SpartanNash Company (SPTN) Q2 2019 Earnings Call Transcript

SPTN earnings call for the period ending July 13, 2019.

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Motley Fool Transcribers
Aug 15, 2019 at 12:23PM
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SpartanNash Company (NASDAQ:SPTN)
Q2 2019 Earnings Call
Aug 15, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the SpartanNash Company Second Quarter 2019 Earnings Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Katie Turner, Managing Director. Please go ahead, ma'am.

Katie Turner -- Managing Director

Thanks, good morning, and welcome to the SpartanNash Company's second quarter fiscal 2019 earnings conference call. On the call today from the Company are, Dennis Eidson, Chairman and Interim President and Chief Executive Officer; and Mark Shamber, Executive Vice President and Chief Financial Officer.

By now, everyone should have access to the earnings release, which was issued yesterday at approximately 4:00 or 5:00 PM Eastern Time. For a copy of the release, please visit SpartanNash's website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the Company's website for approximately 10 days.

Before we begin, we'd like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences, include among others, competitive pressures among food, retail and distribution companies; the uncertainties inherent in implementing strategic plans and integrating operations and general economic and market conditions. Additional information about the risk factors and uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's earnings release, most recent annual report on Form 10-K and then in the Company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP measures and comparable period measures to provide investors with useful information about the Company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by Regulation G is included in the Company's earnings release, which was issued yesterday.

And it's now my pleasure to turn the call over to Dennis.

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

Thanks, Katie. Good morning, everyone, and thank you for joining us today. It's nice to be speaking with many of you again as the Interim President and CEO. I want to take the opportunity to address our leadership transition, and also provide an update of our strategies to sustain our top line growth, while improving our profitability in the long run. Mark will then provide some additional detail on the second quarter financial performance and then we'll open up the call for your questions.

First, on behalf of the Board and the entire SpartanNash team, I personally like to thank Dave Staples for his contributions throughout his tenure at the Company. Since joining SpartanNash in 2000, Dave has presided over numerous successful business initiatives and was instrumental in driving growth across our business and we wish Dave the best in the future.

As many of you know, I have a long history with SpartanNash, having retired as CEO in 2017, and prior to that, I served as President, Chief Operating Officer and EVP of Marketing and Merchandising, dating back to 2003. In the last few days, since I've stepped back into the day role at SpartanNash, certainly been refreshing to see the passion and dedication of our associates across the organization. We're confident in the strength of our platform and the effort of our associates that help us to secure wins across all of our segments in order to gain momentum. I look forward to working together with this team to drive meaningful improvements, while positioning SpartanNash to achieve long-term profitable growth and improve value for our shareholders.

As part of the effort, we've decided to exit the Indianapolis-based Fresh Kitchen operations and shift Caito's focus and expertise to the produce distribution and Fresh Cut operations. We believe this transition better aligns with Caito's operational expertise and it will enable them to improve service levels and efficiency. Production will continue as the transition plan is executed, and we're committed to make the transition as seamless as possible for our Fresh Kitchen customers, associates and our suppliers. We expect to complete this transition by the end of fiscal 2019, and we'll update you on the developments in the future course.

With respect to our strategic business objectives, our team has made progress in many areas during the current quarter. Although we've not achieved our profitability goals, we remain focused on translating our sales growth into improved bottom line performance. Consolidated net sales increased 5.3% to $2 billion, representing the 13th consecutive quarter of growth for the Company. We also continue to make progress on our other strategic objectives during the quarter, and are particularly pleased with our ability to strengthen our team, improve working capital and lower debt levels.

In the Retail segment, sales growth was driven by contributions from the newly acquired Martin's business. Additionally, we've experienced a positive consumer response to the relaunch of the Family Fare banner in West Michigan, resulting in a favorable trend in the sales for these locations.

In the Food Distribution segment, net sales increased 3% before the impact of the elimination of intercompany sales from Martin's. However, we experienced some deceleration in the rate of sales growth from more recent quarters, largely due to unseasonably cool and very wet weather. We're pleased that these trends have improved during the month of July as the weather became more favorable and the rate of growth approximated the more recent levels.

