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SpartanNash Company (NASDAQ:SPTN)
Q4 2019 Earnings Call
Feb 20, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the SpartanNash Company Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Rachel Perkins, ICR. Please go ahead. Good morning, and welcome to the SpartanNash Company's Fourth Quarter and Fiscal year 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 4:05 p.m. Eastern time. For a copy of the earnings 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 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 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. It is now my pleasure to turn the call over to Dennis.

Dennis Eidson -- Interim President and Chief Executive Officer

Thanks, Rachel. Good morning, everyone, and thank you for joining us today. On today's call, I'll start with an overview of our operational progress and financial highlights, and then Mark will provide some additional detail on the fourth quarter and the full year financials and review our 2020 outlook. Finally, we'll open up the call and take some questions. We were able to conclude 2019 with consolidated financial results in line with our guidance despite some ongoing challenges and cost pressures, including elevated healthcare costs in the fourth quarter. Our team remains committed to improving our execution and our long-term strategy. We're building upon our existing foundation each day from our retail stores to our food and military distribution businesses as we increasingly position the company to sustain profitable growth.

For the fourth quarter, consolidated net sales increased over 5% to $2 billion, representing the 15th consecutive quarter of growth for the company. While for the year, net sales increased nearly 6% to $8.5 billion. We not only met our goal of sustaining mid-single-digit sales growth for another quarter, but we continued our momentum at retail by closing the year with positive comp store sales for the second consecutive quarter. For fiscal year 2019, operating cash flow increased $180 million, and free cash flow increased to $105 million, strengthened by our significant reductions in working capital. This additional cash flow supported an overall reduction of our net debt position for the year, which we were able to achieve while growing sales and executing the Martin's acquisition early in the year. As we start 2020, we have achieved our initial goal of $30 million working capital reduction, and our team is poised to drive further improvement in this area. Moving on to our segments.

In the Food Distribution segment, net sales decreased slightly on a reported basis, however, increased 2.5% before the impact of the elimination of the intercompany sales to Martin's. As I mentioned last quarter, we're continuously supporting initiatives to make improvements to our supply chain to increase efficiencies as well as reduce expenses. As evidenced in the fourth quarter, a significant component of our working capital improvements resulted from better inventory management. We're building on the tools we discussed previously to better forecast demand and inform purchasing activities to also manage our assortment. Our transportation team is in the process of implementing new route management tools to reduce miles traveled, which includes the installation of new onboard computers on all trucks to improve rail planning, efficiency and service levels.

We're encouraged by these new programs that will enable us to better leverage our fleet across the distribution network. We concluded the operation of Fresh Kitchen during the fourth quarter of fiscal 2019 and entered into an agreement to sell the facility and related equipment with an expected closing date late in the first quarter of fiscal 2020. In the retail segment, sales growth was driven by contributions from the newly acquired Martin's business and the second consecutive quarter of positive comp store sales. We continue to gain valuable insights from our partnership with Dunnhumby, which will strengthen our assortment, positioning and loyalty programs to deliver better experiences for our customers as we meet their shopping needs and fuel future growth. In the military segment, net sales decreased slightly as our growth from DeCA's private brand program was offset by declining comp store sales at DeCA-operated locations. We are committed to improving our operating results in the future. And to start 2020, we are pleased to welcome David Sisk as President of our Military division.

I've had the pleasure of knowing David for some time and believe he'll be a great addition to the SpartanNash family. David's experience, knowledge and passion for the military resale channel will be important as we continue to grow our relationship with DeCA and our business partners. We appreciate the contributions of Kathy Mahoney, who has been the leader of the military segment for nearly three years while also serving as Chief Legal Officer. She's provided a strong foundation for David to further build upon. And following the completion of the transition, Kathy will continue in her role as Chief Legal Officer. Additionally, I'd like to note that the Board of Directors has continued a comprehensive process to identify the next Chief Executive Officer and has made progress in the search over the course of the last quarter. In summary, we're pleased to have delivered results consistent with our guidance for the second consecutive quarter and are optimistic about our future outlook.

