UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[ X ] |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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OR |
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[ ] |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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Commission File Number: 000-31127
SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Michigan |
38-0593940 |
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850 76th Street, S.W. |
49518-8700 |
Registrant's telephone number, including area code: (616) 878-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes X |
No |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 14, 2002, was $76,585,955.
The number of shares of the registrant's common stock, no par value, outstanding at June 14, 2002, was 19,810,026 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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Part III, Items 10, 11, 12 and 13 |
Proxy Statement for Annual Meeting to be held August 7, 2002 |
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Forward-Looking Statements
The matters discussed in this Annual Report on Form 10-K include "forward-looking statements" about our plans, strategies, objectives, goals or expectations. These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores or management "expects," "anticipates," "projects," "plans," "believes," "estimates," "intends" or is "optimistic" that a particular occurrence "may result," "could result" or "will likely result" or that a particular event "may occur," "could occur," or "will likely occur" in the future or similarly stated expectations. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Annual Report on Form 10-K, there are many important factors that could cause actual results to differ materially. Our ability to strengthen our Ohio retail-store performance; improve sales growth; increase profit margin; reduce operating cost structures; and implement the other plans, strategies, objectives, goals or expectations described in this Annual Report will be affected by, among other factors, those discussed below, as well as changes in economic conditions generally or in the markets and geographic areas that we serve and adverse effects of the changing food and distribution industries.
Anticipated future sales are subject to competitive pressures from many sources. Our retail grocery and grocery and convenience distribution businesses compete with many warehouse discount stores, supermarkets, pharmacies and product manufacturers. Additionally, future sales will be dependent on the number of retail stores that we own and operate and competitive pressures in the retail industry. Sales volumes in our convenience distribution segment may continue to be negatively impacted by increased cigarette prices. 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: the integration of the business operations of our retail acquisitions and retail and distribution operations; future business acquisitions, including additional retail stores; difficulties in the operation of the current business segments; difficulties in the assimilation of acquired personnel, operations, systems or procedures; inability to realize synergies in the amounts or within the time frame expected by management; adverse effects on existing business relationships with independent retail grocery store customers; difficulties in the retention or hiring of employees for the acquired businesses; labor shortages, stoppages or disputes; business divestitures; increased transportation or fuel costs; current or future lawsuits and administrative proceedings; and loss of customers or suppliers.
Our future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings necessary for retail store acquisitions and operations; changes in the interest rate environment; cigarette inventory levels; retail property sales; and the amount of fees received on delinquent accounts. The availability of our senior secured credit facility depends on continued compliance with the credit facility.
Furthermore, events resulting from the terrorist attacks of September 11, 2001 and other acts of violence or war create considerable economic and political uncertainties which 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.
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 Annual Report.
PART I
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Item 1. |
Business |
Overview
Spartan Stores is a premier regional grocery retailer and grocery and convenience distributor, operating principally in Michigan and Ohio. We operate three primary business segments: retail grocery, grocery distribution and convenience distribution. We also operate a real estate segment. We are the ninth largest distributor to grocery stores in the United States and have been the largest distributor to grocery stores in Michigan for more than 10 years. We are also the sixth largest distributor to convenience stores in the United States. Our retail operations hold a #1 or #2 market share position in each of their key retail grocery markets of Greater Grand Rapids, northern Michigan and Greater Toledo. For the fiscal year ended March 30, 2002 ("fiscal 2002"), we generated net sales of $3.5 billion and we qualified as a Fortune 500 company in 2002.
Established in 1917 as a cooperative, Spartan Stores converted to a for-profit business corporation in 1973. In our 85 years as a distributor, we have built a strong infrastructure and have developed extensive knowledge of the merchandising and marketing required for successful retail operations. In January 1999, we began to acquire retail grocery stores in our focused geographic regions. In August 2000, we acquired Seaway Food Town, a self-distributing operator of 47 supermarkets and 26 food/drug combination stores in northwestern and central Ohio and southeastern Michigan. This acquisition greatly increased our retail presence and resulted in the listing of our common stock on The Nasdaq Stock Market under the symbol "SPTN."
We believe that the vertical integration of distribution and retail operations allows us to achieve improved distribution, transportation, merchandising and marketing, and increased purchasing power. In addition, this integration allows us to enhance the services we provide to both our company-owned stores and our independent grocery distribution customers. The large number of independent retail grocers in our markets (many of which are our customers) may offer continued consolidation opportunities. We believe that our experience and expertise in grocery distribution and retail operations provide us with the tools for successful integration of retail stores.
