Thank you. Good morning, and welcome to Spartan Stores' Third Quarter Fiscal 2013 Earnings Conference Call.

By now, everyone should have access to the earnings release for the third quarter ended January 5, 2013. For a copy of the release, please visit Spartan Stores' website at www.spartanstores.com under For Investors.

This call is being webcast, and a replay will be available on the company's website for approximately 10 days.

Before we begin, we'd like remind everyone comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that might involve significant risks and uncertainties.

Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that might cause such differences, include, among others, competitive pressures among food retail and distribution companies, the uncertainties inherent in implementing strategic plans and general economic and market conditions.

Additional information about risk factors and the uncertainties associated with Spartan Stores' forward-looking statements can be found in the company's third quarter earnings release, fiscal annual report on Form 10-K and in the company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements.

Spartan Stores disclaims any intention or obligation to update or revise any forward-looking statements. This presentation will include non-GAAP financial measures, as defined in Regulation G.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and the other [indiscernible] information required by Regulation G is included in the company's earnings release issued after the market closed yesterday.

It is now my pleasure to introduce Mr. Dennis Eidson, President and CEO of Spartan Stores, for opening remarks.

Thanks, Katie. Good morning, and thank you for joining our third quarter fiscal 2013 earnings conference call.

With me this morning are members of our team, including our CFO, Dave Staples; our EVP of Retail Ops, Derek Jones; our Executive Vice President of Wholesale Operations, Ted Adornato; our EVP of Merchandising and Marketing, Alan Hartline; as well as our EVP, General Counsel and Secretary, Alex DeYonker. Today, I will begin by providing you with a brief overview of our business and financial performance for the third quarter, and then they will share more specific information about the third quarter financial results, as well as our outlook for the remainder of fiscal '13.

Finally, I'll provide some closing remarks, and we'll open up the call for your questions.

As you're aware, the quarter was not without its challenges from an economic and market perspective, due to a continued cautious consumer and the lack of inflation. We are managing our business to meet these challenges head-on, and in the third quarter, we've continued to make progress in the execution of our key strategic priorities.

We made promotional and capital investments in both our distribution and retail segments, and are pleased with our ability to attract new customers and deepen existing relationships with current customers. This includes the acquisition of an upscale, high-volume grocery store in West Michigan, further solidifying our leading conventional supermarket share in this area, and the recently announced strategic expansion of our distribution customer base in Ohio, which I'll talk more about in a few minutes.

Now reviewing our distribution segment results, sales decreased approximately 2.2% for the quarter, primarily as a result of lower sales to existing customers and lower pharmacy sales, partially offset by new business gains. We continue to focus on providing a compelling value proposition.

On the product side, we expanded our private brand program, launching 142 net new items, ending the quarter with approximately 4,250 items. Year-to-date, we've launched approximately 350 new products, and are on track to end the year with over 400 new private brand items.

Our private brand penetration at retail on a unit basis was approximately 24.7% in the fiscal year-to-date period, which exceeds the national average by over 150 basis points. We also continue to seek new independent customers.

And in late January, we entered into an agreement with Chief Super Markets in Ohio, to be its primary wholesale grocery supplier. Chief operates 12 stores in Northwest and West Central Ohio under the Chief and Rays banners.

We will assume full distribution to all Chief's banners for grocery, dairy, frozen, bakery and other products at the end of the fourth quarter. I'm very pleased with our ability to secure a significant new customer, as it is further evidence that our value added services, as well as our broad selection of private brand and national brand products, are a point of differentiation with us with the independent retailer.

Further, as we have discussed, securing new business in contiguous states is one of our key strategic business growth initiatives. Going forward, we'll continue to focus on increasing our existing customer penetration and adding new customers in adjacent markets.

As we mentioned on our last call, in early October, the company and the union representing our warehouse, transportation and maintenance associates, ratified a 3-year labor agreement. The new agreement will continue to provide our associates with a good wage and benefit package, while giving us additional flexibility to enhance the efficiency of our operations and allowing us to be even more competitive.

Net sales in our retail segment approximated the prior year, and comp store sales, excluding fuel, declined 1.2%. The comp sales results were due to the continued impact of a cautious consumer, minimal inflation, the calendar shift and the continued migration of pharmacy scripts from branded medications to generics.

