SpartanNash (SPTN) Shares Down Despite Q1 Earnings Beat

Shares of SpartanNash Company (NASDAQ:SPTN) lost nearly 14.6% despite the company posted mixed first-quarter fiscal 2017 results on May 24, wherein its bottom line outpaced the Zacks Consensus Estimate and top line missed the same. Notably, the company’s earnings have surpassed estimates in three of the trailing four quarters.

The company posted adjusted earnings of 55 cents that improved by a penny from the prior-year quarter and also beat the Zacks Consensus Estimate of 53 cents.

On a reported basis, the company’s earnings from continuing operations came in at 40 cents per share, up 48.1% from 27 cents posted in the year-ago quarter. We note that both the company’s adjusted and reported earnings were hurt by the unfavorable effect of the shift of New Year’s Day into the first quarter by 3 cents. This was compensated by a 3-cent gain due to the new accounting standard for taxes related to share-based compensation.

Q1 Highlights

Consolidated net sales came in at $2,402.5 million in the quarter, up nearly 5.4% owing to organic growth in the food distribution division coupled with gains from the Caito acquisition. The upside was somewhat mitigated by soft sales in the company’s retail and military segments. However, the top line missed the Zacks Consensus Estimate in eight of the past 10 quarters, including the current one. The Zacks Consensus Estimate for first-quarter revenues was $2,437 million.

Gross profit grew 6.9% to $357.4 million in the quarter. Also, gross margin expanded 20 basis points (bps) to 14.9% backed by higher margins at Caito coupled with a favorable business mix.

The company’s adjusted operating income inched up 0.3% to $38.6 million in the quarter, as organic sales improvement in food distribution were more to offset the rise in health care costs.

We note that this Zacks Rank #4 (Sell) company’s shares have plunged over 22% year to date, as against the Zacks categorized Food Items – Wholesale industry’s gain of 5.3%. The industry is currently placed at the bottom 18% of the Zacks Classified industries (210 out of 256).

Segment Details

Food Distribution Segment

Net sales of $1,163 million at the Food Distribution segment were up 17.3% backed by 4.2% rise in organic sales along with gains from Caito acquisition, offsetting the unfavorable impact of food deflation.

Further, the segment’s adjusted operating income came in at $33.1 million that improved 14.9% driven by higher organic sales and supply chain initiatives. These were partly mitigated by the unfavorable effect of the New Year’s Day shift as well as deflation.

Military Segment

Net sales declined 4.6% to $643.3 million at the Military segment owing to decreased sales at the Defense Commissary Agency-operated commissaries coupled with the New Year’s Day shift.

Also, the segment’s adjusted operating income totaled $1.0 million versus $3.7 million in the year-ago quarter. The decline was a result of a fall in sales volume, rise in health care expenses, the unfavorable impact of the New Year’s Day shift, as well as a large insurance claim.

Retail Segment

Net sales were $596.2 million at the Retail segment, down 2.8% mainly attributable to negative comparable store sales (comps) and soft sales due to store closures, somewhat offset by higher sales. Excluding fuel, comps were negative 2.2% in the quarter.

Further, the segment’s adjusted operating income decreased 26.2% to $4.5 million owing to higher health care expenses, lower comps as well as the shift of New Year’s Day that were partly compensated by improved margin rates along with unprofitable store closures.

The company sold one outlet and closed three in the quarter. As of Apr 22, 2017, it had 153 corporate-owned retail outlets, 78 pharmacies and 30 fuel centers.

Other Financial Update

SpartanNash exited the quarter with cash and cash equivalents of $19.5 million, compared with $28.7 million in the prior-year quarter. The company had total long-term liabilities of $849.7 million and total shareholders’ equity of $841.5 million as of Apr 22.

Moreover, cash flow used in operating activities came in at $10.3 million in the first quarter. Further, the company’s board approved a 10% hike in its quarterly cash dividend to16.5 cents per share. This marked the seventh straight year of a dividend hike. Notably, the company did not buy back shares in the quarter.

Going forward, the company continues to project capital expenditures in the band of $70–$72 million for fiscal 2017, along with depreciation and amortization of roughly $86.0 million to $88.0 million. Further, total interest expenses are estimated at roughly $25.0 million to $27.0 million.

Guidance

Management is on track to create value and innovative solutions for customers apart from expanding its business portfolio. Also, it is likely to gain from the acquisition of Caito, growth in food distribution and the continuous improvement in supply chain.

The company maintained its guidance for fiscal 2017 and continues to expect adjusted earnings per share in the band of $2.26–$2.35 that will exclude merger/acquisition and integration costs as well as other adjusted expenses and gains. Also, the projection is based on the Caito integration meeting expectations for the second half of fiscal 2017. The Zacks Consensus Estimate for earnings is at $2.34 per share, which is towards the higher end of the company’s guided range.

Further, its reported earnings from continuing operations are projected in the range of $1.99–$2.08 per share based on anticipated Fresh Kitchen start-up costs, a retirement stock compensation award, along with other estimated integration and restructuring charges.

In addition, comps at the retail segment are expected in the band of slightly negative to flat in fiscal 2017. In the military division, the company is anticipated to start shipping DeCA private brand products to commissaries in the second quarter. However, inflation is expected to pick up slightly in the second half of fiscal 2017.

Key Picks

Better-ranked stocks in the broader retail sector include Best Buy Co. Inc. (NYSE:BBY) , Burlington Stores Inc. (NYSE:BURL) and Five Below Inc. (NASDAQ:FIVE) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Best Buy delivered an average positive earnings surprise of 27.7% over the trailing four quarters and has a long-term earnings growth rate of 10.8%.

Burlington Stores delivered an average positive earnings surprise of 26.3% over the trailing four quarters and has a long-term earnings growth rate of 15.9%.

Five Below delivered an average positive earnings surprise of 9.5% for the trailing four quarters and has a long-term earnings growth rate of 28.5%.

Looking for Ideas with Even Greater Upside?

Today's investment ideas are short-term, directly based on our proven 1 to 3 month indicator. In addition, I invite you to consider our long-term opportunities. These rare trades look to start fast with strong Zacks Ranks, but carry through with double and triple-digit profit potential. Starting now, you can look inside our home run, value, and stocks under $10 portfolios, plus more.Click here for a peek at this private information >>