Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
About SpartanNash
SpartanNash, headquartered in Grand Rapids, Michigan, is a food solutions company that delivers the ingredients for a better life. As a distributor, wholesaler and retailer with a global supply chain network, SpartanNash customers span a diverse group of national accounts, independent and chain retailers, e-commerce retailers, U.S. military commissaries and exchanges, and its corporate-owned retail stores, pharmacies and fuel centers. SpartanNash distributes grocery and household goods, including fresh produce and its Our Family private label brand, to locations in all 50 states. The Company's two reportable segments, Wholesale and Retail, are two distinct businesses, each with a different customer base, management structure, and basis for determining budgets, forecasts, and compensation.
Overview of 2024
The Company has continued to execute on Our Winning Recipe , which continued to support strong financial results in fiscal 2024. The plan continues to generate sustainable improvements in profitability as the Company further optimizes its supply chain network, improves value for its customers through stronger vendor relationships, and captures additional benefits, while providing exceptional customer service and additional offerings. The Company’s 2024 highlights include:
Wholesale
Wholesale segment net sales decreased $209.9 million compared to the prior year due primarily to lower case volumes in both the national accounts and independent retailers customer channels, partially offset by growth in the military customer channel.
Wholesale segment operating earnings of $97.4 million increased $9.7 million compared to $87.7 million in the prior year. Adjusted EBITDA of $187.2 million increased $9.3 million compared to $177.9 million in the prior year.
Retail
Retail segment net sales increased $30.0 million compared to the prior year due primarily to incremental sales from stores acquired in fiscal 2024. Retail comparable store sales decreased 1.7% compared to the prior year due primarily to lower consumer demand trends, partially offset by increases in pharmacy sales.
Retail segment operating loss of $43.5 million decreased $62.5 million compared to operating earnings of $19.0 million in the prior year. Adjusted EBITDA of $71.3 million decreased $8.2 million compared to $79.5 million in the prior year.
Other Highlights
The supply chain transformation, merchandising transformation, marketing innovation, and go-to-market plan drove approximately $50 million in incremental benefits in 2024. Since launching the transformation work and beginning to realize benefits in 2022, the Company has improved its throughput (1) rate, passed along significant benefits to its customers through the Enhanced Category Planning program, and captured almost $130 million in total gross benefits. These benefits helped to offset broader industry headwinds which impacted volume and profitability throughout the year.
During 2024, the Company returned $45.0 million to shareholders through $29.9 million in cash dividends, or $0.87 per common share, and $15.1 million in share repurchases. In addition, the Company generated net cash from operating activities of $205.9 million in 2024.
The Company reported earnings from continuing operations for the fiscal year of $0.3 million, compared to $52.2 million in the prior year. The Company reported adjusted EBITDA for the fiscal year of $258.5 million, compared to $257.4 million in the prior year.
As a means of evaluating warehouse efficiency, the Company calculates the throughput rate as cases shipped divided by warehouse labor hours worked, excluding salaried hours
Results of Operations
The current year results of operations are presented in comparison to the prior year within the section below. For a discussion of the results of fiscal 2023 operations in comparison to fiscal 2022, refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations within the prior year Annual Report on Form 10-K.
The Company believes that certain known or anticipated trends may cause future results to vary from historical results. The Company believes certain growth and cost-saving initiatives may favorably impact future results. The Company anticipates that additional operating and capital investments will be necessary to support these and other programs. Offsetting the Company’s expectations of favorable future results are macroeconomic headwinds including changes in consumer demand and input costs such as utilities, insurance and occupancy costs.
The following table sets forth items from the Company’s consolidated statements of earnings as a percentage of net sales and the percentage change from the preceding year:
Percentage of Net Sales
Percentage
Change
Net sales
Gross profit
Selling, general and administrative
Acquisition and integration, net
Goodwill impairment
Restructuring and asset impairment, net
Operating earnings
Other expenses, net
Earnings before income taxes
Income tax expense
Net earnings
Note: Certain totals do not sum due to rounding.
** Not meaningful
Net Sales – The following table presents net sales by segment and variances in net sales between fiscal 2024 and fiscal 2023:
Percentage of
Percentage of
Total
Total
Percentage
(In thousands)
Net Sales
Net Sales
Variance
Change
Wholesale
Retail
Net sales
Net sales decreased $179.9 million, or 1.8%, to $9.55 billion in 2024 compared to $9.73 billion in 2023. The decrease was attributable to decreased volume in the Wholesale segment, partially offset by higher sales volume in the Retail segment.
