SPARTAN STORES INC

In the first quarter of 2019, the Company adopted this standard retrospectively through a cumulative-effect adjustment recorded at the beginning of 2019. The Company has elected the practical expedient available under the guidance to not adjust comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allow for a carry forward of the historical lease classification. The Company elected the hindsight practical expedient to reevaluate the lease term for existing leases. The election of the hindsight practical expedient resulted in the extension or reduction of lease terms for certain existing leases and adjustments to the useful lives of corresponding leasehold improvements. In the application of hindsight, the Company estimated the expected lease term based on management’s plans, including the performance of the leased properties and the associated market dynamics in relation to the overall operational, real estate and capital planning strategies of the Company.

On December 31, 2018, the Company acquired all of the outstanding shares of Martin’s Super Markets, Inc. (“Martin’s”) for $86.7 million, net of $7.8 million of cash acquired. Acquired assets consist primarily of property and equipment of $55.0 million, intangible assets of $20.7 million, and working capital. Intangible assets are primarily composed of an indefinite lived trade name and customer lists which are amortized over seven years. The acquired assets and assumed liabilities were recorded at their estimated fair values as of the acquisition date based on preliminary estimates. These estimates are subject to revision upon the finalization of the valuations of the acquired real estate, inventory and intangible assets. Any adjustments will be made prior to December 31, 2019. No goodwill was recorded related to the acquisition. As of April 20, 2019, the Company has incurred $2.1 million of merger/acquisition and integration costs related to the acquisition, of which $0.9 million was incurred in 2019. The acquisition was funded with proceeds from the Company’s Credit Agreement.

From time to time, the Company may advance funds to independent retailers which are earned by the retailers primarily through achieving specified purchase volume requirements, as outlined in their supply agreements with the Company, or in limited instances, for remaining a SpartanNash customer for a specified time period. These advances must be repaid if the purchase volume requirements are not met or if the retailer no longer remains a customer for the specified time period. As of April 20, 2019, the Company has an unearned advance to one independent retailer for a gross amount representing approximately two percent of the Company’s total assets. The Company’s collateral related to the advanced funds is a security interest in select business assets of the independent retailer’s stores, including select real property assets and other collateral, including a personal guarantee, from the shareholder. Despite the collateral, the Company may be unable to realize the entire unearned portion of the funds advanced to this independent retailer, and accordingly, has evaluated the net estimated realizability of the advance. In the fourth quarter of 2018, the customer defaulted on the terms of the supply agreement. As a result, the Company filed a petition to place the customer in receivership. The Company performed an analysis of the net realizability of the underlying collateral which resulted in a $32.0 million charge in 2018. In the first quarter of 2019, to realize its collateral, the Company placed a credit bid and obtained the rights to acquire five stores. The Company subsequently assigned the rights to acquire three of the stores to an independent retailer in exchange for certain consideration, upon the finalization of the retailer entering into a long-term supply arrangement with the Company. Subsequent to the end of the first quarter of 2019, the Company closed on the acquisition of two stores, and the Company has signed a long-term supply arrangement with the independent retailer for the remaining three stores.    

During the quarter ended April 20, 2019, the Company made significant progress on its strategic objectives and better positioned itself for long-term growth and profitability. In line with its strategic objective to achieve mid-single digit sales growth, the Company realized an increase in consolidated net sales of 6.6% compared with the quarter ended April 21, 2018. The increase in net sales for the quarter was driven by the acquisition of Martin’s Super Markets, Inc. (“Martin’s”), as well as sales growth in the Food Distribution and Military Distribution segments. The Company remains focused on its other top objectives for the current year, including strengthening its management team, systems and supply chain operations, generating improvements through its Project One Team initiative, and reducing its debt, working capital and financial leverage ratios, which will all contribute to improved growth in adjusted operating earnings and adjusted EBITDA.

For the remainder of 2019, the Company expects Food Distribution to achieve low- to mid-single digit sales growth driven by existing customers and new business, partially offset by some attrition in the independent retail base. This expectation excludes the impact of the elimination of intercompany sales related to the acquisition of the Martin’s business, estimated to be approximately $150 to $170 million. In the Military segment, the Company expects that new business within the segment, including continued private brand growth, will largely offset the negative DeCA comparable sales trend. Within the Retail segment, the Company expects total sales will increase due to the acquisition of Martin’s and the significant current year implementation of the Company’s brand positioning, partly offset by the impact of store rationalization plans. Martin’s is expected to contribute approximately $475 million to $500 million in Retail segment net sales. From a profitability perspective, the expected net sales increases will be offset by challenges primarily within the supply chain environment, which will require the Company to navigate historically tight labor markets and a higher cost of transportation. The Company also expects less contribution from the fresh kitchen operations than initially anticipated and has engaged outside consultants to work with the SpartanNash team to generate profitability in this business. The unfavorable impact of these operations in the Food Distribution segment and in the Company’s consolidated results has been significant and, as such, the improvement opportunities are key to the Company’s objectives in the current year.