SpartanNash Company - Q1 2022
June 1, 2022
Transcript
Speaker 0
Good morning, and welcome to the SpartanNash First Quarter 2022 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kailey Campbell, Head of Investor Relations.
Please go ahead.
Speaker 1
Good morning, and welcome to the SpartanNash Company First Quarter 2022 Earnings Conference Call. On the call today from the company are President and Chief Executive Officer, Tony Sarsom and Executive Vice President and Chief Financial Officer, Jason Monaco. By now, everyone should have access to the earnings release, which was issued this morning at approximately 7 am Eastern Time. For a copy of the earnings release as well as the company's supplemental earnings presentation, please visit SpartanNash's website atwww.spartanash.com/investors. This call is being recorded and every play will be available on the company's website.
Before we begin, the company would like to remind you that today's discussion will include a number of forward looking statements. If you will refer to SpartanNash's earnings release from this morning as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially from these forward looking statements. Please remember, SpartanNash Undertakes no obligation to update or revise these forward looking statements. The company will also make a number of references to non GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business, And it has included in the earnings release a full reconciliation of non GAAP financial measures to the most comparable GAAP measures.
And it's now my pleasure to turn the call over to Tony.
Speaker 2
Thank you, Kaley, and welcome to SpartanNash. We are glad to have you on board as Head of Investor Relations. Good morning, everyone. Thank you for joining us. On May 12, we provided our preliminary earnings results.
And today, I'm happy to walk you through additional highlights of the quarter. As part of our winning recipe, we are focused on transforming our supply chain. And this past quarter showed that our efforts are taking hold. We delivered an approximate 7% improvement in throughput year over year. We also secured more than $15,000,000 in run rate cost savings, meaning our initial Full year commitment of $15,000,000 to $30,000,000 in annual savings ahead of schedule.
We reached this significant milestone by leveraging data and insights To create efficiencies throughout the distribution network, we now expect to achieve $25,000,000 to $35,000,000 run rate savings by the end of fiscal 2022. These two impressive accomplishments are a direct result of our supply chain transformation initiative, which is a foundational element We're expanding our profitability and we are just getting started. I wanted to thank our supply chain leaders for their hard work and dedication in making this possible. Moving to our retail segment. Our team of frontline store associates continue to deliver quality service to shoppers resulting in comparable store sales They were up 7.2% in the quarter.
We are building on strong momentum in our retail business and we saw our market share grow. We are focused on providing exceptional service and market competitive pricing. This is helping us retain our current customers and shoppers who have recently discovered our stores. We remain committed to our mission to delivering the ingredients for a better life. To drive gross margin and create more value, we're expanding our private label brand penetration.
Overall, our private label sales increased 13.7% year over year outpacing the company's overall sales growth. That is really impressive. Now turning to our military business. I'm proud to say sales increased over the prior year quarter for the first time since Q1 of 2020. Additionally, we achieved military adjusted EBITDA margins of 1.6%, Exceeding our turnaround target of 1%.
We are strategically positioning military for success through a variety of initiatives and we continue to see opportunities to further increase the profitability of this business. One of these opportunities is around the recent extension of our private label contract with DeCA. Our military distribution network gives us the unique ability We service 160 commissaries and 400 exchanges worldwide. We are proud to continue providing America's military heroes and their families with great value and a taste from home. And speaking of our unique global supply chain, we are currently leveraging our military network to provide critical food and supplies to Ukraine refugees across Eastern Europe.
Now turn to the impact inflation had during the quarter. While inflation was a tailwind for us, our performance also reflects the continued execution of our winning recipe and our supply chain transformation initiative. Looking ahead to the remainder of the year, we expect to continue operating in a volatile and inflationary environment. Our teams are going above and beyond to effectively manage through these uncertainties. Additionally, the impact of inflation on our results should taper in the second half of the year.
Turning to the labor environment. In order to attract and retain top talent in the labor market, We've taken several steps to enhance our associate experience. These include investments in wages, additional benefits, heightened focus on safety and training, Associate recognition and streamlined communication. We are seeing the benefit from these initiatives over the past 2 years, including 2.3 times higher than normal flow and a 48% improvement in our safety incident rate. Turning to strategic growth.
During the past couple of quarters, we introduced our winning recipe, defining who we are and where we are going. The formula is driven by our 3 core capabilities: You can view the Q1 supplemental earnings presentation, which provides an overview of our winning recipe. Now, I'll get into some specifics illustrating how we're executing on our plan. Last month as part of our e commerce strategy, We announced a partnership with DoorDash. This partnership expands our grocery services and solutions across both our digital and physical platforms It also enables us to empower our network of 2,100 independent retail customers.