Wholesale net sales decreased $209.9 million, or 3.0%, to $6.71 billion in 2024 compared to $6.92 billion in the prior year. The decrease in net sales was due primarily to lower case volumes in both the national accounts and independent retailers customer channels, partially offset by higher sales in the military customer channel. Overall case volumes for the segment were down by 5.0% in the current year.
Retail net sales increased $30.0 million, or 1.1% to $2.84 billion in 2024 compared to $2.81 billion in the prior year, while comparable store sales decreased 1.7% in the current year. The comparable store sales decline was due primarily to lower consumer demand trends, which resulted in a 4.5% decline in unit volume. The decrease in comparable store sales in the current year included offsetting increases in pharmacy sales. Retail's comparable store sales decrease was more than offset by incremental sales from newly acquired stores in the current year.
The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), regardless of remodels, expansions, or relocated stores. Sales are compared to the same store’s operations from the prior year period for purposes of calculation of comparable store sales. Fuel is excluded from the comparable sales calculation due to volatility in price. Comparable store sales is a widely used metric among retailers, which is useful to management and investors to assess performance. The Company’s definition of comparable store sales may differ from similarly titled measures at other companies.
Gross Profit – Gross profit represents net sales less cost of sales, which is described in further detail within Note 1, in the notes to the consolidated financial statements. Gross profit increased $26.9 million, or 1.8%, to $1.51 billion in the current year compared to $1.49 billion in the prior year. As a percent of net sales, gross profit increased from 15.3% to 15.8%. The gross profit rate increase in the current year was driven by favorable segment sales mix, lower last-in-first-out ("LIFO") expense of $10.9 million, or 11 basis points, and benefits realized from the merchandising transformation initiative. These increases were partially offset by unfavorable changes in customer mix within the Wholesale segment.
Selling, General and Administrative Expenses – Selling, general and administrative (“SG&A”) expenses consist primarily of operating costs related to retail and supply chain operations, including salaries and wages, employee benefits, facility costs, shipping and handling, equipment rental, depreciation, and out-bound freight, in addition to corporate administrative expenses. SG&A expenses increased $15.1 million, or 1.1%, to $1.38 billion in the current year from $1.37 billion in the prior year. As a percent of net sales, SG&A expenses increased from 14.0% to 14.5% primarily due to increased Retail store labor and depreciation and amortization expense, partially offset by benefits realized from both the merchandising transformation and go-to-market strategy changes and lower incentive compensation.
Acquisition and Integration, net – Acquisition and integration, net was $3.1 million in the current year compared to $3.4 million in the prior year. Current year activity includes fees associated with due diligence activities, purchase agreement negotiations and strategic advice within both segments, as well as costs of integration activities related to three acquired businesses in the Retail segment. Costs in the current year were partially offset by a gain associated with a reduction in the expected contingent consideration payment. Prior year activity includes fees associated with due diligence activities, purchase agreement negotiation and strategic advice within the Retail segment, as well as costs of integration related to an acquired business in the Wholesale segment.
Goodwill Impairment – In the current year, $45.7 million of goodwill impairment charges were incurred within the Retail segment. The impairment was driven by an increasingly competitive grocery retail environment that steadily and negatively impacted cash flow trends within the Retail reporting unit. These competitive factors led to increased pressure on pricing and promotions that have had an adverse impact, and are anticipated to continue to have an adverse impact, on volume, gross profit rates and other costs within the Retail reporting unit.
Restructuring and Asset Impairment, net – In the current year, $28.4 million of net restructuring and asset impairment charges were incurred. The charges in the current year include $20.9 million of asset impairment charges related to impairments of indefinite-lived trade names and long-lived assets within both the Wholesale and Retail segments as a result of changes in the competitive environment. Restructuring charges include $5.4 million of provisions for closing charges associated with lease ancillary costs and $2.5 million of other costs associated with site closures, primarily related to the closure of a distribution center within the Wholesale segment, and $1.6 million of losses on sales of real and personal property of previously closed locations within both the Wholesale and Retail segments. These charges in the current year were partially offset by $2.2 million of gains within the Retail segment recognized from the early termination of lease agreements for previously closed locations. Prior year results included $9.2 million of net restructuring and asset impairment charges, which were largely composed of $8.0 million of asset impairment charges in the Wholesale segment related to initiatives associated with continued supply chain network optimization in response to customer demand changes. Additional asset impairment charges of $3.7 million in the prior year were related to two store closures in the Retail segment and impairment losses related to a distribution location that sustained storm damage in the Wholesale segment. These charges were partially offset by $2.6 million of gains on sales of assets in the prior year primarily related to the sale of a store within the Retail segment.