Now I'll 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. Net sales for the fourth quarter of fiscal 2019 increased to $2 billion, an increase of $101 million or 5.3% over 2018's fourth quarter sales of $1.9 billion. Our sales increase was due to the acquisition margins as well as higher sales within the Food Distribution segment prior to the elimination of the intercompany sales for the acquired business. Adjusted EPS for the fourth quarter of fiscal 2019 came in at $0.23 per diluted share compared to adjusted EPS of $0.32 per diluted share in fiscal 2018's fourth quarter. Adjusted earnings for the fourth quarter of 2019 includes $3.9 million after taxes or $0.11 per share in costs associated with the CEO transition and the supplemental incentive program for eligible associates, which I'll refer to collectively as the transition cost elsewhere in my discussion.

On a GAAP basis, the company reported earnings of $0.15 per diluted share in the quarter compared to a loss of $0.39 per diluted share in the fourth quarter of fiscal 2018. The year-over-year improvement reflects lower asset impairment charges and the benefit of sales growth from the Martin's acquisition as well as lower interest expense compared to prior year's fourth quarter. Shifting to our business segments. Net sales in Food Distribution decreased 1.6% to $939 million in the fourth quarter of 2019. Excluding the elimination of intercompany sales to Martin's post acquisition, net sales increased 2.5%, primarily due to sales growth from our existing customers. Inflation showed inflation slowed to 189 basis points in Food Distribution during the quarter, a decrease of 29 basis points from Q3 but an increase of 67 basis points over the fourth quarter of fiscal 2018.

Reported operating earnings for Food Distribution in the fourth quarter totaled $10.9 million compared to a loss of $14.3 million in the fourth quarter of 2018, primarily due to lower asset impairment charges, partially offset by higher corporate administrative expenses, including the transition cost. Adjusted operating income totaled $15.7 million in the quarter versus the prior year's fourth quarter adjusted operating income of $17.9 million due to the higher corporate administrative expenses mentioned a moment ago and higher supply chain costs partially offset by the exclusion of losses related to the Fresh Kitchen operations, which were not adjusted in the prior year quarter. Our retail net sales increased 27.7% to $548 million for the quarter, primarily due to the acquisition of Martin's. Comparable store sales were positive at 0.5%, a sequential increase of 40 basis points and our second consecutive quarter with positive comp sales.

Retail reported operating earnings of $4.2 million for the fourth quarter of 2019 compared to $2.9 million in the prior year's fourth quarter. The increase was primarily due to contribution of the acquired Martin's stores as well as lower restructuring and acquisition costs. These items were partially offset by higher healthcare costs, which were unusually high in the fourth quarter. On an adjusted basis, retail operating earnings were $3 million for the fourth quarter of 2019 compared to operating earnings of $4.7 million in 2018's fourth quarter and exclude restructuring and acquisition activity in both periods. Finally, military net sales of $511 million in the fourth quarter reflect a decrease of 0.5% compared to prior year sales of $513.3 million. The decrease was due to lower comparable sales at DeCA-operated locations, partially offset by the continued expansion of DeCA's private brand program.

Military reported an operating loss of $3.5 million in the fourth quarter compared to $500,000 in the fourth quarter of 2018, primarily due to higher supply chain costs, partially offset by improvements in margin rates. On an adjusted basis, military's operating loss was $3.5 million for the fourth quarter of 2019 compared to $0.4 million in 2018's fourth quarter. Net sales for fiscal 2019 increased 5.8% to $8.54 billion from $8.06 billion in 2018. The increase was largely generated through the acquisition of Martin's as well as sales growth within the Food Distribution segment prior to the elimination of the intercompany sales for the acquired business. Adjusted EPS for fiscal 2019 came in at $1.10 per diluted share compared to adjusted EPS of $1.87 per diluted share in fiscal 2018. The decrease in adjusted EPS is due to higher supply chain costs and higher administrative expenses.

Administrative expenses within adjusted earnings for fiscal 2019 includes $6.8 million after taxes or $0.19 per diluted share in transition costs. On a GAAP basis, the company reported earnings of $0.16 per diluted share in fiscal 2019 compared to $0.94 per diluted share for fiscal 2018. The decline also reflects the impact of pension termination expenses and the impairment of a business trade name. In fiscal 2019, we generated consolidated operating cash flows of $180.2 million compared to $171.7 million in the prior year. The increase was due to improvements in working capital, partially offset by lower earnings from continuing operations. We generated $105.4 million of free cash in 2019, an increase from $100.2 million in fiscal 2018 and reduced net debt levels by $15.1 million in 2019, despite funding the acquisitions of Martin's. And during during fiscal 2019, we declared cash dividends of $27.6 million.