Since the beginning of our transformation from a wholesale distributor to an integrated distributor and retailer in January 1999, we have made significant enhancements to the infrastructure of our grocery distribution and retail grocery segments and have taken many actions to fully integrate these operations and take advantage of the resulting efficiencies. In addition, we have assembled a management team with significant experience in food retailing and distribution.
Retail Grocery Segment
Our retail grocery segment operates 100 retail grocery stores and 25 deep discount food/drug combination stores predominantly in small metropolitan and rural areas of Michigan and Ohio, and maintains the #1 or #2 market share position in each of our key retail grocery markets of Greater Grand Rapids, northern Michigan and Greater Toledo. Our retail grocery stores are operated under the banners Food Town, Family Fare Supermarkets, Glen's Markets, Great Day Food Centers, Prevo's Family
Markets and Ashcraft's Markets and our deep discount food/drug combination stores are operated under the banner The Pharm.
According to our own estimates, the market shares of our retail stores are 38% in northern Michigan. According to the 2002 Market Scope from Trade Dimensions, the market shares of our retail stores are 24% in the Greater Toledo area and 23% in the Greater Grand Rapids area. We believe that our strong market share positions result from our distinct "neighborhood market" focus and the favorable name recognition from the local banner names we have acquired. Our neighborhood market strategy distinguishes our stores from supercenters and limited assortment stores by emphasizing convenient locations, demographically targeted merchandise selections, strong perishables offerings, customer service, value pricing and community involvement.
We have acquired our stores as a result of six acquisitions since 1999:
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Number |
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Current |
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Ashcraft's Markets |
Central Michigan |
January 1999 |
8 |
6 |
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Family Fare |
Western Michigan |
March 1999 |
13 |
13 |
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Glen's Markets |
Northern Michigan |
May 1999 |
23 |
23 |
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Great Day Food |
Western Michigan |
December 1999 |
3 |
3 |
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Food Town/The Pharm |
Ohio and southeastern |
August 2000 |
73 |
70 |
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Prevo's Family Markets |
Northern and western |
March 2001 |
10 |
10 |
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130 |
125 |
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Since the acquisitions, we have closed five stores as a result of our continual evaluation of store performance against chain-wide profitability benchmarks. We also relocated one store in Harrison, Michigan and changed that store's retail banner from Ashcraft's Markets to Glen's Markets to benefit from the strong name recognition of Glen's Markets in the region.
Our 100 retail grocery stores typically offer dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, tobacco products, health and beauty care products, delicatessen items and bakery goods. Thirty-nine of our grocery stores also offer pharmacy facilities. In addition to nationally advertised products, the stores carry our private label items such as the "Spartan" brand, the "HomeHarvest" brand, which is our value brand label, and the "Bayberry Farms" brand, which is our premium private label brand. These private label items provide above-average retail margins and help to generate increased customer loyalty. See "Merchandising and Marketing--Private Label Brands." Our retail grocery stores range in size from approximately 16,000 to 60,000 square feet and average approximately 40,000 square feet per store.
Our 25 deep discount food/drug combination stores, which operate under the banner The Pharm, offer a unique combination of a full-service pharmacy, general merchandise products and basic food offerings. These stores operate under a deep discount format that emphasizes everyday low prices that
are typically less than a traditional supermarket or drug store. The Pharm stores range in size from approximately 10,000 to 50,000 square feet and average approximately 29,000 square feet per store. The Pharm stores also offer our successful value brand label, "Pharm."
The following chart details the growth in the number of our retail stores from fiscal 1999 through fiscal 2002:
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Stores |
Number of |
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1999 |
0 |
8 |
-- |
8 |
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2000 |
8 |
39 |
-- |
47 |
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2001 |
47 |
83 |
3 |
127 |
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2002 |
127 |
-- |
-- |
127 |
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Two stores were closed in early fiscal 2003.
We pursue a disciplined acquisition strategy, including an extensive pre-acquisition due diligence process. Typical targets include our grocery distribution customers as well as other retail grocery stores that are supplied by competitors or that are self-distributing within the Great Lakes region, preferably in areas contiguous to our markets. Preferred targets are typically the #1 or #2 retailer in their market areas, ideally chains of 10 or more stores. However, we will consider smaller chains or single stores if they are in our existing markets.
