SpartanNash Company (SPTN) Q1 2019 Earnings Call Transcript

SpartanNash Company (NASDAQ: SPTN)Q1 2019 Earnings CallMay 20, 2019, 8:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to SpartanNash Company's First Quarter 2019 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I now would like to turn the conference over to Ms. Katie Turner, Please go ahead, ma'am.

Katie Turner -- Partner

Thank you, Keith. Good morning and welcome to the SpartanNash Company's first quarter fiscal 2019 earnings conference call. On the call today from the Company are Dave Staples, President and Chief Executive Officer; and Mark Shamber, Executive Vice President and Chief Financial Officer.

By now everyone should have access to the earnings release which was issued today at approximately 7:00 A.M. Eastern Time. For a copy of the release, please visit SpartanNash's website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the Company's website for approximately 10 days.

Before we begin, we'd like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include, among others, competitive pressures among food, retail and distribution companies; the uncertainties inherent in implementing strategic plans and integrating operations; and general economic and market conditions. Additional information about the risk factors and uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's earnings release, most recent annual report on Form 10-K and in the Company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP measures and comparable period measures to provide investors with useful information about the Company's financial performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found directly in the Company's earnings release as filed by Regulation G, which we have issued earlier today.

And now, it's my pleasure to turn the call over to Dave.

David M. Staples -- President and Chief Executive Officer

Thank you, Katie. Good morning, everyone, and thank you for joining us today. Our call will begin with an overview of the progress we made during the first quarter on our strategic objectives. Mark will then provide additional detail on our first quarter operating and financial performance, which were consistent with the preliminary net sales and earnings results we announced on May 9th. Finally, we will open the call for your questions.

In a dynamic and evolving operating environment, I am pleased with our ability to continue to find opportunities to grow our top line. We continue to be extremely focused on translating this growth to the bottom line, and our team is addressing key markets and performance areas within each of our business segments to best position us to sustain this growth, while improving profitability. In addition, we believe that the objectives we've identified for the fiscal year will help provide focus to the organization as we progress toward implementing our longer term strategy.

During the first quarter, our team delivered on many, but not all, of the key components of our five top objectives for 2019, which includes growing net sales in the mid-single-digit range; realized an annual run rate of at least $15 million of earnings improvements through Project One Team over the next 24 months; strengthening our management team, systems and supply chain operation; reducing debt and working capital while lowering financial leverage ratios; and improving adjusted operating earnings and EBITDA.

We believe the execution of these objectives during the current fiscal year will help us develop a national highly efficient distribution platform that services a diverse customer base by leveraging our complementary business units, our Food Distribution, Military Distribution and Retail, consistent with our long term strategy.

Now, I'll summarize our performance versus these objectives in a little more detail. First, we continue to be pleased with our ability to consistently achieve growth in net sales. For the first quarter, consolidated net sales increased 6.6% to $2.54 billion compared to the first quarter last year. Our first quarter growth was generated across all three segments. In the Retail segment, growth was driven by contributions from the newly acquired Martin's business, while sequentially improving our comparable store sales trend. In the Food Distribution segment, we maintained the strong growth we've seen for the last several quarters realizing growth of 5.2% before the inter-company elimination of Martin's sale. In the Military segment, net sales increased 1.2% despite a broader commentary environment, which continued to contract in the current quarter. In addition, our annual consolidated net sales outlook projects continued mid-single-digit top line growth.

Next, our entire organization is working together on Project One Team, our companywide initiative to drive growth while increasing efficiency and reducing cost. We exceeded our initial expectations and have identified more than $20 million in annual run rate savings opportunities over the next 24 months versus our original target of $15 million. The effect of implementing these cost savings opportunities are not expected to be material to earnings in 2019 due to the efforts required for implementing the ideas and initial start-up costs associated with some of the initiatives.

I am proud to say that associates and leaders from across the entire organization engaged in developing these ideas and implementation plan, which span all areas of our business and include initiatives such as supply chain efficiencies within our retail operation, administrative process improvements and enhancements to the products, services and experiences offered to customers to generate future growth. The hard work and enthusiasm from our associates has been tremendous. And together, we plan to accelerate the transformation of our culture to drive substantial improvements for our business processes and results.

Our third objective for 2019 is to strengthen our management team, systems and supply chain operation. As we have mentioned previously, we had a new executive talent to our team to include a new Chief Merchandising and Marketing Officer, a new Chief Information Officer and several other key additions throughout the IT and supply chain operations. Other strategic additions to the management team at various levels are in process as we make meaningful additions to our team to support the future growth of our business.