As covered in yesterday's press release, we are issuing guidance for fiscal 2020, which will be a 53-week year with the 53rd week falling in the fourth quarter. Overall, we anticipate low single-digit percentage sales growth over 2019, including the 53rd week. In Food Distribution, we expect to achieve mid single-digit percentage sales growth on a 52-week basis, driven by growth of existing customers and the addition of new business, partially offset by attrition in the independent retail base and lower sales due to the closure of the Fresh Kitchen operations during the fourth quarter of 2019. We in retail, we expect the continuation of positive comp sales ranging from 0.1% to 0.7% for the fiscal year. Within our military business, we expect the continued decline of DeCA comparable sales trend, which will be partially offset by growth in DeCA's private brands, resulting in a mid-single-digit percentage decline on a 52-week basis.

We expect the company's profitability to increase over the prior year with fiscal 2020 adjusted earnings per share from continuing operations to range from $1.12 to $1.20 per diluted share compared to $1.10 in 2019, excluding restructuring charges, merger, acquisition and integration expenses and other adjusted items. We expect fiscal 2020 adjusted EBITDA to be in the range of $180 million to $190 million compared to 2019's adjusted EBITDA of $177.9 million, consistent with the company's projected increase in operating earnings. From a GAAP perspective, we expect that reported earnings from continuing operations will be in the range of $0.93 to $1.04 per diluted share in comparison to earnings from continuing operations of $0.16 in fiscal 2019. Our adjusted and reported diluted earnings per share guidance from continuing operations includes the benefit of approximately $0.02 for the 53rd week in fiscal 2020.

The continued favorable contributions associated with the company's Project One Team initiative are expected to be partially offset by the increase in cost to achieve normalized incentive compensation levels. In fiscal 2020, we expect our capital expenditures to be in the range of $80 million to $90 million, and depreciation and amortization will range from approximately $88 million to $94 million. The approximately $12 million of incremental capital expenditures mentioned in the press release that were not paid in fiscal 2019 are included within our capital expenditures guidance. Also, we expect interest expense will be in the range of $27 million to $28 million. Finally, we expect our reported and adjusted effective tax rates to range from 23.5% to 24.5%.

And now I'd like to turn the call back over to Dennis.

Dennis Eidson -- Interim President and Chief Executive Officer

Thanks, Mark. In closing, we are pleased with the progress we made in the second half of the year, and we'll continue to focus on our execution. We remain confident in the strength of our platform and in our future outlook. And with that, I'll turn the call back over to Elisa, and we can open it up for some questions.

Questions and Answers:

Operator

[Operator Instructions] The first question today comes from Karen Short of Barclays. Please go ahead.

Karen Short -- Barclays -- Analyst

I thanks for taking the question. A couple of things. I just want to talk a little bit about comps in terms of the traffic versus basket and also, inflation in the quarter relative to alation expectations for next year or half 2020.

Dennis Eidson -- Interim President and Chief Executive Officer

Okay. So the comp for the quarter is at retail is made up of more improvement in the SPT and a little degradation in the transactions. And I would say both of those narrowed from the previous couple of quarters. So we've gotten a little more strength in SPT and little less in the SPT. So that's kind of the makeup, Karen, for the Q. in inflation, we talked about 133 points at retail and 139 at distribution. We're looking forward to be in that nearly 1% range for next year, which, based on where we've historically been the last several years, two years ago, retail inflation was negative 0.2. And then we went to 0.4 last year two years ago and positive 0.9 last year. So at least we're out of the doldrums of 0 inflation. And a little bit of inflation has always been good for the space.

Karen Short -- Barclays -- Analyst

Okay. And then just on this quarter, in particular, any color you could give on gas margins as it might have related benefiting you? Because I mean, it does seem gas margins have kind of held in there?

Dennis Eidson -- Interim President and Chief Executive Officer

Yes, our gas margins were actually favorable for the quarter compared to prior year. Actually, on a cents per gallon, it was nearly 10% better on the margins. We were a little short on gallons, but we're more profitable on the fuel business because of the favorable cents per gallon.