We're now providing them with Additional tools and resources they need to grow their businesses and expand their digital footprint. Additionally, we'll be offering on demand grocery delivery from more than 100 company owned stores. Our customer centric innovation is a key priority for driving growth. With this new omnichannel partnership, we will expand our customer base and capture more of the grocery retail market by rapidly scaling our digital offering. We also recently reached an agreement to acquire a 3 store Michigan grocery chain, Shop and Save Food Centers.
These stores will be converted into our popular Family Fare banner. Our focus right now is ensuring a smooth transition for our new team members and the customers they serve. We're also expanding shopper offerings through our robust loyalty program. I'm also pleased to announce that the Stockton, California distribution has been integrated into our network. Through our partnership with the Coastal Pacific Food Distributors, the 500,000 square foot multi temperature facility is now fully servicing customers after a phased in launch.
Having a West Coast presence allows us to provide faster, fresher and more cost effective deliveries to our customers. The arrangement will also save roughly 1,000,000 gallons of diesel fuel annually, while helping us reduce our fleet mileage by 10% or more than 7,000,000 miles. This agreement further advances our progressive work in ESG by reducing our carbon footprint. We anticipate lowering our greenhouse gas emissions by an estimated 10,000 metric tons this year and we are not done yet. If you have not seen the document, I highly encourage you to view our inaugural ESG report, which is available under the corporate responsibility section of our website at spartanash.com.
Now let's talk about long term targets. We have built a strong foundation based on our winning recipe and our momentum gives us confidence in the growth targets we recently announced on May 12. As a reminder, by 2025, we expect to grow net sales by at least 12% from fiscal 2021 to more than $10,000,000,000 We We expect to increase adjusted EBITDA by at least 40% from fiscal year 2021 to more than $300,000,000 and we expect to expand our adjusted EBITDA margin 3% of net sales, an increase of 25% from fiscal year 2021. We are very pleased with the actions the current executive leadership team has taken, which is reflected in our performance. We believe our strategy provides a clear path for long term growth and increased shareholder value.
Before I turn the call over to Jason, I would like to extend one more heartfelt thank you to our SpartanNash associates, whose operational excellence and keen focus on winning has made these results possible. Your hard work and dedication is transforming our company. On behalf of the SpartanNash executive leadership team, Thank you for being our customers' unsung heroes. With that, I'll now turn the call over to Jason to walk you through the Q1 financial performance in great detail.
Speaker 3
Thanks, Tony, and welcome to everyone joining us on today's call. Let's jump into the detailed results. Net sales for the Q1 increased 4 percent or about $106,000,000 to $2,760,000,000 compared to 20 21's Q1 sales of $2,660,000,000 This growth could be attributed to positive sales in all three business segments. Our GAAP EPS came in at $0.53 per diluted share in the quarter compared to $0.54 per share in the Q1 of On an adjusted basis, diluted EPS for the quarter was $0.83 compared to $0.59 in the Q1 of 2021. On an adjusted basis, the increase in profitability from the prior year quarter was due primarily to improvements in the gross profit rate, where we saw an increase to 16.3% compared to 15.7% in the prior year quarter.
Gross profit margin growth was driven by improvements within the food distribution and military segments. Inflation during the Q1 led to higher LIFO expense, which increased $8,500,000 over the prior year's Q1. This incremental expense is included in gross margin, but is excluded from adjusted earnings. The increase in gross margin was partially offset by higher SG and A costs, including higher costs in retail store and supply chain labor, Increased fuel prices and higher incentive compensation related to strong company performance. In addition, our reported GAAP results Also includes $3,500,000 of costs related to shareholder activism.
The labor market conditions continue to drive higher wages, Additional use of overtime and reliance on costly third party contractors within our supply chain. Despite these headwinds, We've made significant progress on our supply chain transformation initiative during the quarter. This includes achieving more than $15,000,000 in run rate cost savings, reaching the range of our original full year 2022 commitment ahead of schedule. Turning to our segments. Net sales in food distribution increased by about $37,000,000 or almost 3 percent to $1,370,000,000 in the 1st quarter, driven primarily by the favorable impact of inflation on pricing.
