Smart & Final Stores, Inc., the value-oriented food and everyday staples retailer, reported Wednesday financial results for the fiscal third quarter ended Oct. 7, 2018.
Third Quarter Highlights:
– Net sales increased 2.8% to $1,497.7 million with a comparable store sales increase of 0.6%
– Gross margin increased 8.7% to $232.4 million
– Adjusted EBITDA of $62.3 million
– Net income of $10.2 million or $0.14 per share, including benefit of lower tax rate
– Adjusted net income of $16.9 million or $0.23 per share, including benefit of lower tax rate
– Debt reduction of $23 million in the quarter and $46 million year-to-date
“Our third quarter performance was solid with 2.8% year-over-year growth in overall sales. We also delivered our sixth consecutive quarter of positive comparable store sales, with growth in both average transaction size and merchandise margins despite greater pressure from deflation in product prices,” said David Hirz, president and chief executive officer of the Company.
“We also continue to allocate our strong free cash flow from operations to reduce outstanding debt with a year-to-date reduction of $46 million. Our focus on our key customer segments, including small business customers, is growing sales despite deflation, as we build on our core strengths in value pricing and unique merchandising. We continue to support our value proposition through targeted investments in digital commerce and infrastructure, which are helping to drive strong online sales gains in both our Smart & Final and Smart Foodservice Warehouse banners.”
In order to aid understanding of the Company’s business performance, it has presented results in conformity with accounting principles generally accepted in the United States (“GAAP”) and has also presented EBITDA, adjusted EBITDA, adjusted net income, adjusted net income per share, and adjusted net income per diluted share, which are non-GAAP measures that are explained and reconciled to the comparable GAAP measures in the tables included in this release. Where applicable, the results below are first presented on a GAAP basis and then on a non-GAAP adjusted basis.
Fiscal Third Quarter 2018 Financial Results
Net sales were $1,497.7 million in the 16-week quarter ended October 7, 2018, representing a 2.8% increase as compared to $1,457.4 million for the same period of 2017. Net sales growth was driven by a 0.6% increase in comparable store sales and from the net sales contribution of new stores. Comparable store sales growth was comprised of a 1.9% increase in comparable average transaction size, partially offset by a 1.3% decrease in comparable transaction count. The Company estimates that the year-to-year deflation rate in product pricing was -0.7% in the third quarter.
Net sales for Smart & Final banner stores were $1,144.1 million, a 2.6% increase as compared to $1,115.2 million for the same period of 2017. Comparable store sales growth for the Smart & Final banner was 0.2% in the third quarter.
Net sales for Smart Foodservice Warehouse banner stores were $353.6 million, a 3.3% increase as compared to $342.1 million for the same period of 2017. Comparable store sales growth for the Smart Foodservice Warehouse banner was 2.0% in the third quarter.
Gross margin was $232.4 million, an 8.7% increase as compared to $213.9 million in the third quarter of 2017. Gross margin rate was 15.5% as compared to 14.7% for the same period of 2017. Gross margin rate in the quarter was supported by the Company’s strategic sourcing, merchandising and pricing initiatives.
Operating and administrative expenses were $209.9 million, a 7.5% increase as compared to $195.3 million for the same period of 2017. This increase was related to expenses associated with the effect of higher minimum wage rates, as well as new stores opened during the prior twelve months and their related support costs.
Interest expense in the third quarter was $13.3 million, an 18.0% increase as compared to $11.2 million in the prior year quarter, primarily driven by higher interest rates as well as interest expense related to accounting for build-to-suit store developments.
The third quarter results reflect an effective tax rate benefit of approximately 2% which includes a $2.9 million discrete tax benefit related to accelerated depreciation deductions included in the Company’s 2017 income tax return and the effect of the 2017 Tax Cuts and Jobs Act.
Net income was $10.2 million, or $0.14 per share, as compared to net income of $5.1 million, or $0.07 per share, for the same period of 2017. Adjusted net income was $16.9 million, or $0.23 per share, as compared to adjusted net income of $12.9 million, or $0.17 per share, for the same period of 2017.
Adjusted EBITDA was $62.3 million, a slight decrease of 1.0% as compared to $62.9 million for the same period of 2017.
Fiscal Year-to-date Financial Results
In the forty weeks ended October 7, 2018, net sales were $3,639.4 million, an increase of 3.9% as compared to $3,502.7 million in the same period of 2017. Net sales growth was driven in part by the net sales contribution of new stores and a 1.0% increase in comparable store sales. The increase in comparable store sales was attributable to a 2.5% increase in comparable average transaction size, partially offset by a 1.5% decrease in comparable transaction count.
Net sales for Smart & Final banner stores were $2,807.7 million, an increase of 3.4% as compared to $2,716.3 million in the same period of 2017. Year-to-date comparable store sales for the Smart & Final banner increased 0.3%.
Net sales for Smart Foodservice Warehouse banner stores were $831.7 million, a 5.8% increase as compared to $786.3 million in the same period of 2017. Year-to-date comparable store sales for the Smart Foodservice Warehouse banner increased 3.4%.
Net income was $9.7 million, as compared to net income of $7.6 million in the same period of 2017, which included a tax provision of $0.3 million and $0.4 million, respectively. Net income per diluted share was $0.13 as compared to $0.10 for the same period of 2017.
Adjusted net income was $25.5 million, as compared to $22.5 million in the same period of 2017. Adjusted net income per diluted share was $0.34, compared to $0.30 in the same period of 2017.
Adjusted EBITDA was $140.2 million, as compared to $135.4 million in the same period of 2017.
Growth and Development
During the fiscal third quarter of 2018, the Company opened three new Smart & Final Extra! stores, relocated one legacy Smart & Final store to an Extra! format store and closed one legacy Smart & Final store. As of October 7, 2018, the Company operated a total of 324 stores, including 199 Smart & Final Extra! stores, 61 legacy format Smart & Final stores and 64 Smart Foodservice Warehouse stores.
Year-to-date, the Company has closed three legacy Smart & Final banner stores where leases were expiring and the store economic performance was marginal. The Company expects to close one additional legacy store in the fourth quarter of fiscal 2018.
Leverage and Liquidity
As of October 7, 2018, the Company’s debt, net of debt issuance costs, was $653.0 million and cash and cash equivalents were $62.2 million.
During the forty weeks ended October 7, 2018, the Company generated cash from operations of $109.5 million and invested $107.9 million in capital expenditures, primarily related to the improvement of existing assets and new stores.
Year-to-date, the Company has reduced outstanding borrowings under its revolving credit facility by $46 million.
The Company is revising certain elements of its previously issued guidance framework for the full year ending December 30, 2018, as noted in the table below:
The above guidance includes certain non-GAAP financial measures (namely adjusted EBITDA, adjusted net income and adjusted net income per diluted share), which exclude certain costs and non-cash costs and provide investors with additional financial measures of the expected operating performance of the Company’s business. The primary factors in reconciling these non-GAAP financial measures to comparable GAAP measures include the following: pre-opening costs associated with new stores of approximately $2.6 million, non-cash rent related to stores of approximately $4.8 million, share-based compensation expense of approximately $13.3 million, and $3.9 million of store closure expenses. The other amounts needed to reconcile these non-GAAP financial measures to comparable GAAP measures cannot be quantified and are not available without an unreasonable effort.
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