Karen Short -- Barclays -- Analyst

Okay. And then in terms of click-and-collect, obviously, you are getting a lot of traction on that. Any thoughts on like a further rollout or ongoing rollout? And maybe just a little color on that business generally.

Dennis Eidson -- Interim President and Chief Executive Officer

Yes. We don't talk a whole expletive about the click-and-collect. And I think maybe our ceiling by virtue of the kind of makeup of our store base more rural in many places, maybe a little more limited than other retailers, but we have a team that's working incredibly hard on that click-and-collect business. Out of our 156 stores, we currently have that in place in 68 of them. And we are we track lots of numerics around that. That's one part about this business. If you like numbers, there are a lot of them. One of the things we do is we ask customers about their overall satisfaction with the program. And we asked them to rank one through 5, five being the best. We have 82% of the customers give us a five on that business. It's growing nicely. We've added some stores in the year, and that helped.

The we've also recently added on to our mobile app. If you want to sign on for what we're calling fly by, if you give us your permission, we'll track your geo coding to our locations, so we can get that order ready quicker. So we're really focused on reducing the wait time. We actually were pleased to see Incisive did a study of 80 retailers in North America and Europe, but we probably were one of the smallest. And we actually got ranked number five across the U.S. and Europe in fulfillment in our click-and-collect model and actually number 11 overall in maturities. So lots of good things going on there in that space, and we're hoping to make it even better as we move forward.

Karen Short -- Barclays -- Analyst

Okay. And then last question for me, and I'll get back in the queue. Any puts and takes to think about as it relates to next year? I mean, obviously, I appreciate there's Easter there's the Easter shift and then obviously also the 53rd week, but anything else just to think about and call out since we modeled the various...

Mark Shamber -- Executive Vice President and Chief Financial Officer

No. I mean, I think, Karen, we sort of laid out the sales by the business units in that regard. I think that's probably the just the other component is looking at the individual business units and how they have varying profitability as to who's growing mid-single digits, who is declining mid-single digits, that sort of speaks a little bit for itself, but nothing unique within there.

Karen Short -- Barclays -- Analyst

Okay, thanks. I'll get back with you.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Good morning, everyone.

Operator

The next question today comes from Chuck Cerankosky of Northcoast Research.

Chuck Cerankosky -- Northcoast Research -- Analyst

Good morning, everyone.

Dennis Eidson -- Interim President and Chief Executive Officer

Morning, Chuck.

Chuck Cerankosky -- Northcoast Research -- Analyst

I think you've got three or four distribution centers that are serving both food distribution customers and military. Can you give us an update on where that program has had to have more of those DCs on such a footing and how it contributes to margins in both of the segments?

Dennis Eidson -- Interim President and Chief Executive Officer

Well, we actually only have a couple of DCs that are kind of being used for more than pure military truck so that it's a little less limited in scope. And I think we see with kind of the strategy of the company of building out a network that will be able to solve maybe more difficult logistic problems, shipping foodstuffs primarily, the network is critical. And the first two that we've kind of comingled, we're getting some benefit from. So those are important parts of the network.

Chuck Cerankosky -- Northcoast Research -- Analyst

What types of customers or excuse me, what types of logistics solutions are you referring to?

Dennis Eidson -- Interim President and Chief Executive Officer

Well, I don't know that we want to get into a lot of specifics about the customer base and what we're serving out of each DC specifically. But I think it's fair to say, as you look at the trends of our business and the fact that we've now put 15 consecutive quarters of growth on the table and that we're calling for, on the distribution space, mid-single-digit sales growth again next year, I think it's fair to say we're finding ways to if not optimize, getting close to optimize that network.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yes. And I mean, just on the logistics side, Chuck, I mean, anytime that you can get closer to the customer and reduce stem miles, I mean, you're going to have reduced costs, and so hopefully, increased profitability in that regard. So I mean, if we're able to leverage certain locations to be closer to the customer. I mean that's always going to be a win from us as well as for the customer because it leads to later cut-off times and later dispatch time so that they can get a better reflection of what they're selling through before the order gets submitted.

Chuck Cerankosky -- Northcoast Research -- Analyst

Got it? Thank you.

Operator

The next question comes from Kelly Bania of BMO Capital.

