GRAND RAPIDS — Grocery distributor and retailer Spartan Stores Inc. has been front-page news in recent months, but not for anything the company is actually doing. Instead, reports widely circulated that the company would buy troubled Detroit-area grocery chain Farmer Jack. That deal has apparently fizzled, just in time for the company to release its earnings report for the second quarter of fiscal 2006.
This quarter’s results bear a striking similarity to last year’s. Net sales were just under $486 million for the quarter, compared to just under $487 million during the same period of fiscal 2005. Cost of sales for each quarter was just under $392 million. Operating expenses were nearly identical year-over-year as well: $81.3 million this year, $81.8 million last year. The bottom line was pretty close, too: Net earnings for the second quarter of fiscal 2006 were down just under 2 percent to $6.85 million. That represents 33 cents per diluted share, compared to 35 cents last year.
Explaining the flat performance, Spartan President, Chairman and CEO Craig Sturken said that increased competition challenged the company’s sales.
“During the past 12 months, eight additional supercenters and two Costcos have opened in markets that directly affect sales at our corporate stores,” Sturken said in a company statement. “Yet we have made steady financial progress during this period.”
Progress is a relative term, however, considering that the company’s sales are actually down from the same period last year. The company cited two big-ticket items that made for a $1.6 million difference in operating costs between the two quarters. First, the company received a one-time contract termination payment that was credited as a $1 million reduction in the 2005 second-quarter operating expenses. This year, the company paid out $600,000 “related to the conclusion of our strategic review process.” Even accounting for this difference, the total operating expense for this quarter was lower than fiscal 2005’s figure. The company cited “continued productivity improvements” and the sale of two underperforming discount drug stores as means of containing costs.
Spartan also has paid more than $13 million in outstanding long-term debt, down to $81.5 million from $94.8 million six months ago. This also resulted in more than $500,000 savings in interest expense.
The company’s lower-margin distribution business has grown both in number of outlets and in revenue. The retail segment, on the other hand, has shrunk. Selling off the unprofitable Pharm discount stores meant a loss of $7.2 million in revenue, the company said. That would account for just under 70 percent of the $10.3 million reduction the company saw in retail sales, which fell to $221.9 million. Spartan’s two gas stations added a revenue boost, though the company did not put a dollar figure on it. Spartan also was able to lower retail costs, resulting in just a $300,000 reduction in retail operating earnings, based on the $10.3 million decrease in sales.
Following the specifics of the earnings statement, Sturken reiterated the company’s recent announcement of the end of the strategic review process.
“During a 10-month period, we thoroughly assessed several strategic options with the potential to enhance long-term shareholder value,” said Sturken. “We thoroughly evaluated the possible sale of the company and/or pursuit of a significant retail acquisition and we concluded that, at this time, it is in the best long-term interest of our company and shareholders to continue to build on the strong foundation we have created.”
Loeb Partners, a New York investment firm and Spartan’s largest shareholder, was not pleased at that news.
“We are not satisfied with the practice of publicly ending an investigation of strategic alternatives before you tell owners that the company has commenced such a process,” Loeb President Gideon J. King wrote in a letter to Spartan’s board. He went on to refer to the company’s executives and board as “an apathetic management team” and demanded that they follow Loeb’s prescription to improved company value.
Loeb has long been a proponent of Spartan selling its valuable distribution network, or the company in its entirety. Loeb also has used its pointed letters to express its displeasure at “being ignored” by the Spartan board. Although the firm was adamantly opposed to the rumored Farmer Jack sale, it does not seem any more pleased with Spartan now that that rumor has been quieted.
For his part, Sturken never mentioned the name Farmer Jack in any of his statements, and he did leave open the possibility of future retail growth or a sale of the company by saying: “Although we have ended the formal strategic evaluation process, we have not yet eliminated any strategies that have the potential to improve long-term shareholder value.”