We continue to see an upward trend in inflation as the quarter progressed. In fact, inflation exceeded 10% by the end of the quarter, while certain categories, including proteins and dairy, continue to see the largest overall increases. Looking forward, our outlook assumes continued inflation for the remainder of 2022 with the impact on results tapering in the second half of the year. Reported operating earnings for food distribution in the Q1 totaled $26,700,000 compared to $21,100,000 in the prior year quarter. The increase in reported operating earnings for the segment was driven by higher gross margins, partially offset by an increase in incentive compensation and higher supply chain wages.
Adjusted operating earnings totaled $34,600,000 in the quarter versus the prior year's Q1 adjusted operating earnings of $22,300,000 Military net sales of $612,000,000 in the Q1 increased by 4.7% compared to prior year sales of $584,000,000 The increase was driven by inflationary pricing, partially offset by reduced case volumes. Notably, though military case volumes declined in the Q1, the rate of decline slowed compared to the trend experienced over the previous year. The Q1 reported operating earnings in the military business of $1,400,000 compared to a loss of $5,100,000 in 20 21's Q1 reflects improvements in the gross margin rate. These benefits were partially offset by increased incentive compensation as well as increased supply chain labor expenses. The segment's adjusted operating earnings of 4 point $7,000,000 for the quarter is up $9,300,000 from 20 21's Q1 loss of $4,600,000 Retail net sales came in at $781,000,000 for the quarter compared to $739,000,000 in the Q1 of 2021, an increase of 5.7%.
Our comparable store sales momentum remained strong at 7.2% for the Q1. 1st quarter reported operating earnings in the Retail segment were $300,000 compared to $14,200,000 in the prior year quarter. The decrease was driven largely by market competitive pricing, higher utility and supply costs, investments in wages made throughout the course of 2021 And increased expenses. Retail adjusted operating earnings were $4,000,000 for the quarter compared to $14,800,000 in 20 21's Q1. Each of the segments adjusted operating results exclude the impact of LIFO expense in both years and the costs related to shareholder activism in the current year.
Overall, we achieved a 1st quarter record adjusted EBITDA $76,600,000 compared to $64,800,000 last year. The company's ratio of net long term debt to adjusted EBITDA increased slightly to 1.9 times compared to 1.8 times at prior year end. The increase was due to strategic inventory purchases In the current quarter, in anticipation of further product cost inflation and to maximize service to our customers. For the quarter, we generated $10,000,000 of cash from operating activities compared to using $31,800,000 of cash in operating activities in the prior year quarter. The increase in cash from operating activities compared to the prior year is due primarily to these changes in inventory.
During the quarter, the company declared $7,700,000 in cash dividends equal to $0.21 per common share. The company did not repurchase shares during the quarter. We currently have approximately $80,000,000 remaining on our current share repurchase authorization and are committed to returning value to our shareholders through share repurchases as well as continued regular dividends. As announced on May 12, we raised our fiscal 2022 guidance. The adjusted EBITDA range was increased by $10,000,000 and is now expected to range from $224,000,000 to $239,000,000 Adjusted EPS is now expected to range our operating segments.
Improved gross margins in the Food Distribution and Military segments and ahead of planned supply chain transformation results, Partially tempered by economic headwinds gives us confidence in the improved outlook. These headwinds include the impact of limited labor availability rising wages as well as expectations of future interest rate increases. We also raised our fiscal 2022 guidance as it relates to consolidated net sales with an updated range of $9,000,000,000 to $9,300,000,000 Our outlook now reflects improvements in all three reporting segments. With the continuation of positive results in the military business, We now expect military full year sales will be negative 4% to flat as compared to the prior year. We also expect 1% to 3%.
We are delivering on our turnaround goals and are executing on our winning recipe, while being focused on managing through volatile conditions to create sustainable shareholder value. And now, I'd like to turn the call back over to Tony.
Speaker 2
Thank you, Jason. We are very pleased with the continued momentum of our performance, which is a direct reflection on the actions we've taken across our business. We believe our strategy provides a clear path for long term growth and increased shareholder value. Now, Kayla will make a brief statement before we open the line up for Q and A.
Speaker 1
Thank you, Toni. As a reminder, the purpose of today's call is to discuss our Q1 results and the progress we're making through the execution of our strategy. Please keep our conversations focused on these topics. As it relates to matters involving our annual meeting, we remain in dialogue with our shareholders and we'll continue to ensure our actions are in the best interest of all shareholders. I encourage you to visit our spartanashtransformation.com website for more information and updates.