Kelly Bania -- BMO Capital -- Analyst

Hi, good morning. Thanks for taking our questions. Wondering if you could just help us kind of step back and look at the year in 2019 and some of the big buckets of expenses. Clearly, supply chain was a headwind. Just maybe help us understand how much that impacted EBITDA in 2019 and what you think you can get back in 2020 and then transition costs and how that came out relative to your expectation and what, if any, we should think about in 2020? And then healthcare seemed to jump in the quarter and just same kind of question.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yes. So I'll maybe take them in the reverse order. And then if I missed a portion of it, so I would say in the healthcare, yes. I mean, I would tell you that as we were entering into the fourth quarter, and you obviously update the guidance as you go along for both the positives and the negatives, I would tell you that with some of the changes we have made to the program and some of the updates that we had, we felt on the health insurance side, that we are going to run favorable to the prior year going into the fourth quarter because that's the way the trends were leading us. And the way the quarter played out, not only did we not decline, we had a reasonable increase on a year-over-year basis in healthcare.

And I don't want to say bad luck, but you just had a disproportionate amount of large claims during that fourth quarter. You always have the different claims come, and that's part of the challenge of being self-insured. But in the fourth quarter, I would tell you that we had a disproportionate amount, both versus any quarter we had this year. Any time we had in the last three years, this was the highest number of claims. And so that led to the $4.5 million exception. So I mean, I think from our standpoint, you can't because you can't control that, you can't predict that. I think we've got some elements of that increase as being a new baseline built in for 2020 and you'll see how that goes, and we'll update during the course of the year as health insurance plays out in that regard.

As it relates to the transition costs, Kelly, I would say that they came in stacked out in the middle of the range. I mean, we had a relatively tight range. We were saying $0.18 to $0.20, and I think we came in at $0.19. And I would say that those costs came in right where we expected. Part of that is that the company and its associates achieved the incentive program that we had put in place for the back half of the year. Had we not, it will lead to a significantly different result for those costs. And those are baked into the number for fiscal 2020, because as we highlighted when we put when we talked about the incentive program that we put in place, the company was not on track to achieve its normal incentive program, and this was this was a program that was put in place simply for the back half. Having said that, for 2020, we're showing the top line growth that we are, but we do have an incentive bucket to fill.

And talk about getting to normalized incentives I mean, we probably have an incentive bucket to fill that's in excess of $10 million for fiscal 2020. And so as we look at the improvements that we're going to make in supply chain and other elements of the business, we're dropping anywhere from a 2% to a 9% increase in EPS and a 2% to 7% increase in EBITDA. But some of the improvements that we're making, some of the growth that we're getting in fiscal 2020, are being used to refill the incentive comp back to a historical level. So I don't know if that answers all your questions. I mean, because it kind of wraps in the supply chain piece of it, but I don't know if I covered everything you were asking in the response.

Kelly Bania -- BMO Capital -- Analyst

Yes. No, just was trying to think about supply chain a little bit more in detail on how much you think you can improve on that in terms of just EBITDA dollars next year.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yes. I don't know that I'm going to call them out specifically because we've got I would tell you that it will be one of the major drivers of our improvement year-over-year. And Walt and his team have identified a number of initiatives under way, and we've seen the success we had in the back half of the year in reducing the inventory, which helps improve our turns but also helps improve the operating efficiency of the warehouses, both from a put away and a replenishment standpoint. So I'm not going to necessarily try to quantify it. But I mean, I would tell you that the improvements in supply chain are some of the larger drivers from the year-over-year overall improvement between refilling the IP and the overall bottom line expansion.

Kelly Bania -- BMO Capital -- Analyst

Okay. That's helpful. And just as we also look back a year in terms of Martin's, can you help us understand just how much that added to sales and EBITDA for the year, how that came in relative to your expectation, how those banners are performing relative to the legacy retail business? And I'm guessing that, that gets folded into the comps this year. So just is there any impact from that to the comp outlook across retail in 2020?