Operating Earnings (Loss) – The following table presents operating earnings (loss) by segment and variances in operating earnings (loss):
Change in
Percentage of
Percentage of
Percentage of
(In thousands)
Net Sales
Net Sales
Variance
Net Sales
Wholesale
Retail
Operating earnings
The Company reported operating earnings of $54.0 million in the current year compared to $106.7 million in the prior year. The decrease of $52.8 million, or 49.4%, was attributable to changes in net sales, gross profit and operating expenses discussed above.
Wholesale operating earnings increased $9.7 million, or 11.1%, to $97.4 million in the current year from $87.7 million in the prior year. The increase was due to an improvement in the gross profit rate and benefits realized from the merchandising transformation initiative, partially offset by lower unit volumes and higher restructuring charges.
Retail operating earnings decreased $62.5 million, or 328.6%, to an operating loss of $43.5 million in the current year compared to earnings of $19.0 million in the prior year. The decrease in operating earnings was due to goodwill impairment charges, higher restructuring and asset impairment charges, and increased store labor as a percent of net sales, partially offset by an improvement in the gross profit rate and lower incentive compensation.
Interest Expense – Interest expense increased $4.9 million, or 12.4%, to $44.8 million in the current year from $39.9 million in the prior year, driven by a higher average debt balance on the Company's credit facility. The weighted average interest rate for all borrowings, including loan fee amortization was 7.03% in both 2024 and 2023. During 2024, the total debt balance increased $156.3 million to $753.8 million, compared to $597.5 million at the end of 2023. The increase in the debt balance was due to incremental investments in business combinations and capital expenditures.
Income Taxes – The Company’s effective income tax rates were 97.3% and 25.5% for 2024 and 2023, respectively. The differences from the federal statutory rate in the current year were primarily due to non-deductible goodwill impairment, state taxes and non-deductible expenses, partially offset by benefits associated with federal tax credits and contingent consideration. In the prior year, the differences from the federal statutory rate were primarily due to state taxes and non-deductible expenses, partially offset by benefits associated with federal tax credits, discrete benefits due to changes in tax contingencies, and discrete benefits related to stock compensation.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company also provides information regarding adjusted operating earnings, adjusted earnings from continuing operations, as well as per diluted share ("adjusted EPS"), net long-term debt to total capital, and adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”). These are non-GAAP financial measures, as defined below, and are used by management to allocate resources, assess performance against its peers and evaluate overall performance. The Company believes these measures provide useful information for both management and its investors. The Company believes these non-GAAP measures are useful to investors because they provide additional understanding of the trends and special circumstances that affect its business. These measures provide useful supplemental information that helps investors to establish a basis for expected performance and the ability to evaluate actual results against that expectation. The measures, when considered in connection with GAAP results, can be used to assess the overall performance of the Company as well as assess the Company’s performance against its peers. These measures are also used as a basis for certain compensation programs sponsored by the Company. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its financial results in these adjusted formats.
Current year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude, among other items, LIFO expense, organizational realignment, severance associated with cost reduction initiatives, a non-routine settlement gain with an insurance company related to a legal matter from a previously closed operation, operating and non-operating costs associated with the postretirement plan amendment and settlement and a non-operating benefit associated with a pension refund from an annuity provider. Current year organizational realignment includes consulting and severance costs associated with the Company's change in its go-to-market strategy as part of its long-term plan, which relates to the reorganization of certain functions. Costs related to the postretirement plan amendment and settlement include operating and non-operating expenses associated with recognition of plan settlement losses and amortization of the prior service credit related to the amendment of the retiree medical plan, which are adjusted out of adjusted earnings from continuing operations. Postretirement plan amendment and settlement costs also include operating expenses related to payroll taxes which are adjusted out of all non-GAAP financial measures. Each of the adjusted items are considered “non-operational” or “non-core” in nature. The pension refund from an annuity provider is related to a terminated pension plan and is a non-operating benefit which is adjusted out of adjusted earnings from continuing operations. Each of the adjusted items are considered “non-operational” or “non-core” in nature.