Additionally, we have filed a definitive proxy statement, a white proxy card and other relevant documents with the SEC connection with the solicitation of proxies for the annual meeting. Shareholders are strongly encouraged to read our definitive proxy statement and all other documents filed with the SEC carefully and in their entirety because they will contain important information. Shareholders may obtain a copy of any documents filed by the company with the SEC at no charge at the SEC's website or on our spartanashtransformation.com website. Now I'd like to turn the call back over to the operator and open it up for your questions.
Speaker 0
We will now begin the question and answer session. Please pick up your handset before pressing the And you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Chuck Cerankosky with Northcoast Research. Please go ahead.
Speaker 4
Good morning, everyone. Great quarter. Could you talk about the retail sales a little bit With gas, I'm not sure you excluded gas from the comps, but could you give some commentary on what the numbers looked like with and without gas and How profitable gas was in the quarter and how gallons trended?
Speaker 3
Yes. Good morning, Chuck. This is Jason Monaco. Thanks for joining this morning. On fuel itself, we saw fuel dollars naturally raised significantly with the higher price points.
Gallons were up marginally in the quarter and profit margins themselves on a per gallon basis were about flat to last year. And to your first question is, is it in comps? It's excluded from our comp sales of 7.2% And the continued momentum on that front.
Speaker 4
Okay. That's great. Now is that strong comps, does that include Anything you can tell that's left over from the pandemic? Or is it mostly just inflation? Because those are pretty strong numbers.
Speaker 2
Yes. They're great numbers. Hey, Chuck, this is Tony. The pandemic has waned, And what we look at now is that there are some habits from the pandemic that we think are going to be sticky for the longer For the long haul, but I don't think it's temporary anymore at this point. So we have With the inflation rising, we think we had about almost about 10% inflation during the quarter overall.
Naturally, with that with the naturally Followed with that, there's a little bit of slight unit decline, but the team has done a great job overall of kind of managing the price for the It's difficult, as you know, in the retail space to find a way to make sure that you get pricing that the consumers can manage in their budgets. And We've done, I think, a really good job of managing our key value items to that. And as I mentioned a moment ago, our own brands have done really, really well. We think with our own brand performance, we're Seeing great growth there. They're good quality products.
They're historically and currently at slightly lower price points than National Brands And the availability has been good. So I think the fact we have great partnerships and solid availability in the owned brands has also been a component of driving our comps.
Speaker 4
Are you able to comment please on what you're seeing in terms of changes in product mix as a result of the acceleration in inflation and how fuel costs might be affecting in store purchasing habits.
Speaker 3
Sure, Ben. And Chuck, this is Jason again. So a couple of things I highlight. And if you step back and Look at our business performance, as I noted before, fuel prices are up significantly and kind of the first order impact we're seeing is, as Tony mentioned, of our non private label portfolio. So we're seeing consumer shifts on that front.
Secondarily, just as a reminder, our store footprint and The products and the offerings that we have in our retail business really cater to these sorts of needs. So for example, We're winning with those consumers that are loyal to our stores, but we're also winning on what we characterize as kind of fill in and smaller shops as well. So as consumers have perhaps less money in their pocket and they need to buy a smaller basket, the convenience that we offer with Our supermarket format is really winning and we're seeing strong growth and performance on that front.
Speaker 4
And then finally, with this Coastal Pacific facility in Stockton, California, you say it's been fully phased in. Is there An option for Spartan to purchase that, are you leasing it in any way? What are sort of the mechanics of how it fits in with your logistics network?
Speaker 3
Yes, great question. So I characterize it as a partnership really from start to finish. And we've had a long partnership with Coastal Pacific the military side, the way that this arrangement works is that we are leveraging Coastal's operations. They're operating the site. We have a presence there to ensure we have quality and service to our consumers, but or to our customers out of that site, but it's on a kind of on a fee basis, if you will.
So if you think about This program, what it's allowed us to do is to take about 10% of the miles out of our network by being located closer to our customers. It's allowed us to have fresher deliveries to our customers on the West Coast. And last but not least is that it's allowed us to take Over a 1,000,000 gallons of diesel fuel out of our consumption and 10,000 tons of carbon out of our carbon footprint. So we're proud of the arrangement And the creative way that our teams have found an access to the West Coast that's really been a win win for the environment for our customers and ourselves. Thank you.
Speaker 0
The next question comes from Greg Badishkanian with Wolfe Research. Please go ahead.
Speaker 5
Good morning. This is Spencer Hennis on for Greg. Maybe if we can just take a step back for a minute, could you talk about how you're thinking about the synergies between your 3 segments? And then when we look at the military segment's performance in the quarter, What is driving the inflection of profitability there? And is there an opportunity to spin that business now that you seen sort of the improvement in profitability there?
