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SpartanNash Company (NASDAQ:SPTN)
Q2 2020 Earnings Call
Aug 13, 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 Second Quarter Fiscal Year 2020 Earnings Conference Call.

[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turner, please go ahead.

Katie Turner -- Partner at ICR

Thank you. Good morning, and welcome to the SpartanNash Company second quarter fiscal year 2020 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 PM Eastern Time. For a copy of the earnings release, please visit SpartanNash's website at www. 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, disruption associated with the COVID-19 pandemic; 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 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 include 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 -- Interim President and Chief Executive Officer

Thanks Katie. Good morning, everyone, and we appreciate you joining us today to discuss our second quarter financial results. I'll provide a brief overview of our strong quarterly results. Mark will then provide some additional detail on our second quarter financials and review our improved 2020 outlook. Finally, we'll open up the call for some questions.

I'm incredibly proud of the strength and the resiliency of our entire team of associates as they support the communities we serve with our Retail, Food Distribution, and Military Businesses to continue to respond to unprecedented times, including the heightened consumer demand as a result of COVID-19.

Our priority remains ensuring the well-being and safety of our team, particularly those on the frontlines driving our business forward every day, as well as our customers. During the quarter, we incurred additional direct and indirect costs associated with the enhanced safety measures and support resources to maintain an industry-leading effort.

The strength of the incremental sales volume in Retail and Food Distribution together with sound execution, drove our second quarter financial results to be ahead of our expectations. Net sales for the Company increased 9.4% to $2.18 billion compared to the prior year quarter, representing our 17th consecutive quarter of growth. Retail comp store sales of 17.1% were positive for the fourth consecutive quarter.

Food distribution net sales increased 16.5%, with strong growth resulting from impacts of COVID-19 as well as continued growth from our portfolio of existing customers. This resulted in an adjusted EPS of $0.73 per share, an increase of 115% over the prior year quarter, supporting robust cash generation in the quarter as we paid down over $40 million of long-term debt and even further reduced our leverage ratio.

Based on the strong results we've observed to date and our expectations for the remainder of the fiscal year, we're pleased to raise our full-year profitability guidance. This guidance includes consideration of the impacts of COVID-19 experienced to-date as well as our expectations for the remainder of the year.

Focusing on our second quarter business segment results in a little more detail, the operating environment and consumer behavior continue to evolve in response to the pandemic. Similar to the first quarter, we experienced higher sales volumes due to retail consumer demand in our Retail and Food Distribution segments, driven by a shift to more food-at-home consumption in connection with federal and state guidelines as well as consumer concerns for personal safety.

Turning to the Retail segment, our sales trend continue to be very strong in the beginning of the second quarter with comparable sales of approximately 25% in the first period of the quarter. Our comp sales leveled throughout the remainder of the quarter and have somewhat stabilized in recent weeks into the low-double digits.

We are pleased to have continued to gain market share compared to the prior year for a second consecutive quarter as consumers have gravitated toward trusted local supermarkets. We are proactively working to maintain the new households we now serve by actively supporting consumers as their preferences evolve.

For the quarter, our e-commerce sales increased over 300% compared to the prior year quarter. This growth was driven by both new and existing customers and e-commerce accounted for 5.6% of our sales in the locations where these solutions are offered. As I mentioned last quarter, we also increased staffing levels to accommodate the significant increase in the number of customer's shopping online and are offering free same day home delivery of prescription medications from our pharmacies.

Private label sales were also up over 24% as consumers look for quality products at a value price or for alternatives to sometimes unavailable national brands. We believe our inviting store atmosphere, mix of fresh foods along with local, national and private label products, positions us well in the long-term in this Retail segment.

Within the Food Distribution segment, sales comparisons to the prior year increased 16.5% in the second quarter. Our supply chain teams continue to work around the clock to support the surge in sales volume resulting from the increased demand from our external customers as well as our own Retail segment. While operating in this current environment tests the capability of our supply chain operations, we have continued to lever the partnerships with our suppliers and other distributors to support the efficient delivery of products to the retail shelves.

In the Military segment, sales decreased 5.6% for the quarter, where growth in export sales were more than offset by the impact of limits on domestic base access and commissaries shopping restrictions associated with COVID-19.