Prior year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude, among other items, LIFO expense, organizational realignment, severance associated with cost reduction initiatives, a non-routine settlement related to a legal matter resulting from a previously closed operation and operating and non-operating costs associated with the postretirement plan amendment and settlement.
In 2022, adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA also exclude costs related to shareholder activism, and non-operating costs associated with the write off of certain unamortized deferred financing costs related to the debt modification. Costs related to shareholder activism include consulting, legal and other expenses incurred in relation to shareholder activism activities. Organizational realignment in 2022 includes benefits for associates terminated as part of leadership transition plans, which do not meet the definition of a reduction-in-force. Each of the adjusted items are considered “non-operational” or “non-core” in nature.
Adjusted Operating Earnings
Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.
The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because adjusted operating earnings and adjusted operating earnings by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in an adjusted operating earnings format.
Adjusted operating earnings is not a measure of performance under GAAP and should not be considered as a substitute for operating earnings, and other income statement data. The Company’s definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.
Following is a reconciliation of operating earnings (loss) to adjusted operating earnings for 2024, 2023 and 2022.
(In thousands)
Operating earnings
Adjustments:
LIFO expense
Acquisition and integration, net
Restructuring and goodwill / asset impairment, net
Organizational realignment, net
Severance associated with cost reduction initiatives
Legal settlement
Postretirement plan amendment and settlement
Costs related to shareholder activism
Adjusted operating earnings
Wholesale:
Operating earnings
Adjustments:
LIFO expense
Acquisition and integration, net
Restructuring and asset impairment, net
Organizational realignment, net
Severance associated with cost reduction initiatives
Legal settlement
Postretirement plan amendment and settlement
Costs related to shareholder activism
Adjusted operating earnings
Retail:
Operating (loss) earnings
Adjustments:
LIFO expense
Acquisition and integration, net
Restructuring and goodwill / asset impairment, net
Organizational realignment, net
Severance associated with cost reduction initiatives
Postretirement plan amendment and settlement
Costs related to shareholder activism
Adjusted operating earnings
Adjusted Earnings from Continuing Operations
Adjusted earnings from continuing operations, as well as per diluted share ("adjusted EPS"), is a non-GAAP operating financial measure that the Company defines as net earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.
The Company believes that adjusted earnings from continuing operations provide a meaningful representation of its operating performance for the Company. The Company considers adjusted earnings from continuing operations as an additional way to measure operating performance on an ongoing basis. Adjusted earnings from continuing operations is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and excludes the contributions of activities classified as discontinued operations. Because adjusted earnings from continuing operations is a performance measure that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted earnings from continuing operations format.
Adjusted earnings from continuing operations is not a measure of performance under GAAP and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted earnings from continuing operations may not be identical to similarly titled measures reported by other companies.
Following is a reconciliation of net earnings to adjusted earnings from continuing operations for 2024, 2023 and 2022.
per diluted
per diluted
per diluted
(In thousands, except per share data)
Earnings
share
Earnings
share
Earnings
share
Net earnings
Adjustments:
LIFO expense
Acquisition and integration, net
Restructuring and goodwill / asset impairment, net
Organizational realignment, net
Severance associated with cost reduction initiatives
Pension refund from annuity provider
Legal settlement
Postretirement plan amendment and settlement
Costs related to shareholder activism
Write off of deferred financing costs
Total adjustments
Income tax effect on adjustments (a)
Total adjustments, net of taxes
Adjusted earnings from continuing operations
The income tax effect on adjustments is computed by applying the applicable tax rate to the adjustments.
Adjusted EBITDA
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”) is a non-GAAP operating financial measure that the Company defines as net earnings plus interest, discontinued operations, depreciation and amortization, and other non-cash items including share-based payments (equity awards measured in accordance with ASC 718, Stock Compensation , which include both stock-based compensation to employees and stock warrants issued to non-employees) and the LIFO provision, as well as adjustments for items that do not reflect the ongoing operating activities of the Company.