In the Military segment, net sales increased nominally even as the broader commissary environment continued to contract in the current quarter. We expect Military revenues continue to be slightly ahead 2018, the remainder of this year as we benefit from new business and growth in DeCA's private brands.

As we move forward, we expect Project One Team, our previously discussed Companywide initiative, will help drive growth and profitability in our business. Our team has made progress in the last six months since starting this initiative and we continue to remain on track to achieve greater than $20 million in annual run rate savings by the end of fiscal 2020. At this time, we've implemented several initiatives across the organization that are in the process of implementing more significant initiatives, which include improving the systems and policies for inventory procurement and management, supply chain efficiency and automation of routine administrative tasks. The effect of implementing these cost saving opportunities are not expected to be material to earnings in 2019, due to the time and resources required during the start-up phase.

Another strategic objective is strengthening the management team, systems and supply chain. And most recently, we welcomed Walt Lentz, as the President of Food Distribution. His depth of experience in supply chain, manufacturing and the retail landscape will benefit the Food Distribution segment and the Company's entire supply chain. We're excited to see that Walt hit ground running, he's already aligning with some of the other leaders in the organization to improve the Company's way that we take food places.

I'm also especially pleased with the progress the team has made on our strategic objective to reduce debt and working capital investment. Since the second quarter of last year, we've paid down over $90 million in debt, resulting in an $8 million net debt reduction in the net balance, despite the $87 million used to fund the Martin's acquisition. As a result of our significant reduction to our revolving credit facility, last week we paid up our term loan, which will contribute to overall [Phonetic] rate of interest expense, not only in the back half of this year, but also going forward.

Our team has also reduced working capital by over $15 million from the second quarter of last fiscal year, while growing sales mid-single digits. I commend the team for their efforts to date and look forward to the improvements that we're able to make in the balance of the fiscal year, as we work toward our $30 million capital reduction target.

I'll now turn the call over to Mark for the financial review.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Thanks, Dennis, and good morning to everyone joining us on the conference call and webcast today.

Net sales for the second quarter of fiscal 2019 increased to $2 billion, as Dennis mentioned, an increase of $100 million or 5.3% over 2018 second quarter sales of $1.9 billion. Adjusted EPS for the second quarter of fiscal 2019 came in at $0.34 per diluted share compared to adjusted EPS at $0.50 per diluted share in fiscal 2018 second quarter. On a GAAP basis, the Company reported loss of $0.19 per diluted share in the quarter compared to earnings of $0.50 per share in the second quarter of 2018.

Shifting to our business segments. Net sales for Food Distribution decreased by $6.3 million, or 0.7%, to $935.4 million in the second quarter of fiscal 2019. Excluding the elimination of intercompany sales to Martin's subsequent to the acquisition, sales increased by 3%, primarily due to sales growth from existing customers. Inflation accelerated to a 115 basis points in Food Distribution during the quarter, an increase of 33 basis points from Q1 and an 81 basis point improvement compared to the second quarter of fiscal 2018.

Reported operating earnings for Food Distribution in the second quarter totaled $272,000 compared to $18.7 million in the second quarter of fiscal 2018, primarily due to asset impairment charges associated with the repositioning of the Caito Fresh Production operations, losses from the Fresh Kitchen operations, and higher supply chain expenses, partially offset by lower recall expenses than in the prior year, and favorable adjustments to incentive compensation.

Adjusted operating income totaled $16.8 million in the quarter versus the prior year second quarter adjusted operating income of $19.8 million. Second quarter adjusted operating earnings in the current year, excludes $16 million in asset impairment charges, as well as the allocation of one-time costs associated with Project One Team in the current quarter. Fiscal 2018 second quarter adjusted operating earnings exclude $1.1 million in expenses, which are detailed in Table 3 of yesterday's press release.

Military net sales of $490.6 million in second quarter reflect an increase of $0.9 million, or 0.2%, compared to prior year revenues of $489.7 million. Incremental volume from new business with an existing customer and DeCA's private brand program drove the sales increase, which is partially offset by lower comparable sales at commissary locations.