Thanks.
Speaker 2
Great. Thank you, Spencer. This is Tony. So the our business, if you can go back to the winning recipe That we shared our corporate identity and how we think about our business and the difference we make for our customers and our shoppers. We have a unique way We have a segment of our business that is retail at 29%.
And because those stores are full scale business, They are larger on average than our customer stores, the 2,100 independent grocers that we serve. We have an opportunity to really understand What makes a difference is those folks, we can model that and show them that and allow us to provide services and generate those services, everything from human resource services to IT services to Category management, how to think about pricing in different geographies, all that works together very nicely between the retail part of our business and the larger part of business, which is grocery So we continue to leverage that. We're getting great feedback as we're taking the next step on that and mining the insights that can make a difference and drive solutions for our customers. And so we're delighted where we are right now. We're getting really good feedback from our customers about how that is all working together.
We're also delighted about the performance of our military. We had a great quarter. We've had a great a nice run. You may remember back When I first got started here, I did job 1 with the military to figure out how we can make it better and to be a good operator, provide these ingredients to our network and work directly with DECA to improve the network efficiency there. We have made improvements in our dray arrangements with our Manufacturing suppliers, all that is coming together and we have some great growth there on the profitability as you've seen.
We are still focused exclusively on making that a great business. And that's the focus of the team, that's the focus of the overall organization. Certainly, I think your question was, are we in a better position to sell it now? It's certainly better to sell something that's making more profit That's not, but that's not our focus at all. Our focus right now is actually continuing the path Improving the operations, improving the service and that we think that's going to be a fine business and that we don't see any reason why it can't be the same profitability as the balance of our portfolio.
Speaker 5
Got it. That's really helpful. And then maybe if we could pivot to the cost savings target, you raised that to $25,000,000 to $35,000,000 for this year from 15,000,000 What's driving that change in outlook? And then how much of those savings do you expect to contribute to the long term $300,000,000 EBITDA target that you guys have put out there?
Speaker 2
Yes. So, I'll start and let me let Deesean pick up a little bit here too. So the, we've had really great success, very proud of the work we've done in the transformation of Supply chain and the focus on operational excellence overall by the supply chain team. We have our throughput progress has been terrific. We're ahead of schedule there.
We're ahead of schedule on some of the network changes that we've made and all that has delivered savings and productivity as ahead of schedule. So we felt bullish on taking our number up For the year, that number increase will carry over. The $25,000,000 to $35,000,000 that we've quoted for this year We'll continue and we'll continue to grow. Our team has the next wave of ideas and how that supply chain gets transformed. It will be a significant player within that $300,000,000 I would say probably roughly in the range of a quarter of the overall profitability on the way to $300,000,000 will come from supply chain improvements.
The ability on the way to 300 will come from supply chain improvements.
Speaker 3
Thanks, Tony. And kind of building that out, maybe putting a little more detail on The performance thus far and where we're headed, just as a reminder, and you may pick this up, Spencer, in the notes. There's a 7% increase in throughput and that throughput reflects pretty closely to our cost performance in the warehouse and in warehouse operations. But beyond that, as you kind of step back and think about the supply chain transformation as we've talked about before, You've got the warehouse operations. We also have network optimization where we've executed the both the addition and the subtraction of sites over the last 12 months to 15 months to ensure we've got the right locations and the right inventory at the right place.
That together with Transportation and route improvements and with improvements in the way that we manage our inventory Have all delivered and frankly delivered ahead of schedule. So what we've done is taken that $15,000,000 to $30,000,000 run rate And we brought the bottom end of that forward by 3 quarters and raised the total guidance For the exit of this year to that $25,000,000 to $35,000,000 range, we feel good about it and that's also playing a role in the raised guidance for the overall company performance, the plus 10 EBITDA at both the bottom and top end of the range.
Speaker 5
Got it. Really helpful and nice job this quarter. Thanks.
Speaker 0
The next question comes from Scott Mushkin with R5. Please go ahead.
Speaker 6
Hey guys, thanks for taking my questions. Just a lot to unpack here. So one of the things I wanted you guys said, this is more macro, I'm going to start there, That you expect and we've heard this from other companies and I just I guess I would push back a little bit that inflation is going to somehow decrease as we move through the year. I don't believe, at least our research should say the Ukraine war is actually not even reflected in prices yet. And of course, Diesel continues to move forward, so I was just or up.
