SpartanNash - 10-Q quarterly report FY

OR

FORWARD-LOOKING STATEMENTS

          The matters discussed in this Quarterly Report on Form 10-Q include "forward-looking statements" about the plans, strategies, objectives, goals or expectations of Spartan Stores, Inc. (together with its subsidiaries, "Spartan Stores"). These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores or management "expects," "anticipates," "projects," "plans," "believes," "estimates," "intends," is "optimistic" or "confident" that a particular occurrence "will," "may," "could," "should" or "will likely" result or that a particular event "will," "may," "could," "should" or "will likely" occur in the future, that the "outlook" or "trend" is toward a particular result or occurrence, or similarly stated expectations. Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 2 of this Form 10-Q, are inherently forward-looking. You should not place undue reliance on these forward-looking statements , which speak only as of the date of this Quarterly Report.

          In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q, Spartan Stores' Annual Report on Form 10-K for the year ended March 27, 2004 and other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause actual results to differ materially. Our ability to strengthen our retail-store performance; sustain sales growth; increase gross margin; maintain and improve customer and supplier relationships; reduce operating costs; sell on favorable terms assets classified as held for sale; generate cash; continue to meet the terms of our debt covenants; and implement the other programs, plans, strategies, objectives, goals or expectations described in this Quarterly Report will be affected by changes in economic conditions generally or in the markets and geographic areas that we serve, adverse effects of the changing food and dis tribution industries and other factors including, but not limited to, those discussed below.

          Anticipated future sales are subject to competitive pressures from many sources. Our Grocery Distribution and Retail businesses compete with many warehouse discount stores, supermarkets, supercenters, pharmacies and product manufacturers. Future sales will be dependent on the number of retail stores that we own and operate, our ability to retain and add to the retail stores to whom we distribute, competitive pressures in the retail industry generally and our geographic markets specifically and our ability to successfully implement effective new marketing and merchandising programs. Competitive pressures in these and other business segments may result in unexpected reductions in sales volumes, product prices or service fees.

          Our operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: difficulties in the operation of our business segments; future business acquisitions; adverse effects on business relationships with independent retail grocery store customers; difficulties in the retention or hiring of employees; labor shortages, stoppages or disputes; business and asset divestitures; increased transportation or fuel costs; current or future lawsuits and administrative proceedings; and losses of, or financial difficulties of, customers or suppliers. Our operating and administrative expenses, net income and cash flow could also be adversely affected by changes in our sales mix. Our ongoing cost reduction initiatives and changes in our marketing and merchandising programs may not be as successful as we anticipate. Acts of terrorism or war have in the past and may in the future result in considerable economic and political uncertain ties that could have adverse effects on consumer buying behavior, fuel costs, shipping and transportation, product imports and other factors affecting our company and the grocery industry generally.

          Our future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings; changes in our borrowing agreements; changes in the interest rate environment; and changes in the amount of fees received or paid. The availability of our secured loan agreement depends on compliance with the terms of the loan agreement.

          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 January 1, 2005 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 ("APB") 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 ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:

(In thousands, except per share data)

(In thousands, except per share data)

covenants will not be effective as long as Spartan Stores maintains a minimum excess availability level, as defined in the credit agreement. Spartan Stores had available borrowings of $58.9 million at January 1, 2005 and maximum availability of $68.9 million, which exceeds the minimum excess availability levels. The credit facility provides for the issuance of letters of credit of which $11.3 million were outstanding and unused as of January 1, 2005. The credit facility bears interest at the London InterBank Offered Rate ("LIBOR") plus 1.75% or the prime rate (weighted average interest rate of 4.40% at January 1, 2005).

Spartan Stores' long-term debt consists of the following:

Note 5
Discontinued Operations

Spartan Stores' former convenience distribution operations, insurance operations and certain of its retail, grocery distribution and real estate operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.

(In thousands, except per share data)

The following table provides the activity of exit costs for fiscal year 2004 and the forty weeks ended January 1, 2005. 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 8
Operating Segment Information

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

(In thousands)

Results of Operations

          The following table sets forth items from our Consolidated Statements of Operations as a percentage of net sales and the year-to-year percentage change in dollar amounts:

reduced sales at our deep-discount food and drug stores and the sale of our joint venture in a retail store, which resulted in a sales decline of approximately $0.6 million during the third quarter and year-to-date period, partially offset by sales increases at our supermarkets.

          Comparable store sales at our supermarkets increased 0.9 percent in the third quarter and 2.1 percent for the year-to-date period, despite four competitor supercenter store openings during the past four quarters. Sales increased 0.8 percent in the third quarter and 0.7 percent year-to-date due to a change in 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 continued improvements in marketing, merchandising and operations and contributions from new in-store pharmacies and fuel centers. These increases were partially offset by lower prescription sales at certain in-store pharma cies due to the UAW mail-order mandate.

