SpartanNash Company – Currently Listed as ‘SPTN’ on the Stock Market

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Company Overview

SpartanNash Company (“SPTN”) is a business that primarily distributes grocery products whilst also operating a premier fresh produce distribution network. Grocery products are distributed to the Company’s corporate-owned retail stores, independent and chain retailers, and U.S. military commissaries and exchanges. The Company currently operates two reportable segments which are detailed below:

  • Wholesale: This segment distributes company-owned and national brands to SPTN’s corporate-owned retail stores, e-commerce providers, food service distributors, independent retailers, and national accounts. This segment also contracts with manufacturers and brokers to distribute a wide variety of grocery products to many U.S. military commissaries and is the only global delivery solution to service the Defense Commissary Agency (“DeCA” or “the Agency”).
  • Retail: This segment operates both a number of corporate-owned retail stores and fuel centers throughout the U.S. Also via this segment, SPTN offers a number of pharmacy services in a number of its corporate-owned retail stores whilst contemporaneously operating a few pharmacy locations not associated with corporate-owned retail locations.

This Security Issue came to our attention at the price of approximately 21.79 during September 2024, with drafting of this Piece beginning relatively soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 22].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from SPTN’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 1.52 in accordance with Table 2 – 3, and Table 2 – 4 above, whilst the best, average and worst-case scenarios are 1.25, 1.12 and 0.95 respectively, with only the stated case being below the minimum recommended figure of 1.5. The Issue also fails the acid test in all four instances.

The long-term debt value exceeds 110% of all positive current asset values.

The Company has demonstrated one loss over the last decade, although outside of that it is our opinion that the earnings have been relatively consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 2006.

The Company’s most recent annual earnings were positive whereas those six years prior were negative; and looking at the three-year averages of our diluted EPS (beginning 2015) we can see that over the latest fiscal decade, the EPS have increase by approximately 249%.

The discernible tangible equity per share is 1.35 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -11.64, -19.83 and -25.02, respectively. The current price of 21.05 is greater than 120% of the first value with the rest being negative and rendering the 120%-price-paid-to-DTE metric invalid in this instance.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were five main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following five points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Acquisition Trend

This Company does have a trend of acquiring smaller companies. Please review the ensuing list of acquisitions from the latest fiscal decade (or thereabouts):

  • “On November 19, 2013, Spartan Stores completed a merger with Nash-Finch, a food distribution company serving military commissaries and exchanges and independent grocery retailers, and an operator of retail grocery stores. The merger was pursued to create a larger, more balanced company with a broader customer base across multiple food retail and distribution businesses. Each outstanding share of the common stock of Nash-Finch converted into 1.20 shares of Spartan Stores common stock” [20].
  • “On June 16, 2015, the Company acquired certain assets and assumed certain liabilities of Dan’s Super Market, Inc. (Dan’s) for a total purchase price of $32.6 million. Dan’s was a six-store chain serving Bismarck and Mandan, North Dakota, and was not a customer of the SpartanNash Food Distribution segment prior to the acquisition” [16].
  • “On January 6, 2017, the Company acquired certain assets and assumed certain liabilities of Caito Foods Service (‘Caito’) and Blue Ribbon Transport (‘BRT’) for $214.6 million in cash, net of $2.5 million of cash acquired. Acquired assets consist primarily of property and equipment of $76.7 million, intangible assets of $72.9 million, and working capital. Intangible assets are primarily composed of customer relationships, which are amortized over fifteen years, and indefinite lived trade names. In connection with the purchase, the Company provided certain earn-out opportunities if the business achieved certain performance targets. As certain performance targets were not met in the first year after acquisition, the Company was reimbursed $15.0 million of the initial purchase price during 2019 from funds paid into escrow…Caito is a supplier of fresh fruits and vegetables to grocery retailers and food service distributors in the Southeast, Midwest and Eastern United States. BRT offers temperature-controlled distribution and logistics services throughout North America. The Company acquired Caito and BRT to strengthen its fresh product offerings to its existing customer base” [12].
  • “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 $23.9 million, and working capital. Intangible assets are primarily composed of an indefinite-lived trade name of $20.6 million and pharmacy customer prescription lists of $3.1 million, 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, which were subsequently finalized during the fourth quarter of 2019. No goodwill was recorded related to the acquisition…Martin’s operates retail stores in Northern Indiana and Southwest Michigan. Prior to the acquisition, Martin’s was an independent retailer and customer of the Company’s Food Distribution segment. Subsequent to the acquisition, sales from the Food Distribution segment to Martin’s stores are eliminated. The acquisition expanded the footprint of the Company’s Retail segment into adjacent geographies in northern Indiana and southwestern Michigan” [10].
  • “The Company acquired goodwill within the Retail reporting unit of $1.1 million related to an immaterial acquisition during the second quarter of 2022” [7].