During the first quarter, we continued to invest in enhancements to our systems and supply chain operations. However, some improvements are developing more slowly than we initially expected, partly due to the competitive environment for both warehousing and transportation associates. We are also intently working toward our strategic objective of reducing debt and working capital, while lowering the Company's financial leverage ratio.

During the first quarter, adjusted for the funding of the Martin's acquisition, we paid down over $20 million in debt and also reduced our inventory levels by approximately 2% from the first quarter last year. We are pleased to have made progress on this objective in the first quarter without any negative impact at the customer service levels even as we continue to generate solid growth in net sales. Our team will continue to focus on debt and working capital improvements for the remainder of fiscal 2019.

Our last top objective for the fiscal year is to improve adjusted operating earnings and adjusted EBITDA growth, which we did not achieve. Our below expectation performance was primarily due to increased costs in the supply chain and efficiencies within our Fresh Kitchen operations, a challenging retail environment and the effect of the voluntary recall at our fresh-cut fruit operation. We remain focused on improving these results through initiatives aligned with our organization's overall strategy, many of which I just mentioned.

Turning to segment results for the quarter. As I mentioned, we are very pleased to continue to deliver sales growth in our Food Distribution segment. The first quarter represented our 12th consecutive quarter of sales growth and accomplishment we are very proud of. This growth has come from our ability to attract new accounts and to continue to provide a strong partnership through existing accounts, through offering expanded services and geographical reach. We continue to look for ways to grow the perimeter and center store, as well as sponsored programs to partner with independent retailers to help them succeed in this intensely competitive marketplace.

Included in our sales increase for the Food Distribution segment was a 3.7% increase in sales at our Byron BRT business before we implement the elimination of intercompany sales related to Martin's. This improvement reflects new customer growth and increased sales of existing customers within our Fresh Distribution and Fresh Kitchen operations, partially offset by the impact of the voluntary product recall and our fresh-cut fruit operation. We expect continued top line pressure in our fresh-cut operations in the second quarter as we cycled through the impact from this year's recall. Consistent with our top five objectives for fiscal 2019, our operations team is working closely with an on-site external advisory business to improve the profitability of the Fresh Kitchen operation.

As we have discussed the last few quarters, we continue to experience industrywide cost pressure in our supply chain and food processing operations, including increases in transportation costs, shortage of available labor, and significant price volatility in certain produce categories. These pressures have been compounded by the significant growth experienced in certain of our facility. We will continue to implement solutions to improve our overall supply chain efficiency and processes to address these pressures.

A couple of examples of these actions include introducing straight trucks to our fleet to create a more efficient delivery model for smaller load sizes and to expand the availability of labor by increasing the categories of drivers we can choose from. A second action step will be to reflow distribution centers where we've experienced significant growth to ensure we have the most efficient (inaudible). We believe these steps, along with improved recruiting and retention programs, will result in better future performance.

In the Military segment, we are pleased with our net sales growth for the quarter, particularly given we are operating in an environment where commissary sales continue to have declining comparisons. The growth we achieved was driven by incremental volume from a customer program and boarded in the fourth quarter of last year as well as further growth in DeCA's private brand program. We finished the first quarter as the exclusive supplier of the over 750 private brand products in the DeCA network. We continue to expect the contribution of these two programs as well as incremental new business obtained late in the first quarter to provide increased sales for the majority of fiscal 2019. We remain focused on growing our sales pipeline as we build on our relationship with the military and food manufacturers to remain the supplier of choice for their operation.

In our Retail segment, we continue to navigate through a tough operating environment, which was compounded in the first quarter by the significant shifts in the timing of government SNAP benefit payments in the Easter holiday. However, at the same time, we are pleased with the improvement in our comparable store sales trend and with the look and feel of our stores included in the new brand positioning initiative. Our brand positioning was tested in several stores last year and a more significant implementation was just completed Sunday into working additional West Michigan family fare stores. This positioning will be key to the differentiation of our operations and sharpening our focus on affordable wellness, value beyond price, a fun and indulgent shopping experience with a focus on local products and providing a socially smart and community focused store operation.

Key elements of our offer include in-store cut-to-order fruit and vegetable, new meat cases featuring in-store butcher crafted bratwurst, sausages and other seasonal favorites. Gourmet donuts crafted in-store, expanded meal solutions, better for him and her, health and beauty departments as well as special marketing and pricing strategy. We continue to be happy with the consumer response thus far, and believe these efforts will increasingly position us to win in the current retail environment. While we will incur additional marketing, promotional and labor costs associated with these launches during the second quarter, we expect to begin realizing benefits later in fiscal 2019 and through 2020.