Military Distribution reported an operating loss of $1.6 million in the second quarter compared to earnings of $3.1 million in the second quarter of fiscal 2018, primarily due to higher supply chain costs and lower marginal rates, partially due to a shift in the mix of the business, as well as the cycling of gains related to the sale of a closed facility in the prior year quarter. On an adjusted basis, Military's operating loss was $1.5 million for the second quarter of fiscal 2019 compared to operating earnings of $2.3 million in 2018 second quarter.

Finally, our Retail net sales increased 22.6% to $570 million for the quarter, compared to $464.6 million in the second quarter last year. The sales increase was due to the Martin's acquisition. Excluding this acquisition, sales decreased 3.3% due to lower sales associated with store closures totaling $10.2 million, and a decrease in comparable store sales of 2%, partially due to a shift in the Easter holiday, which we estimated 0.5% and unfavorable weather conditions for the first two periods of this quarter. The comparable sales trends have improved sequentially in the July and August timeframe.

Reported -- Retail reported GAAP operating earnings of $8.7 million for the same quarter of 2019, compared to $8 million in the prior year second quarter. First quarter adjusted operating earnings in Retail were $8.2 million compared to $7.7 million in 2018 second quarter. The increase was primarily driven by the contribution of the acquired Martin's stores, the favorable impact of closing underperforming stores and lower incentive comp, mostly offset by higher fees paid to pharmacy benefit managers.

Interest expense increased $1.7 million in the second quarter of fiscal 2019 to $8.7 million due to higher interest rates compared to the same period last year. Interest associated with the borrowings to fund the Martins acquisition were more than offset by debt paid down through cash from operations. We recognized pension termination costs of $9 million in the second quarter, primarily due to settlement expense, as we are distributing assets and winding down our corporate pension plan as previously announced. We expect additional non-cash expense of approximately $10 million to $11 million in the third quarter related to the final asset distributions of the plan.

So, in the first half of fiscal 2019, we generated consolidated operating cash flows of $103.8 million, consistent with the prior year-to-date period of $104.3 million.

Our total net long-term debt decreased by $12.4 million to $682.3 million, compared to $694.7 million at the end of the second quarter of 2018, as we were able to offset the acquisition of Martin's and other investments with cash generated by operations and the disposition of certain closed facilities.

From an outlook perspective, we have reiterated our full-year 2019 sales -- net sales guidance of mid-single-digit sales growth, which was originally provided on February 20, 2019. As communicated in our earnings release, we expect full-year earnings of $1.20 or $1.35 per share on an adjusted basis, excluding charges totaling $32 million to $36 million after taxes, which include after tax charges to terminate the Company's frozen pension plan of $7 million to $8.3 million for the remainder of the year and projected losses and disposition expenses associated with the Company's planned exit of its Fresh Kitchen operations of $3.7 million to $4.5 million and other items as detailed in Table 6 of yesterday's earnings release.

We expect adjusted EBITDA will range from $183 million to $195 million. This outlook does not include costs associated with the CEO transition, and costs from a non-recurring supplemental transition incentive program for eligible associates. From a GAAP perspective, we expect the reported earnings from continuing operations will be in the range of $0.21 to $0.47 per diluted share.

We are updating our capital expenditure guidance to a range of $86 million to $92 million and we now expect depreciation and amortization to range from approximately $89 million to $91 million. Interest expense to range from $34 million to $35 million and our reported and adjusted effective tax rates to range from 22% to 23% due to a shift in profitability into lower tax jurisdictions.

And at this point, I'd like to turn the call back over to Dennis.

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

Thanks, Mark. In closing, we recognize that much work still remains to be done to return our organization to the profitability levels that we expect. Our team remains extremely focused on moving the Company forward in this area, and I'm excited to see how the new members of the team are contributing to build an even stronger organization. I personally look forward to what will -- we will accomplish at SpartanNash as this team reaches its full potential.