The Company believes that adjusted EBITDA provides a meaningful representation of its operating performance for the Company and for its operating segments. The Company considers adjusted EBITDA as an additional way to measure operating performance on an ongoing basis. Adjusted EBITDA is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because adjusted EBITDA and adjusted EBITDA by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted EBITDA format.
Adjusted EBITDA and adjusted EBITDA by segment are not measures of performance under GAAP and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definitions of adjusted EBITDA and adjusted EBITDA by segment may not be identical to similarly titled measures reported by other companies.
Following is a reconciliation of net earnings to adjusted EBITDA for 2024, 2023 and 2022.
(In thousands)
Net earnings
Income tax expense
Other expenses, net
Operating earnings
Adjustments:
LIFO expense
Depreciation and amortization
Acquisition and integration, net
Restructuring and goodwill / asset impairment, net
Cloud computing amortization
Organizational realignment, net
Severance associated with cost reduction initiatives
Stock-based compensation
Stock warrant
Non-cash rent
(Gain) loss on disposal of assets
Legal settlement
Postretirement plan amendment and settlement
Costs related to shareholder activism
Adjusted EBITDA
Wholesale:
Operating earnings
Adjustments:
LIFO expense
Depreciation and amortization
Acquisition and integration, net
Restructuring and asset impairment, net
Cloud computing amortization
Organizational realignment, net
Severance associated with cost reduction initiatives
Stock-based compensation
Stock warrant
Non-cash rent
(Gain) loss on disposal of assets
Legal settlement
Postretirement plan amendment and settlement
Costs related to shareholder activism
Adjusted EBITDA
Retail:
Operating (loss) earnings
Adjustments:
LIFO expense
Depreciation and amortization
Acquisition and integration, net
Restructuring and goodwill / asset impairment, net
Cloud computing amortization
Organizational realignment, net
Severance associated with cost reduction initiatives
Stock-based compensation
Non-cash rent
Loss on disposal of assets
Postretirement plan amendment and settlement
Costs related to shareholder activism
Adjusted EBITDA
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Based on the Company’s ongoing review, the Company makes adjustments it considers appropriate under the facts and circumstances. The Company believes these accounting policies, and others set forth in Note 1, in the notes to the consolidated financial statements, should be reviewed as they are integral to understanding the Company’s financial condition and results of operations. The Company has discussed the development, selection and disclosure of these accounting policies with the Audit Committee of the Board of Directors.
An accounting estimate is considered critical if: a) it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and b) different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the Company’s consolidated financial statements. The Company considers the following accounting policies to represent the more critical estimates and assumptions used in the preparation of its consolidated financial statements:
Customer Exposure and Credit Risk
Allowance for Credit Losses. The Company evaluates the collectability of its accounts and notes receivable based on a combination of factors. The Company estimates losses using an expected loss model, by considering both historical data and future expectations, including collection experience, expectations for current credit risks, accounts receivable payment status, the customer’s financial health, as well as the Company’s collateral and creditor position. The Company pools similar assets based on their credit risk characteristics, whereby many of its trade receivables are pooled based on certain customer or aging characteristics. After assets are pooled, an appropriate loss factor is applied based on management’s expectations. Based on the estimated loss, the Company records an allowance to reduce the receivable to an amount the Company reasonably expects to collect. It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the collectability based on information considered and further deterioration of accounts. If circumstances change (e.g., further evidence of material adverse creditworthiness, additional accounts become credit risks, store closures), the Company’s estimates of the recoverability of amounts due could be reduced by a material amount, including to zero.
Funds Advanced to Independent Retailers. From time to time, the Company may advance funds to independent retailers which are earned by the retailers primarily through achieving specified purchase volume requirements, as outlined in their supply agreements with the Company, or in limited instances, for remaining a SpartanNash customer for a specified time period. These advances must be repaid if the purchase volume requirements are not met or if the retailer does not remain a customer for the specified time period. In the event these retailers are unable to repay these advances or otherwise experience an event of default, the Company may be unable to recover the unearned portion of the funds advanced to these independent retailers. The Company evaluates the recoverability of these advances based on a number of factors, including anticipated and historical purchase volume, the value of any collateral, customer financial health and other economic and industry factors, and establishes a reserve for the advances as necessary.