At the beginning of the second quarter, Military segment sales comparisons were only slightly behind the prior year, however, reduced significantly beginning in June due to those restrictions. More than 45% of bases are currently at the second highest alert level related to health conditions, resulting in reduced base access, limitations on travel and gatherings on base, and other restrictions having an impact on commissary operations.

Our analysis indicates that bases with the most significant restriction are seeing reductions in commissary volumes of 22% on average. We are in close communication with DeCA to continue to monitor the timing of reopening of domestic commissaries and remain well positioned to serve them going forward.

Finally, I'd like to mention that the Board of Director's process to identify the next Chief Executive Officer remains ongoing. In the meantime, the Company and I have agreed to extend the term of my interim agreement for a period of up to an additional 90 days.

In summary, we are pleased with the collaboration across our organization and our ability to continue to respond to the challenges associated with the incremental demand, while remaining focused on our priority to keep our team of associates and customers safe from the virus.

Our ability to exceed our financial expectations for the first half of the year is a reflection on the strength of our team and we are pleased to, again, be in position to increase our fiscal 2020 outlook.

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 welcome to everyone joining us on today's conference call and webcast. Our net sales for the second quarter of fiscal 2020 increased by $188 million or 9.4% to $2.18 billion versus 2019 second quarter sales of $2 billion. Adjusted EPS for the second quarter of fiscal 2020 came in at $0.73 per diluted share compared to adjusted EPS of $0.34 per diluted share in fiscal 2019's second quarter, an increase of 115%.

GAAP EPS came in at $0.80 per diluted share in the quarter compared to a loss of $0.19 per share in the second quarter of fiscal 2019. The increase in profitability from the prior year quarter was due to higher sales volume and increased leverage of operating expenses, particularly in retail store labor and certain fixed costs. Significant increases in incentive compensation and a higher rate of supply chain expenses served as partial offsets to our increased profitability.

The higher levels of incentive compensation were associated with above-target performance versus the applicable current year metrics compared to the prior year's below-target performance, which resulted in incentive compensation in 2019 materially below target levels.

Shifting to our business segments; Retail net sales came in at $631 million for the quarter compared to $570 million in the second quarter of fiscal 2019, an increase of 10.8% or $61 million. Our comparable store sales improved to 17.1% for the second quarter of fiscal 2020, an acceleration from the comp sales trend of 15.6% in the first quarter.

Comparable store sales benefited from the shift toward food at home associated with COVID-19 and also reflect our gains in market share. These results reflect increases of over 300% in our e-commerce sales for the quarter. We continue to benefit from increases in EBT sales, although at a lower rate than observed at the start of the second quarter.

Second quarter adjusted operating earnings in the Retail segment came in at $24.7 million compared to $8.2 million in 2019's second quarter. Retail reported GAAP operating income of $24.5 million for the second quarter of 2020 compared to $8.7 million in the prior year second quarter.

The profitability improvement was driven primarily by the COVID related sales increase during the quarter, while we also benefited from improvements in margin rates including inventory shrink, as well as favorable variances in both labor rates and health insurance costs. Partially offsetting these items were higher incentive compensation and incremental compensation for frontline associates.

Net sales in Food Distribution increased by $155 million or 16.5% to $1.09 billion in the second quarter of fiscal 2020, driven by incremental volume associated with the impact of COVID-19 as well as continued sales growth with existing customers. Inflation accelerated to 4.43% in Food Distribution during the quarter, more than doubling the Q1 rate, an increase of over 325 basis points compared to the second quarter of fiscal 2019, driven almost entirely by significant inflation in meat although produce also contributed to the sequential increase.

Reported operating earnings for Food Distribution in the second quarter totaled $14.4 million compared to $0.3 million for the same period in the prior year. The increase was due to the current year quarter increase in sales volume associated with the impacts of COVID-19 and prior year asset impairment charges in the second quarter associated with changes to the fresh production business as well as cycling prior year losses in the fresh production business. These increases in operating earnings were largely offset by higher compensation -- higher incentive compensation levels and a higher rate of supply chain expenses, including additional compensation for frontline associates and additional sanitation measures.