In fiscal 2002, we embarked on a multi-year remodeling program for our retail stores, with a goal of implementing a five-to-seven year remodeling cycle for each store. Maintenance capital expenditures are expected to approximate $10 to $15 million per year and expenditures for upgrades, remodeling and two to four new stores are expected to be approximately $20 to $25 million per year. We will evaluate projects based on demographics and competition within each market and prioritize projects based on their expected returns on investment. We generally target a 15% after-tax internal rate of return (IRR) hurdle for both new store expenditures and store remodeling projects. While we may undertake projects that do not meet this standard, we believe that focusing on such measures provides us with an appropriate level of discipline in our capital expenditures.
Grocery Distribution Segment
Spartan Stores is the ninth largest distributor to grocery stores in the United States and the largest distributor to grocery stores in Michigan. We have been the largest distributor to grocery stores in Michigan for more than 10 years. Our grocery distribution segment provides more than 450 stores, including more than 330 independently owned grocery stores and our 125 company-owned stores, with a selection of approximately 40,000 products, including dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, and pharmacy and health and beauty care items. In addition, we offer our grocery distribution customers approximately 2,400 private label grocery and general merchandise items. Total distribution revenues, including shipments to our company-owned stores, were $1,941.8 million for fiscal 2002.
The following chart provides information on our grocery distribution market share:
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Market |
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Population |
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Market Position |
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Market Share |
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Greater Grand Rapids, Michigan(1) |
1,920,000 |
1 |
47.0% |
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Flint, Michigan (2) |
1,205,600 |
1 |
23.9% |
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Traverse City-Cadillac, Michigan |
604,000 |
1 |
49.9% |
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Lansing, Michigan (2) |
654,800 |
3 |
19.2% |
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Detroit, Michigan (2) |
4,985,000 |
3 |
13.7% |
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Source: Trade Dimensions, DMA Market Definitions. Includes Spartan Stores distribution and retail.
(1) Includes Kalamazoo and Battle Creek, Michigan.
(2) Represents distribution markets only. We do not operate any retail stores in these markets.
Customers. Our grocery distribution segment supplies our company-owned stores and a diverse group of independent grocery store operators that range from single stores to supermarket chains with as many as 21 stores. We offer our customers payment terms on a net six-day basis. Pricing is generally based upon a "cost plus" model for grocery, frozen, dairy, deli, bakery, pharmacy and health and beauty care items and a "variable mark-up" model for meat, produce, seafood, floral products and general merchandise.
We do not believe that our success is dependent upon maintaining the grocery distribution business of any customer. Our ten largest grocery distribution customers (excluding company-owned stores) accounted for approximately 16.0% of our fiscal 2002 consolidated net sales, but no single grocery distribution customer accounted for more than 4.1% of our fiscal 2002 consolidated net sales.
Distribution Functions. Our grocery distribution business utilizes approximately 2.5 million square feet of warehouse, distribution and office space. We supply our company-owned stores and our independent grocery distribution customers from our distribution centers located in Grand Rapids and Plymouth, Michigan and Toledo, Ohio. We believe that our distribution facilities are strategically located to serve our customers. During fiscal 2003, we plan to implement our network rationalization initiative, which involves shifting stock-keeping units (SKUs) within our distribution centers to create dedicated slow and fast-moving sections. We believe that this realignment will reduce our labor and inventory carrying costs when it is completed.
To supply our grocery distribution customers, we operate a fleet of approximately 110 tractors, 200 conventional trailers and 175 refrigerated trailers, substantially all of which we lease. We are currently undertaking several initiatives to minimize our vehicles' outbound miles and increase inbound freight revenue based on our new logistics programs.
In October 2001, we signed a five-year labor contract with our Grand Rapids grocery distribution center associates. The contract provides for improved work-rule flexibility which we believe will improve overall distribution center productivity and lead to a more efficient distribution operation. In addition, these union associates will share in rising healthcare and welfare benefit costs. Subsequent to the labor negotiations, we adopted a gain-share compensation program at our Grand Rapids grocery distribution center that provides for incentive-based compensation and has already resulted in improved productivity and reduced direct labor costs. Since October 2001, our shipping productivity, based on our engineered standards, has increased by 9.1% and our cases shipped per labor hour worked has increased by 6.3%. We plan to roll out this program to our other distribution centers in the near future.