Positively these companies were related to the core operations of SPTN at the time. Negatively, there has been a lot of intangibles paid for and the first listed example does appear to involve some type of equity dilution. With regards to the financing and whether or not loans were utilized, it was not stated in the extracts above but judging from the way ‘liquidity’ is discussed it seems like this is most likely the case, although it should be clearly stated. We don’t believe the Company is relying on this method for expansion as from a visual inspection of last decade’s net income, there is not much conclusive growth. There was in increase in the three-year averages, but this was in large-part because fiscal 2017 was a net loss. Altogether the trend is not deplorable like it has been with previous Security Issues we have looked at, but we do wonder whether or not the attempts are gaining notable dividends and if the interest paid on the debt for them is being offset by any possible increases in net income.

Additional Income Statement Matters

This Issue had constant recurring, non-recurring charges affecting income which spanned several types of classifications (some overlapping). There were: charges on customer advancements, gains on sales of assets, goodwill impairment charges, impairments of long-lived assets, lease termination adjustments, merger/acquisition and integration costs, pre-tax settlement charges related to the Pension Plan terminations, severance charges, store closing costs, and more. The details are littered throughout the 10-K Forms (we won’t be repeating them there) and as a starting point for locating them, may we suggest searching for any of the following phrases:

  • ‘Asset impairment charges’
  • ‘Merger/acquisition and integration’
  • ‘Non-cash charge’
  • ‘Restructuring, asset impairment and other charges’
  • ‘Restructuring, goodwill/asset impairment and other charge’

However this will not be enough and to capture all of them you will likely have to scan the entire filings. We find this unattractive in a security issue as constant earning erosions appear to defeat the objective in a suitable investment operation. Please also be aware that the net loss in 2017 came from the following transgression:

In 2017, the Company experienced significantly lower than expected Retail operating results and it was determined that the carrying value of the Retail segment exceeded its fair value. Consequently, the Company recorded a goodwill impairment charge of $189.0 million in the third quarter of 2017 to fully impair Retail segment goodwill. [12]

Had this not occurred, 2017’s ‘operating earnings’ would have been $82,352,00 as opposed to the reported -$106,675,000.

The Company’s Growth or Stagnation

In our opinion, SPTN’s modus operandi warranted a quick look at whether or not things are stagnating or possibly even regressing. The following excerpt taken from the 2023 10-K Filing summates what we are effectively referencing:

Industry consolidation, alternative store formats, nontraditional competitors and e-commerce have contributed to market share losses for traditional grocery stores. The Company’s Wholesale and Retail segments are primarily focused on traditional retail grocery trade, which faces competition from faster growing alternative retail channels, such as dollar stores, discount supermarket chains, Internet-based retailers and meal-delivery services. The Company expects these trends to continue. If the Company is not successful in effectively competing with these alternative channels, or growing sales into such channels, its business or financial results may be adversely impacted.

The Company faces competitive pressures from e-commerce activity, as consumers continue to adopt this format and do more of their shopping online. While the Company offers e-commerce services at many of its stores, some of its stores and many of its independent retailer customers do not. Other e-commerce providers may offer lower prices, superior online ordering or delivery service, or greater convenience than the Company. If the Company fails to compete successfully, it could face lower sales and may decide or be compelled to offer greater discounts to its customers, which could result in decreased profitability. [5]

Because of this newly formed landscape we have composed a Table directly below which looks at several of the Company’s metrics. Please see Table 4 – 1 below:

From a visual inspection we fail to observe any notable regression which may be a positive given the industry’s current state of affairs outside of the number of corporate-owned retail stores. We would also not speak confidently of much consistent growth financially, at least where it can be said to really matter as whilst the revenue and assets may have steadily been on the incline, the same is not necessarily too apparent for the net income. We do believe that this topic should be very closely monitored over the next few years however as the tide could change in either direction, and as always, the reader is to come to their own conclusion(s) based on their own research.