And lastly, we are pleased with the contribution from Martin's for the quarter, which was consistent with our expectations. This is a quality operation and fits perfectly with our brand positioning for family fare. In summary, we are pleased with what our team has accomplished with respect to sales growth and ability to attract new business. Our team remain highly focused on deploying strategies to translate this growth into increased profitability despite the challenges we faced across our business segments, but we believe our five strategic objectives for fiscal 2019 position us well for long-term sustainable growth and sales and profitability.

And with that, I will now turn the call over to Mark.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Thanks, Dave, and good morning to everyone joining us on the conference call and webcast. Net sales for the first quarter of fiscal 2019 increased to $2.54 billion, an increase of $157 million or 6.6% over 2018's first quarter sales of $2.39 billion. The adjusted EPS for the first quarter of fiscal 2019 came in at $0.24 per diluted share compared to adjusted EPS of $0.55 per diluted share in fiscal 2018's first quarter.

As we expected, Q1 was negatively impacted by the operational performance of one of our warehouses, the lapping of changes in the realization of rebates and dividends from private brands, the changes in direct and indirect remuneration pharmacy fees, and the slower than previously anticipated rate of improvement in the Company's food processing operations. Q1 was further impacted by increased costs in the supply chain and a difficult retail environment, and our food processing operations were largely driving performance than expected, partly due to the voluntary recall of our fresh-cut fruit operation.

Both our adjusted and GAAP EPS reflect an impact of approximately $1.1 million or $0.02 associated with the fresh-cut recall. On a GAAP basis, the Company had earnings of $0.21 per diluted share in the quarter compared to earnings of $0.34 per share in the first quarter of fiscal 2018.

Shifting to our business segments, net sales in Food Distribution increased by $14 million or 1.2% to $1.2 billion in the first quarter of fiscal 2019. Excluding the elimination of intercompany sales of Martin's subsequent to the acquisition, sales increased 5.2% primarily due to sales growth from existing customers. Inflation accelerated to 82 basis points in Food Distribution during the quarter, an increase of 10 basis points from Q4, and declined 15 basis points compared to the first quarter of fiscal 2018.

Reported operating earnings in Food Distribution in the first quarter totaled $24.6 million compared to $24.5 million in the first quarter of fiscal 2018, largely driven by higher sales volume and a gain on the sale of real property from a previously closed site, offset by lower margin rates and higher supply chain costs. Adjusted operating income totaled $21.3 million in the quarter versus the prior year's first quarter adjusted operating income of $29.5 million. First quarter adjusted operating earnings in the current year exclude $3.2 million of net pre-tax gains as detailed in Table 3 under the Food Distribution segment in this morning's press release. Fiscal 2018's first quarter adjusted operating earnings exclude $5 million in expenses, which are also detailed in Table 3 of the press release.

Military net sales of $671 million in the first quarter increased by $7.7 million or 1.2% compared to prior year revenues of $664 million. Incremental volume from new business with an existing customer in DeCA's private brand program drove the sales increase, which is partially offset by lower comparable sales at commissary locations. Military Distribution reported an operating loss of $1.6 million in the first quarter compared to earnings of $1.5 million in the first quarter of fiscal 2018, primarily due to the previously noted warehouse operational issue and increases in general distribution and transportation costs, partially offset by improved margin rate. On an adjusted basis, Military's operating loss was $0.8 million for the first quarter of fiscal 2019 compared to operating income of $1.6 million in 2018's first quarter, largely due to Project One Team cost.

Finally, our Retail net sales came in at $702 million for the quarter compared to $566 million in the first quarter last year. Excluding the impact of the Martin's acquisition, sales decreased 3% due to lower sales associated with store closures totaling $12.4 million and a decrease in fuel price on a per gallon basis. Our comparable store sales improved to negative 0.3% for the first quarter of fiscal 2019 compared to a decline of 1.9% in the fourth quarter of fiscal 2018 and a decline of 2.2% in the first quarter of fiscal 2018.

Comparable store sales benefited from a greater number of snowstorms in the current year compared to fiscal 2018's first quarter. First quarter adjusted operating earnings in Retail amounted to $2.7 million compared to $4.7 million in 2018's first quarter. Retail reported a GAAP operating loss of $0.8 million for the first quarter of 2019 compared to a loss of $0.3 million in the prior year's first quarter. The decrease was primarily attributable to lower supermarket margin gain -- margin rate, merger, acquisition, and integration expenses related to the Martin's acquisition, and higher fees paid to pharmacy benefit managers, partially offset by the contribution of the acquired Martin's stores, lower occupancy costs, and the favorable impact of closing under-performing stores.