Additional Services. We also provide our independent grocery distribution customers with many value-added services, including:
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• |
Site identification and market analyses |
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Coupon redemption |
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• |
Store planning and development |
• |
Product reclamation |
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Marketing, promotion and advertising |
• |
Printing |
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• |
Technology and information services |
• |
Merchandising |
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• |
Accounting and tax preparation |
• |
Real estate services |
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• |
Human resource services |
Over the years, we have provided various types of financial support for our independent grocery distribution customers. We view such support as an important tool for cementing relationships with distribution customers, providing us with such benefits as minimum purchase commitments, rights of first refusal upon sales and rights to purchase. We maintain a conservative approach to entering into these financial supports. As of March 30, 2002, they included approximately $2.7 million of loan guarantees, $0.6 million of loans and $0.2 million per year in annual lease guarantees.
Those of our independent grocery distribution customers with whom we have loan agreements, leases, guarantees or other agreements agree to purchase a minimum percentage of products from us for the term of the agreement. At March 30, 2002, we had such agreements with 24 customers covering 51 retail grocery stores with terms ranging from one to 15 years. The minimum purchase requirements under these agreements varied from approximately 41% to 55% of the total retail sales of the grocery stores covered by the agreements. For fiscal 2002, these stores had total retail sales of approximately $553 million and total distribution purchases from us of approximately $268 million. When combined with sales to our own stores, these sales approximate 51% of our total distribution sales volume.
Convenience Distribution Segment
We are the sixth largest distributor to convenience stores in the United States. Our convenience distribution segment provides a broad selection of tobacco products, specialty foods, grocery products and other items to approximately 3,800 convenience stores and other retail locations in Michigan, Ohio, Indiana, Kentucky, Tennessee and Pennsylvania. We also service our company-owned retail stores out of our convenience distribution centers for certain items such as candy and tobacco products. In addition, we operate 12 cash and carry outlets in Michigan and Ohio serving an additional 2,800 stores.
We provide our convenience distribution customers with services that range from a full-service program, including merchandising, marketing, advertising and information systems, to a customized program in which customers can order the products they desire at lower cost without the associated services. This differentiated approach allows us to target both large and small convenience store chains and provide them with a service offering program customized to their needs.
Customers. Our typical customer's convenience store averages approximately 2,500 square feet and carries approximately 3,000 items. Approximately 50% of our convenience distribution segment's sales are to chains of two to 30 stores, 10% are to supermarkets and the remainder are to individually owned stores.
We do not believe that our success is dependent upon maintaining the convenience distribution business of any one customer. Our ten largest convenience distribution customers (excluding company-
owned stores) accounted for approximately 4% of our fiscal 2002 consolidated net sales, but no single customer accounted for more than 1% of our fiscal 2002 consolidated net sales.
Distribution Functions. Our convenience distribution business utilizes approximately 355,000 square feet of warehouse, distribution and office space. We supply our company-owned retail stores, other Spartan-served independent grocery stores and our convenience distribution customers using our fleet of approximately 47 straight trucks and 28 tractor-trailers (substantially all of which we lease) from our distribution centers located in Grand Rapids, Michigan, Gahanna (Columbus), Ohio and Louisville, Kentucky. We believe that our distribution facilities are strategically located to serve our convenience customers. Our distribution center personnel are non-unionized and are incentivized to maintain high productivity levels.
We utilize our convenience distribution centers in tandem with our grocery distribution centers to increase efficiencies and reduce inventory levels. We have transferred all of our tobacco inventory and non-seasonal candy to our convenience distribution centers, with the transfer of Toledo candy to be complete by September 2002. We cross-dock these products for distribution to our grocery distribution customers. The consolidation of these products helps increase profitability as a result of reduced inventory levels while reducing transportation and distribution costs.
Real Estate Segment
We own real estate totaling approximately 4.65 million square feet under roof, including 19 shopping centers and 17 freestanding locations. Approximately 2 million square feet is leased to customers that we supply and to other retailers. Each shopping center is substantially full and is anchored by a lease with a retail grocery store, all but one of which we supply. We also own non-operating real estate assets. Management estimates that the market value of our real estate is approximately $155 million and exceeds its book value by approximately $75 million.
The following table lists the retail banner, number of stores, geographic region, approximate total square footage under the banner, average store size (in square feet) and ownership of our retail grocery stores.
