It seems the analyst community didn't fully catch up with its guidance because the Q1 EPS consensus still stood at $0.31 heading into the print.
In its earnings press release, SPTN also reaffirmed its FY19 EPS guidance of $1.20-$1.50, which was lowered from $1.70-$1.80 on May 9. The company also continues to expect mid-single digit revenue growth this year.
Click here to access SPTN's earnings press release.
SPTN is battling several challenges, some of which are self-inflicted, some of which are out of its control, but all of which are pressuring its bottom line.
First, to rewind, when the company acquired The Fresh Kitchen in 2016, it immediately ran into some problems.
The 118,000 square foot food processing facility was expected to be fully operational in 1Q17. However, in 2Q17, the company stated that the integration was progressing more slowly than had been expected and that the acquisition wasn't going to meet its original financial expectations for FY17.
Fast forward to this quarter, and SPTN is again having issues with its Fresh Kitchen segment.
This time, the company is having difficulty optimizing its supply chain; rising transportation costs, labor shortages, and price volatility were partly to blame for that sharply reduced earnings guidance.
The fact that The Fresh Kitchen has been a source of difficulty since it was acquired also creates uncertainties regarding management’s execution. Consequently, investors' confidence in the company and the stock may be shaken as it has now missed earnings expectations in three of its past four quarters.
SPTN also felt the effects from a voluntary food recall at its fresh-cut food operations. This recall, which was announced in April, included the suspension of production of fresh-cut fruit items and the recall of certain cut melon products.
The good news is that SPTN had by its issuance of preliminary results in mid-May resumed production of non-melon products and was hopeful that it would resume watermelon production in the subsequent week, with cantaloupe and honeydew to follow.
Additionally, the company is taking actions to improve its logistics by increasing the categories of drivers it can choose from and by redirecting routes associated with its highest growth distribution centers.
However, during its earnings call, the company admitted that some of the improvements are developing more slowly than anticipated due to the competitive environment for both warehousing and transportation workers.
Although SPTN had some issues on the cost efficiency side, it did achieve a meaningful pick-up in revenue growth to 6.6% from the 1-2% growth it had been experiencing over the past several quarters.
This improvement was partly driven by its November 2018 acquisition of Martin's Super Markets, an independent supermarket chain based in the Midwest. To put the impact of that acquisition into context, revenue growth in SPTN’s retail division (~28% of total) would have only been 3% excluding Martin’s, as opposed to the 24% growth it posted.
Looking ahead, the company has put together a five-point plan that it hopes will turn its operations around. This plan includes a goal of achieving mid-single digit revenue growth, realizing at least $15 mln in annual run-rate savings, strengthening its supply chain and systems, reducing debt, and improving its adjusted operating earnings growth.
The company made progress on most of these objectives this quarter, including paying down $20 mln in debt and identifying $20 mln in savings opportunities that it expects to accomplish over the next 24 months.
The main drag continues to be headwinds facing its supply chain.
Key Takeaways: On May 9, the company warned that its Q1 earnings would fall short of expectations. Unfortunately, that guidance didn't appear to be fully incorporated into analysts' estimates, as the headline number shows that SPTN badly missed expectations.
In reality, SPTN's earnings were in-line with its downside guidance, which should have already been baked into the stock.
That issue aside, SPTN is getting hit on multiple sides as rising transportation, labor, and commodity costs are applying pressure on its supply chain. Furthermore, a product recall and the consequent production shut-down compounded issues for SPTN this quarter.
Most of these problems stem from the Fresh Kitchen facility. The integration of that huge facility has been anything but smooth since it was purchased in 2016, which doesn't bode well from an investor confidence standpoint.
Finally, SPTN has outlined a plan to turn its operations around. While it has hit on some of its objectives, the highest hurdle continues to be improving supply chain efficiency. Unfortunately, based on the company’s commentary, the improvement there is more gradual than the company -- and its investors -- would like it to be.