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Food retailer Smart & Final Stores Inc. reported financial results Wednesday for the fiscal fourth quarter and full year ended January 1, 2017.

 

Full Year Highlights:

* Net sales increase of 9.3% to $4,341.8 million

* Comparable store sales decrease of 0.5%, including impacts of deflation and cannibalization

* Net income of $12.9 million, or $0.17 per diluted share

* Adjusted net income of $42.2 million, or $0.54 per diluted share

* Adjusted EBITDA of $180.3 million

“We are pleased with our performance in 2016, which marks a period of unprecedented store growth,” said David Hirz, President and Chief Executive Officer. “Our 2016 store development included the successful integration of a major acquisition resulting in the largest number of new Smart & Final Extra! stores in a single year in the Company’s history, and we simultaneously expanded our Cash & Carry banner.  We continue to build upon our differentiated brand message as the one-stop shop for business and household needs, and to communicate Smart & Final’s unique banner propositions to both new and existing customers.”

Mr. Hirz added, “2016 was not without its challenges as the continued effects of deflation and anticipated impacts from cannibalization pressured comparable store sales growth and earnings.  Looking ahead to 2017, we expect these pressures to ease as we move through the year and that, when combined with our merchandising and marketing initiatives, will position us to return to positive comparable store sales growth in 2017.”

The Company’s fiscal year and fiscal fourth quarter ended January 1, 2017 comprised 52-week and 12-week periods respectively, and the Company’s fiscal year and fiscal fourth quarter ended January 3, 2016 comprised 53-week and 13-week periods, respectively.  For comparability of net sales between periods, the Company includes in the presentation below consistent 52-week and 12-week comparisons, calculated by excluding the first week of the 53-week and 13-week periods, respectively.

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 adjusted net income, adjusted net income per share, adjusted net income per diluted share, EBITDA and adjusted EBITDA, 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 numbers below are first presented on a GAAP basis and then on an adjusted basis.

Fourth Quarter Fiscal 2016 Financial Results

Net sales were $1,000.6 million in the 12-week quarter ended January 1, 2017, representing a 0.3% increase as compared to $997.6 million in the 13-week quarter ended January 3, 2016.  On a consistent 12-week comparison basis, sales increased by 9.2% from the prior year quarter.  Net sales growth was driven by the net sales contribution of new stores, partially offset by a 2.0% decrease in comparable store sales. Comparable store sales were comprised of a 0.2% increase in comparable transaction count, including the effect of anticipated cannibalization from new stores, and a 2.2% decrease in comparable average transaction size, including the impact of deflation in key product categories in both store banners.

Net sales for Smart & Final banner stores were $796.2 million for the 12-week quarter ended January 1, 2017, a 2.0% increase as compared to $780.6 million in the 13-week quarter ended January 3, 2016.  On a consistent 12-week comparison basis, sales increased by 11.1% from the prior year quarter.  Comparable store sales for the Smart & Final banner decreased 2.1% in the fourth quarter.

Net sales for Cash & Carry banner stores were $204.4 million for the 12-week period ended January 1, 2017, a 5.8% decrease as compared to $217.0 million in the 13-week quarter ended January 3, 2016.  On a consistent 12-week comparison basis, sales increased by 2.6% from the prior year quarter.  Comparable store sales for the Cash & Carry banner decreased 1.5% in the fourth quarter.

Gross margin from operations was $140.9 million, a 4.7% decrease as compared to $147.9 million in the fourth quarter of 2015. Gross margin rate was 14.1% as compared to 14.8% in the same period of 2015.

Operating and administrative expenses were $135.2 million, a 7.4% increase as compared to $125.9 million in the same period of 2015. This increase was primarily related to expenses associated with 37 new stores opened over the prior 12 months and related support costs.

Net loss was $0.3 million, including the effect of higher store development and closure expenses, and an income tax benefit of $1.7 million, as compared to net income of $10.0 million in the same period of 2015. Net loss per diluted share was $0.00 as compared to net income per diluted share of $0.13 in the same period of 2015.

Adjusted net income was $5.0 million as compared to $14.7 million for the same period of 2015. Adjusted net income per diluted share was $0.07 as compared to $0.19 in the same period of 2015.

Adjusted EBITDA was $37.3 million as compared to $47.4 million in the fourth quarter of 2015.