Despite the cautious nature of the consumer, we continued to be encouraged by the consumer trends in our West Michigan market, as we experienced further increases in the acceptance of our loyalty program, with active households increasing from the prior year by over 10% and sales to loyalty program members increasing nicely on a year-over-year basis. We believe these positive trends will become more apparent as the program continues to mature.

We also continue to leverage our fuel and pharmacy programs as value-added rewards for our consumers' loyalty. During the quarter, we acquired 1 fuel center, bringing the total to 30.

Our pharmacies posted a 5.5% increase in comp script count. However, we did experience some softness in comp store pharmacy sales, due to the ongoing shift from branded to significantly lower priced generic prescriptions.

This impact may be slightly more pronounced for us due to the success of our loyalty program, which offers $4 and $10 generics, as well as free prescriptions for select antibiotics, diabetes medication and prenatal vitamins. From a competitive perspective, we experienced no new supercenter openings in the third quarter, and do not expect any supercenter openings to affect our corporate-owned retail locations in the fourth quarter.

Moving onto our capital plan. During the third quarter, we completed 2 major remodels, re-bannered 2 Glen's to Family Fare, including one of the remodeled stores, and acquired 1 upscale store and 1 fuel center.

In addition, in December, we soft-opened 2 Valu Land stores in the suburban Detroit area. We continue to learn from these initial investments, and are working to fine-tune the concept.

As a result, we made adjustments to our décor and signage, and reduced our overall item count while maintaining a meaningful assortment of the items that matter most to our consumers. We plan to open 1 more Valu Land store during fiscal 2013, in February, marking the fourth Valu Land location for the fiscal year, and bringing the total store count to 7.

As I briefly mentioned earlier, near the close of the quarter, we acquired an upscale, high-value grocery store and adjacent fuel center located in Grand Rapids. Although this is a relatively modest acquisition, we're excited about the potential, and believe that this solidifies our leading conventional share in the market.

As we've discussed previously, making acquisitions is a core part of our strategy, and we'll continue to monitor the industry landscape for future opportunities. With that overview, I'll turn the call over to Dave for more detail on our third quarter financial results and an outlook for the remainder of fiscal '13.

Dave?

Thank you, Dennis, and good morning, everyone. Consolidated net sales for the 16-week third quarter were $789.9 million compared to $797.2 million in the year-ago quarter.

The retail segment was up slightly due to higher fuel sales during the quarter, while the distribution segment was down year-over-year. Distribution and fuel sales represented 43.8% and 7.3%, respectively, of consolidated net sales compared to 44.4% and 6.8%, respectively, in last year's third quarter.

The consolidated gross profit margin for the third quarter was flat year-over-year at 20.4%, primarily due to the continued impact of reduced inflation-driven inventory gains in the distribution segment, offset by a decrease in LIFO expense in both the distribution and retail segment. Third quarter operating expenses, excluding restructuring, asset impairment and other gains or losses were $149.1 million or 18.9% of net sales compared to $150.5 million or 18.9% of net sales in the same quarter last year.

On an absolute basis, the decrease was due to lower incentive compensation expense, a reduction in promotional expenses due to the cycling of the rollout of the YES loyalty program, and lower property taxes compared to the prior year, partially offset by increased health care costs.

Adjusted EBITDA for the quarter was $25.1 million or 3.2% of net sales compared to $26 million or 3.3% of net sales last year. Adjusted earnings from continuing operations for the third quarter were $5.2 million or $0.24 per diluted share compared to $5.1 million or $0.22 per diluted share in the same quarter last year.

Third quarter adjusted earnings from continuing operations exclude an after-tax debt extinguishment charge of $1.4 million or $0.07 per diluted share, associated with the early retirement of a portion of the company's convertible senior notes due 2027, and an after-tax charge for acquisition-related professional fees of $300,000 or $0.01 per diluted share. Last year's third quarter adjusted earnings from continuing operations exclude an after-tax gain on the sale of assets of $400,000 and an after-tax expense associated with the early termination of the company's interest rate swap agreement of $500,000.

Turning to our operating segments. Third quarter net sales for the distribution segment were $346.1 million compared to $353.8 million in the year-ago quarter.

Third quarter operating earnings for the distribution segment were $9.5 million versus $10.9 million in the same quarter last year. The operating earnings decrease was largely due to reduced inflation-driven inventory gains as the rate of inflation continues to moderate, partially offset by a decrease in LIFO expense of $1 million.

We also incurred a $300,000 signing bonus associated with the completion of our labor union contract in October. In our retail segment, third quarter net sales were $443.8 million compared to $443.5 million in the same quarter last year.