Adjusted operating income totaled $17.9 million in the quarter versus the prior year second quarter adjusted operating income of $16.8 million. Adjusted operating earnings exclude the items detailed in Table 3 under the Food Distribution segment in yesterday's press release.

Military net sales of $463 million in the second quarter decreased by $28 million or 5.6% compared to prior-year quarter revenues of $491 million. Sales were negatively impacted by commissary and base restrictions, as Dennis mentioned, as many bases shift to a higher alert level and either limited or did not allow visitors, thereby reducing the number of shoppers who could access the commissary.

Military generated an operating loss of $4.9 million in both the reported and adjusted basis in the second quarter compared to a reported loss of $1.6 million in the second quarter of fiscal 2019 and an adjusted operating loss of $1.5 million. These results were driven by higher rate of supply chain expenses including additional compensation for frontline associates and additional sanitation measures while improved margin rates, partially offset the expense headwinds.

Interest expense decreased $5 million in the second quarter of fiscal 2020 to $3.7 million due to the combination of lower interest rates compared to the same period last year and lower average debt levels resulting from our increased profitability and improvements in working capital.

In the first half of 2020, we generated consolidated operating cash flows of $198 million compared to $104 million over the same period in fiscal 2019. The increase was due to the improvements in profitability and working capital that I just mentioned. These improvements resulted in free cash flow generation of $168 million in the first half of fiscal 2020 compared to $72 million in the prior year.

During the second quarter, we declared and returned $6.9 million to shareholders in the form of cash dividends and the Company did not repurchase any shares in the second quarter. Our total net long term debt decreased by $141 million during the first half of 2020 ending the second quarter at $523 million compared to $664 million at the end of fiscal 2019, as the company has paid down over a $130 million in debt year-to-date, including more than $40 million during the second quarter.

Our net long-term debt to adjusted EBITDA ratio decreased to just below 2.5 times in the second quarter from a leverage ratio of 3.7 times at the end of fiscal 2019, driven by the combination of our strong debt pay down as well as a 35% increase in year-to-date adjusted EBITDA to $133 million. We expect to continue to make progress on our leverage through the remainder of the years and we are pleased to have achieved our near-term target of 2.5 times.

As covered in yesterday afternoon's press release, we are raising our fiscal 2020 earnings guidance. For fiscal 2020, we now anticipate adjusted earnings per share from continuing operations of approximately $2.40 per diluted share to $2.60 per diluted share compared to our prior projections of $1.85 to $2.00. Reported earnings per share from continuing operations are expected to range from $2.13 to $2.41 per diluted share compared to our prior projections of $1.48 to $1.81.

The Company's updated outlook includes consideration of the impacts from the COVID-19 pandemic observed year-to-date, as well as the estimated impact for the remainder of the fiscal year. We now expect fiscal 2020 adjusted EBITDA to range from $232 million to $242 million compared to our prior guidance of $205 million to $215 million, consistent with our projected increases in operating earnings.

Our guidance continues to reflect capital and IT capital expenditures in the range of $80 million to $90 million for the fiscal year 2020. Depreciation and amortization is still expected to be $88 million to $92 million for the fiscal year. Interest expense is now expected to range from $17.5 million to $18.5 million in fiscal 2020. Finally, our guidance continues to reflect an adjusted effective tax rate of 23.5% to 24.5% while our reported effective tax rate is now expected to be 14% to 15%.

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

Dennis Eidson -- Interim President and Chief Executive Officer

Thanks, Mark. So in closing, I'm extremely pleased with our very strong first half 2020 results and I appreciate the contributions from the entire team and believe we are extremely well positioned for future growth and success.

And with that, I'll turn the call back over to Andrew and open up the call for some questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Karen Short of Barclays. Please go ahead.

Kate Howard -- Barclays -- Analyst

Hi, good morning. This is Kate Howard on for Karen. Thanks for taking our questions. First, I wanted to ask about overall market growth and share gains and where do you think the overall market grew by within your footprint versus how you performed and how do you think that compared to your math and conventional competitors?