Mark Shamber -- Executive Vice President and Chief Financial Officer

A lot of questions in there. So the answer to the last part is Martin's will be in our comp. Even though there is only a 1-day or a 2-day or one or 2-day portion of the first week that's not comp, Martin's will be in for 52 of the 53 weeks. And I would say that I think our retail folks would like it to be 53 of the 53 as we had a really strong start to the year for Martin's. But they will be in for 15 of the 16 weeks in the first quarter. And then the remainder of the year, they'll be in the comp for all those numbers. As it relates to the sales part, I would tell you that we were pleasantly surprised with where their sales were. I mean they probably fell less than 1% or so from our expectations.

Probably, we guided a little conservatively when we took the business on because you do worry about a loss of some volume when an acquisition and customers maybe go elsewhere. But I would say is that from a top line standpoint, we were able to maintain or retain the vast amount of the sales volume there. So we were pleased on that. And from an EBITDA, I'm not necessarily going to try to break that portion out, but I mean, I would say that we had that they were in line. They're probably much like the rest of our business, they fell a little bit short versus the budget. But I would say that they were relatively close on a full year basis to what we had projected and modeled when we made the acquisition. And then I know there were more questions there, but I lost track of them.

Kelly Bania -- BMO Capital -- Analyst

No, that was it. And I guess, just one more from me in terms of free cash flow. So big improvements in working capital this year. I think you may have said another $30 million improvement so far this year, and I may have misheard that. But just maybe what is your outlook for free cash flow in 2020, if you can help us at all there? And also, how much debt you're planning to pay down because your interest expense was a little lower than I would have thought?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yes. So on the interest expense side of things, I mean, we generated I guess, I would say we made more improvements in working capital more quickly than we had projected. So the interest, I think, did come in a little bit lighter. And then I think from our standpoint, when we were setting guidance, the last rate cut that the Fed had put in place was not one that we had originally modeled. So I think we got the benefit of one more rate cut in the fourth quarter that wasn't in our expectations when we were setting the guidance. And so that's probably where we got some benefit in addition to the debt paydown. I think from our standpoint, as we look at 2020, I think we've I don't know that we put a $30 million target out there.

I know that we've got some targets on the inventory side that would probably be in that range. But then when you factor in the corresponding offset from an accounts payable standpoint because you've got less than you're purchasing any given point in time, it sort of minimize not minimizes it. It reduces that to some degree. So I feel comfortable saying that it's probably in excess of $15 million, but I don't know that I'd go so high as to say $30 million improvement in working capital for fiscal 2020.

And then as it relates to the debt paydown, I mean, between the free cash that we generate as well as the expected sale of the Fresh Kitchen and some other underutilized assets, I mean, I would expect that our leverage would get down to the low threes. I don't want to get too specific because I don't want people trying to back into my budgeted EBITDA or where we think for EBITDA with the debt paydown and kind of make assumptions there. But I would say low threes between the expansion of our EBITDA during the year as well as the actual pay down debt that we'd finish leverage in the low threes.

Kelly Bania -- BMO Capital -- Analyst

Okay, thank you.

Operator

The next question comes from Paul Trussell of Deutsche Bank.

Damon Polistina -- Deutsche Bank -- Analyst

Good morning. This is Damon Polistina on for Paul. Just back on the retail comp for this upcoming year, it's going to be expected to be in positive territory. What gives you confidence in this, whether it be macro drivers or specifically SpartanNash initiatives?

Dennis Eidson -- Interim President and Chief Executive Officer

Yes. I'll take a shot at that. First of all, we ended the year with two consecutive quarters of positive comps. And I think that gives us a lot of conviction about the things we're doing are delivering. We don't spend a lot of time or want to really talking about region by region. But Michigan is our by far, our largest market. And we actually were positive for the full year in Michigan even though we only had 2, three and four positive for the company. We're doing some, I think, really good stuff with dunnhumby. We're already seeing some wins in that. I think they're helping us with some price perception information. They've also been very effective in helping us with better understanding efficient promotions and drivers of traffic, so that's an important element. I'd also say that we the click-and-collect piece is meaningful in terms of how that's performing.

We have a new senior merchant, Laurie Rias. She's not been here quite a year yet. She's made a big difference, along with Tom Swanson that's running that business. So there's no reason for us not to feel like we can sustain the comps for the year. And the Martin's business will go into the comp. That will help. We did call out that in Q1, because we have an Easter shift, Easter Sunday in the post Easter week now fall into Q1, and that's a very slow week. So that's about a 30 to 40-point headwind in Q1. So we called it approximately flat. We're going to be around flat. But the balance of the year, we see as positive.

