SpartanNash - 10-Q quarterly report FY

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          In fiscal 2004, we completed the sales of substantially all of the assets of United Wholesale Grocery Company, L&L/Jiroch Distributing Company, J.F. Walker Company, Inc. and most Food Town stores and have closed all Food Town stores that were not sold. We believe that these actions will allow us to better focus our efforts and capital on key strategic markets where we have the strongest growth and value creation opportunities. However, we cannot assure you that these transactions will be beneficial to our company. Our asset impairment and exit cost provisions for these transactions are estimates and actual costs may be more or less than these estimates. The agreements relating to some of these transactions require us to indemnify these asset buyers for breaches of our representations and warranties contained in the agreements and certain other matters.

          This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information obtained after the date of this Quarterly Report.

PART I
FINANCIAL INFORMATION

SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)

SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

SPARTAN STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1
Basis of Presentation and Significant Accounting Policies

The Consolidated Financial Statements include the accounts of Spartan Stores, Inc. and its subsidiaries ("Spartan Stores"). All significant intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying consolidated financial statements, taken as a whole, contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position of Spartan Stores as of September 11, 2004 and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

Stock-Based Compensation
Spartan Stores has a stock incentive plan, which is more fully described in Note 10 of the 2004 Annual Report on Form 10-K. Spartan Stores accounts for the plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based compensation cost is reflected in the Statements of Operations, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share as if Spartan Stores had applied the fair value recognition principles of Statement of Financial Accounting Standards Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:

(In thousands, except per share data)

Total assets of discontinued operations decreased from $8.3 million at March 27, 2004 to $7.1 million at September 11, 2004. Total liabilities of discontinued operations decreased from $16.9 million at March 27, 2004 to $14.8 million at September 11, 2004.

In accordance with Emerging Issues Task Force Issue No. 87-24, "Allocation of Interest to Discontinued Operations," interest was allocated to discontinued operations based on the debt that was required to be repaid as a result of the asset dispositions. Interest expense of $0.3 million and $1.6 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for the second quarter and year-to-date period ended September 13, 2003. Interest expense is no longer allocated to discontinued operations as all debt has been repaid as a result of the disposal of these operations.

Note 4
Asset Impairments and Exit Costs

Discontinued operations recognized pre-tax charges of $3.0 million and $6.6 million during the second quarter and year-to-date period ended September 13, 2003 for asset impairments and exit costs related to transaction costs and severance.

The following table provides the activity of exit costs for fiscal year 2004 and the twenty-four weeks ended September 11, 2004. Exit costs recorded in the Consolidated Balance Sheets are included in Other accrued expenses in current liabilities and Other long-term liabilities based on when the obligations are expected to be paid.

(In thousands)

Note 5
Associate Retirement Plans

The following table provides the components of net periodic pension and postretirement benefit costs for the second quarter and year-to-date periods ended September 11, 2004 and September 13, 2003:

Note 6
Operating Segment Information

The following tables set forth information about Spartan Stores by operating segment:

(In thousands)

          Net Sales - Net sales for the quarter ended September 11, 2004 ("second quarter") decreased $4.7 million, or 1.0 percent, from $491.4 million in the quarter ended September 13, 2003 ("prior year second quarter") to $486.7 million. Net sales for the year-to-date period ended September 11, 2004 ("current year-to-date") increased $7.1 million, or 0.7 percent, from $953.9 million in the prior year-to-date period ended September 13, 2003 ("prior year-to-date") to $961.0 million.

          Net sales for the second quarter in our Grocery Distribution segment decreased $6.4 million, or 2.4 percent, from $260.9 million in the prior year second quarter to $254.5 million. Net sales for the current year-to-date period increased $4.2 million, or 0.8 percent, from $511.1 million in the prior year-to-date period to $515.3 million. The sales decrease in the second quarter was primarily due to a shift of our fall private label promotion to the third quarter, which is estimated to have impacted sales by approximately $4.0 to $5.0 million, the loss of two distribution customers of approximately $4.0 million and the cycling of incremental sales to customers in the prior year second quarter due to the power outage that affected the Detroit area. The sales increase for the year-to-date period was due primarily to sales to new customers, partially offset by the factors mentioned above.

