10-Q: SpartanNash Q2 Earnings Decline Amid Merger Progress

SpartanNash reports a significant drop in second-quarter net earnings and EPS, even as net sales increased and the company progresses towards its $1.77 billion acquisition by C&S Wholesale Grocers.

Summary

• Net sales increased 1.8% to $2.27 billion for the 12 weeks ended July 12, 2025, and 2.9% to $5.18 billion for the 28 weeks.
• Net earnings decreased 46.1% to $6.2 million for the 12 weeks and 66.2% to $8.3 million for the 28 weeks.
• Diluted earnings per share decreased to $0.18 for the 12 weeks from $0.34 in the prior year, and to $0.24 for the 28 weeks from $0.71.
• Wholesale segment net sales decreased 3.0% to $1.51 billion for the 12 weeks and 2.7% to $3.47 billion for the 28 weeks, primarily due to the elimination of intercompany sales to newly acquired stores and changes in the National Accounts customer channel.
• Retail segment net sales increased 12.8% to $762.9 million for the 12 weeks and 16.5% to $1.71 billion for the 28 weeks, driven by incremental sales from recently acquired stores.
• Comparable store sales in the Retail segment decreased by 0.5% for the 12 weeks, primarily due to a 3.7% decline in unit volumes, partially offset by inflationary pricing.
• Adjusted EBITDA increased 6.5% to $68.7 million for the 12 weeks and 4.4% to $145.6 million for the 28 weeks.
• Operating earnings decreased 30.6% to $18.1 million for the 12 weeks and 34.6% to $37.1 million for the 28 weeks.
• Incurred approximately $8.3 million in legal and other third-party advisor expenses during the 12-week period in connection with the pending Transaction with C&S Wholesale Grocers.
• Cash generated from operating activities decreased to $112.6 million during the first half of fiscal 2025 compared to $132.1 million in the first half of the prior year.
• The net long-term debt to adjusted EBITDA ratio improved sequentially to 2.7x from 2.9x at the end of the first quarter.
• Declared $7.7 million in dividends during the quarter, with a 1.1% increase in the quarterly dividend rate to $0.22 per share.

Sentiment

Score: 4

Explanation: While net sales and adjusted EBITDA saw modest increases, net earnings and EPS declined significantly. The pending merger with C&S Wholesale Grocers introduces both opportunity and substantial uncertainty and operational disruption, overshadowing current financial performance. The decline in wholesale volumes and comparable store sales, coupled with increased interest and acquisition-related expenses, points to underlying operational challenges despite the strategic acquisition.

Positives

• Overall net sales increased by 1.8% for the quarter and 2.9% year-to-date.
• Retail segment net sales grew significantly by 12.8% for the quarter and 16.5% year-to-date, driven by recent acquisitions.
• Adjusted EBITDA increased by 6.5% for the quarter to $68.7 million and 4.4% year-to-date to $145.6 million.
• The net long-term debt to adjusted EBITDA ratio improved sequentially to 2.7x from 2.9x.
• The quarterly dividend rate increased by 1.1% to $0.22 per share.
• Restructuring and asset impairment resulted in a net gain of $0.1 million for the quarter and $0.5 million year-to-date, compared to net charges in the prior year.
• A one-time tax benefit arising from a purchase accounting measurement period adjustment for the Fresh Encounter acquisition positively impacted the effective tax rate.

Negatives

• Net earnings decreased significantly by 46.1% for the quarter to $6.2 million and 66.2% year-to-date to $8.3 million.
• Diluted EPS decreased to $0.18 for the quarter from $0.34 in the prior year, and to $0.24 year-to-date from $0.71.
• Operating earnings decreased by 30.6% for the quarter to $18.1 million and 34.6% year-to-date to $37.1 million.
• Wholesale segment net sales decreased by 3.0% for the quarter and 2.7% year-to-date, with overall case volumes down 2.4% and 2.8% respectively.
• Comparable store sales in the Retail segment decreased by 0.5% for the quarter, primarily due to a 3.7% decline in unit volumes.
• Cash generated from operating activities decreased by $19.5 million in the first half of fiscal 2025 compared to the prior year.
• Acquisition and integration expenses increased significantly to $9.3 million for the quarter (from $2.6 million) and $13.2 million year-to-date (from $2.9 million), largely due to merger-related costs.
• Interest expense increased by 16.5% for the quarter to $12.3 million and 14.4% year-to-date to $27.5 million, due to higher average debt balances.
• A significant customer advised of its intention to begin a transition to in-sourcing, which is expected to have an unfavorable impact on sales volume within the Wholesale segment.