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Number |
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Total |
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Ashcraft's Markets |
6 |
Central Michigan |
239,000 |
39,833 |
Leased |
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Family Fare |
13 |
Western Michigan |
520,000 |
40,000 |
Leased |
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Food Town |
19 |
Northwestern and |
774,000 |
40,737 |
Owned |
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Food Town |
26 |
Northwestern and |
1,162,000 |
44,692 |
Leased |
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Glen's Markets |
23 |
Northern Michigan |
844,000 |
36,696 |
Leased |
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Great Day Food |
3 |
Western Michigan |
167,000 |
55,667 |
Leased |
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Prevo's Family |
9 |
Western and northern |
286,000 |
31,778 |
Leased |
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Prevo's Family |
1 |
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Northern Michigan |
34,000 |
34,000 |
Owned |
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Total |
100 |
4,026,000 |
40,260 |
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In addition to the stores listed above, we own a 65% interest in a joint venture that operates a grocery store of approximately 45,700 square feet located in southeastern Michigan.
The following table lists the retail banner, number of stores, geographic region, approximate total square footage under the banner, average store size (in square feet) and ownership of our deep discount food/drug combination stores.
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Total |
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Pharm Stores |
5 |
Northwestern and |
126,000 |
25,200 |
Owned |
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Pharm Stores |
20 |
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Northwestern and |
597,000 |
29,850 |
Leased |
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Total |
25 |
723,000 |
28,920 |
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The following table lists the location, approximate size and ownership of the facilities used in our grocery distribution segment.
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Facilities |
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Location |
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Square Feet |
|
Ownership |
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Dry grocery |
Grand Rapids |
585,000 |
Owned |
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Perishables (refrigerated) |
Grand Rapids |
307,000 |
Owned |
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General merchandise |
Grand Rapids |
233,000 |
Owned |
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General office (including print shop) |
Grand Rapids |
127,000 |
Owned |
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Transportation and salvage |
Grand Rapids |
79,000 |
Owned |
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Warehouse and office |
Grand Rapids |
52,000 |
Leased |
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Dry grocery |
Plymouth, MI |
416,000 |
Leased |
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Reclamation center/support services |
Charlotte, MI |
80,000 |
Owned |
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Grocery and general merchandise |
Toledo |
16,000 |
Leased |
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Grocery and general merchandise |
Toledo |
133,000 |
Owned |
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Grocery and general merchandise |
Toledo |
516,000 |
Owned |
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Total |
2,544,000 |
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The following table lists the location, approximate size and ownership of the facilities in our convenience distribution segment.
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Facilities and Number of |
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Warehouse and office |
Michigan |
180,000 |
Owned |
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Transfer stations (8) |
Indiana, Ohio, Pennsylvania |
27,500 |
Leased |
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Distribution centers (2) |
Kentucky and Ohio |
172,500 |
Owned |
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Cash and carry distribution centers |
Michigan |
206,000 |
Owned |
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Cash and carry distribution center |
Michigan |
9,000 |
Leased |
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Cash and carry distribution center |
Ohio |
17,600 |
Owned |
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Total |
612,600 |
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Operating Segment Financial Data
More detailed information about our operating segments may be found in Note 14 to the consolidated financial statements included in Item 8 below.
Merchandising and Marketing
Private Label Brands. We market and distribute approximately 2,400 highly recognized private label brand items under three tiers of exclusive store brands: (1) the "Spartan" brand, (2) value brands "HomeHarvest" and "Pharm" and (3) a premium brand, "Bayberry Farms."
We believe that the Spartan brand product line, first introduced in 1954, is one of the most widely accepted and recognized brands in Michigan. Michigan consumers have come to expect high quality products from Spartan Stores at below national brand pricing. We believe that the Spartan brand is gaining consumer acceptance in our Ohio markets due to aggressive promotions, in-store couponing and product demonstrations.
Our value brands, HomeHarvest and Pharm, have proven effective in combating limited assortment store competitors. These brands appeal to consumers who are looking for a consistent quality brand at a low price. Introduced in May 2001, the Bayberry Farms brand is positioned and marketed as a superior product in every category in which it has a presence.
We believe that our private label brands promote customer loyalty and increase our retail margins. The private label brands typically sell at retail prices between 15 and 20% below the prices of targeted national brand products, while providing us with above-average retail gross margins. The target retail margins of the private label brands tend to be about 5% greater than similar national brand products.