Interesting Segment Reorganization

At this point in time the Company has two reportable segments but if you go back to the 2021 annual report you will come across the following quote:

The Company operates three reportable segments: Food Distribution, Retail and Military. [8]

In the last few years of the aforementioned reportable-segment-setup, the Military segment’s decline in profitability became evident and with that, began repeatedly posting an operating loss. Please see Table 4 – 2 below which shows the previous segment’s operating income for the few years leading up to the recent re-organization:

Evidently the Military segment had lost the past habit of posting an operating profit (which had happened prior to fiscal 2019). We’ve provided the Company’s explanations for these years below in chronological order:

  • “Military operating earnings decreased $15.0 million to a $9.3 million operating loss in 2019 from earnings of $5.6 million in the prior year. The decrease was attributable to higher supply chain costs and higher corporate administrative expenses than in the prior year” [12].
  • “Military operating loss increased $0.6 million to $9.9 million in the current year from $9.3 million in the prior year. The change was attributable to increases in the rate of supply chain expenses, as well as increases in corporate administrative expense, partially offset by improved margin rates” [10].
  • “Military operating loss increased $4.3 million to $14.3 million in the current year from $9.9 million in the prior year. The change was attributable to a decrease in net sales, a higher rate of supply chain labor and transportation expense, partially offset by improvements in gross margin rates and $3.1 million related to the transition impact of the new PTO plan” [8].

And then subsequently the 2022 10-K Form detailed this shift:

At the beginning of the third quarter of 2022, the Company combined the previous Food Distribution and Military operating segments into one operating segment: Wholesale. The change in the operating segments was driven by both a change in the Company’s organizational structure, and in the reporting utilized by the Chief Operating Decision Maker to allocate the Company’s resources and assess operating performance. The combination of the two segments reflects the way the Company manages the distribution business as one comprehensive distribution network and furthers the Company’s efforts to streamline operations in connection with its supply chain transformation and to better serve customers. As a result, the Company now operates two reportable segments: Wholesale and Retail. These reportable segments are two distinct businesses, each with a different customer base, management structure, and basis for determining budgets, forecasts, and compensation. Segment financial information for the comparative prior year periods within this report has been recast to reflect this update. [7]

It is interesting that this reorganization followed a steady decline in the Military segment’s profitability but all interpretation responsibilities remain with the individual. Some may speculate over attempts to conceal elements of SPTN’s profitability, but we shall leave the drawing of conclusions with the reader after conducting their arbitrarily satisfactory research. Either way, we believe this matter an important one to be aware of.

Senior Employee Reorganization

This could have been bullet point under the portion in the subsection below where we highlight unfavourable observations involving Management, but we deemed it important enough in this instance to warrant distinguishment. Our typical review of the last five most recent 10-K Filings revealed a few notable changes at the senior level of this Company. The first we noticed was as follows:

Although the Company made significant progress in the execution of its strategic plan, the Company’s profitability fell short of expectations.   The Board took decisive action in August 2019 by exiting the former Chief Executive Officer, Mr. David Staples, and replacing Mr. Staples on an interim basis as President and Chief Executive Officer with the Company’s Chairman of the Board, and previous Chief Executive Officer, Mr. Dennis Eidson.  The Board previously established a succession plan in the event of an unplanned need to install an interim Chief Executive Officer, securing Mr. Eidson’s prior agreement to step in as Interim Chief Executive Officer if, and when, needed.  Mr. Eidson continues to serve as Chairman of the Board of Directors.

Contemporaneously with the leadership transition, the Board established a Transition Committee to lead the search effort to identify the next President and Chief Executive Officer.  Mr. Douglas A. Hacker, Lead Independent Director, chairs the Transition Committee.  The membership of the Transition Committee is comprised of Mr. Hacker; Mr. Eidson; Ms. Yvonne R. Jackson, Chair of the Compensation Committee; and Mr. Matthew M. Mannelly. The Board of Directors has retained Spencer Stuart, a leading executive search and leadership consulting firm, as an advisor in the process. [11]

The second instance was as follows:

Separations of Ms. Trupiano and Mr. Dar

On April 26, 2022, the Company and Yvonne Trupiano, the Company’s Executive Vice President and Chief Human Resources Officer, entered into a separation agreement. Pursuant to the separation agreement, Ms. Trupiano remained with the Company until April 29, 2022 and received a severance package that included a $1.1 million lump sum payment, a prorated portion of the 2022 AIP payout representing $177,402 and up to 78 weeks of COBRA reimbursement for health benefit coverage, $2,500 for an executive physical and $17,800 for tax and financial planning services. The Company also waived certain non-competition restrictions in Ms. Trupiano’s Employment Agreement and Post-Employment Competition Agreement. Ms. Trupiano’s agreement also contains customary provisions associated with an executive’s separation, including a waiver and release of claims against the Company, confidentiality and cooperation obligations.