          Net sales for the second quarter in our Retail segment increased $1.7 million, or 0.7 percent, from $230.5 million in the prior year second quarter to $232.2 million. Net sales for the year-to-date period increased $2.9 million, or 0.7 percent, from $442.8 million in the prior year-to-date period to $445.7 million. Comparable store sales increased 1.4 percent in the second quarter, representing the sixth consecutive quarter of comparable store sales growth, and 1.2 percent year-to-date. Comparable store sales increases include 0.7 percent and 0.6 percent during the second quarter and year-to-date periods, respectively, due to the recording of bottle deposits as a liability when sold and an asset when returned, rather than a net reduction in sales as was done in previous fiscal years, as supermarkets typically receive more returns of bottles than originally sold. This change has no impact on reported gross margin dollars. We believe this revised reporting method better reflects the true sales performance of our stores. The remaining sales increases were due primarily to store refurbishing, product merchandising and reset initiatives and continued improvements in store level execution at our supermarkets. Also contributing to the sales increase was higher customer traffic in certain supermarkets due to the closure of competing stores in northern Michigan. These increases were partially offset by sales decreases at our deep-discount food and drug stores due to lower prescription sales resulting from a United Auto Workers mandate that requires members to switch to mail order prescription refills for maintenance medication, which also resulted in lower than expected prescription sales at our supermarket pharmacies, and due to the cycling of promotional activity that accompanied the closure of select Food Town stores.

          During the fourth quarter of fiscal 2004, two supercenters opened in markets where we operate corporate owned stores. Two additional supercenters opened in the second quarter of fiscal 2005 that affected certain supermarkets and deep-discount food and drug stores, and we are anticipating another opening in the third quarter. We expect our comparable store sales growth to moderate further as we compare results against the strong sales growth reported in the previous year, we cycle competitive store closings and as new supercenters open in our markets. We are improving our offering to our customers by continuing to implement more effective category management practices, adding more convenient services such as fuel centers and in-store pharmacies and improving physical facilities with our remodel and new store programs. We expect to open two fuel centers and three in-store pharmacies during the third quarter.

          Gross Margin - Gross margin represents sales less cost of sales, which include purchase costs and promotional allowances. Vendor allowances that relate to our buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for our merchandising costs, such as setting up warehouse infrastructure. Vendor allowances are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.

          Gross margin for the second quarter increased $2.2 million, or 2.4 percent, from $92.9 million in the prior year second quarter to $95.1 million. As a percent of net sales, gross margin for the second quarter increased to 19.5 percent from 18.9 percent. Gross margin for the year-to-date period increased $3.4 million, or 1.9 percent, from $177.6 million in the prior year-to-date period to $181.0 million. As a percent of net sales, gross margin for the year-to-date period increased to 18.8 percent from 18.6 percent. The gross margin rate improvement was primarily due to the timing of new product initiatives at the Grocery Distribution segment.

          Selling, General and Administrative Expenses - Selling, general and administrative ("SG&A") expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, utilities, equipment rental, depreciation and other administrative costs.

          SG&A expenses for the second quarter decreased $3.8 million, or 4.4 percent, from $85.6 million in the prior year second quarter to $81.8 million. As a percent of net sales, SG&A expenses for the second quarter improved to 16.8 percent from 17.4 percent. SG&A expenses for the year-to-date period decreased $8.4 million, or 4.9 percent, from $171.3 million in the prior year-to-date period to $162.9 million. As a percent of net sales, SG&A expenses year-to-date improved to 16.9 percent from 18.0 percent. The decreases in SG&A are primarily due to the following:

          Discontinued operations had no sales during the second quarter and year-to-date period ended September 11, 2004 and generated sales of $47.6 million and $263.4 million during the second quarter and year-to-date period ended September 13, 2003, respectively. The operating losses in discontinued operations for the second quarter and year-to-date period ended September 11, 2004 of $0.2 million and $0.4 million were partially offset by income tax benefits of $0.1 million and $0.2 million. The net losses from discontinued operations contributed a loss of $0.01 per share for the second quarter and year-to-date period ended September 11, 2004.