Dennis Eidson -- Interim President and Chief Executive Officer

Well we talked about the market share growth in Q1 and again here in Q2 and that's a measure that we use from AC Nielsen tracking, that's a retail metric that we track each quarter. So, without going into too much detail on that, in the geography, it includes all of the regions where we operate a retail store, and the fact that we grew our market share and the total as well as every region we think is pretty significant and in fact that had happened two quarters in a row. In terms of the actual size of that growth, in terms of some kind of metrics, I don't think we have that available.

Kate Howard -- Barclays -- Analyst

Okay. And on COVID related expenses this quarter, where did you shake out and was there any deviation from your estimates? And then, related to that, what are your expectations for the third quarter to the extent that some of these expenses are rolling off?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Well, I would say that when we talked last quarter, we referenced that we were expect -- we had about $6 million to $8 million in the first quarter and that we expected that we will hit the low end of that range for the second quarter or that we'd be in that range for the second quarter and we came in toward the low end of that range for the second quarter.

I think that the longer we get into this, the harder it is to sort of call out those expenses. I mean, we were -- we're doing a pretty robust job when this first started thinking that it's may be a quarter or two impact and we're now focused on running the business.

And so I would say that the numbers are probably less than that $6 million range in the third quarter by virtue of costs on some of the PPE coming down and some of the sanitation efforts that we've undertaken such as regular fogging of our distribution centers. We've purchased the equipment that will be in later this month where we'll do that in-house and that will reduce those costs probably 75% or so on just that specific item.

So I think, we'd probably be below that level, but we're not prepared to give any guidance on that because we're certainly not sure whether or not there could be a second wave or things of that nature. But I would say, it's probably below the $6 million level.

Kate Howard -- Barclays -- Analyst

Okay, thanks.

Operator

The next question comes from Scott Mushkin of R5 Capital. Please go ahead.

Scott Mushkin -- R5 Capital LLC -- Analyst

Hey guys, thanks for taking my questions. So I wanted to term [Phonetic] as we start thinking about next year and cycling maybe some of these really strong sales. And I know, no one knows exactly what's going to happen. So the question really is, when you guys think of your business, how do you prepare it for what looks to be probably negative sales as we get to next year, are there things that you can do to kind of mitigate the impact there on the cost side and how are you thinking about it?

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah, I think that's naturally what you would do, right, and we're basically on a calendar year for our fiscal year end. We're just beginning to budget for next year, and so, we're feeling the pain of trying to figure out how next year is going to play out, but there are certain things in the side of the pandemic results that have caused us to be inefficient and wanted to gain some of that efficiency back, we believe, next year.

When you are growing the business 25%, 30%, it's sometimes too much of a good thing and we became inefficient and had a lot of over time that we had to digest. We had outside third-party labor in our system, the fill rates for the trucks that we're getting for manufacturers were not optimal, so we were spending more labor there

So, I think many of those things go away, Scott, and I think, it becomes a little bit more normalized. The top line is probably the biggest question we all have about next year. I think as we get to cycling, particularly the first parts of COVID where we had sales in some weeks at -- were like 50% increases etc. We're going to have a reduction against those weeks, we're not going to comp those.

What that actual comp rate is going to look like as we go through the teeth of that pandemic is something we're working hard on, but we do believe there is a sustainable tailwind to food at home, it may -- we will have negative comps, but against the long-term trend lines, it will really be growth in the core business, if that makes sense to you, when you strip out the acute spikes that we got with COVID. So we're working hard on all of those things and think that we can make the thing come together nicely for next year.

Scott Mushkin -- R5 Capital LLC -- Analyst

And so my second question, thanks for that, Dennis. So my second question really, again, is much more strategic. In the idea of -- this military business, I know this is special circumstances right now, so it's hurting them a little bit more. But generally, if you look at that military business, it's struggled quite a bit.

What are the thoughts on that business as we look out over time, is there a way, I know we were -- for a while we were thinking if the penetration of private label would kind of help that business. How do we think about that business on a go-forward basis? And is there anything you could do with it, sell it or improve it to make it less of a -- less of a kind of headwind for the Company?