So I was just wondering what gives you that confidence and how much of your guidance is Dependent on this idea that things will get better.
Speaker 2
Yes. So we're working backwards. Our guidance is not tied to things Getting better on the inflation front. We said that we expected the inflation to wane. We're looking at things Like what we saw in the last month where inflation may go from 11% to 10%.
We're not talking about a quick retreat there. We agree that inflation in the United for a long time. I think you're right. I think the disturbances in the Ukraine have not fully hit yet. There's a whole another wave of The missed agricultural cycle is going to be very significant from the war in the Ukraine.
There are a number of other things on the horizon in our own country around labor contracts And shipping ports and railroad and all kinds of other things that we may have we may be looking at more supply chain disruptions And we may be looking at inflation rates that are more extended. Now, so that's when we talk about the decline, we're talking about don't think it's going to be double digit the balance of the year. And we may see some contraction on that rate as we hit some The overlaps from the end of last year. We tend to agree. We've been we were early on this dialogue that inflation is not at all transitory.
It's going to be We're in a cycle now that the underlying causes of the inflation are not quick fixes and they're going to be around for a couple
Speaker 6
of years we think at least. That's great color, really great color. So then the other question I had, and you guys went into this in your military business and the distribution business almost looks like it turned on a dime from a profitability perspective. What would you say to that, Someone pushing back that way.
Speaker 2
They're pushing back and it turned on a dime?
Speaker 6
Yes. That it turned so fast that it's got to be more temporary than permanent.
Speaker 2
I see. So you're not arguing that we should be slower. Look, I think there are some things as a I've got a team here of seasoned operators changes we're making right now in our warehouse and our network are permanent changes. We're changing the delivery schedules to our suppliers to re look our agreements with them and those are changes that are baked into contracts and they'll be around. So I think we acted quickly because we had to act quickly.
We had a business that was not doing so well when I first got here and we had to make very quick changes and we found some really good productive ones to make.
Speaker 6
Okay. My final one before I yield and this is real quick. Fill rates from manufacturers to you guys and then your fill rates To your customers.
Speaker 2
Great, great questions. So fill rates for manufacturers as I've mentioned in the last couple of calls have remained Pointing. The manufacturers are suffering from the same types of problems that a lot of businesses are on staffing and other and disruptions that come from the staffing issues. Our fill rates have been Sort of it's kind of static. They're improving modestly from our suppliers.
We're making better headway candidly internally terms of the gap between what we've received and what gets shipped out. So we are now right now, we are performing internally Better than we were pre pandemic in terms of here's the portfolio of goods we got versus we ordered and here's we're going to fulfill on the way out of our business. That gap Historically, it's been about 8 or 9 points. It's around 6 to 7 points right now for us. So we feel great about our performance And still in the circumstance where we're still receiving really tough numbers from our manufacturing community.
All right, guys.
Speaker 3
Thank you. And obviously a lot of
Speaker 6
heavy lifting done during the quarter. So congratulations to
Speaker 2
the team on that. Good work, guys. Thanks so much.
Speaker 0
The next question comes from Peter Saleh with BTIG. Please go ahead.
Speaker 7
Great. Thanks and congrats on the quarter. Tony, I think you mentioned that inflation was up about 10% in the quarter. I was hoping you could give us a little bit more color on the retail comps, the really strong 7.2% number in the quarter. Can you break down a little bit of how much of that was, actual pricing or basket increases versus, maybe transaction growth?
Just trying to understand how the consumer Trended in the quarter?
Speaker 2
Yes. Great question. So what we're seeing right now we're seeing an increase in trips to our stores. I think there's a little bit of an, and this is my opinion, there's a little bit of an audit going on here where you have the scenario where people are getting out more, as As it getting more comfortable after the pandemic, at a time when you might expect them to be taking fewer trips while gas prices are increasing. So we have these kind of competing effects, but we saw a pretty significant uptick Our trips, the basket size is smaller.
The net of that was modestly negative, roughly close to 0. But we're seeing more trips, slight decline in units and of course, then we have higher rings overall because of the inflation. So So that's a little bit of the mix of what's going on. So we're encouraged by the fact that people are coming in. We're also seeing the mix of our customers and more shoppers.
We're adopting more shoppers The loyalty category and more of them, and we're seeing more of them come in routinely for their fill in trips. So we're seeing some really good things around the visits to the stores. We're seeing on the overall basket, we think it's sort of what you should expect slightly lower units and of course higher prices.