As expected, we experienced pressure from the increase in DIR fees is in the pharmacy, as pharmacy margin was $2.6 million lower than the first quarter of 2018. As we progressed through fiscal 2019, we expect pharmacy DIR fees to represent a headwind but not as significant of a headwind as we experienced in the prior year.

Interest expense increased $3.1 million in the first quarter of fiscal 2019 to $11.9 million due to higher interest rates compared to the same period last year and interest associated with the borrowings to fund the Martin's acquisition.

In the first quarter of 2019, we generated consolidated operating cash flows of $13.5 million compared to $60.4 million in the prior year period. The year-over-year decline was primarily related to the three week-shift in the timing of the Easter holiday to the end of the first quarter and the corresponding impact on accounts receivable balance. During 2019's first quarter, we returned $6.9 million in the form of cash dividends. Our total net long-term debt increased by $70.3 million to end the quarter at $749.8 million compared to $679.5 million at the end of fiscal 2018, due to the acquisition of Martin's. During the quarter, we paid down $24 million in debt after adjusting for the acquisition of Martin's.

Our net long-term debt to adjusted EBITDA ratio increased to 3.821 in the first quarter from 3.221 at the end of fiscal 2018, largely driven by our borrowings from the acquisition of Martin's, whereas only one quarter of Martin's EBITDA is currently reflected in the calculation.

As covered in our preliminary financial results press release on May 9th, we are updating our fiscal 2019 earnings guidance. We have reiterated our initial net sales guidance, which was originally provided on February 20th, 2019. From profitability perspective, these expected net sales increases will be offset by the challenges initially described in our May 9th press release, including a supply chain environment, which will require us to navigate historically tight labor markets and a higher cost of transportation. We also expect greater solution from our Fresh Kitchen operations than initially anticipated and to engage outside consultants to work with our team to generate profitability in this business.

The unfavorable impact of the kitchen operations along with the recall in our fresh-cut operations in our Food Distribution segment represent important opportunities for us to realize profitable growth. Relative to the prior year, we expect EPS comparisons to improve at a gradual rate, which will accelerate each quarter for the remainder of fiscal 2019. We expect 2019 adjusted earnings per share from continuing operations to be approximately $1.20 per diluted share to $1.50 per diluted share. Excluding charges totaling $16.5 million to $18.5 million after taxes primarily related to the termination of our frozen pension plan as detailed in Table 6 of today's earnings release. From a GAAP perspective, we expect the reported earnings from continuing operations will be in the range of $0.70 to $1.04 per diluted share.

Finally, we are maintaining our capital expenditures guidance range of $85 million to $93 million, our depreciation and amortization range of approximately $89 million to $92 million, our interest expense range of $36 million to $37.5 million, and our reported and adjusted effective tax rate ranges from 23% to 24%.

And at this point, I'd like to turn the call back over to Dave.

David M. Staples -- President and Chief Executive Officer

Thank you, Mark. While we're not satisfied with our bottom line performance in the quarter, I am pleased with the progress the team made in the first quarter on many of our key strategic objectives for 2019. We believe these are necessary to move our organization forward, and they will enable us to win over the long-term. We believe the execution of our strategic objectives will help us increasingly develop a national highly efficient distribution platform with services of diverse customer base and leveraging our complementary business units, Food Distribution, Military Distribution, and Retail, again consistent with our long-term strategy.

So with that, I'd like to turn the call back over to the operator, and open it up for any of your questions.

Questions and Answers:

Operator

Yes. Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Scott Mushkin with Wolfe Research.

Scott Mushkin -- Wolfe Research -- Analyst

Hey, guys.

David M. Staples -- President and Chief Executive Officer

Good morning, Scott.

Scott Mushkin -- Wolfe Research -- Analyst

Sorry. Hi. I had you on speakerphone. So -- hey, good morning. So I just wanted to -- if you could think about the challenges in the quarter and think about what was in your control and what was out of your control and kind of size them up a little bit, like I guess, so what was more operational and what was more environment? That's my first question.

David M. Staples -- President and Chief Executive Officer

Well, Scott, I think the two intersect obviously. I think the Fresh Kitchen is one I would put in our control in some degrees, and then it's up to us to make sure we have the efficiencies and the processes and everything in place that will continue to make this kitchen grow and be what we think it can be. But certainly, the availability of labor and some of those types of issues as we consistently bring on new business complicate that desire.

So, it's a mix of items. In our distribution and supply chain, I certainly think -- as we mentioned in the discussion -- that there's things we can do. I believe our distribution centers can certainly be reflowed to some extent where we're experiencing large growth to make them more efficient. I believe we can address some of our differentiated business opportunities that have shorter runs, smaller load sizes with different types of trucks open it up, incremental access to drivers and alleviating problems that way. So I think there's a number of things we certainly can control. And then the availability of labor and the cost of supply chain, while we can't control those directly, we can certainly put in strategies to overcome them.

