NAFC Nash-Finch Company (MM)

Nash Finch Company (NAFC) reported third-quarter 2013 earnings (excluding one-time items) of 66 cents per share, 52.2% lower than $1.38 per share reported in the year-ago period. Earnings also lagged the Zacks Consensus Estimate of 88 cents by 25.0%. The drop was due to pressure on military gross margins during the quarter.

Quarterly Details

Nash Finch's total sales in the third quarter of 2013 were $1.56 billion, up 3.3% from the year-ago quarter. The gain in sales was backed by higher sales to new customers in the Food Distribution segment. However, the increase in sales was partially offset by reduced sales in the military segment and the sequestration carried out by the U.S. government. Sales exceeded the Zacks Consensus Estimate of $1.48 billion.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter of 2013 declined 27.0% to $31.9 million. EBITDA margin shrank 90 basis points (bps) to 2.0%. The decline was mainly due to reversal of year-to-date incentive compensation accruals in the prior-year period. Selling, general and administrative expenses amounted to $100.14 million, up 18.2% from the prior-year quarter.

Segment Update

Military Distribution: Sales declined 6.5% year over year to $665.5 million in the third quarter of 2013 mainly due to the sequestration carried out by the U.S. government and shutdown of numerous military commissaries.

The segment's EBITDA decreased 22.8% from the prior-year quarter to $10.5 million, due to reversal of incentive compensation accruals in the prior-year period. EBITDA margin was 1.6% in the reported quarter, down 30 bps from the prior-year quarter.

Food Distribution: Food Distribution sales increased 17.9% to $656.4 million in the quarter. The increase was primarily due to addition of new Food distribution customers in the quarter.

Segment’s EBITDA slipped 13.3% from the prior-year quarter to $12.8 million in the quarter. EBITDA margin shrank 70 bps year over year to 2.0% in the reported quarter due to reversal of incentive compensation accruals in the prior-year period.

Retail: Retail sales slipped 0.3% year over year to $241.6 million, as increase in sales due to the Bag 'N' Save and No Frills supermarkets acquisitions was offset by tough retail conditions prevailing nationwide. NAFC added two stores to its store base through acquisition.

Segment’s EBITDA slipped 28.1% from the prior-year quarter to $8.1 million in the quarter. EBITDA margin shrank 130 bps year over year to 3.4% in the reported quarter.

Financial Update

Cash and cash equivalents for Nash Finch was $1.2 million as of Oct 5, 2013, compared with $1.18 million as of Jun 15, 2013. Long-term debt went up to $383.0 million in the quarter from $416.1 million in the prior quarter.

Conclusion

Nash Finch’s earnings were not very encouraging. The bottom line declined year over year, but top line grew 9.1% in the quarter. Moreover, a low food inflation rate continues to affect the company as it limits the company’s pricing power.

We expect lower contractual margin rates to continue to pressurize on gross margins in the Military segment.

Update On Merger

Nash Finch provided an update on its $1.3 billion merger agreement with leading grocery distributor Spartan Stores Inc. (SPTN), which was announced in Jul 2013. NAFC has scheduled a meetingwith shareholders on Nov 18 following which each share of NAFC will be converted into 1.2 shares of Spartan stores share.

The merger is of great interest to the investors as the combined entity will form a leading wholesale and food distributor boasting 22 distribution centers covering 37 states and 177 retail stores. Also, Nash Finch will be able to expand in Michigan, Indiana and Ohio.

Moreover, the new entity is expected to earn about $7.5 billion in sales in fiscal 2014 and will command a strong portfolio of private brands like Spartan Stores’ Spartan and Nash Finch’s Our Family among many others.

Currently, Nash Finch carries a Zacks Rank #3 (Hold). Other Food Item Wholesale retail stocks worth considering are Sprouts Farmer Market Inc. (SFM) and The Hain Celestial Group Inc. (HAIN). Both the stocks carry a Zacks Rank #2 (Buy).

 
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