With that, I'll turn the call over to you, Keith, and open up for any questions.

Questions and Answers:

Operator

Yes. Thank you. [Operator Instructions] And the first question comes from Chris Mandeville with Jefferies.

Blake Anderson -- Jefferies -- Analyst

Hi, good morning. This is Blake on for Chris. Thanks for taking my questions. Can you first of all, walk us through the learnings just from your assessment of the Fresh Kitchen business? I know you've been discussing some options there with outside experts. So just a little more detail on the main problems you're experiencing, what you found out and how you came about the decision to sell that business?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. I mean, I think, Blake, I appreciate the question. I think at this point, our findings and the decision, I mean, I don't want to focus too much on that as we have at this point made the decision to exit that business and we have a process under way that we think will be completed by the end of the fiscal year. I think at the end of the day, it was strategically a good decision. There were some expectations of sales growth from some customers and where we thought there would be opportunities and while they -- eventually the sales team, they thought the sales have come, they've come at a lower rate than I think we initially anticipated. And the length of the runs or the -- we have far more SKUs and smaller runs and I think we're originally in the projections. And so, while the team made significant efforts to reduce our labor costs associated with that and manage the shrink associated with that, we just weren't able to get them to a level where we felt, as the additional sales came on-board, so we should wait for that period of time. And then, it was a scenario where the sales lead time, I think was perhaps, longer than we initially expected. And by virtue of the shorter runs, we've talked probably in the last three or four quarters about looking to see measurable improvements, so that we could see that we're on a trajectory and the sales growth we've added customers, we've added volume, it just hasn't happened at the pace that we needed. And so, we felt the right decision was to exit at this point in time and move forward.

Blake Anderson -- Jefferies -- Analyst

Okay. That's helpful. And then, are you willing to share any numbers on the EBITDA level it had or maybe how much of a headwind that was to margins, so we can think about the lift going forward?

Mark Shamber -- Executive Vice President and Chief Financial Officer

No. I don't think we're going to get into that level of detail. I mean, it was sort of an integrated operation. And so, in trying to break out some of the administrative aspects of it at this time, I think is a little challenging. And given, we talked about the fact, if you go back to some of the prior calls that we were doing, $40 million to $45 million of business, and we're -- with what we're exiting, we're only going to exit on about $20 million of the business. It would all be projections as to what we think it will -- what portion of the business that we're retaining into the Fresh Cut operations will do and I don't want to get there until we've actually had that up and running and sort of see what it does in the results. So, we've given guidance for the back half as to what we expect the losses would have been had we continued at the current run rate, as well as some of these expenses that we expect to incur as part of this process and part of the shutdown. But I'm not going to try to go back into the history of it, because it would all be sort of a pro forma that may or may not be dead on.

Blake Anderson -- Jefferies -- Analyst

Okay. Understood. And then last one, just real quickly on Retail. Could you give us what Martin's same-store sales were versus the rest of your banners? Are you willing to break that out at all?

Mark Shamber -- Executive Vice President and Chief Financial Officer

No. I mean, we'll talk about what Martin's is doing when they fall into the comp. But we've -- I mean, I stayed during my two years here, I don't know we've ever broken any particular banner out. So we're sharing what the sales are. We gave you an estimate, I think when we announced the transaction as to what they were doing historically, that should give you some sort of range as to how they're performing. But we're not going to carve it out because I think there'd be an expectation we do that going forward and we typically don't do individual banner.

Blake Anderson -- Jefferies -- Analyst

Yeah. That makes sense. Okay. Thanks so much.

Operator

Thank you. And the next question comes from Karen Short with Barclays.

Karen Short -- Barclays Capital -- Analyst

Hi, thanks very much. So, just a bigger picture question. I mean, obviously, I realized that Kitchen has been a disappointment, but the industry has also been very tough. So, I guess, have they led to the decision with respect to Dave. How do you think about it being self-inflicted as opposed to just being in this general industry malaise? Because I think if you look at the industry in general, most retailers are seeing top line growth with operating profit declines. So, just kind of trying to parse out how much of it is relates to industry?