Damon Polistina -- Deutsche Bank -- Analyst

And then on the military segment with the down mid-single digits for this upcoming year, can you just talk about the dynamics there? And kind of any opportunities to kind of improve that going into the next year, what any initiatives in place there?

Dennis Eidson -- Interim President and Chief Executive Officer

Yes, we're working really hard on that. I mentioned David Sisk, who's our new President of MDV; and David has got long tenure with P&G and ran the military business for P&G. He's really passionate about the space. There's a trade group called ALA that works with the military retail system, and David has chaired that in the past. So I think he's going to bring some new perspective and fresh ideas. I would say, as you look at like a same-store sales running negative 4% to 5%, that's clearly a big headwind for us. Over the past the last couple of years, the MDV team under Kathy's leadership has found ways to kind of plug that volume gap, and we don't have a ready solution at this moment for 2020. But I would say, on the military DeCA's side, this advent of new customers eligible to shop in the commissaries could be a potential driver. We have not seen published numbers, public numbers from DeCA on how that's going.

Starting January 1, there are several million folks that are now eligible to shop there. I think the forecast was maybe 800,000 or so of those people were located in a geography to legitimately take advantage. We know in January, there was an increase in new shoppers at DeCA. So that's a good sign. And also, as it relates to our own performance in the channel, we talked about supply chain kind of being a bit of a headwind all of last year and particularly so at military DCs, we believe we've made significant improvement on that and that we will improve our bottom line next year in the military business, even though the top line could be negative $80 million to $120 million. So I guess, that's saying something, right? So that's a lot of revenue that could be falling off, but we still think we're going to improve the bottom line.

Damon Polistina -- Deutsche Bank -- Analyst

Thank you.

Operator

The next question today comes from Chris Mandeville of Deutsche Bank.

Chris Mandeville -- Deutsche Bank -- Analyst

Hey, good morning. Mark, I think I heard you referenced that the year-on-year EBITDA improvement, it's predominantly going to be driven by supply chain improvements this coming year. If I heard that correctly, just been thinking about retail profitability for the full year. Is there an opportunity or maybe even an expectation internally to begin showing some margin stability or should we be thinking about kind of a certain level of investment to sustain the positive comps that you're looking forward to?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Well, yes, let me on the first part, I think that, obviously, with supply chain affecting 75% of the business between military and food distribution. I mean, when we're saying 2019, we had some of the higher supply chain costs. I mean, it is supply chain in 2020, but I don't want to discount that the top line growth that we'll get from the Food Distribution business in and of itself will drive some incremental profit there. So I would say supply chain improvements are a large driver, but then the top line growth will certainly contribute. I think on the retail side of things, I mean, we've made some investments in certain areas where we felt that we would get the return, and that's been one of the contributors to us moving toward positive comps, as Dennis was alluding to.

So I'm not sure as we sit here that we feel that there needs to be substantial investments in retail or in their margins in order to drive comps. But selectively, within categories, within markets, I mean, that's where we're leveraging our data and leveraging the partnership with dunnhumby to try to identify where to get the greatest return as we go forward. But I think it's going to be selective and maybe where price perception-wise we may be able to get a better return, not so much that we need to make a blanket investment across the retail store base.

Chris Mandeville -- Deutsche Bank -- Analyst

Okay. Maybe if I could ask it a little bit differently. In Q4 being down roughly 55 basis points on adjusted EBIT, how much of that was the healthcare increase versus some of the controllable investments on?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Almost all. I mean, I would say almost all, if not more than all, I mean, if I broke it down. I mean, the retail business has the largest portion of our associates, and they obviously then represent the largest portion of the associates on healthcare. And so when we allocate out, they received the largest charge. So I would tell you that the that if not the whole portion, the overwhelming portion of it, because you can always play it however you want with some of the other puts and takes. But I would say that, if not all of it, the vast majority of it was associated with the incremental healthcare in Q4.

Chris Mandeville -- Deutsche Bank -- Analyst

Okay. That's helpful. And then just thinking about the distribution business, I guess, it's no hidden secret that, obviously, there's been quite a bit of challenge on the independent specialty grocery front of late. Can you just talk about maybe the general health of the conventional independent versus some of your larger retailers? And similar to what Karen had asked a little bit earlier, is there a way of thinking about the cadence of distribution sales growth throughout the year on a 52-week basis?