On September 26, 2022, the Company and Arif Dar, the Company’s Senior Vice President, Chief Technology Officer, entered into a separation agreement. Pursuant to the separation agreement, Mr. Dar remained with the Company until September 30, 2022 and received a severance package that included a $974,250 lump sum payment, a prorated portion of the 2022 AIP payout representing $321,253, up to 78 weeks of COBRA reimbursement for health benefit coverage, $27,000 for tax and financial planning services and a $140,000 payment for consulting and transition services. Mr. Dar’s agreement also contains customary provisions associated with an executive’s separation, including a waiver and release of claims against the Company, confidentiality and cooperation obligations. [6]

And the last notable example was as follows:

Separation of Mr. Sisk

On December 30, 2023, the Company and Mr. David Sisk, the Company’s Executive Vice President and Chief Customer Officer, entered into a separation agreement to terminate employment without cause. Pursuant to the separation agreement, Mr. Sisk served through December 30 and received the following severance benefits which were consistent with the benefits payable under his employment agreement for a termination without cause: (i) a $984,000 lump sum payment; (ii) a 2023 AIP payout determined based on actual performance ($194,300); and (iii) reimbursement for retiree medical coverage in lieu of COBRA health benefits ($20,286). Mr. Sisk’s severance also included tax and financial planning services ($28,000) and payment for up to $10,000 in household moving expenses. In 2024, he will receive $375,000 in compensation for consulting and transition services related to the military customer channel. Mr. Sisk’s agreement also contains customary provisions associated with an executive’s separation, including an 18 month restrictive covenant, waiver and release of claims against the Company, confidentiality and cooperation obligations. [4]

On account of these we harkened back over the reminder of the decade in a search for more and came across a couple more of relevance. The first one being:

Also in connection with the Merger, Wendy Beck resigned from the Board of Directors to reduce the number of continuing Spartan Stores directors to seven, which was the number required under the merger agreement between Spartan Stores and Nash Finch. On July 19, 2013, Frederick Morganthall, II resigned as a director due to the proposed merger of The Kroger Co. with Harris Teeter Supermarkets, Inc., for which Mr. Morganthall serves as President and Chief Operating Officer. [23]

And the second one being:

Derek R. Jones resigned from the Company, effective March 17, 2017. [17]

With Derek R. Jones being an EO with the title of ‘Executive Vice President, President of Wholesale and Distribution Operations’. We won’t pretend to know exactly how these will or will not affect the Company but what we will agree is that such internal stability is usually preferred; and by the Company’s own admission this subsection possibly puts their success in jeopardy:

The Company may not successfully retain or manage transitions with executive leaders and other key personnel.

The Company’s success depends upon the continued services of executive leaders and other key Associates, as well as its ability to effectively transition to their successors. The loss of such personnel may be disruptive to the Company, and if the Company is unable to execute an orderly transition and successfully integrate the new executives or personnel to successfully develop and implement strategic initiatives, the Company’s revenue, operating results and financial performance may be adversely affected. Any future changes to the executive leadership team, including hires or departures, could cause further disruption to the business and have a negative impact on operating performance, while these operational areas are in transition. The Company may not be able to timely find suitable successors to key roles as transitions occur or may not successfully integrate successors into its leadership team or the Company’s business operations. The Company’s inability to retain other key leaders or effectively transition to their successors, or any delay in filling any such critical positions, could harm its business and profitability. [5]