And so, in the end, I think all of these things we can make impacts on and make change. In the retail environment, sure, it's a tough environment, it always is. And certain of the players have chosen to be pretty aggressive on price. I think they moderate that a little bit over the longer term. But I think our positioning puts us in a place where we can take these kind of opportunities to bring craftsmanship back into the food business, offer more alternatives than some of the newer competitors, have pride in craftsmanship whether that's in our cut fruit and vegetables made to your order or whether it's in gourmet dominance or whether it's in a butcher focused meat department that so many others have abandoned. So, I think, right now, it's a mix of things and we've put a lot of efforts in place to change the things that are under our control..

Scott Mushkin -- Wolfe Research -- Analyst

Hey, David. It's a follow up, appreciate the answer. The Upper Midwest has been real competitive. I mean, all of the -- but our data would show, Meyer, has also just really come pretty heavy. As you look at it, I mean, it obviously affects some of your retail operations. But overall, it affects some of your distribution. How are you dealing with that environment, I guess, both on the retail side and on the distribution side from your clients' perspective? Because they got to be struggling a little bit with that environment too. And then I'll yield. Thank you.

David M. Staples -- President and Chief Executive Officer

Yeah. I mean, Meyer and all the -- we're obviously very experienced with both of those operators and both are obviously very good in the things they do. But both also have their limitations, right, only very limited assortment, obviously incredible price, Meyer, great assortment, better pricing not to Walmart's level, but a better food operator. And so, we lived in that environment for the past basically 20 years. They've both been competitors of ours, Meyer, for all that time all the more pronounced over, say, the last 15 years -- 10 to 15 years. And so what we really try to do in our business is things we learn and tactics we've deployed at retail and provide them to our distribution customers along with all the great ideas they have to put together our program that compete in this environment. So, it's not new these competitors, we've put forth programs that have been successful against them in the past. And we work with our distribution customers to do that. And a lot of this new positioning we're deploying in our retail operations is just that, how do we help them with differentiated center store programs that emphasize and handy and some of the areas that we can differentiate from all of that, Meyer. How do we bring to life the fresh side of the business, where we do have the butchers and we do have the ability to offer a great prudent solution, some things that (ph) all are well known for.

So, Scott, I guess that's how we would do it. I think everybody feels competitive pressure in an environment like this. But our independents are very resourceful, and they work through competitive incursions with Walmart and others before. And I think we've been pretty good at figuring out solutions to work through that.

Scott Mushkin -- Wolfe Research -- Analyst

Thanks very much. Good luck.

Operator

Thank you. And the next question comes from Charles Cerankosky with Northcoast Research.

Charles Cerankosky -- Northcoast Research -- Analyst

Good morning, everyone.

David M. Staples -- President and Chief Executive Officer

Good morning, Chuck.

Charles Cerankosky -- Northcoast Research -- Analyst

Could you please go through where you're at with the Gordy's repositioning and which stores you've sort of repossessed and resold, and was the real estate gain in the quarter part of that whole process?

David M. Staples -- President and Chief Executive Officer

So, Chuck, with Gordy's at this point, we have taken possession of two of the stores in Chippewa Falls area. And one of our other customers will take over three incremental stores here as we speak over the next few weeks, I believe. And so, all of the stores will then reposition. I think, in total, we were -- we probably now between us and the two we have and our customers are somewhere around 10, 11, 12 stores something like that I believe. And so, that will be pretty much transitioned out here over the next month. The gain in real estate really didn't have anything to do with that transaction, that was from the sale of a warehouse we had decommissioned probably about a year-and-a-half ago or two years ago.

Charles Cerankosky -- Northcoast Research -- Analyst

Okay. Thank you. On the Project One Team cost that we're seeing this year, what will those total during the year? And I guess they'll be completely offset next year. And are they all cash costs that are -- that we see as adjustments in the...

David M. Staples -- President and Chief Executive Officer

So, like you're seeing -- what you're seeing right now would be the fee, so those would not recur next year they are cash. It's really the fee that we pay for the assistance from the Harvest Earnings Group. So, I would -- they won't be recurring next year.

Charles Cerankosky -- Northcoast Research -- Analyst

And they'll be relatively little in the form of benefits this year to offset those fees?

David M. Staples -- President and Chief Executive Officer

Correct. It's basically because of timing.