Mark Shamber -- Executive Vice President and Chief Financial Officer

So, Karen, let me just make sure I understand the question and then maybe this portion -- Dennis will answer this portion, I'll try to answer. So, if I understand what you just asked, you're asking if -- how much of our recent performance we feel is self-inflicted versus what portion is associated with the industry as a whole and you're focusing primarily on the Retail side or are you asking for all the segments?

Karen Short -- Barclays Capital -- Analyst

No. I would say, for all, I mean, not necessarily Military, but Distribution, Retail. I mean, and I ask it in the context of like, again, obviously Kitchen has been a problem. But is -- what's happening at Spartan really -- a Spartan issue or is it an industry? [Speech Overlap]

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

[Speech Overlap] expecting. Karen, I think the answer is kind of yes, right? It is not one or the other. I think, we certainly recognize that the macro environment is a difficult one in the space. And yeah it is we reflect on that. We're pretty heartened by the fact that we've been able to generate positive sales consistently despite that environment. I think as we put in the releases, the 13th consecutive quarter. And, I guess, we're not as pleased with our ability to get an appropriate amount of that top line sales to cascade to the bottom line. Some of that is industry pressures, to be sure. Other things that are causing some of our shortfall, we think are execution in nature and we believe that we will be in a position to get those improved going forward. So, it's a complex business and there is no simple answer to that question. But I think it's a broad-based kind of solution that we need to have in place.

Karen Short -- Barclays Capital -- Analyst

Okay. That's helpful. And then, I guess, just on the quarter, can you maybe provide some color on traffic versus basket in Retail? And then also give us an update on the rate of attrition you're seeing in Distribution? And then along those lines, have you seen any recent customer wins or losses that are worth noting, I mean, even if you obviously haven't called anything out in the press release? Thanks.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. Well, let me answer the second question first and then I don't know that I have handy and I don't know that we've typically talked on ticket versus basket size, but we can do that next. I mean, I would say that, look, we -- at any given quarter, there are some customers that we win and there are some customers that maybe we're showing declines on whether they've chosen to close the store, whether they emerged or things of that nature. I would say, for this quarter, we probably had about in the low- to mid-teens of new customers. Having said that, the volumes associated with those customers, I don't know that anyone individually or in the aggregate, I was in attempt to call out. But, I would say, the number of wins we had would be typical for any given quarter.

As it relates to the attrition of the business, I think that there is nothing that -- again, it was out of the ordinary. I think we talked on the -- Dennis covered in his comments, and as I mentioned as well and it was in the press release, we saw with the unusually or unseasonably cooler spring and into early summer and the weather we saw softer numbers but as we returned to sort of a more typical summer timeframe, we've seen in July and into August to date that the sales have returned. And so, while probably two-thirds of the period or two-thirds of the quarter might have had some softness, I attribute that more to a weather component than anything from a competition perspective, just because of what we've seen since the weather has returned to more typical levels. So, I think that the covers on the Distribution side.

And then, as it relates to the basket size, I'm not sure -- I can tell you that I don't have it right in front of me. So I don't know I can answer that. I don't know if it's something I can follow up with you on or if, Dennis, do you have to add something?

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

Yeah. I think the numbers that I saw, Mark, I think were the negative 2, which, as you said, is really impacted by the Easter shift fall, 0.5% or negative 2. We actually have a negative transaction income, and positive sales per transaction without identifying the actual rates that was a mix, Karen.

Karen Short -- Barclays Capital -- Analyst

Okay. Great. Thank you.

Operator

Thank you. And the next question comes from Scott Mushkin with Wolfe Research.