The slight increase in sales was driven by higher fuel retail selling prices and increased fuel volume. Comparable store sales, excluding fuel, were down 1.2% due in large part to the lower inflation rate, as well as the calendar shift due to the 53rd week in fiscal 2012, and the change in mix of pharmacy sales away from branded medications to generics.

Retail segment adjusted operating earnings for the quarter were $2.5 million, excluding $400,000 of professional fees associated with a single store acquisition, compared to $1.6 million excluding a $500,000 gain on the sale of assets last year. Improvement in adjusted operating earnings was due to lower incentive compensation expense, lower promotional expenses due to the cycling of the rollout of the YES loyalty program, a decrease in LIFO expense and higher fuel margins, partially offset by significantly higher health care costs.

Operating expenses for the retail segment, as reported, were $2.1 million in both the third quarter of fiscal 2013 and fiscal 2012. From a cash flow perspective, our operating cash flow was $26.4 million at the end of the third quarter compared to $8.7 million for the same quarter in fiscal '12.

The increase was principally due to the timing of working capital requirements. Total net long-term debt was up $37.8 million to $162 million as of January 5, 2013 versus $124.2 million at the end of the third quarter of fiscal '12, primarily reflecting the funding of shares repurchased, tax payments made earlier in fiscal '13 and the acquisition of a grocery store and fuel center, including the associated capital leases.

As previously announced, during the quarter, we refinanced a portion of our convertible senior notes due in 2027, through a private exchange and sale of $50 million of newly issued 4-year unsecured 6.625% senior notes due 2016, with $40.3 million of our existing convertible senior notes and $9.7 million in cash. We recorded a pretax debt extinguishment charge of $2.3 million associated with this refinancing.

Additionally, late in the third quarter, we called for the redemption of the remaining outstanding $57.4 million aggregate principal amount of convertible notes for March 30, 2013, and we plan to fund this redemption with available borrowings under our revolving credit facility. As a reminder, we expect to record a pretax charge of approximately $2.8 million in the fourth quarter associated with this redemption.

These actions are enabling us to lengthen the maturity of our debt obligations and reduce our overall interest expense. We expect to save approximately $3 million in annual interest expense as a result of the private exchange and the redemption of the remainder of the convertible notes.

I will now provide further detail on our outlook for the remainder of fiscal 2013. We expect comparable store sales for the fourth quarter to be flat to slightly positive, due to the continued maturation of the YES Rewards loyalty program and a favorable Easter calendar.

Distribution sales for the fourth quarter are expected to return to flat to slightly positive as a result of new business gains and the Easter calendar shift. We believe adjusted earnings per diluted share from continuing operations, which excludes the impact of the anticipated fourth quarter charge related to the convertible debt redemption, will slightly exceed the prior year fourth quarter, when excluding the 53rd week and nonrecurring benefits previously disclosed last year.

The net effect of the 53rd week and the nonrecurring items in the prior year's fourth quarter was a benefit of $0.11 to $0.12 per diluted share, approximately half of which related to the extra week, and half of which predominately related to a LIFO credit, favorable incentive compensation expenses and favorable occupancy costs. We now anticipate the capital expenditures for fiscal year 2013 will be in the range of $43.5 million to $44.5 million with depreciation and amortizations in the range of $39 million to $40 million, and total interest expense in the range of $13 million to $13.5 million, excluding the debt extinguishment charges.

This concludes our financial discussion, and I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. In summary, we were encouraged by the promotional and capital investments we've made in both our distribution and retail segments.

I believe that a cautious consumer and the lack of inflation will continue to impact our operations. As a result, we are committed to focusing on the initiatives that will drive our sales and profitability in this environment.

I believe we have a strong value proposition and a talented team, which will allow us to continue to execute our plan. Additionally, our strong balance sheet provides us with the financial strength to pursue strategic growth opportunities and prudent acquisitions in both the distribution and retail business segments, as we demonstrated this quarter.

And with that, we will now open up the call for your questions.

Dennis, when you're looking at the distribution sales falling off in the most recent quarter, you mentioned lower sales to existing customers. What's behind that?

Well, there's probably a combination of things going on here. We had a customer that decided to exit the pharmacy business in the quarter, and those were 8 pharmacies that he sold and we lost that volume, so that was a driver.