Mark Shamber -- Executive Vice President and Chief Financial Officer

And as Dave mentioned, Chuck, some of them will get benefits, but the investment that goes with it whether on a technology front or some of the upfront costs associated where you know might generate a $0.5 million return, but there might be a $100,000 investment and that $100,000 is offset in this current year. So we have some instances like that as well.

Charles Cerankosky -- Northcoast Research -- Analyst

Okay, thank you.

Operator

Thank you. And the next question comes from Kelly Bania with BMO Capital Markets.

David Lantz -- BMO Capital Markets -- Analyst

Hi, this is David Lantz on for Kelly Bania. Thank you for taking our questions.

David M. Staples -- President and Chief Executive Officer

Hi, David.

David Lantz -- BMO Capital Markets -- Analyst

Good morning. So, I was wondering, could you give us some more color on maybe what you've learned so far with the outside team that you've brought in -- outside team of experts for Fresh Kitchen to improve execution there?

David M. Staples -- President and Chief Executive Officer

Well, I mean, we've heard a number of things as you'd expect. I think so much of this is just continued focus on how do we -- not only streamline the processes we have, but really position the Kitchen to be able to accommodate growth. And so, what is helping us to do is really put in those type of processes that not only result in day-to-day running the day-to-day improvement of our operations, but also that ability to on-board new business. And that's where a lot of the focus is in. And in addition, as you'd expect, with any Fresh Kitchen where you're really building from scratch, your scrap component or your waste component is always much higher than you'd like, and we think there's quite a bit of opportunity to reduce that.

David Lantz -- BMO Capital Markets -- Analyst

Great. Thank you. And then, on the retail side, I think you'd given 82 basis points of inflation in the quarter for Food Distribution. I was wondering what you are seeing in retail. And if you could give us your outlook for both the Retail and the Food Distribution segments for the rest of the year?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. So -- for on the retail side, we actually took a step backwards, it was about 18 basis points though. From a sequential standpoint, a decline of like 36 basis points, I think we are at 52 -- 34 four basis points, I think we're at 52 basis points for the fourth quarter. And on a year-over-year basis, we were down almost 66 basis points. So I mean, I think we've seen some price increases come through on the distribution side. And as we've talked about in the past, there has been some challenges in being able to get it passed through on the retail front. And so, I think, where we feel that we may see a little bit more on the distribution side as we go through the year, I wouldn't necessarily expect that I'm going to be 1.5% to 2% or maybe we get to 1%, 1%-plus. And on the retail side, I think it still varies as to how much of that is going to get passed through. For this particular quarter, we saw dairy take a big step backwards and we were hurt as I'm sure another -- a number of other retailers were this year with regards to eggs, where eggs were deflationary leading into Easter where they're typically inflationary. And then it continued coming out of Easter which is more typical. So I think that it's tough to tell on the retail front how that's going to play out.

David Lantz -- BMO Capital Markets -- Analyst

Okay, great. Thank you. And then the last one for me. Do you have anything more that you can share on kind of potential synergies now with the Martin's acquisition?

David M. Staples -- President and Chief Executive Officer

Well, I mean, I think, from the Martin's acquisition when we gave our guidance for the full year, I mean, I would say that for the most part, we're tracking in line with those synergies. We've exceeded in some areas our initial expectations, and we've backed off in a couple of others where we felt from a systems and a process perspective that we would rather approach it a little bit differently, but I think net-net we're in line with our expectations where we're in the initial guidance. So I'm not sure I'm going to break it down any further than that.

David Lantz -- BMO Capital Markets -- Analyst

Great. Thank you very much.

David M. Staples -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And the next question comes from Renato Basanta with Barclays.

Renato Basanta -- Barclays -- Analyst

Hi, good morning. Thanks for taking my questions. Just quickly to follow-up on Scott's question earlier, my question really has to deal with the competitive environment, specifically in Food Distribution, you've talked about 1% to 3% attrition for customers in the past and sort of declined in same-store sales for your customers. So, just curious what you're sort of seeing out there. It seems like maybe sales growth coming, I had an overall higher cost. So I think it would be helpful if you provided just some color on what you're seeing from a competitive standpoint, and specifically if it's actually getting worse or sort of steady state here?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. I mean, I'll start off and then I'll maybe let Dave sort of chime in. I think, I mean, I know there was a research report out that sort of talked about the environment becoming more costly. And I think that, look, we've always been in a tight margin business and you don't typically win and lose business strictly on cost if your service levels and how you operate that really drives that cost as a factor, but it's not always the factor. So, I mean, I think that we haven't seen anything dramatically change with regards to the competitive environment in that regard, but it's always an environment where you're only as good as your last day's delivery.