On account of the entirety of this subsection’s contents we would suggest that all investors monitor Director and EO turnover over the next few years.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. SPTN may currently be entering a business cycle trough.
  2. The Company is not overly conservatively capitalized so may make for an interesting speculative purchase in this regard.
  3. We would say this is a medium sized company relative to their consolidated financials.
  4. We do not suspect any corporate pyramiding here.
  5. Regarding the principles of consolidation, there is the yearly re-iteration that the consolidated financial statements “include the accounts of SpartanNash Company and its subsidiaries” [3, 5, 7, 8, 10, 12, 14, 16, 18, 20, 22], but it does not say if they are wholly owned. Exhibit 21 on the reports, also does not make it clear but as there is no mention of a non-controlling interest anywhere it can perhaps be assumed. It should not have to be assumed however, and the Company should make it clear.
  6. SPTN has mentioned depreciation expenses being included in both ‘Cost of Sales’ and ‘Selling, General and Administrative Expenses’, ergo we believe them to be accounted for on the income statement. Concerning the depreciation methodology, every annual report says that the Company’s fixed assets have been computed using the using the straight-line method over the estimated useful lives of the assets, which are repeatedly stated as follows: ‘land improvements’ is 15 years; ‘buildings and improvements’ is 15-40 years; and ‘equipment’ is 3-15 years. We’d prefer exact estimated useful lifetimes as opposed to ranges.
  7. It is not clear if the number of shares issued equals the number of shares outstanding. That being said, there are no mention of treasury shares anywhere so it is likely that the two numbers are the same. It should not have to be assumed however, and the Company should make it clear.
  8. The Company has an active share repurchase plan in place although it is not stated what happens with the repurchased shares, i.e., whether they are retired/cancelled or kept as treasury shares. This should be made clear.
  9. The Black-Scholes option-pricing model was last mentioned in the annual report for fiscal 2014 so it is not clear how the Company is pricing up their stock options.
  10. The Company’s reported net earnings typically approximate to the comprehensive income.
  11. The Company spends a lot of time discussing non-GAAP metrics (notably more so than usual) but we have not factored them into our discussions.
  12. Over the last fiscal decade, there have been an equal number of year-over-year increases in cash and cash equivalents as there have been decreases.
  13. The latest two 10-K Filings have said inventories are valued at the ‘lower of cost or net realizable value’, whereas before they were consistently ‘lower of cost or market’. The Company then proceeds to say most of their inventories are valued using the last-in, first-out (LIFO) method i.e., “inventories are valued at the lower of cost or net realizable value. Approximately 90.4% and 87.5% of the Company’s inventories were valued on the last-in, first-out (LIFO) method at December 30, 2023 and December 31, 2022, respectively” [5]. SPTN then proceeds to say “the Company accounts for its Wholesale segment inventory using a perpetual system and utilizes the retail inventory method (‘RIM’) to value inventory for center store products in the Retail segment. Under RIM, inventory is stated at cost, determined by applying a cost ratio to the retail value of inventories” [5], which we’ve assumed to make up the remining percentages not mentioned earlier (although it should be clearly stated). When discussing inventories, it is always said that if the RIM method was used as opposed to the LIFO method the inventory values would be much higher. And then interestingly enough the Company always says inventory values were reduced which resulted in the liquidation of some LIFO inventory which also decreased the LIFO provision. Admittedly it seems like an overly convoluted matter.
  14. There are other assets listed as ‘other current assets’ and ‘other assets, net’ on the latest balance sheet that we were not able to account for in our valuation(s) as their nature was not fully disclosed.
  15. The effective income tax rates are usually a few percentage points away from the official statutory rates. And concerning operating net loss carryforwards, the following was said in the latest 10-K Filing – “As of December 30, 2023, the Company’s state net operating loss carryforwards in various taxing jurisdictions expire in tax years 2024 through 2043 if not utilized” [5], of which there were $5,507,000 worth.
  16. The latest 10-Q Filing had the following to say about off-balance sheet arrangements “the Company has also made certain commercial commitments that extend beyond July 13, 2024. These commitments consist primarily of purchase commitments, standby letters of credit of $18.1 million as of July 13, 2024, and interest on long-term debt and finance lease liabilities” [3].
  17. The Company’s debt obligations are secured by “by substantially all of the Company’s assets” [3]. The latest annual report said “the weighted average interest rate for all borrowings, including loan fee amortization, was 7.03% for 2023” [5], which seem a tad usurious.
  18. The Company does not appear to have any large or concerning payments due in the upcoming year or so.
  19. There has been no notable decline in the value of assets over time, neither current nor non-current.
  20. Concerning rule 12b-2 of the Exchange Act up until (but not including) the 2014 annual report, the Business was an “accelerated filer”; from the 2014 annual report up until (but not including) the 2019 annual report it was a “large accelerated filer”; for 2019 it was an “accelerated filer” again; and since the 2020 annual report it has been a “large accelerated filer”, a status it remains till this day.
  21. ‘Goodwill — Wholesale Reporting Unit’ has been a critical audit matter in the last two 10-K Filings, and prior to that (and before the interesting merging of segments we discussed earlier) ‘Goodwill — Food Distribution Reporting Unit’ was a critical audit matter for both the 2021 and 2020 annual report.
  22. The DEF 14A Form for 2022 which should have been in alignment with the 2022 Annual Meeting of Shareholders and the 2021 10-K Form is not on the SEC website so we were unable to review it and factor it into our discussion for this Piece.