          The $1.0 million loss from discontinued operations for the second quarter ended September 11, 2003 consisted of a loss from operations of $0.6 million, provision for asset impairments and exit costs of $3.0 million, gain on disposal of assets of $1.6 million and an income tax benefit of $1.0 million. The net loss from discontinued operations contributed a loss of $0.05 per share. The $4.0 million loss from discontinued operations for the year-to-date period ended September 13, 2003 consisted of a loss from operations of $1.3 million, provision for asset impairments and exit costs of $6.6 million, gain on disposal of assets of $1.8 million and an income tax benefit of $2.1 million. The net loss from discontinued operations contributed a loss of $0.20 per share.

          Total assets of discontinued operations decreased from $8.3 million at March 27, 2004 to $7.1 million at September 11, 2004. Total liabilities of discontinued operations decreased from $16.9 million at March 27, 2004 to $14.8 million at September 11, 2004.

Liquidity and Capital Resources

          The following table summarizes our consolidated statements of cash flows for the year-to-date and prior year-to-date periods:

(In thousands)

          Net cash used in financing activities includes cash paid and received from our long-term borrowings and in the prior fiscal year, the payment of financing fees associated with our credit facilities. Our current maturities of long-term debt at September 11, 2004 are $5.2 million. Our ability to borrow additional funds is governed by the terms of our credit facilities.

          Net cash used in discontinued operations contains the net cash flows of our discontinued operations and consists primarily of net proceeds received on the sale of assets, net of identifiable debt repayments, the payment of store exit cost reserves, partial year operating results, and the payment of severance and related benefit accruals of employees that previously worked for discontinued operations. We expect the cash usage of our discontinued operations will be approximately $6.5 million in fiscal 2005 for the payment of store exit costs and other liabilities.

          Our principal sources of liquidity are cash flows generated from operations and our $185.0 million credit facilities. The credit facilities terminate December 2007, and are secured by substantially all of our assets. We had available borrowings of $46.6 million at September 11, 2004 and maximum availability of $56.6 million, which exceeds the minimum excess availability levels, as defined in the credit agreements. We believe that cash generated from operating activities and available borrowings under the credit facilities are sufficient to support current operations.

          Our current ratio was 1.24:1.00 at September 11, 2004 versus 1.30:1.00 at March 27, 2004 and our investment in working capital decreased to $32.0 million at September 11, 2004 from $39.3 million at March 27, 2004. The improvement in our overall working capital requirements is primarily the result of improved inventory management and the shift in timing of our fall private label promotion.

          Our long-term debt to total capital ratio at September 11, 2004 was 0.48:1.00 versus 0.55:1.00 at March 27, 2004. This improvement was primarily due to reducing long-term debt by $23.4 million and the net earnings of $8.5 million.

          For information on contractual obligations, see our 2004 Annual Report on Form 10-K. At September 11, 2004, there have been no material changes to our significant contractual obligations outside the ordinary course of business.

New Accounting Standards

          In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP FAS 106-2 provides guidance on the accounting, disclosure, effective date and transition rules related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FAS FSP 106-2 was adopted in the second quarter of fiscal 2005 and had no significant impact on our financial statements.

Critical Accounting Policies

          This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, exit costs, retirement benefits and contingencies and litigation. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we make adjustments we consider appropriate under the facts and circumstances. We have discussed the development, selection and disclosure of these estimates with the Audit Committee. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our 2004 Annual Report on Form 10-K.

PART II
OTHER INFORMATION