Guarantees of Debt Obligations of Others. The Company may guarantee debt and lease obligations of independent retailers. In the event these retailers are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of their debt, which would be due in accordance with the underlying agreements. The Company evaluates the likelihood that funding will occur and the expected credit losses on commitments to be funded using an expected loss model.
The Company also subleases and assigns various leases to third parties. In circumstances when the Company becomes aware of factors that indicate deterioration in a third party’s ability to meet its financial obligations guaranteed or assigned by SpartanNash, the Company records a specific reserve in the amount the Company reasonably believes it will be obligated to pay on the third party’s behalf, net of any anticipated recoveries from the third party. It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the obligations based on information considered and further deterioration of accounts, with the potential for a corresponding adverse effect on operating results and cash flows. Triggering these guarantees or obligations under assigned leases would not, however, result in cross default of the Company’s debt, but could restrict resources available for general business initiatives.
Business Combinations
The Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at their estimated fair values as of the acquisition date, with any excess purchase price over the estimated fair values of the net assets acquired being recorded as goodwill.
Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by the Company but are inherently uncertain. Also, determining the estimated useful life of an intangible asset requires judgment based on the Company’s expected use of the asset, as different types of intangible assets will have different useful lives and certain assets may be considered to have indefinite useful lives. The Company primarily utilizes an income approach method to estimate the fair value of intangible assets, which discounts the projected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuation reflect a consideration of other marketplace competition and include the amount and timing of future cash flows, including expected growth rates and profitability, and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill and other indefinite-lived intangible assets are tested for impairment on an annual basis, as of the first day of the fourth quarter of each year, and more frequently if circumstances indicate impairment is more likely than not to have occurred. The quantitative impairment evaluation of these assets involves the comparison of their fair value to their carrying values.
Goodwill. The Company has two reporting units, which are the same as the Company’s reportable segments. Fair values are determined based on the discounted cash flows and comparable market values of each reportable segment. If a reporting unit’s fair value is less than its carrying value, an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company’s goodwill impairment analysis also includes a comparison of the estimated fair value of the enterprise as a whole to the Company’s total market capitalization. Therefore, a significant and sustained decline in the Company’s stock price could result in goodwill impairment charges. During times of financial market volatility, significant judgment is given to determine the underlying cause of the decline and whether stock price declines are short-term in nature or indicative of an event or change in circumstances.
The Company estimates the fair value of the Wholesale and Retail reporting units based on the income approach using a discounted cash flow model and also incorporates the market approach using observable comparable company information. Key assumptions used by the Company in preparing the fair value estimate under the discounted cash flow method include:
Weighted average cost of capital (“WACC”): The determination of the WACC incorporates current interest rates, equity risk premiums, and other market-based expectations regarding expected investment returns. The development of the WACC requires estimates of an equity rate of return and a debt rate of return, which are specific to the industry in which the reporting unit operates.
Revenue growth rates: The Company develops its forecasts based on recent sales data for existing operations and other factors, including management’s future expectations.
Operating profits: The Company uses historical operating margins as a basis for its projections within the discounted cash flow model. Margins within the forecast may vary due to future expectations related to both product and administrative costs.
The Company compares the results of the discounted cash flow model to observable comparable company market multiples to support the appropriateness of the fair value estimates. The Company concludes whether the implied multiple is reasonable with respect to the comparable company range, and whether the assumptions used in the fair value estimate are supportable.
In 2024, the Company recorded non-cash goodwill impairment charges of $45.7 million related to the Retail reporting unit. Refer to Note 5, Goodwill and Other Intangible Assets, in the notes to the consolidated financial statements for additional information related to the full impairment of Retail goodwill. As of the date of the most recent goodwill impairment test, which utilized data and assumptions as of October 6, 2024, the Wholesale reporting unit had a fair value that was substantially in excess of its carrying value. The Company has sufficient available information, both current and historical, to support its assumptions, judgments and estimates used in the goodwill impairment test; however, if actual results for the Wholesale reporting unit are not consistent with the Company’s estimates, it could result in the Company recording a non-cash impairment charge.
Other Indefinite-Lived Intangible Assets. The estimated fair value of these assets is computed by using a discounted cash flow method, such as the relief-from-royalty methodology. The Company determines future cash flows generated from the use of the asset, generally using estimated revenue growth rates and profitability rates and, in the case of the relief-from-royalty methodology, royalty rates. Discount rates are determined based on the WACC of the reporting unit in which the asset resides, consistent with the discussion above. Impairments of these assets were $12.7 million for 2024. There were no impairments of these assets in 2023 or 2022.