Points we feel may be considered negative

  1. The company’s capital expenditures very frequently fall outside the range of the previous year’s expectations.
  2. The Company has no historic stock splits [24], but on account of the warrants issued in 2020 there was some stock dilution as clarified in the following extract – “On October 7, 2020, the Company and Amazon.com, Inc. (‘Amazon’) entered into a Transaction Agreement (the ‘Transaction Agreement’), in which the Company has agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon, warrants to acquire up to an aggregate of 5,437,272 shares of the Company’s common stock, subject to certain vesting conditions. Warrants equivalent to 2.5% of the Company’s outstanding and issuable shares, or 1,087,455 shares, vested upon the signing of the commercial agreement. Warrants equivalent to up to 10.0% of the Company’s outstanding and issuable shares, or 4,349,817 shares, may vest in connection with conditions defined by the terms of the Warrant, as Amazon makes payments to the Company in connection with the commercial supply agreement, in increments of $200 million. Upon vesting, shares may be acquired at an exercise price of $17.7257. The right to purchase shares in connection with the Warrant arrangement expires on October 7, 2027” [10].
  3. There is very high institutional ownership of the common shares outstanding (83.52% at the time of this Piece’s posting [25]).
  4. The Company makes use of derivatives and hedges interest rate risks.
  5. The Company paid cash dividends on their common stock during their financial loss of fiscal 2017.
  6. Every one of SPTN’s annual reports say “from time-to-time, the Company is engaged in routine legal proceedings incidental to its business. The Company does not believe that these routine legal proceedings, taken as a whole, will have a material impact on its business or financial condition. Additionally, various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against the Company” [5, 7, 8, 10, 12, 14, 16], hence there are legal proceedings but we could not see any being divulged in much if any detail.
  7. We had a few negative-leaning issues concerning Management:
    1. The Company is determining NEO compensation using non-GAAP measures.
    2. The CEO pay ratio has notably enlarged over the last few years.
    3. Some of the amounts showcased under the ‘Potential Payments Upon Termination Not in Connection With a Change in Control’ banner appear rather excessive.
    4. Most of the DEF 14As in the latest decade detail delinquency as it pertains towards Section 16(a) of the Securities Exchange Act of 1934.
    5. The 2021 DEF 14A Form says the following with regards to SPTN’s current President and Chief Executive Officer – “Previously, Mr. Sarsam led Borden Dairy Company, Inc. (‘Borden’) as Chief Executive Officer from March 2018 to July 2020, where he focused on developing a people-first culture and a renewed commitment to innovation and service. In January 2020, Borden filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In June 2020, the bankruptcy court approved the sale of substantially all of the assets of Borden to a group led by Capitol Peak Partners” [9]. We would not imagine this to inspire Shareholder confidence.

Points we feel may be considered positive

  1. We would say the operations of the Company are easy for layman comprehension.
  2. The Business has been around for over a century thus has stood the test of time.
  3. The older 10-K Filings demonstrate the Business profiting during both relevant years of the economic downturn of 2008-2009.
  4. Year-after-year SPTN states sales to one customer contributed more than 10% of the consolidated net sales, although over the last decade that percentage has not yet exceeded more than 17% of the total. We do believe they should disclose the customer’s identity. And year-after-year the Company says “no single supplier accounts for more than 5% of the Company’s purchases” [5, 7, 8, 10, 12, 14, 16, 18, 20].
  5. Every sampled DEF 14A statement states a lack of related party transactions for the corresponding financial year.

Possible Questions for SPTN’s Approximate 1,200 Stockholders to Consider, Investigate and/or Raise with Management