Renato Basanta -- Barclays -- Analyst

Okay. All right. That's helpful. And then, just on retail, hoping you can just provide more color on the new brand positioning. Maybe talk about the lift you're seeing from the program, how many stores you expect to have it this year, and then how you think of it from a perception perspective? In other words, the risk that perception that Family Fare is going to be more upscale but then -- upscale in service but then also higher on price, how do you deal with that risk?

David M. Staples -- President and Chief Executive Officer

Sure. So, let me walk you through it. So, it's been a (ph) whoppy one day since we've launched it. So, we had a very good first day, and so we were very happy with our sales in day one. But obviously, leading up to the launch, you're making change and improvements, and it's been very favorably received by our customer and we're not doing this in a way that is expensive. We're doing this in a way that we're trying to make it much more experiential but a targeted experience that is really for that family fare customer. So the objective here is not -- it is not to make it feel expensive, it's to make it feel more fun.

And when we use the term indulgence, right, indulgence, I think to your point, sometimes implies expensive, but indulgence doesn't have to be expensive. Starbucks coffee is an indulgence. Having your produce and vegetables cut the way you like it is an indulgence in a way in that you could do that yourself, but instead you choose to let someone else do it. Buying a gourmet donut is a little more fun and a little more tasteful than just a normal donut. That's an indulgence. Having a butcher shop where we have store-made sausage and marinated meat and things you can't find in other places doesn't have to be more expensive, but it allows you to know where your food came from, to know who made your food.

And so, I think the way we're doing this isn't going to speak expensive at all. It's going to speak a fun, it's going to speak a much better shopping and experience, and it's going to speak for more differentiated shopping experience. And we're experimenting with smoke houses and some of these facilities where sushi is now a mainstay, which is doing incredibly well. We're working with an Asian hot bar and regular hot bars, hot burritos will be in a (ph) few of them.

And so, we're bringing a lot of the trends that people are looking for. We're bringing this grab and go, this prepared food, bringing to the customer that ability to have a quality meal quickly. They trust us more than they trust fast food. Our food will be more wholesome. We're bringing in affordable wellness. So, you're going to be able to (ph) get your grasp for beef, your hormone-free, antibiotic-free beef, you're going to be able to get gluten-free. You're going to be able to have thousands of natural and organic options. In our produce department, you're going to have more organic produce operations than anyone else in our market. But yet, it's done in an affordable way, in an affordable way. We're not going to be a real high-priced operator like some of the people in that space. And so, you're going to see us focus on affordable wellness.

You're going to see us focused on value beyond price which are some of the things that we've talked about. You're going to see us be very local. We'll have 1,000-plus local items with very focused displays of local and based on the success of those products, our customers can help local businesses become successful and become part of our normal (ph) shade. And there's many experiences where our customers have really allowed some local companies to grow on a pretty significant basis.

We're going to be much -- we're going to really bring forward the commitment we bring to being socially smart and part of that social fabric of our communities whether it be carbon footprint, whether it be the type of products we sell, whether it be our involvement in the community. I mean, our associates volunteered 57,000 hours last year for local events. We raised over $3 million between our consumers and our associates in other ways that we put funding together to get back to our community. And so, we're going to emphasize more of that.

So, I really think, and you're welcome to come visit our stores at some point, you're going to find that we've done this in a very fun, very experiential way, but it does not feel more expensive at all. It actually feels more engaging.

Renato Basanta -- Barclays -- Analyst

Okay, that's helpful. I'll pass it along.

David M. Staples -- President and Chief Executive Officer

Okay.

Operator

Thank you. (Operator Instructions) And the next question comes from Chris Mandeville from Jefferies.

Blake Anderson -- Jefferies -- Analyst

Good morning, this is Blake on for Chris. I wanted to start on Caito's Fresh Kitchen. You mentioned you've hired now a third-party to help with the progress there and then making some changes not only on the day-to-day improvement for the processes, but also more growth-oriented getting new business. Can you talk about kind of what the continued issues are? Are they the same as recent quarters or are they new ones you're experiencing? And then, if you can just talk a little more about the changes you're exactly making to fix them. And then just specifically, do you think you have the right leadership and team or you're looking to hire management here and then maybe any update on the expected timing of profitability?

David M. Staples -- President and Chief Executive Officer

You're probably going to have to repeat a couple of those given that you, I think, gave five questions there. Well, let's try to move through it, right? So, as we look at the kitchen operation, as we grow, and one of the things we've experienced in the kitchen is, it's done a significant number of products you've grown as well. So, it's not just more of the same, it's more and different. And so, that has put forth a lot of unique pressures on an organization as it's trying to build from the ground up.