And then much as this calendar shift affected retail, because if you look at our retail, we reported 1.2% negative comps, excluding fuel, if you look at that on a like-week per like-week, our comps would have been negative 0.9%, so there was another 30 point impact by the mix of weeks we measured in this year's third quarter. But that also would have corresponded to the distribution segment as well.

We started the quarter stronger. Given it's a 16-week quarter, that September, October was better for us.

We kind of felt a little softening toward the end of the quarter. But I'm pleased to tell you that, early in the fourth quarter, it seems like we've gotten a little bit more momentum back.

Can you give us, please, an update on Valu Land?

Valu Land, as we indicated, we opened -- soft-opened 2 stores in Metro Detroit in the quarter, and we'll open up a third store in Dearborn. Actually, that's where we'll open this coming Sunday, which will bring our total to 7.

As you may recall, the first 3 stores were existing stores that we were operating that we converted. And we kind of used them a little bit as a test tube, in terms of what we may be -- might be able to accomplish.

And the fourth store we opened in Lansing really became more of what we kind of perceived to be the prototype look and feel and design, and that store is performing fairly close to the expectations that we had. Then the next 2, and now the third one in Metro Detroit, we've kind of rolled out what we did in Lansing.

We actually took a little bit more assortment out in the center store. We think we can do that and improve operating efficiency and still satisfy the consumer.

It's still early. I would characterize the 2 in Detroit, they maybe have opened a little softer than what I would have liked, but it's an awfully big marketplace.

And it's tough to get a message out on a new brand in the market, and we're really, really early. So with the third store opening Sunday, that will give us a little more opportunity to express our voice in the market.

Do you see any more conversions of existing Spartan Stores into the Valu format? Or are you going to pretty much reach out into new markets with that?

Chuck, at this moment, we don't see in the near horizon any conversions, but I wouldn't totally rule it out.

And with the acquisition of that single store in Grand Rapids, is that a trend or was it more of a one-off? I'm wondering if, given some of the challenges in the marketplace, you might be able to pick up additional small operators, 1 store operators, 2 store operators, as opposed to the 10, 20 store chain.

Yes, I don't think that really, I would characterize it as a trend. These -- it takes 2 willing partners to consummate a transaction, and this happened to work out for the owner and Spartan Stores and the timing was right.

I think it was mutually beneficial on multiple fronts. I think there's a potential for more, but I'm not sure this signals a trend.

And finally, on SUPERVALU, a lot's going on there. I think those Chief stores you will be supplying out of the distribution segment were SUPERVALU customers.

What do you see happening in your market area that provides an opportunity, because of what SUPERVALU is going through?

I think anytime there is uncertainty with a strategic partner, like your wholesaler, it does potentially open up an opportunity for a competitor. In the case with Chief, we're just thrilled to have them on board as a customer.

And the way we approach the distribution segment, as we've spoken before, Chuck, is we attempt to add more value-added services and maybe thought leadership than some other wholesalers in this space. I think that resonated with Chief, and it's strategic for us.

I mean, we're in a land-locked, water-locked peninsula here. We can only grow to the South, and we think this is a great springboard and we're hopeful that we'll be able to capitalize even more in the coming years.

You guys have commented that demand trends improved into the early fourth quarter. Is it fair to say that you haven't seen any pullback with the rise in fuel prices and are comps turning positive quarter-to-date?

I don't -- comps have improved. Quarter-to-date, we are flattish, so just very, very slightly negative.

And we haven't seen a lot of reaction to the higher fuel price. Now this week, fuel in Michigan has gone to nearly $4, I think in the $3.80s, $3.89, that product saw locally in the market, and I'm surprised we haven't felt a little bit of a reaction to that.

But I'll remind you, we do have a fuel program embedded into our go-to market strategy. And oftentimes, when we see fuel prices go up and we look historically at the trend, we tend to get more redemption on our promotional program, as consumers are looking ways -- for ways to defray that.

And likewise, I'd tell you, Ben, not that you asked this question, but I'm a little surprised based on the early read of this, with the increase in the payroll tax, we haven't been negatively impacted. That is a pretty meaningful increase.

I mean, household, a $50,000 income and 2%, you get a $1,000, you're going to be spending more in tax, and that equates to -- people have done that work, but it could be roughly equivalent to 25% of what the average household spends on food at home. So we're cautious about that because it is still early, but I'm concerned.

That's helpful. It's encouraging though to see those type of trends early in the fourth quarter.

The Ohio foothold that you have, that kind of a new entry, can you discuss how that helps your ability to capture additional accounts in that region?