  1. To some, it may look like the net income has not all to convincingly improved over the latest fiscal decade. Is Management doing anything to ensure this is not the case going forward?
  2. Why is the Company subject to so many additional charges than others appear to be?
  3. Is the “yes”™ loyalty program last mentioned in the 2019 annual report still in effect, and if not, why not?
  4. Is the Identity Access Management (IAM) program last mentioned in the 2019 annual report still in effect, and if not, why not?
  5. When discussing the previous Food Distribution segment’s net sales (decline) in fiscal 2021 the Company said “the decrease was due to favorable prior year net sales attributable to increased consumer demand related to COVID-19, as well as impacts from the Company’s decision to exit its fresh production business, which accounted for a $21.7 million decline in segment revenues from the prior year” [8]. Why did the Company decide to exit the fresh production business?
  6. Every year, the 10-K’s Item discussing the Business’ owned properties mentions matters not reflected in the tables and it mentions these directly below the tables. Why aren’t these just detailed in their own table or why isn’t the table modified to become more inclusive?
  7. Every annual report has income entitled ‘other, net’ on the consolidated income statement. Can the nature of this ‘other, net’ income always be clearly explained?
  8. Whenever an individual customer’s sales contribute more than 10% of the Company’s total sales can their identity be disclosed in the 10-K Filings?
  9. Going forward can a full compressive breakdown of all ‘other’ assets (current and/or non-current) be provided in all 10-K and 10-Q Filings?
  10. The 2022 annual report said “the Company acquired goodwill within the Retail reporting unit of $1.1 million related to an immaterial acquisition during the second quarter of 2022” [7]. Can full details of this and all other acquisition be provided going forward irrespective of how ‘immaterial’ they may appear?
  11. If there are acquisitions or business combinations, can the Company always say how they were financed i.e., cash on hand, loan proceeds, debt issuance, issuance/selling of equity/common shares etc.?
  12. Can the principles of consolidation always say whether or not all of the subsidiaries are wholly-owned? And if they are partially-owned, can the exact percentage of ownership be clearly detailed?
  13. Can the Company always say the number of shares issued as well as the number outstanding?
  14. Can the Company always make it clear what happens with the shares they repurchase?
  15. Every year the Company says certain inventory quantities were reduced which resulted in the liquidation of LIFO inventory carried at lower costs prevailing in prior years, the effect of which decreased the LIFO provision. The amount of this provision decrease has been steadily increasing in recent years. Is this trend expected to continue moving forward into the future?
  16. Can the percentage of the inventories valued using each method be clearly stated going forward?
  17. Why are the Company’s processes with valuing and then liquidation inventories seemingly not as simplistic as other companies?
  18. Can exact estimated useful lives of the depreciated assets be provided as opposed to ranges?
  19. The Company has said that from time-to-time they are engaged in routine legal proceedings incidental to its business. Is there a minimum estimated legal or settlement cost at which it is decided that the details of these will be provided to Shareholders? And can examples of these claims and lawsuits be provided as they occur?
  20. In 2022 the stop-loss coverage for automobile liability increased to $2.0 million, up from $1.0 million the previous year; why did this increase happen?
  21. When the Company has bad debt income (as opposed to an expense), can they explain why this occurred?
  22. Why is ‘long-term debt and finance lease liabilities’ on the balance sheet listed as one item as opposed to ‘long-term debt’ and ‘finance lease liabilities’ being listed separately? Can this be changed going forward with the two financial items separated?
  23. The latest 10-K Form said “the weighted average interest rate for all borrowings, including loan fee amortization, was 7.03% for 2023” [5]. Are these rates not a bit usurious?
  24. Does the Company plan on tackling the long-term debt on the balance sheet and eventually writing it off?
  25. Why did the Company pay cash dividends on their common stock during their financial loss of fiscal 2017? And how was this funded?
  26. Every now and then the Company mentions something they anticipate for the following year, for instance, the 2016 annual report says “lastly, the Company anticipates benefits from certain efficiency initiatives to be realized in the second half of the year” [18], and the 2020 annual report says “the Company anticipates that savings generated through certain initiatives will be more than offset by investments the Company is making in its people and supply chain capabilities” [10]. Can these be more consistent and can it be clearer whether or not the anticipations come to fruition?
  27. Why did the Company recently remove the table under the ‘Contractual Obligations’ header which outlined their upcoming payment obligations (last seen in the 2020 annual report)? Can it be returned?
  28. Can off-balance sheet arrangement information be included in the 10-K Filings as well as the 10-Q Filings?
  29. “On October 7, 2020, the Company and Amazon.com, Inc. (‘Amazon’) entered into a Transaction Agreement (the ‘Transaction Agreement’), in which the Company has agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon, warrants to acquire up to an aggregate of 5,437,272 shares of the Company’s common stock, subject to certain vesting conditions” [10]. Why did the Company opt to go this route, contributing to the dilution of the current (relative to the appropriate time) Shareholders’ equity?
  30. The Black-Scholes option-pricing model was last mentioned in the annual report for fiscal 2014 so how is SPTN currently pricing up their stock options?
  31. Where is the DEF 14A Form for 2022 which should have been in alignment with the 2022 Annual Meeting of Shareholders and the 2021 10-K Filing?
  32. What would Management say to those not impressed with the turnover rate of EOs and/or Directors over the latest decade?
  33. The 2022 10-K Filing said the following with regards to human capital retention – “While the rate of turnover remains high, specifically in the retail and distribution environments, the Company has specific engagement plans to further reduce attrition in 2023” [7]; could this not be elaborated on further and are these plans still in effect now?
  34. The 2021 DEF 14A Form says the following with regards to SPTN’s current President and Chief Executive Officer – “Previously, Mr. Sarsam led Borden Dairy Company, Inc. (‘Borden’) as Chief Executive Officer from March 2018 to July 2020, where he focused on developing a people-first culture and a renewed commitment to innovation and service. In January 2020, Borden filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In June 2020, the bankruptcy court approved the sale of substantially all of the assets of Borden to a group led by Capitol Peak Partners” [9]. How would Management instil any confidence in any investors that are subsequently unsure of the individual in question’s ability to protect their assets?
  35. Most of the DEF 14As in the latest decade detail delinquency as it pertains towards Section 16(a) of the Securities Exchange Act of 1934. Is any action being taken to prevent such future delinquencies?
  36. SPTN’s DEF 14A Forms now repeatedly mention ‘Shareholder Outreach’; can this subject matter be elaborated on? Does the Business reach out to smaller individual investors or only institutional investors?
  37. Why are the DEF 14As Filings so long, at times having more enumerated pages than the corresponding 10-Ks?
  38. Why did the Company switch independent compensation consultants a few years ago?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 21.05. Using our most recent three-year average of the diluted EPS (1.33) as opposed to the most recent EPS figure (1.34) increased the P/E ratio from 15.69 to 15.88; and using our discernible tangible equity value per share (1.35) as opposed to the stated book value per share (19.95, in accordance with Table 2 – 2) has increased the P/BV ratio from 1.06 to 15.56. With that in mind and considering current federal interest rates (4.83% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 1.33 for diluted EPS and our stated discernible tangible equity value per share of 1.35, and multiplying the corresponding P/E and P/BV ratios of 15.88 and 15.56 respectively, we get a figure of 247.01, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 6.35).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – no longer valid
  • The Company’s low P/BV ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – still somewhat valid
  • The Company’s cash dividend payments – still somewhat valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently fairly overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