Scott Mushkin -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking my questions. And Dennis, nice to talk to you again, and I wish Dave all the best, too. I know you guys worked a long time together. So -- in the past. So, I guess, what I wanted to do is I want to talk a little bit about what kind of direction of the industry, we have Walmart report this morning, and I think what was noteworthy is that, they actually reported on the retail side slight deflation in food. And so, I think you guys commented about 132 basis points, if I got that right, of inflation on the wholesale level, really suggesting some pinch here, not only on your own Retail business, but also with your customers. So I was wondering if, in this environment should be attractive [Phonetic] margin, how do you help your customers when the retail pricing seems to be stuck in neutral at best and maybe actually falling, even though costs are going up?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Well, I mean, I think maybe when I started, I don't know that we called it out in the script, but on our side, from an inflation standpoint, we saw about 80 basis points for the quarter on the Retail side. So, I know that that would contradict what Walmart is saying. And so, maybe there is a mix or a blend perspective. But we actually saw a sequential acceleration from an inflation standpoint. Last quarter we are at about 18 basis points. So, we went up over 60 basis points, almost quadrupled. Still some 1% for the quarter, but we actually saw an acceleration.

Scott Mushkin -- Wolfe Research -- Analyst

And Mark, is there -- and dose that make you a little nervous, though, because it might be Walmart taking pricing down, right, or holding wide [Phonetic]?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Well, I mean, I think, if you go back to almost a year -- almost two years ago, I think, we saw what Walmart was doing and we talked about it for a period of time in our markets. And so, as I think about today and I think about where we are two years later and think about the commentary that Walmart made a year-or-so ago that caused a lot of concern. I mean, I think we've already gone through that battle as we entered into the US and, Walmart, whether they were attempting to push back against further incursions from Aldi or Lidl expanding. I think we've seen that pricing. And so, they've returned to what might be referred to as more rational levels over the last nine to 15 months. But we're still on some of the basic commodities at levels that would be lower than where we were two years ago. I think perhaps, what they're referencing, where they're seeing is now being pushed into other geographies within the country because I don't know that we're seeing it as we sit here today. But as I look at price check and see information that gets shared by yourself and your peers from your price checks, some of those prices are still well above what they are in our markets.

Scott Mushkin -- Wolfe Research -- Analyst

All right, guys. Thanks very much. I appreciate for taking my questions.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Okay. Thanks, Scott.

Operator

Thank you. And the next question comes from Andrew Wolf with Loop Capital Markets.

Andrew Wolf -- Loop Capital Markets -- Analyst

Oh, thanks. Good morning. I want to follow-up on Scott's question on Walmart, I guess, continuing to push into price. Sort of sounds like maybe them and as the larger players maybe what's going on is they're continuing to do that, but the rest of the industry, frankly, isn't, which isn't -- which at least historically has been kind of the case, they maintain in an inflationary -- turn to an inflationary environment. Historically, Walmart maintained, price and created a sharper pricing image and then boosted up their prices later. I'm not saying that I know what they're going to do, but I know historically I think that's been the case. First of all, do you agree that in a sense that's may be what's going on as you look at price studies that you might have done for yourself, sort of with your customers and the broader market, other large chains that compete out there?

And second, do you agree that that's kind of a historical pattern that one would expect in a return to inflation?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. I mean, I think on the first part, Andy, because I might have lost you in the middle as to what the question was. But, I think, that yes, I mean, we've -- what you're referencing, we've seen and we certainly -- we were talking before about $0.99 gallons of milk and egg prices and banana prices below -- approaching or below where costs were. And I think those have migrated back to, perhaps not historical levels, but they've certainly drifted their way back up over the last 12 to 18 months. And so, I think, we've experienced the need in not all of our markets, but certainly some of our markets, we've experienced during that timeframe. And I can't speculate to the same comment you made, I can't speculate if that's what they're going to do or not. But I think that what we saw in the back half of 2017 in the first half or first three quarters of 2018, that's what we were up against and battled through. And I think those -- we commented at the time that those sort of investments likely weren't sustainable and that they would return to some sort of higher watermark. And I think that's what we've seen occur.