And so, one of the things I think we've learned and one of the things we're working on is how do we focus the organization on the type of products we do well and what products are bringing the turns and the efficiencies that they should. So, we will rationalize some of the products that we've taken in and we'll focus more on some of the products that and grow profitably. So, I'd say, that's a big learning, right. It can't be all things to all people and sometimes as you're starting up an operation, you're on the hunt for growth and all types of products being great and you learn, and that isn't always the case.

I think we've seen very clear efforts to reduce waste. I think, as you -- as we've put that operation together, we need a much more focused effort on that and the teams we've put in place from a reporting and measurement perspective are really focused and helping the team focus even more clearly on the points and the production process where we can eliminate waste, whether that's product waste or an efficient use of our labor resources. Probably the next big learning really is getting the consistency of that supervisory team and getting that supervisory team trained to the level they need to be because consistent employee turnover in a tough environment makes it really hard to be productive.

So, those are the areas we're most focused on. Those are the areas that we put process in place in the fresh-cut operation and really saw nice improvements in those. As far as the team, I think our leader down there is a strong operator. We will -- structurally when we bring in our president of distribution, move that operation up under him, and we're making good progress in that area. So, I'm hopeful over the next month or so, we'll have an addition in that area. So I think we'll make some management reporting structure changes, but overall we believe this team, with this kind of help and maybe a few tweaks will be what we need to make it work. And with that, I'm not sure I've answered all of the five questions that Mark alluded by. I think I probably got a good number of them. If I missed one, let me know.

Blake Anderson -- Jefferies -- Analyst

That was good. I appreciate it. And then secondly, you continue to talk about reducing your debt leverage and making pretty good progress there. But given some of the challenges on the costs, have you considered alternative methods to generate cash to help (technical difficulty) such as real estate monetization? And then on that front, when was the last time you had your real estate value?

David M. Staples -- President and Chief Executive Officer

So to answer the question, I mean, we actually use our real estate as part of our collateral pledge against our revolving credit facility in the program that we have there. And so, when was it last revaluated, second part of the question, part of the Martin's transaction we amended our debt agreement at that point in time. So it was done as part of that. So, there would be perhaps a short-term opportunity but with a much more expensive long-term cost that we would to try to take it out from the revolver and then do some sort of sale leaseback for all the transactions.

Blake Anderson -- Jefferies -- Analyst

All right. Thank you so much. And then, the last one was on retail. You talked a lot about the initiatives you're making there. It seems to be making some progress on the comp side. And you mentioned also you've been closing some more challenged stores on the profitability front. Maybe just talk about the core profitability if you were to back out those two items. How do you feel about the margin progress in retail? Because I'm wondering if some of these investments you're making are maybe weighing on the ability to see improved margins. So maybe just talk about the retail margins.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Well, I mean, I think right now in the current environment, retail margins are feeling pressure, and I think you've written about that and so have most of your peers. I think it's a difficult pricing environment right now. I think, when you look at what we're doing with our positioning, and again, like I said, we're in the very early stages. We have a total of 18 stores with this positioning in it and it really just launched yesterday. So, it hasn't really been able to have an impact.

But one of the big things we're working on with this positioning is how we mix the products we sell in the store and how we offer the consumer really great values in produce and some other areas like that, but how we also offer them really great value beyond price in other areas like a fresh-cut fruit and veg or a butcher shop with more custom meat products or gourmet donuts or better HBC for him and her essential oils, better hair care products, and things where the consumer can choose to buy products that help our margin balance out.

And so, part of this positioning is how do we structure our store to give that consumer the balance they're looking for while helping us improve our overall margin base. And so, we really haven't been able to see that part of the positioning yet, and that's something we're looking forward to as we continue to roll it out. A better experience for our consumer that blends a profitability picture that works well for us.

Blake Anderson -- Jefferies -- Analyst

Great. Thanks so much.

Operator

Thank you. And as there are no more questions, I would like to return the floor to Dave Staples for any closing comments.

David M. Staples -- President and Chief Executive Officer

Well, again, I'd just like to thank everyone for your questions and participation on today's call. And we look forward to speaking with you again when we report our second quarter fiscal 2019 results.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 51 minutes

Call participants:

Katie Turner -- Partner

David M. Staples -- President and Chief Executive Officer

Mark Shamber -- Executive Vice President and Chief Financial Officer

Scott Mushkin -- Wolfe Research -- Analyst

Charles Cerankosky -- Northcoast Research -- Analyst

David Lantz -- BMO Capital Markets -- Analyst

Renato Basanta -- Barclays -- Analyst

Blake Anderson -- Jefferies -- Analyst

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