This did not do great in our ‘Initial Discussions Regarding the Company’s Financials’ section and the other quantitative elements did not impress. There is currently no pricing point at which this Issue would be assigned a valuation of ‘Gold’ or higher.

At this point in time and all matters here considered, this is not stock pick we would likely follow nor likely add to a stock portfolio even at a seemingly reasonable price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. SPTN’s 2nd 2024 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/877422/000095017024097572/sptn-20240713.htm
  4. SPTN’s 2024 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000095017024043163/sptn-20240404.htm
  5. SPTN’s 2023 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000095017024022070/sptn-20231230.htm
  6. SPTN’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000095017023012415/sptn-20230411.htm
  7. SPTN’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000095017023005530/sptn-20221231.htm
  8. SPTN’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459022008291/sptn-10k_20220101.htm
  9. SPTN’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000156459021018682/sptn-def14a_20210526.htm
  10. SPTN’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459021010568/sptn-10k_20210102.htm
  11. SPTN’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000156459020015894/sptn-def14a_20200520.htm
  12. SPTN’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459020006792/sptn-10k_20191228.htm
  13. SPTN’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000156459019011175/sptn-def14a_20190522.htm
  14. SPTN’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459019004916/sptn-10k_20181229.htm
  15. SPTN’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000119312518114256/d511174ddef14a.htm
  16. SPTN’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459018003137/sptn-10k_20171230.htm
  17. SPTN’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000119312517123203/d369254ddef14a.htm
  18. SPTN’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459017003079/sptn-10k_20161231.htm
  19. SPTN’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000119312516546493/d168890ddef14a.htm
  20. SPTN’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459016013895/sptn-10k_20160102.htm
  21. SPTN’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/877422/000119312515138144/d911703ddef14a.htm
  22. SPTN’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/877422/000156459015001292/sptn-10k_20150103.htm
  23. https://www.sec.gov/Archives/edgar/data/877422/000119312514142605/d695966ddef14a.htm
  24. https://www.stocksplithistory.com/?symbol=sptn
  25. https://www.gurufocus.com/stock/SPTN/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of December, i.e., any mention of the ‘2022 10-K Filing’ or ‘2022 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended December 2022. The Filings are usually published a few months later, the following calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2023 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2022 10-K Filing; usually published not too soon after the 10-K Filing (typically the following calendar month relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V