Speaker 3
Absolutely, Pete. This is Jason. I'd just add modestly to that discussion. Just if you kind of back up and look at the same store comps of 7.2%, As Tony said, it's largely inflation driven, but there's some moving parts beneath the surfaces as you pull back the cover with trips and basket size. The other thing I'd point you to is that this retail business is performing what I would characterize as kind of at or better than the median For the general retail grocery space and so there's a lot of moving parts, but we think we cop well relative to
Speaker 7
Thank you for that. Just maybe one more on the retail segment. Can you just talk about the what you're seeing on wages and the impact there? It sounded like you're starting to see some more Applicant flow, but yet maybe wages took another leg up. Just trying to understand your comments on that this morning.
Speaker 2
Yes, great. So we are seeing better applicant flow about almost 2.5% times sort of the normal applicant flow that we saw in sort of right around Just pre pandemic and during the pandemic. We believe that's a combination of effects. We've taken our entry level wages up, as you know. We take them up just almost 11% in 2021.
We will probably take them up close to that same number here in 2022. So there's a so it's a big So big changes with entry level wages. The combination of wage improvements, benefit improvements and what we've done with our overall the overall culture of the organization Around training, around communications, all those things woven together we think have led to not just better applicant flow, but better stickability once people get here as well. They find a home that they can stay at. So we're not out of the woods yet.
We think that the overall there's a real tough shortage of good quality talent for all businesses. And so we have to compete. We know that we have to compete on all those fronts. The opening offer has to be a solid entry level pay and that's why we made
Speaker 7
Great. And then just lastly, nice improvement in the military in terms of the margins there. Should we expect this going forward? Is there any seasonality that we should be aware of or anything that We now wouldn't preclude you from kind of hitting these targets on a go forward basis.
Speaker 3
Yes, great question. We see ourselves as being passed In the 1% EBITDA margin range going forward. So as Tony said, when he first got here, there was a challenge in that business. We've applied Operational performance improvements, we've applied enhanced customer engagement and practices and we've reached the 1% goal and I expect that going forward we're going to be
Speaker 0
The next question comes from Andrew Wolf with C. L. King. Please go ahead.
Speaker 8
Thanks. Good morning. So on the distribution side, you just sort of went through on retail Kind of a real sales growth exercise. So if your sales are up almost 3%, 2.8% versus 10% inflation, Simple math says cases not mix adjusted, but cases would be down around 7. If there's something else going on like mix or something, maybe you can help us understand that.
But also, why is that? Is there some big customer that Left the business we don't know about or is it just the typical independent customers is not ordering as much at this juncture?
Speaker 3
Hey, good morning. This is Jason Monaco. Good to hear from you, Andy. I think the one thing I'd call out here and we've mentioned this On some of the prior calls is we're still in the process of lapping the in sourcing of some of the business that we used to do with DG. And we've expected that to carry over through into the Q3.
So we're on the kind of the phase down. It's all out of the network, but you're seeing the Positive or the negative comps in this case from prior year.
Speaker 8
Okay. So that's the DG Fresh Steph, can you say how much that is so we can ourselves get a sense of how much is not going to go away, how much better Your cases will get, perhaps in
Speaker 3
What I'd suggest is that our I would characterize the rest of our business looks a lot like the retail business in our wholesale kind of core independent space.
Speaker 8
Okay. That's helpful. And back to retail, you did mention competitive pricing. I Assume for you guys that was a response to something in the market. So was that response be your customers just naturally seeing inflation and Going to discounters or are there other supermarket chains already starting to do something with their pricing?
Like what is the dynamic That caused you guys to get more sharp on your pricing.
Speaker 3
Sure. What I yes, I'd characterize it kind of if you step back and think about the context that we're operating in, We're in a had been in an accelerating inflationary environment. So when you think about competitive pricing, it doesn't necessarily mean that we are taking price is down, it may mean the pace at which prices are going up to match the inflationary pressures on the back end. And as we think about Understanding what our consumers need and managing through those price changes, what we want to do is ensure that we were sensitive to those consumer needs. We're pricing Properly, we're focused on the key value items in the stores and we feel good about the outcome in that we drove the 7 plus percent comps, the Flattish volumes in a rising price environment and maintained your group share in many instances.
Speaker 8
Okay. And lastly, Jason, just when you were answering 1 or 2 times on the cost savings and supply chain. I think you referenced productivity or throughput. Is that the main driver? I mean, product throughput being up 7% seems like quite an improvement.
At this juncture, is that the main driver of what's in your what you're realizing in your results?