Fiscal 2016 Financial Results

In the 52-week year ended January 1, 2017, net sales were $4,341.8 million, an increase of 9.3% as compared to $3,971.0 million in the 53-week year ended January 3, 2016.  On a consistent 52-week comparison basis, sales increased by 11.2% from the prior year.  Net sales growth was driven by the net sales contribution of new stores, partially offset by a 0.5% decline in comparable store sales.  The decline in comparable store sales was comprised of a 0.8% increase in comparable transaction count and a 1.3% decrease in comparable average transaction size.

Net sales for Smart & Final banner stores were $3,400.8 million, a 12.0% increase as compared to $3,037.0 million in the 53-weeks of fiscal 2015.  On a consistent 52-week comparison basis, sales increased by 13.9% from the prior year.  Full year comparable store sales decline for the Smart & Final banner was 0.6%.

Net sales for Cash & Carry banner stores were $941.0 million, a 0.8% increase as compared to $934.0 million in the 53-weeks of fiscal 2015.  On a consistent 52-week comparison basis, sales increased by 2.4% from the prior year.  Full year comparable store sales decline for the Cash & Carry banner was 0.3%.

Net income was $12.9 million, including the effect of higher store development costs, as compared to $38.3 million in 2015. Net income per diluted share was $0.17 as compared to $0.50 for 2015.

Adjusted net income was $42.2 million, a 25.0% decrease as compared to $56.3 million in 2015. Adjusted net income per diluted share was $0.54 as compared to $0.73 for 2015.

Adjusted EBITDA was $180.3 million, as compared to $192.9 million in 2015.

Growth and Development

During fiscal 2016, the Company opened 33 new Smart & Final Extra! stores, completed six conversions of legacy Smart & Final stores to the Smart & Final Extra! format, relocated six legacy Smart & Final stores and closed eight legacy Smart & Final stores. The Company opened four new Cash & Carry stores during fiscal 2016.  As of January 1, 2017, the Company operated a total of 305 stores, including 172 Smart & Final Extra! stores, 74 legacy Smart & Final stores and 59 Cash & Carry stores.

Operating Stores at Fiscal Year End (January 1, 2017)

Smart & Final Banner Stores

Cash & Carry
Banner Stores

Total
Company

Extra!
format

Legacy
format

Total

End of Fiscal 2015

127

94

221

55

276

New stores

33

33

4

37

Relocations, net

6

(6)

Conversions

6

(6)

Store closures

(8)

(8)

(8)

End of Fiscal 2016

172

74

246

59

305

Leverage and Liquidity
As of January 1, 2017, the Company’s debt, net of debt issuance costs, was $678.9 million and cash and cash equivalents were $54.2 million.

In the 52-weeks ended January 1, 2017, the Company generated cash from operations of $97.1 million and invested $151.2 million in capital expenditures, primarily related to the development of Extra! format stores and to improvements of existing assets.

Outlook
The Company is providing the following guidance for the full year ending December 31, 2017:

Net sales growth

5.5% – 6.5%

Comparable store sales growth

1.0% – 2.0%

Unit growth (new stores)

15 Smart & Final Extra!

4 Cash & Carry

Relocations of existing stores to Extra! format

Smart & Final stores

Expansions or conversions of legacy stores to Extra! format

4 to 5 Smart & Final stores

Adjusted EBITDA

$185 – $195 million

Adjusted net income

$39 – $43 million

Adjusted diluted EPS

$0.50 – $0.55

Capital expenditures 

$120 – $130 million

Fully diluted weighted average shares

77 million

The above guidance includes certain non-GAAP financial measures (namely adjusted net income, adjusted net income per diluted share and adjusted EBITDA), 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 $6 million, non-cash rent, related to stores, of approximately $4 million and share-based compensation expense of approximately $10 million. 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.

In the first quarter of fiscal year 2017, the Company expects to open two new Smart & Final Extra! stores, and one new Cash & Carry store.

 

About Smart & Final

Smart & Final Stores, Inc. (NYSE: SFS), is a value-oriented food and everyday staples retailer, headquartered in Commerce (near Los Angeles), California. The Company offers quality products in a variety of sizes, saving household, nonprofit and business customers time and money. As of January 1, 2017, the Company operated 305 grocery and foodservice stores under the “Smart & Final,” “Smart & Final Extra!” and “Cash & Carry Smart Foodservice” banners in California, Oregon, Washington, Arizona, Nevada, Idaho and Utah, with an additional 15 stores in Northwestern Mexico operated through a joint venture. In business for over 145 years, the Company remains committed to giving back to local communities through employee volunteer opportunities and Company donations to local nonprofits.

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