Impairment of Long-Lived Assets
Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. When the undiscounted future cash flows are not sufficient to recover an asset’s carrying amount, the fair value is compared to the carrying value to determine the impairment loss to be recorded. Long-lived assets are evaluated at the asset-group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Impairments of long-lived assets were $8.2 million, $11.7 million and $5.1 million for 2024, 2023 and 2022, respectively.
Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of operations. These estimates project cash flows several years into the future and are affected by changes in the economy, the competitive environment, real estate market conditions and inflation. If the book value of assets is determined to not be recoverable, future cash flows for the expected useful life of the asset group are discounted using a rate based on the WACC of the reportable segment in which the asset resides, consistent with the discussion above.
Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less cost to sell. Management determines fair values using independent appraisals, quotes or expected sales prices developed by internal real estate professionals. Estimates of expected sales prices are judgments based upon the Company’s experience, knowledge of market conditions and current offers received. Changes in market conditions, the economic environment and other factors, including the Company’s ability to effectively compete and react to competitor openings, can significantly impact these estimates. While the Company believes that the estimates and assumptions underlying the valuation methodology are reasonable, different assumptions could result in a different outcome.
Insurance Reserves
SpartanNash is self-insured through self-insurance retentions or high deductible programs. Refer to Note 1, in the notes to the consolidated financial statements for additional information related to self-insurance reserves.
Any projection of losses concerning insurance reserves is subject to a degree of variability. Among the causes of variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, changing regulations, legal interpretations, benefit level changes and claim settlement patterns. Although the Company’s estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, such changes could have a material impact on future claim costs and currently recorded liabilities. The impact of many of these variables may be difficult to estimate.
Income Taxes
The Company reviews deferred tax assets for recoverability and evaluates whether it is more likely than not that they will be realized. In making this evaluation, the Company considers positive and negative evidence associated with several factors, including the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing taxable temporary differences, tax planning strategies, history of taxable income or losses, and projections of future income or losses. A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period.
SpartanNash is subject to periodic audits by the Internal Revenue Service and other state and local taxing authorities. These audits may challenge certain of the Company’s tax positions, such as the timing and amount of income credits and deductions and the allocation of taxable income to various tax jurisdictions. The Company evaluates its tax positions and establishes liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. These tax uncertainties are reviewed as facts and circumstances change and are adjusted accordingly. This requires significant management judgment in estimating final outcomes. Actual results could materially differ from these estimates and could significantly affect the Company’s effective income tax rate and cash flows in future years.
Liquidity and Capital Resources
Cash Flow Information
The following table summarizes the Company’s consolidated statements of cash flows for 2024, 2023 and 2022:
(In thousands)
Cash flow activities
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Net cash provided by operating activities. Net cash provided by operating activities in the current year increased compared to the prior year by $116.6 million, due primarily to changes in working capital, including the Company's efforts to streamline inventory balances.
Net cash used in investing activities. Net cash used in investing activities increased $130.5 million in 2024 compared to 2023 primarily due to acquisitions in the Retail segment and an increase in capital expenditures in the current year in line with the Company's long-term plan.
The Wholesale and Retail segments utilized 50.0% and 50.0% of capital expenditures, respectively, for the current year. Capital expenditures for 2024 primarily related to investments in supply chain infrastructure, store remodels, information technology upgrades and implementations, and equipment upgrades. Capital expenditures were $132.4 million in the current year and cloud computing application development spend, which is included in operating activities, was $12.0 million, compared to capital expenditures of $120.3 million and cloud computing application development spend of $7.0 million in the prior year.
Net cash provided by financing activities. Net cash provided by financing activities increased $28.7 million in 2024 compared to 2023 primarily due to increased borrowings in the current year on the Company's senior credit facility.