Speaker 3
Yes. I characterize it as I would characterize It's about half of the benefit, the remainder coming from transportation efficiencies, route efficiencies, network optimization, Inventory management practices and the like, but it's a significant portion and that throughput flows right to the bottom line.
Speaker 8
Great. That's it for me. Thank you.
Speaker 0
The next question comes from Christina Katay with Deutsche Bank. Please go ahead.
Speaker 9
Great. Good morning and congrats on a very nice quarter. I wanted to go back inflation, I mean, you did mention sort of 10% or higher exiting the quarter, from a food inflation perspective. Can you just talk about what you are seeing specifically in retail stores regarding consumer behavior? I know you said that private label is growing At double the rate, which I would imagine means that there is some trade down happening.
But are you seeing any resistance to these higher prices? Do you think we have reached And how best to think if inflation remains this high for a prolonged period of time?
Speaker 2
Yes, it's a great question. So we are so 1st and foremost, we remain very vigilant in the study of this because there's not a playbook That exists for the last 40 years on how consumers will behave. We haven't had the advent of prolonged double digit food inflation in This country since the 1970s and the world is quite different back then. So we're learning along the way as well. We're seeing some things that look like We might expect that we're seeing, I mentioned earlier the a little bit of flight to the private label And looking for ways to get a great experience at a lower price to those vehicles.
So we obviously have mentioned that and you mentioned that just a second ago. We're also seeing really strong growth in Fresh and Fresh is a higher is a typically higher cost, higher margin part of the store. I think that what we'll see is that people will look for ways to save money on key value items that are sort of everyday items for them And look for ways to actually maintain some element of indulgence and find a way to again explore the continued joys of living Through food at home. And so we think there'll be a little bit of a bifurcation and we're certainly seeing that. As an example, we'd say, inflationary market, Flowers might not be seen as a really important staple, but our floral business is up and we're doing quite well with floral.
We're doing well with our deli business is doing well. So it's a prepared meals that, I get people still are seeking convenience An easy way to get a solution, and our deli business is doing quite well in that regard. So and I should note that it's also this is either complicated analysis. Deli business might be doing well because people are not going to the restaurant. We don't know the precise reason why people are making those choices, but we're seeing Yes, we're seeing really strong growth in fresh, strong growth on a lot of those higher cost, higher margin items.
At the same time, people being very aggressive instead of store trying to find their way to lower priced items. Yes, Christina, this is Dave White.
Speaker 3
I would say just adding to that demand for food at home trends is likely to continue As this food inflation plagues consumers and we're here to bring solutions to those consumers with whether it's prepared meals or a private label offering to ease the budget. But we believe price sensitive behaviors are going to continue to strengthen as we continue to work through this cycle, which as Tony said is, I won't characterize as unprecedented, but unprecedented in the business lives of probably everybody on the phone today.
Speaker 9
Yes, that makes sense. Thank you for that. And I guess just one question on the supply chain, which obviously remains very challenging. I think you mentioned the ongoing tightness in the labor market, although it sounds like it is improving. Can you just talk a bit more about some of the improvements that you are seeing, Especially from a logistics operations perspective to really overcome some of these challenges as we think about supply chains essentially remaining Dislocated for longer than we initially thought.
Speaker 2
Yes. So we have certainly dialed up Our focus on improving the overall logistics part of our business or the transportation part of our business, we always mentioned that piece about Coastal Pacific, that was a big, Big hit that we've talked about already today. But additionally that we're looking at ways that we can actually reposition and get closer To our shoppers, to our consumers, our customers, through our network DC, and there's a lot of great tools And new science that allows you to be more efficient in that regard. So we're just wrapping up a transportation management system that's going that went live here just Recently, it's giving us some great insight about how we can maintain the overall effectiveness in the network and be more efficient. So that will continue to be a big focus For us, it's cost in an area that's escalating faster because of the fuel pricing and diesel pricing.
So we've seen as Jason mentioned earlier, we've We've seen some of that here in this last quarter, some of those improvements in productivity came from that area. It's a significant part of our future growth in that Pathway to 2025 as well. So it will continue to be a focus for us.
Speaker 9
Great. Thank you so much and congrats again on a good quarter.
Speaker 6
Thank you.
Speaker 0
This concludes our question and answer session. I would like to turn the conference back over to Tony Sarsim for any closing remarks.
Speaker 2
All right. Well, I'd like to start by just thanking everyone for their participation in today's call. We certainly look forward to speaking with you again and we report our Q2 2022 results. So with that, I wish everybody a great day.