So, I think, yes, they're doing that in other parts of the country. It's quite likely that once they've pushed and maintain -- gotten those gains in other geographies, that they may then allow pricing to drift back up. We've seen that some inflation has drifted in. And so, I know what Scott referenced that Walmart called out and haven't had a chance to fully digest their release. But I could say that we've seen inflation both on the wholesale and distribution side this quarter. But again, as we've referenced in the last few quarters, they're not the same, right? So there's almost a 35 basis points spread between what we're seeing in wholesale and what was reflected at retail.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. Thanks. It's quite helpful. I guess, this one might be for Dennis. Can you give us idea that sort of challenges to get the two largest segments going to profit growth, which I think is your goal for next year. As I look at wholesale and I guess we could throw a Military in there. The sales are decent, it's good. But clearly, there's some execution issues. And when I look at Retail, ex Martin's, it's more of a sales productivity issue, which Karen alluded to. And so, I would think more so than execution. Do you agree, am I kind of framing it the right way? And if so, could you kind of elaborate on what you -- on the plans, on the execution side in wholesale and sales productivity side in retail?

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

Yeah. It's a little bit touching on where Karen was going and, clearly, on the Distribution side, we're heartened by our ability to continue to grow the top line. It is the growth engine of the Company going forward, we've articulated that. We believe, yes, there are some macro challenges that are causing some disruption in the profitability. And we also believe there are plenty of things that we can improve on in the segment.

Supply chain, Walt is brand new, but clearly, will be a primary focus of their improvement will come. Inventory management is another area that we think we have some opportunities to improve the metrics around that. The -- picking unproductive inventory out, all the focus on working capital is -- some of those hidden benefits, they kind of just cascade down through the P&L when you start executing at a higher level. And so, we believe that they are to do.

On the Retail side, we've discussed about that segment and how it plays into our strategy and we did the Martin's acquisition last year. It was a fit very nicely in the portfolio in adjacent market, a customer that we were servicing for decades. It, I think, fit right into the strategy that the Company has talked about. With regard to retail acquisitions, we would be opportunistic there, also that Martin's business was in the western part of the US, we wouldn't have engaged in that transaction. But this made sense and fits the strategy.

And I think the Retail landscape is tough and we've done some things more recently in some of our stores here in our home Grand Rapids market that seems to be resonating with the consumer with regard to improving sales trends pretty significantly. And in some cases -- and some of the initiatives are working exactly as we thought they would. But our job as an organization is to get the retail comp store sales from red to black. And I can tell you, the team is focused on that. I spoke about Walt engaged on supply chain side, but Lori Raya is relatively new to the organization. And she's got the Merchandising and Marketing functions of the Company. She's bringing a lot of fresh ideas. And I think the combination of Lori and Walt will help on both of those fronts.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. And I could just kind of link in the Project One initiative and assuming the cost savings begin to flow in as you project. I think, I heard a reference to, using those for growth, which to me sounds like, some kind of -- well, it could be a lot of things, but it could include reinvestment, for example, in price or something like that. Do you have a sense like at this time at least, how those save the Project One cost reductions might be allocated to driving growth for the business versus flowing it through to the bottom line?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. Andy, I don't know that the way Project One is -- look, I can say -- I can tell you exactly how -- as much as we're not going to share that level of detail, I could tell you exactly how we expected to flow through the improvements that flow through the business and in which divisions and in what timeframe as we've got a whole group of folks managing the project, as well as all the associates that are working on to make those initiatives take place. As we look into 2020 and we set our plan, in order to present that next year and kind of give you folks guidance, I think it's still a bit early as to where we're going to take some of those opportunities and invest or reinvest in the business. I don't know that we're in a position to necessarily break that out.

And there may be some aspects when you talk about reinvesting, there may be components that if we tried, we would have tried to do something price or otherwise that honestly we'd probably couldn't share for competitive reasons until they were already in place in the market.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. Thank you.

Mark Shamber -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. [Operator Instructions] And the next question comes from Chuck Cerankosky with Northcoast Research.

Charles Cerankosky -- Northcoast Research -- Analyst

Good morning, everyone.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Good morning, Chuck.

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

Good morning.