Debt Management
Long-term debt and finance lease liabilities, including the current portion, increased $156.3 million to $753.8 million as of December 28, 2024 from $597.5 million at December 30, 2023. The increase in total debt was driven by additional borrowings on the senior credit facility to fund three acquisitions within the Retail segment and capital expenditures in both segments. The Company's Amended and Restated Loan and Security Agreement (the "Credit Agreement") matures on November 17, 2027. In 2023, the Company entered into amendments (the "Amendments") to the Company's Amended and Restated Loan and Security Agreement (the "Credit Agreement"). The principal terms of the Amendments included increasing the size of the Tranche A portion of the Company's revolving credit facility by $130 million in 2023. The Credit Agreement provides for a Tranche A revolving loan of up to $1.17 billion and a Tranche A-1 revolving loan with $40 million of capacity. The Company has the ability to increase the amount borrowed under the Credit Agreement by an additional $195 million, subject to certain conditions. The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s personal and real property. The Company may repay all loans in whole or in part at any time without penalty.
Liquidity
The Company’s principal sources of liquidity are cash flows generated from operations and its senior secured credit facility. As of December 28, 2024, the senior secured credit facility had outstanding borrowings of $627.2 million. Additional available borrowings under the Company’s Credit Agreement are based on stipulated advance rates on eligible assets, as defined in the Credit Agreement. The Credit Agreement requires that the Company maintain Excess Availability of 10% of the borrowing base, as defined in the Credit Agreement. The Company had excess availability after the 10% requirement of $339.3 million at December 28, 2024. Payment of dividends and repurchases of outstanding shares are permitted, provided that certain levels of excess availability are maintained. The Credit Agreement provides for the issuance of letters of credit, of which $17.9 million were outstanding as of December 28, 2024. The Company anticipates that additional borrowings may be required to fund increased investments in expenditures related to both organic and inorganic initiatives included in the long-term strategic plan. The Company believes that cash generated from operating activities and available borrowings under the Credit Agreement will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future. However, there can be no assurance that the business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the Credit Agreement.
The Company’s current ratio (current assets over current liabilities) was 1.57:1 at December 28, 2024 compared to 1.63:1 at December 30, 2023, and its investment in working capital was $396.6 million at December 28, 2024 compared to $417.6 million at December 30, 2023. The net long-term debt to total capital ratio was 0.50:1 at December 28, 2024, compared to 0.43:1 at December 30, 2023. Total net long-term debt is a non-GAAP financial measure that is defined as long-term debt and finance lease liabilities, plus current portion of long-term debt and finance lease liabilities, less cash and cash equivalents. The Company believes both management and its investors find the information useful because it reflects the amount of long-term debt obligations that are not covered by available cash and temporary investments. Total net long-term debt is not a substitute for GAAP financial measures and may differ from similarly titled measures of other companies.
Following is a reconciliation of “Long-term debt and finance lease liabilities” to net long-term debt, a non-GAAP measure, as of December 28, 2024 and December 30, 2023.
December 28,
December 30,
(In thousands)
Current portion of long-term debt and finance lease liabilities
Long-term debt and finance lease liabilities
Total debt
Cash and cash equivalents
Net long-term debt
The Company’s material cash requirements as of December 28, 2024 primarily include long-term debt, including the estimated interest on the long-term debt, operating and finance lease liabilities, purchase obligations, and capital expenditure commitments. For additional information related to long-term debt and lease obligations, refer to Notes 7 and 11, respectively, in the notes to the consolidated financial statements. Purchase obligations include the amount of product the Company is contractually obligated to purchase in order to earn advanced contract monies that are receivable under the contracts, the majority of which are due in the next 12 months.
Cash Dividends
The Company declared a quarterly cash dividend of $0.2175, $0.215 and $0.21 per common share in each quarter of 2024, 2023, and 2022, respectively. Under the Credit Agreement, the Company is generally permitted to pay dividends in any year up to an amount such that all cash dividends, together with any cash distributions and share repurchases, do not exceed $35.0 million. Additionally, the Company is generally permitted to pay cash dividends in excess of $35.0 million in any year so long as its Excess Availability, as defined in the Credit Agreement, is in excess of 10% of the Total Borrowing Base, as defined in the Credit Agreement, before and after giving effect to the repurchases and dividends. Although the Company currently expects to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the Board of Directors (the “Board”) to declare future dividends. Each future dividend will be considered and declared by the Board at its discretion. Whether the Board continues to declare dividends depends on a number of factors, including the Company’s future financial condition, anticipated profitability and cash flows and compliance with the terms of its credit facilities.
Recently Adopted Accounting Standards
Refer to Note 1, in the notes to the consolidated financial statements for additional information related to recently adopted accounting standards, as well as the anticipated effect of any impending accounting standards.