          Comparable store sales at our deep-discount food and drug stores decreased 8.9 percent in the third quarter and 6.6 percent year-to-date. The sales decreases were primarily due to lower prescription sales as a result of the UAW mail-order mandate and the resulting effect on front-end sales. Also contributing to the decrease were the strong sales gains recorded in the prior year's third quarter due to aggressive promotions and the cycling of customers from the previous year's Food Town store closings. On a two-year basis, which we believe more appropriately reflects the long-term effect of our retailing strategies, comparable store sales at our deep-discount food and drug stores increased 0.6 percent for the third quarter and 2.2 percent for the year-to-date period.

          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 third quarter increased $2.3 million, or 2.0 percent, from $115.1 million in the prior year third quarter to $117.4 million. As a percent of net sales, gross margin for the third quarter increased from 17.9 percent to 18.8 percent. Gross margin for the year-to-date period increased $5.6 million, or 1.9 percent, from $292.7 million in the prior year-to-date period to $298.3 million. As a percent of net sales, gross margin for the year-to-date period increased from 18.3 percent to 18.8 percent. The gross margin improvement for the third quarter and the year-to-date period was partially due to a $2.3 million favorable supply contract settlement at the Retail segment received in the third quarter. This settlement increased consolidated net margin by 40 basis points and 10 basis points for the third quarter and year-to-date period, respectively. The settlement was due to a favorable costing adjustment that accumulated during the past three years, includin g $0.6 million attributable to fiscal 2005. We believe the new contract signed in conjunction with the settlement will favorably affect future gross margin. In addition, more targeted promotional strategies at our deep-discount food and drug stores and improved merchandising execution at our Grocery Distribution segment has improved gross margin for the third quarter and year-to-date period. These increases were partially offset by gross margin declines at our supermarkets during the third quarter and year-to-date period.

          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 third quarter decreased $3.1 million, or 2.8 percent, from $109.0 million in the prior year third quarter to $105.9 million. As a percent of net sales, SG&A expenses for the third quarter increased from 16.9 percent to 17.0 percent. SG&A expenses for the year-to-date period decreased $11.5 million, or 4.1 percent, from $280.2 million in the prior year-to-date period to $268.8 million. As a percent of net sales, SG&A expenses year-to-date improved from 17.5 to 17.0 percent.

The decreases in SG&A are primarily due to the following:

Discontinued Operations

          Our former convenience distribution operations, insurance operations and certain of our retail, grocery distribution and real estate operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.

restrictions under the terms of our amended senior secured revolving credit facility ("credit facility"), should our available borrowings fall below certain levels, our capital expenditures would be restricted each fiscal year. We expect capital expenditures to be approximately $22.0 to $25.0 million for fiscal 2005, which would be below the restriction.

          Net cash used in financing activities primarily includes cash paid and received related to our long-term borrowings and the payment of financing fees associated with bank financing. Our current maturities of long-term debt at January 1, 2005 are $2.8 million. Our ability to borrow additional funds is governed by the terms of our amended credit facility.

          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, 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 $5.5 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 amended $215.0 million credit facility. The credit facility matures December 2008, and is secured by substantially all of our assets. We had available borrowings of $58.9 million at January 1, 2005 and maximum availability of $68.9 million, which exceeds the minimum excess availability levels, as defined in the credit agreement. We believe that cash generated from operating activities and available borrowings under the credit facility are sufficient to support current operations.

          Our current ratio was 1.27:1.00 at January 1, 2005 versus 1.30:1.00 at March 27, 2004 and our investment in working capital decreased to $35.6 million at January 1, 2005 from $39.3 million at March 27, 2004. Our long-term debt to total capital ratio at January 1, 2005 was 0.46:1.00 versus 0.55:1.00 at March 27, 2004. This improvement was primarily due to reducing long-term debt by $27.0 million and the net earnings of $13.0 million.

          For information on contractual obligations, see our 2004 Annual Report on Form 10-K. At January 1, 2005 there have been no other material changes to our significant contractual obligations outside the ordinary course of business other than the amendment of our senior secured revolving credit facility and the termination of our supplemental secured credit facility. The table below presents our long-term debt maturities as of January 1, 2005:

effective at the beginning of our second quarter in fiscal 2006. We expect that the impact of adopting the FAS No. 123(R) will be consistent with the pro forma expense that has been previously disclosed, adjusted for future grants, cancellations and exercises of stock options in accordance with the Statement.

          In May 2004, the FASB issued 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. FSP FAS 106-2 was adopted in the second quarter of fiscal 2005 and did not have a significant impact on the 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; however, the sensitivity of those analyses can differ during the fiscal year based on changes in the underlying facts and circumstances used to calculate the estimates. We evaluate each of these estimates on a quarterly basis and different assumptions or additional changes in the underlying facts and circumstances may cause charges to be recorded in the future.