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Smart & Final Stores Reports Strong Sales Despite 4Q Net Loss

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Smart & Final Stores Inc. has released its financial results for the fiscal fourth quarter and full year ended Dec. 31, 2017.

Highlights of the report include:

  • Net sales increase of 6.7 percent to $1.07 billion, driven by comparable store sales increase of 3.2 percent.
  • Online options for both business and household customers, including delivery or in-store pickup options, available in more than 85 percent of Smart & Final banner stores.
  • Net loss of $146.6 million in fourth quarter reflects a non-cash goodwill impairment charge of $180 million.
  • Adjusted net income of $11.3 million or $0.15 per diluted share and adjusted EBITDA of $49.1 million.

“We have a differentiated position in the evolving retail marketplace, and our unique store operating model enables us to maintain our position as a low-cost leader serving multiple sales channels,” said David Hirz, president and CEO. “We are pleased with our strengthening comparable store sales trends, which represent the third consecutive quarter of comp growth. This reflects the success of our merchandising initiatives aimed at both household and business customers with an emphasis on our natural and organic, private label and club-size items. These initiatives, combined with our efforts in strategic sourcing and pricing, contributed to a gross margin rate expansion in the fourth quarter, despite ongoing promotional activity within the grocery landscape.

“Over the course of 2017, we accelerated the expansion of our online sales channel and delivery offerings, with over 85 percent of our Smart & Final banner stores offering delivery or in-store pickup at year-end. While we remain focused on our strong brick-and-mortar stores with two successful store banners, we are increasingly focused on digital channels for brand marketing and customer transaction options. In 2018, we plan to make additional investments in our infrastructure to position all of our sales channels for continued success.”

4Q 2017 financial results

Net sales were $1.07 billion in the 12-week quarter ended Dec. 31, 2017, representing a 6.7 percent increase as compared to $1 billion for the same period of 2016. Net sales growth was driven by a 3.2 percent increase in comparable store sales and the net sales contribution of new stores. Comparable store sales growth was comprised of a 3.7 percent increase in comparable average transaction size, partially offset by a 0.4 percent decrease in comparable transaction count, including the effect of cannibalization from new stores.

Net sales for Smart & Final banner stores were $841.4 million, a 5.7 percent increase as compared to $796.3 million for the same period of 2016. Comparable store sales growth for the Smart & Final banner was 2.5 percent in the fourth quarter.

Net sales for Cash & Carry Smart Foodservice banner stores were $226.6 million, a 10.8 percent increase as compared to $204.4 million for 2016. Comparable store sales growth for the Cash & Carry banner was 6.2 percent in the fourth quarter.

Gross margin was $164.4 million, a 16.7 percent increase as compared to $140.9 million in the fourth quarter of 2016. Gross margin rate was 15.4 percent as compared to 14.1 percent for the same period of 2016.

Operating and administrative expenses were $147.1 million, an 8.8 percent increase as compared to $135.2 million for the same period of 2016. The increase was related to expenses associated with the effect of higher minimum wages, the 14 new stores that opened following the fourth quarter of 2016 through the end of the fourth quarter of 2017 and related support costs.

Net loss was $146.6 million, or $2.03 per diluted share, as compared to a net loss of $0.3 million for the same period of 2016. These results included a non-cash net benefit of $27.0 million, as a result of the Tax Cuts and Jobs Act and other one-time items, primarily due to a lower valuation of net deferred tax liabilities. During the quarter, the company also recorded a goodwill impairment charge of $180.0 million, related to the Smart & Final banner.

Adjusted net income was $11.3 million, or $0.15 per diluted share, as compared to $5.0 million, or $0.07 per share, for the same period of 2016.  Adjusted net income excludes the $27.0 million, or $0.37 per diluted share, benefit associated with the Tax Cuts and Jobs Act and other one-time items, and the $180.0 million, or $2.44 per diluted share, goodwill impairment charge.

Adjusted EBITDA was $49.1 million as compared to $37.3 million for the same period of 2016.

Fiscal 2017 Financial Results

In the 52 weeks ended Dec. 31, 2017, net sales were $4.57 billion, an increase of 5.3 percent compared to $4.34 billion for the same period of 2016. Net sales growth was driven by the net sales contribution of new stores and a 1.0 percent increase in comparable store sales. Comparable store sales growth comprised a 0.3 percent increase in comparable transaction count and a 0.8 percent increase in comparable average transaction size.

Net sales for Smart & Final banner stores were $3.56 illion, an increase of 4.6 percent as compared to $3.4 billion for 2016. Full year 2017 comparable store sales for the Smart & Final banner increased 0.7 percent.

Net sales for Cash & Carry Smart Foodservice banner stores were $1.01 billion, a 7.6 percent increase compared to $941.0 million for 2016. Full-year 2017 comparable store sales for the Cash & Carry banner increased 2.4 percent.

Net loss was $138.9 million, or $1.92 per diluted share, as compared to net income of $12.9 million, or $0.17 per diluted share, for fiscal 2016. These results included a non-cash net benefit of $27.0 million, as a result of the Tax Cuts and Jobs Act and other one-time items, primarily due to a lower valuation of net deferred tax liabilities.

Adjusted net income was $33.6 million, or $0.45 per diluted share, as compared to $42.2 million, or $0.54 per share, for 2016.  Adjusted net income excludes the $27.0 million, or $0.36 per diluted share, benefit associated with income tax reform and other one-time items, as well as the $180.0 million, or $2.39 per diluted share, goodwill impairment charge.

Adjusted EBITDA was $184.4 million as compared to $180.3 million for 2016.

Goodwill impairment

In the fourth quarter of 2017, the company concluded an annual review of its goodwill as required under accounting standard ASC 350. The review included current equity market valuation metrics and the company’s near-term plans for growth. The result of the review was an impairment of Smart & Final banner goodwill in the amount of $180.0 million. Smart & Final says it does not believe that this impairment charge reflects a fundamental change in the long-term attractiveness of future store investments.

Growth and development

During the fiscal fourth quarter of 2017, the company opened seven new Smart & Final Extra! stores, and completed three expansions of legacy Smart & Final stores to the Extra! store format, and one store relocation. As of Dec. 31, the company operated a total of 323 stores, including 194 Smart & Final Extra! stores, 66 legacy format Smart & Final stores and 63 Cash & Carry Smart Foodservice stores.

Outlook

The company is providing the following guidance for the full year ending December 30, 2018:

Net sales growth 4.0% – 5.0%
Comparable store sales growth 1.0% – 2.0%
Unit growth (new stores) 3-5 Smart & Final Extra!
3-5 Cash & Carry Smart Foodservice
Relocations of existing stores to Extra! format 2-3 Smart & Final stores
Expansions or conversions of legacy stores to Extra! format 1-2 Smart & Final stores
Adjusted EBITDA $180 – $190 million
Adjusted net income $31 – $35 million
Adjusted diluted EPS $0.42 – $0.47
Capital expenditures (net) $80 – $90 million
Fully diluted weighted average shares 74 to 75 million

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