeks after we closed them, so we're really pleased with the outcome.

Ben Wood

Okay, great. That's helpful and then just wanted to dig in a little bit on the 2025 guidance and if we strip out the extra week and the contributions from acquisitions by my math, it kind of looks like you're implying negative low single digit sales growth and maybe flattish EBITDA at the midpoint. Is that the right way to think about it on an organic basis and how does that compare to kind of your industry expectations which seem to imply maybe slightly positive volumes.

Jason Monaco

Yes, Ben, maybe a little color on the year and the guidance. The fifty third week is worth a little less than $200 million. We finished 2024 revenues at $9.55 billion and so, if you were to kind of mentally back out the impact of that sub $200 million impact on the top line from the guidance, you'd still see a pretty solid step up in revenues even at the midpoint. As a reminder that the transactions that we closed late in the year impacted our revenues are expected to impact the revenues by a couple $100 million annually as we pick up incremental retail revenue but we lose the kind of intercompany wholesale piece of that. We expect that our all in organic growth is flattish in an environment where we have relatively modest inflation. So, our inflation assumption at this point is about 1% for the year. And we we're pursuing market share growth in our markets.

Ben Wood

Okay, thank you very much.

Operator

Thank you and once again if you would like to ask a question. (Operator Instructions)
And your next question comes from the line of Scott Mushkin with R5. Please go ahead.

Scott Mushkin

Oh great, so thanks for taking the question.
Tony, I wanted to dive into something you mentioned in your prepared remarks, which is the ethnic store footprint and the growth opportunity there. Maybe it's not so much in 2025, maybe it's more 2026, 2027, but I was wondering if you could give us a little bit more details on your expectations there and what it would mean to revenue growth.

Tony Sarsam

Sure, great question. So, we have, [we've run] 3 ethnic stores in Nebraska for years, and they're great performing stores for us, have been for a long time. They grow faster, we've got terrific margins at those stores as well, and we're looking at where a couple of different angles where else in the Midwest are there places where we could have a great presence in that way. And so, we're looking at opportunities amongst other cities within our current footprint where we can look at either acquisitions or brownfield or even greenfield startups of Hispanic stores. And you're right, the impact of this year we will have an increased footprint in the number of stores we have, but looking at this as a long term development as well. We have expertise in serving those stores and it's a growing community that also we believe. A lot of long runway ahead of it in terms of the types of both growth and profitability in that segment. So, we're excited about that we've got a kind of [subteam] that's looking into that, and we've got [some sites] and, looking to essentially double our footprint of this year and then they grow more significantly in the out years.

Scott Mushkin

Perfect, and then Jason, I just wanted to again go back to something I think you said with the guidance that tuck-in acquisitions are included in EBITDA guidance. Is that material or is that more kind of rounding?

Jason Monaco

Hey. So, the way I think about it is we've completed some tuck-in acquisitions already in 2024, and the full year impacts of those are reflected in the 2025 guidance, but the remainder I think about as being not particularly material based on what's in the kind of in the near term frame at this point.
But you should think about and the way we think about this is we're going to continue to pursue our M&A strategy and as opportunities present themselves to create value, we'll execute on those. So, long term broadly speaking, [you] kind of smallish tuck-in acquisitions are included. The way to think about the current guide is largely [e that] we've got in the kind of in the bag and completed already.
And overall, maybe Scott to build on the comments, Tony made earlier, when I think about our business, we're really energized by where our retail business is going. If you think about the trends in the business in the first half of 2024, we had a negative comp of about 1.7%. In the second half of the year, we had a negative comp of 0.7% as we've seen really nice progression in the growth of our business. And as we look forward to 2025, we're expecting that comp outlook to change and to turn positive. And we see that that opportunity both in execution of within our retail operations as well as growth within certain segments or platforms that Tony mentioned of the call both our C-store and our Hispanic operations. So, we're thinking about how do we reshape the portfolio, how can we invest in the things that are going to drive the most value and the most growth over time and see elements of that in our traditional retail business. You're going to see elements of that of that in our ethnic business which has outsized performance with respect to the demographics and the growth opportunities, and you're going to see it in the sea store operations where we see, and we have really attractive market dynamics to participate in.
All three of those are going to be growth vectors for us in 2025 and beyond. As we build on the momentum of 2024 and continue to create what we think is going to be a great business outcome, as a reminder, the midpoint of our guidance for this year at the bottom line would deliver [77% ish] compound annual growth rate since 2019 that outperforms many in the grocery space and we're excited by the capabilities, the performance, and the opportunities we have in front of us to create shareholder value.

Scott Mushkin

That's excellent, Jason. I really appreciate all the detail.

Operator

All right, thank you. (Operator Instructions)
And your next question comes from the line of Aaron Switalski with Northcoast Research. Please go ahead.

Aaron Switalski

Hey guys, good morning. Thanks so much for taking the question. So just a little bit more interest in the [M&A] market, particularly as you have expressed interest in sea stores in the past, particularly with regards to the pressured economic environment, and pertaining to smaller independent C-store operators, there was kind of talk that Some of these were more willing to engage in M&A discussions and kind of get out of things while they could with kind of a potential shift in sentiment about where the economy is going to go in macro conditions. Do you see any reservation on operators wanting to sell because they think there might be some improvement? I guess just some color on what the M&A market looks like for you guys, what the sentiment you're picking up is. Thanks so much.

Tony Sarsam

Great. Thank you. We are very active in terms of engaging in conversations and looking for those right opportunities for us. There is and I'm going to tell you there's a full mix. There are folks who are who are looking for the ideas around exit strategies as folks are saying that they see great things ahead and they want to continue to run their business. So, it runs the full [gamut]. What we're seeing is that good operators in this space have a great business. They continue to grow, the base idea around convenience and being able to offer the one stop for fuel and picking up snacks or whatever, that's a trend that's going to that we think is going to continue to look at how the shopper changed over the Over the period of time, kind of a pandemic, post-pandemic, there's a lot of shifts, but the shifts around sea stores have been pretty stable, and again, the good operators are growing and we see that as a great place for us to play as well. So, kind of runs the [gamut], we're always engaged with folks, we talked about the acquisition [we did of the] Markham Group this past year, and I would expect you'd see us doing more of those types of things in 2025.

Aaron Switalski

Great, thank you so much.

Operator

Thank you, and there are no further questions at this time. I will now turn the call back to Tony Sarsam for closing remarks.

Tony Sarsam

All right. Well, thank you to everybody for their participation in today's call. We certainly appreciate your interest in the SpartanNash. And so, from our family to yours, we'd like to wish you all a very pleasant, good day.
Thank you and this concludes today's conference call.
Thank you all for attending. Let me now disconnect.