Although our private label brands have gained strong name recognition in our core markets, we are developing merchandising and marketing plans to increase their percentage of our sales. These plans include a new package design for the Spartan brand, focused in-store merchandising and further brand development of the HomeHarvest and Bayberry Farms product lines.
Category Management Initiatives. We have recently implemented several category management initiatives to improve product selection and pricing. These initiatives include reducing inventory levels in distribution centers and store backrooms by consolidating slow-moving inventory, ensuring that no advertised merchandise is out of stock and emphasizing more locally preferred product offerings. We have also focused on more effective pricing programs and reducing our "shrink" and seasonal markdown losses by introducing improved perishable item tracking systems and adjusting our seasonal buying based on scan-based data which better reflect sales trends.
Competition
Our company-owned stores and the independent retail grocery stores that we supply compete with, among others, other retail grocery stores, large chain stores that have integrated wholesale and retail operations, mass merchandisers, limited assortment stores and wholesale membership clubs, some of whom have greater resources than we do. The principal competitive factors in the retail grocery business include the location and image of the store; the price, quality and variety of the products; and the quality and consistency of service.
We have developed and implemented strategies and processes to meet competition in our retail grocery segment. We monitor planned store openings by our competitors and have established strategies for proactively responding to new competition. Our goal is to have a comprehensive plan to address new competition in place six months prior to a competitor's opening. Strategies to combat competition vary based on many factors, such as the competitor's format, weaknesses, pricing and sales focus.
Our retail and distribution segments operate in highly competitive markets and are characterized by low profit margins. Our grocery and convenience distribution segments compete with a number of national and regional distributors, some of whom have greater resources than we do. The primary competitive factors in the distribution segments include price, product quality and variety and service.
Suppliers
We purchase products from a large number of national, regional and local suppliers of name brand and private label merchandise. We have not encountered any material difficulty in procuring or maintaining an adequate level of products to serve our customers. No single supplier accounts for more than 12% of our purchases.
Technology
We invest in technology as a means of improving service to our customers and maximizing the efficiency of our operations. We have recently upgraded and standardized many of our systems across all of the companies we have acquired to provide better interactions among our segments and stores. These enhanced capabilities enable us to improve the service levels we provide our customers as well as reduce our costs. As a result of our technology investments, we believe that our systems are up-to-date and highly efficient.
Our information technology strategy is organized around six functional uses:
Retail Stores. We have recently implemented a common, standardized point-of-sale (POS) system across all of our retail grocery stores and deep discount food/drug combination stores. In addition, we have in place enhanced labor scheduling systems for our front-end associates and direct-store-delivery management system along with standard systems for our pharmacies.
Retail Headquarters. Our customer loyalty card is backed by a marketing system to enable us to comprehensively analyze customer purchases. This will be backed by the installation of a POS-based data "warehouse" to support item profitability and price management.
Supply Chain. Our warehouse management and other logistics systems enable common order management, warehouse withdrawal forecasting, in-bound traffic management and routing.
Customer Relationship Management. In support of our independent grocery and convenience distribution customers, we have installed upgraded invoicing and billing software, order management, product catalog price management and promotion management.
Financial. We maintain systems devoted to our accounts payable and receivables, warehouse and store receiving and consolidated financial reporting.
Human Resources. We have consolidated all of these back office systems for our acquisitions onto one platform, covering benefits and administration, payroll, time and attendance, and human resource management.
Subsidiaries
We conduct our grocery distribution business through a wholly owned subsidiary named Spartan Stores Distribution, LLC, and operate our company-owned retail grocery stores primarily through two wholly owned subsidiaries, Family Fare, LLC and Seaway Food Town, Inc. and their respective subsidiaries. We conduct our other business operations through a number of other wholly owned subsidiaries. L&L/Jiroch Company, J.F. Walker Company, Inc. and United Wholesale Grocery Company conduct our convenience distribution business. Market Development Corporation operates our real estate business.
Associates
We currently employ approximately 11,900 associates, approximately 6,800 of which are full-time and approximately 5,100 of which are part-time.