Charles Cerankosky -- Northcoast Research -- Analyst

Could you talk a little bit about -- in Food Distribution, the labor supply and productivity situation [Technical Issues], I know you had some absenteeism issues and what are sort of the offsets to that from internal programs, including the automation?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Well, I think -- look, I think as it relates to the supply, I mean, you see the unemployment numbers, I mean, we're -- the country I think we're approaching on full employment. And I think that, while it's perhaps a little more challenging than it's been in the recent past, we're still able to attract folks into the Company by virtue of a good starting wage and the benefits that we offer. I think that, from our standpoint and we've talked about a little bit, the learning curve of associates getting out to say our standards has been a bit more delayed than what we've seen in recent years. And so, we're not getting as much productivity as quickly as we might have in the past. They eventually do get to that level. But it's not in the same -- it used to be, hey, in 60 days or at this point, 90 days or this point, there may be a lag associated with that compared to what we've seen historically.

To the question on the absenteeism, we still experience some unexplained absenteeism in some of our DCs. And I think, that's something that's a challenge that we've had to work through and I don't want to attribute it to a generational thing versus a full employment scenario but it's something that we face and we're working through a variety of solutions to try to address that in the future.

From a standpoint, what was this -- from the standpoint of the second part of the question, I think it's too early to speculate on anything from an automation perspective. I think we're focused on being more efficient in our operations. And I think Walt's got a number of initiatives that he's driving through the organization to help our rates and help get improvements within the supply chain. And I would say, they're not automation-driven.

Charles Cerankosky -- Northcoast Research -- Analyst

Thanks. And looking at the two distribution segments, Military and the traditional grocery. How -- I realize those are separate segments. How integrated now are the distribution platforms to better utilize the assets involved?

Mark Shamber -- Executive Vice President and Chief Financial Officer

The platforms, there are parts that they share, but they're -- for the most part, they are on different platforms. And Arif Dar, who is our new CIO that joined us at the beginning of the year. That is one of the initiatives that he has in place, as -- over the coming next couple of years, maybe a little longer, we've got an initiative to get our -- on a whole platform across our entire distribution network.

Charles Cerankosky -- Northcoast Research -- Analyst

All right. Thank you very much. Best of luck for the rest of the year.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Thanks, Chuck.

Operator

Thank you. And the next question is from Chris Mandeville with Jefferies.

Blake Anderson -- Jefferies -- Analyst

Hey, I just had one follow-up. On your Retail business, I was wondering if you could share how many remodels you now have done. Just give us the update on that number? And then how many you have left? Or do you have a number in the pipeline we can expect? And then Fast Lane locations, I think there are about 65 as at the end of last year, if you could provide us how many stores have that now? Thank you.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah. So I think on the Fast Lane, we have enrolled Fast Lane out on the additional store. So that would still be the same number, the 65 that you quoted, is still the same number. On the remodel, I would say, it depends on -- are you talking about the current fiscal or what period of time are you referencing? I would say that for the current fiscal year, we did 10 major remodels and then we had a number of the stores that had whether you want to call medium or touch-ups. And so, the number we get into the mid- to high-teens, if you factor in all of them but from a major remodel perspective, it's about 10.

Blake Anderson -- Jefferies -- Analyst

Okay. Perfect.

Mark Shamber -- Executive Vice President and Chief Financial Officer

And then, I missed a question in the middle or did I answered all?

Blake Anderson -- Jefferies -- Analyst

No. That was it. Thank you.

Operator

Thank you. As we have exhausted all the questions, I'd like to return the floor to Dennis Eidson for any closing comments.

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

I want to thank everybody for their questions and participation on today's call, and we certainly look forward to speaking again with all of you when we report our third quarter fiscal 2019 results. Thanks.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Katie Turner -- Managing Director

Dennis Eidson -- Chairman and Interim President and Chief Executive Officer

Mark Shamber -- Executive Vice President and Chief Financial Officer

Blake Anderson -- Jefferies -- Analyst

Karen Short -- Barclays Capital -- Analyst

Scott Mushkin -- Wolfe Research -- Analyst

Andrew Wolf -- Loop Capital Markets -- Analyst

Charles Cerankosky -- Northcoast Research -- Analyst

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