Well, I think, in a number of ways. Changing wholesalers is a very significant event, if you're an independent operator.

And it takes a lot of courage to pull that trigger. The transition is not an easy one to make.

And I think as we're successful with integrating that business into the Spartan family, I think it will provide a bit of a roadmap and maybe a template for other retailers, and in the end, Ohio, to watch it, to see it, to feel it. And believe me, there's a network to discuss it, and perhaps, allow them to maybe have a little bit more courage to make that change.

Listen, we have great competitors in the marketplace. We fight like heck for every dollar on the street.

We've been working with the Chief's team for years, frankly, trying to build a relationship and partner with them, and nobody flips a switch and changes wholesalers. I mean, it takes a tremendous amount of hard work and effort, and I'm really proud of our team here for being able to affect that change.

And just one last one for me. The loyalty program, do you have the number of households on that program and the redemption rate in the quarter?

In the third quarter, we had right at 800,000 active households on the YES program, and it continued grow. We actually, I think, added 52,000 households to the program in the quarter.

The majority of them came from West Michigan. That shouldn't be a surprise because we, in the third quarter, lapped the launch of the program a year ago.

But we actually had increases in active households in all 3 regions of the company, the East, the North and the West.

And the redemption rate, if you have it?

I don't know that I'm tracking with your question there, Ben.

This is actually Ryan Gilligan, on for Karen. Can you talk about the tonnage trends in the quarter and contrast that with what you guys saw last quarter?

Yes, the tonnage trends in the third quarter did not keep pace with the tonnage trends we had in the second quarter. Early in the quarter, they were pretty good.

As a matter fact, we had the call, the analyst call and earnings release. We kind of alluded to that, that we were feeling pretty good about that.

And as I mentioned earlier, that middle part of the quarter really got softer for us. So the trends were softer in terms of tonnage.

We were negative in tonnage, as the way we measure it. And however, I would say to you that we've gotten significantly better or nearly back to 0 in the early part of the fourth quarter.

That's helpful. Can you update us on your outlook for inflation?

Gosh, we talk about this every time. I don't know that we have a better crystal ball than anybody else.

One of the drivers to the comp in Q3 are actually -- because we gave you a 1.2% negative comp, as reported, 0.4% of that was in the average item rate. So we saw a deflationary impact in the quarter.

Our distribution inflation is quite tame, around 1%, and it's -- in the quarter was about 1% in virtually every category. It was kind of a homogeneous quarter for us.

At retail, we're not seeing much inflation. I just told you, we were slightly negative in the third quarter.

I think it's going to be tame in the early part of the calendar year, maybe get a little bit more aggressive later in the year with maybe some of the drought conditions kicking in and some of the CPGs having to pass some of that on. I know the USDA is forecasting food at home, for calendar '13, to be 3% to 4% up.

That seems a little high to me, but I'm sure their crystal ball is better than mine.

That's great. And do you have an early estimate for what you think the impact from the Easter calendar shift will have on sales this upcoming quarter?

David?

Yes, it's about 70 points.

Okay. And last question, what impact did fuel margins have on earnings this quarter?

It was pretty de minimus. It's pretty consistent with the past.

Dennis, could you talk about the sales mix during the Christmas holiday, Christmas through New Year’s period? Did it show trading up or not?

Was there a lack thereof? How would you characterize consumer spending in that critical period?

We didn't see much of a shift at all. And trying to understand, are consumers' trading up or down or is the mix changing, even though there was, through that Christmas holiday, I think every time you turned on the news, it was like this doom and gloom, fiscal cliff, things were so negative.

We didn't see much of a change. The -- I do think that our loyalty program helped us a bit during the holiday period.

And as you know, we have a points-driven program, and customers have an assortment of things they can -- products they can redeem their points for. We actually, over the holiday period, ended up giving away, or redeeming through points, over 13,000 fresh hams and/or turkeys for the holiday, and I think those kind of things help us.

We gave our most loyal customers free points, unannounced. As they get to the check out, we identify, through their card, who they are, and I think those are the kind of things that we are going to continue to mine even more aggressively to really cement that loyalty into the consumer base.

All right. But no -- you wouldn't say customers were unduly cautious during Christmas nor optimistic?

I would not.

Thank you, and I thank all of the participants on today's call. We truly appreciate your continued support, interest in Spartan Stores, and we look forward to sharing our year-end results with you in May.

Thank you.