Unions represent approximately 38% of our associates, with contracts for 1,145 distribution center and transportation associates expiring between October 2003 and October 2006, and contracts for 3,379 retail associates expiring between March 2003 and March 2005. Contracts for 27 convenience
distribution associates at our 12 cash and carry outlets expire by location from 2002 to 2006. Our convenience distribution center associates are not unionized. In October 2001, we signed a five-year labor contract with our key Grand Rapids grocery distribution center associates. The Plymouth, Michigan distribution center contract has also been renegotiated within the past twelve months.
We consider our relations with our union and non-union associates to be satisfactory and have not had any work stoppages in the last five years.
Regulation
We are subject to federal, state and local laws and regulations covering the purchase, handling, sale and transportation of our products. Various of our products are subject to federal Food and Drug Administration regulation. We believe that we are in substantial compliance with all Food and Drug Administration and other federal, state and local laws and regulations governing our businesses.
Forward-Looking Statements
The matters discussed in this Item 1 include forward-looking statements. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K.
|
Item 2. |
Properties |
Information concerning the properties of Spartan Stores and its subsidiaries is set forth in Item 1 of this Annual Report on Form 10-K under the heading "Real Estate Segment" and is here incorporated by reference.
|
Item 3. |
Legal Proceedings |
Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against Spartan Stores and its subsidiaries. While the ultimate effect of such lawsuits and claims cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, operating results or liquidity of Spartan Stores. See Note 8 to the consolidated financial statements included in Item 8 below for a description of a lawsuit that was dismissed in the fourth quarter of fiscal 2002.
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of Spartan Stores' shareholders during the fourth quarter of fiscal 2002 through the solicitation of proxies or otherwise.
PART II
|
Item 5. |
Market for Registrant's Common Equity and Related Stockholder Matters |
Until August 2, 2000, there was no established public trading market for our securities. However, on August 2, 2000, Spartan Stores common stock began trading on the National Market System of The Nasdaq Stock Market under the trading symbol "SPTN."
The following table sets forth the high and low sale prices for Spartan Stores common stock for the fiscal quarters indicated, all as reported by Nasdaq:
|
High |
Low |
|||
|
Fiscal Year Ended March 30, 2002: |
||||
|
First Quarter |
$ 14.74 |
$ 9.19 |
||
|
Second Quarter |
16.95 |
11.38 |
||
|
Third Quarter |
13.66 |
10.79 |
||
|
Fourth Quarter |
12.14 |
5.90 |
||
|
Fiscal Year Ended March 31, 2001: |
||||
|
Second Quarter* |
$ 11.81 |
$ 5.34 |
||
|
Third Quarter |
7.88 |
5.00 |
||
|
Fourth Quarter |
11.50 |
6.00 |
||
*The second quarter of Spartan Stores' 2001 fiscal year ran from June 18, 2000 to September 9, 2000. However, as noted above, Spartan Stores common stock did not begin trading on Nasdaq until August 2, 2000.
At June 14, 2002, there were approximately 882 record holders of Spartan Stores common stock.
The amount of quarterly dividends for fiscal 2000 was $0.0125 per share of Spartan Stores Class A common stock. During fiscal 2001, we paid quarterly dividends of $0.0125 per share of Class A common stock for the first quarter, which ended on June 17, 2000, but did not pay any dividends for the other three quarters of that fiscal year. During fiscal 2002, we did not pay any dividends.
We have not paid any dividends since the Seaway Food Town merger on August 1, 2000. The payment of future dividends will be determined by our board of directors. We anticipate that we will use any net earnings in our operations, to repay debt and to acquire additional retail operations, and that we will not pay any dividends for the foreseeable future.
Our senior secured credit facility contains restrictions which materially limit our ability to pay future dividends and make a variety of other restricted payments. See the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 below for a more detailed discussion of these restrictions.
|
Item 6. |
Selected Financial Data |
The following table provides selected historical consolidated financial information of Spartan Stores. The historical information of Spartan Stores was derived from its audited consolidated financial statements for and as of each of the five fiscal years ended March 28, 1998 through March 30, 2002. Fiscal 2001 was a 53-week year. Certain reclassifications have been made to the fiscal 1998 through fiscal 2001 selected financial data to conform to the fiscal 2002 presentation.