Dennis Eidson -- Interim President and Chief Executive Officer

So I would just say that as you start characterizing independent retailers, it's just not a monolithic thing. We serve a couple of thousand locations, and there's a wide disparity in size and the volume and the health. The independent space has been a modestly shrinking space for some time, 1%, 2%. And I don't think that's, in a macro sense, going to change much. But from a perspective of looking at the cadence of the Food Distribution segment on the top line, I think we're guiding this mid-single digits despite last quarter being only 2.5%. I think that should suggest to you, we have some confidence in that number, and we're seven weeks into the year.

And it's probably pretty ratable. So we're feeling good about the volume in that segment. And I think just kind of stepping back a little bit about kind of the trends of the business, and you asked a question about retail profitability,etc. I think we've probably given more specific guidance here on the year than we've given in any year that I can recall. So if you kind of reflect back on kind of where we were, it was a tough year for us. And I think we're coming out of this year with what I would say a significant amount of momentum. I mean, I think the outlook looks very good. We're still forecasting here for you mid-single-digit growth on the distribution segment and continued positive comps at retail.

And as I just discussed, the military segment is going to be negative on the top line, but we're going to improve the bottom line. When you roll that all up into low single-digit growth in this environment and improve earnings, as Mark was discussing, what, 2% to 9% on EPS and EBITDA growing, at the same time, deleveraging our balance sheet. I mean, from my perspective, I think we've taken a big turn here, and I want to make sure that everybody understands that the turn is comprehensive. It's not just one little slice of the pie. And I think the team here has worked incredibly hard in the back half of the year, and I'm proud of what they've accomplished.

Chris Mandeville -- Deutsche Bank -- Analyst

Okay. And then just one last quick one for me. Mark, I know it's really early in the year, but nonetheless, I believe intermodal freight rates are actually down year-on-year. If that trend were to persist, is that an opportunity for some potential savings for the full year?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yes. I mean, I think that our volume of intermodal isn't that heavy, but I mean, it certainly represents an opportunity. If rates stay that way, where you'd have to you'd have to look at our network and how we're bringing things inbound and try to capitalize on that, we're certainly well situated in some of our DCs to be able to capitalize on that.

Chris Mandeville -- Deutsche Bank -- Analyst

Great, thanks again, and best of luck on the year.

Mark Shamber -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

[Operator Instructions] The next question is a follow-up from Chuck Cerankosky of Northcoast Research.

Chuck Cerankosky -- Northcoast Research -- Analyst

Thanks. Just a question about the mild winter weather, how it impacted the fourth quarter, especially in your Northern Michigan stores and what it's looking like thus far in the first quarter.

Dennis Eidson -- Interim President and Chief Executive Officer

Chuck, we actually had, in the fourth quarter, a more typical kind of winter experience. So it was like, year-over-year, I don't think we felt it had any kind of material impact on the volume. But as we are now into week seven of the new fiscal year, it clearly has had an impact on the volume. We had a really snowy January, February last year. We've got virtually, we've got a couple of bouts of snow but nothing sustainable. The temperatures have been very warm. It is having a negative impact, to be sure, and so I'm a little concerned. I think we talked about we're guiding flat. I think we'll probably get approximately flat in the first quarter. But if there's going to be a hiccup in it, it's that this weather is materially different than a year ago.

Chuck Cerankosky -- Northcoast Research -- Analyst

All right, thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Eidson for any closing remarks.

Dennis Eidson -- Interim President and Chief Executive Officer

Thanks, Elisa, and I want to thank everybody for participating on the call today. We look forward to speaking with everybody again when we report our first quarter 2020 results. Everybody, have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Dennis Eidson -- Interim President and Chief Executive Officer

Mark Shamber -- Executive Vice President and Chief Financial Officer

Karen Short -- Barclays -- Analyst

Chuck Cerankosky -- Northcoast Research -- Analyst

Kelly Bania -- BMO Capital -- Analyst

Damon Polistina -- Deutsche Bank -- Analyst

Chris Mandeville -- Deutsche Bank -- Analyst

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