Risks

• Failure to complete the Transaction with C&S Wholesale Grocers on the agreed terms, within the expected timeframe, or at all, could have a material adverse effect on business, financial condition, cash flows, and stock price.
• Uncertainty regarding the receipt of necessary regulatory approvals and Company shareholder approval for the merger.
• Potential obligation to pay a termination fee if the Merger Agreement is not consummated.
• Business uncertainties, operational disruptions, and contractual restrictions during the pendency of the Transaction could materially harm business, operations, financial condition, and relationships with stakeholders.
• Restrictive covenants under the Merger Agreement limit the ability to pursue certain business opportunities, strategic transactions, financing activities, or operational changes without C&S's consent.
• Challenges in retaining and attracting key personnel during the pendency of the Transaction.
• Adverse impacts on customer purchasing behavior or supplier relationships due to concerns about post-closing integration or strategic alignment.
• Distractions for management and employees, as significant time and resources are diverted to Transaction-related matters.
• Ability to compete in an extremely competitive industry.
• Dependence on certain major customers.
• Disruptions to information technology systems and security network, including security breaches and cyber-attacks.
• Changes in relationships with the vendor base, product availability, and product pricing from vendors.
• Macroeconomic uncertainty, including rising inflation, potential economic recession, tariffs, and increasing interest rates.
• Difficulty attracting and retaining well-qualified Associates and effectively managing increased labor costs.
• Failure to successfully retain or manage transitions with executive leaders and other key personnel.
• Impairment charges for goodwill or other long-lived assets.
• Impacts to business and reputation due to focus on environmental, social, and governance matters.
• Customers to whom credit is extended or for whom loans are guaranteed may fail to repay.
• Disruptions associated with severe weather conditions and natural disasters, including effects from climate change, and disease outbreaks.
• Ability to manage its private brand program for U.S. military commissaries, including the termination of the program or not achieving desired results.
• Level of indebtedness, interest rate fluctuations, and ability to service debt and comply with debt covenants.
• Cost increases related to multi-employer pension plans, specifically the Central States Southeast and Southwest Pension Fund's solvency as an ongoing risk factor despite Special Financial Assistance.

Future Outlook

The company anticipates that certain growth and cost-saving initiatives may favorably impact future results, though additional operating and capital investments will be necessary, potentially impacting depreciation and interest costs. Macroeconomic headwinds, including changes in consumer demand and input costs, are expected to offset these favorable results. A significant customer's intention to transition to in-sourcing is expected to unfavorably impact Wholesale segment sales volume. The merger with C&S Wholesale Grocers is expected to close in late 2025, subject to shareholder and regulatory approvals, after which common stock will be delisted from NASDAQ. The company expects to continue paying a quarterly cash dividend, subject to the Merger Agreement and Board discretion.

Management Comments

• The Transaction was unanimously approved by the Boards of Directors of both companies and is expected to close in late 2025, subject to certain customary closing conditions, including, among other things, receipt of Company shareholder approval and applicable regulatory approvals.
• 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 which may have an impact on depreciation and interest costs.
• 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.
• During the second quarter, a significant customer advised the company of its intention to begin a transition to in-sourcing which is expected to have an unfavorable impact on sales volume within the Wholesale segment.
• The company believes that cash generated from operating activities and available borrowings under the credit facility will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future.
• The company anticipates that additional borrowings may be required to fund investments related to both organic and inorganic initiatives included in the long-term strategic plan.