(In thousands, except per share data)
|
|
|
|
|
|
Year Ended |
|
|
|
|
||||||||
|
|
March 30, |
|
March 31, |
|
March 25, |
|
March 27, |
|
March 28, |
||||||||
|
Statements of Earnings Data: |
|||||||||||||||||
|
Net sales |
$ |
3,501,153 |
$ |
3,505,923 |
$ |
3,030,917 |
$ |
2,655,854 |
$ |
2,473,306 |
|||||||
|
Cost of sales |
|
2,904,865 |
|
2,960,582 |
|
2,643,490 |
|
2,397,818 |
|
2,234,165 |
|||||||
|
Gross margin |
596,288 |
545,341 |
387,427 |
258,036 |
239,141 |
||||||||||||
|
Selling, general and administrative |
557,580 |
483,879 |
344,993 |
224,580 |
215,468 |
||||||||||||
|
Restructuring charge (credit) (B) |
- |
- |
(4,521 |
) |
5,698 |
- |
|||||||||||
|
Interest expense, net |
24,527 |
27,044 |
22,802 |
7,495 |
8,928 |
||||||||||||
|
Other gains, net |
|
(2,767 |
) |
|
(2,542 |
) |
|
(1,491 |
) |
|
(1,188 |
) |
|
(3,906 |
) |
||
|
Earnings before income taxes, |
|||||||||||||||||
|
discontinued operations and |
|||||||||||||||||
|
extraordinary item |
16,948 |
36,960 |
25,644 |
21,451 |
18,651 |
||||||||||||
|
Income taxes |
|
5,610 |
|
13,925 |
|
9,653 |
|
7,909 |
|
6,710 |
|||||||
|
Earnings before discontinued operations |
|||||||||||||||||
|
and extraordinary item |
11,338 |
23,035 |
15,991 |
13,542 |
11,941 |
||||||||||||
|
Discontinued operations, net of taxes (C) |
(1,491 |
) |
407 |
1,203 |
2,288 |
2,293 |
|||||||||||
|
Extraordinary item, net of taxes |
|
- |
|
- |
|
- |
|
(1,031 |
) |
|
- |
||||||
|
Net earnings |
$ |
9,847 |
$ |
23,442 |
$ |
17,194 |
$ |
14,799 |
$ |
14,234 |
|||||||
|
Weighted average shares outstanding (D) |
19,549 |
17,333 |
13,432 |
14,508 |
15,136 |
||||||||||||
|
Earnings from continuing operations |
|||||||||||||||||
|
per share |
$ |
.58 |
$ |
1.33 |
$ |
1.19 |
$ |
.93 |
$ |
.79 |
|||||||
|
Basic earnings per share |
.50 |
1.35 |
1.28 |
1.02 |
.94 |
||||||||||||
|
Cash dividends per share |
- |
.0125 |
.05 |
.05 |
.05 |
||||||||||||
|
Balance Sheet Data: |
|||||||||||||||||
|
Total assets |
$ |
746,540 |
$ |
801,543 |
$ |
568,555 |
$ |
521,546 |
$ |
406,133 |
|||||||
|
Property and equipment, net |
268,315 |
285,988 |
178,591 |
158,348 |
161,112 |
||||||||||||
|
Working capital |
113,711 |
82,199 |
91,574 |
103,285 |
64,589 |
||||||||||||
|
Long-term obligations |
304,892 |
315,203 |
266,071 |
277,126 |
108,310 |
||||||||||||
|
Shareholders' equity |
231,492 |
218,413 |
126,007 |
121,062 |
114,192 |
||||||||||||
(A) See Note 3 to Consolidated Financial Statements
(B) See Note 5 to Consolidated Financial Statements
(C) See Note 4 to Consolidated Financial Statements
(D) See Note 13 to Consolidated Financial Statements
|
Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Spartan Stores, Inc. is a premier regional grocery retailer and grocery and convenience distributor, operating principally in Michigan and Ohio. Spartan Stores was originally formed as a food distribution cooperative in 1917 but converted to a for-profit business corporation in 1973. We have historically focused on the distribution of groceries and related merchandise to independently owned stores. However, since January 1999, we have completed six acquisitions of grocery store chains. We operate three primary business segments: retail grocery, grocery distribution and convenience distribution. We also operate a real estate segment.
Our retail grocery segment operates 100 retail grocery stores in Michigan and Ohio under the banners Food Town, Family Fare Supermarkets, Glen's Markets, Great Day Food Centers, Prevo's Family Markets and Ashcraft's Markets and 25 deep discount food/drug combination stores in Ohio and Michigan under the banner The Pharm. Our retail grocery stores average approximately 40,000 square feet and have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores.
&nbs