Industry Context

The food distribution and grocery retail industry is highly competitive and currently navigating macroeconomic challenges such as inflation and potential recession, which are impacting consumer demand and input costs. The trend of major customers opting for in-sourcing, as noted for the Wholesale segment, presents a significant challenge for distributors. Consolidation through mergers and acquisitions, exemplified by the pending C&S acquisition, is a common strategy in this mature industry to achieve greater scale and operational efficiencies. The company's retail strategy, focusing on convenience and community-focused stores, aims to differentiate it from larger supercenters and limited assortment stores.

Corporate Governance

Legal Proceedings

• Engaged in routine legal proceedings incidental to its business, with management believing allowances for loss are disclosed to the extent necessary and outcomes will not result in a material adverse effect.
• Exposure to loss contingencies related to the Central States Southeast and Southwest Pension Fund, a multi-employer pension plan. The Plan received approximately $35.8 billion in Special Financial Assistance in January 2023, but its actuary certified it was in 'critical' zone status on March 31, 2025. The company views the Plan's solvency as an ongoing risk factor, but management believes assets cover liabilities. The current amount of potential withdrawal liability or increased funding obligations cannot be determined with certainty.

Related Party Transactions

• Issued Amazon.com NV Investment Holdings LLC, a subsidiary of Amazon, a warrant to acquire up to an aggregate of 5,437,272 shares of common stock, subject to certain vesting conditions. Warrant shares totaling 1,087,455 vested upon the signing of the commercial agreement, and up to 4,349,817 shares may vest as Amazon makes payments to the Company in increments of $200 million. The exercise price is $17.7257 per share, and the warrant expires on October 7, 2027. Upon closing of the C&S merger, if any portion of the Warrant is outstanding, the Company shall, under certain circumstances, effect a Cashless Exercise.

Stakeholder Impact

• Shareholders: Potential for cash acquisition at $26.90 per share if the merger closes, but also risk of stock price decline if the merger fails. Continued quarterly dividends are expected.
• Employees: Challenges in retaining and attracting key personnel during the merger pendency. Increased labor costs and severance associated with cost reduction initiatives.
• Customers: Potential adverse impacts on customer purchasing behavior or supplier relationships due to concerns about post-closing integration or strategic alignment related to the merger. The Wholesale segment is facing a significant customer transitioning to in-sourcing.
• Suppliers: Potential adverse impacts on supplier relationships due to merger uncertainty and changes in the vendor base.
• Creditors: Ongoing debt management and compliance with debt covenants. The merger includes assumed debt, which will impact the company's capital structure.

Next Steps

• Complete the acquisition by C&S Wholesale Grocers, LLC, expected in late 2025, subject to shareholder and regulatory approvals.
• Continue to implement growth strategy and transformation initiatives.
• Manage the transition of a significant customer to in-sourcing within the Wholesale segment.
• Evaluate the impact of adopting new accounting standards (ASU 2023-09 and ASU 2024-03).
• The Board of Directors will consider and declare future quarterly cash dividends at its discretion.

Key Dates

Recommendation

The stock is currently trading at a premium due to the announced acquisition by C&S Wholesale Grocers at $26.90 per share. While the acquisition provides a clear exit strategy for shareholders at a defined price, the significant decline in net earnings and EPS, coupled with decreasing wholesale volumes and comparable store sales, indicates underlying operational challenges. The merger is subject to regulatory and shareholder approvals, introducing execution risk. For a seasoned investor, holding the stock to realize the merger consideration is the most logical strategy, assuming the deal closes as expected. However, the operational performance in the quarter does not warrant a 'buy' recommendation for long-term fundamental investment outside of the merger arbitrage. A 'sell' would only be appropriate if there was significant doubt about the merger closing or if the current price was above the offer price.

Keywords

SpartanNash, C&S Wholesale Grocers, Merger, Acquisition, Food Distribution, Grocery Retail, Wholesale, Retail, SEC Filing, 10-Q, Financial Results, Earnings, EBITDA, Supply Chain, Supermarkets, Military Commissaries, Private Label, Michigan, NASDAQ