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah, I do think there are things we can do with it. Scott, I think the fact that the commissary business has gone from -- on the $6 billion mark about the time we merged our companies to this year, maybe that number is going to be in the low $4 billion range is problematic. And as you know, we don't really control that revenue stream.

We are working with DeCA on ways that we can become more efficient with them and with their support, but we're also working with the supplier community to find ways where we can cut costs and potentially increase our margin rates. So, I also think from a distribution platform perspective, there are some things we can do differently that can enhance the profitability of that space.

Historically, those DCs have primarily been used for military only, and I think that there are some options with some of those DCs to get them more productive for the SpartanNash enterprise. So I think, it's a combination of all of those things and the fact that, when we started in Q1, the sales were positive, right.

And much like Distribution and Retail, we kind of felt like we might be able to continue and it could be a bridge to some of these changes we're working through to improve the profitability and then we end up with these restrictions on the base is really quite unfortunate. But -- hopefully, that gives you a little color to what you're looking for there.

Scott Mushkin -- R5 Capital LLC -- Analyst

Yeah, that's perfect. Thank you. I actually have one more, but I'm going to get back into the queue. Thanks.

Operator

The next question comes from Kelly Bania of BMO. Please go ahead.

Stephen Caputo -- BMO Capital Markets -- Analyst

Hi guys, this is Steve Caputo on for Kelly. Just looking at digital sales, up more than 300% in the quarter and now sort of a mid-single digit level of penetration. Can you talk about the leverage you're seeing in -- as e-commerce has expanded, and how that's driven profitability relative to sort of the core Retail business? And if there's any differences you're seeing in terms of the pick-up in third party delivery?

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah. So we're really, really proud of the accomplishments the team has made on the e-commerce part of the business. The fact that 5.6% of our store sales in those units are coming from e-commerce is really, pretty impressive to me. We're not operating in an environment, it's not a big city environment or urban environment where you think e-commerce would be far more important to the consumer. We're doing this in a more suburban and sometimes even rural environment.

You're right that in our business, we are actually profitable on the e-commerce platform. But I don't want to make it sound like we're as profitable as the core business, but it's not like we're losing money on the e-commerce business. And so we're optimistic about that. I think, going forward, seeing what we've experienced and the fact that there are so many new customers adding to the portfolio, we're probably prepared to do some other things to enhance our operations and to become even more efficient as time goes by.

I mean, I am heartened by the fact that we have so many new customers that are actually driving that performance and the 300% increase that we had in the Q, 63% of the increase came from customers who were first time users of that platform in Q1, ostensibly because of COVID and 27% of the increase are those folks that signed up for the first time in Q2.

And when we survey our customers that are using the platform, they're saying, they're going to continue to use the platform. They are happy with it and 74% say, they're going to use it more. And against national benchmarking, that's a significantly higher number that say they're going to continue to use the platform. So lots of good news on that front. So, kudos to our team, Retail, Merchandising and Marketing doing a great job.

Stephen Caputo -- BMO Capital Markets -- Analyst

Okay. And then, just sort of following up maybe on that. Are you hearing from your distribution customers that they are seeing similar levels of benefits from e-commerce or is that a challenge for them? Any color you could provide there would be helpful?

Dennis Eidson -- Interim President and Chief Executive Officer

I don't have anything that I can quantify for you. We are working with our independent customers to help them forge solutions. For e-commerce, we have some customers doing very, very well that I've talked to. Others that are not playing and that probably shouldn't surprise you, as you think about the breadth of the customers that we serve. So I can't really quantify anything there, but obviously, there are some that are performing very well there as well.

Stephen Caputo -- BMO Capital Markets -- Analyst

Okay. And then, just the last one from me. As we look sort of at the guidance for the rest of the year. Obviously it's a volatile environment and things could change, but as it sort of stands now, in the back half, we sort of are assuming that margins could be a little bit better in the Distribution segment and a little bit lower in Retail, if sort of the environment remains elevated, but not quite at the level we've seen in the past few months.

I think that the net EBITDA guidance implies sort of slightly lower EBITDA margins overall if you were to assume those trends stay a little bit elevated. Is that the right way to sort of think about the rest of the year and any sort of detail you could provide there?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yeah, I mean that -- it's such a tough question to answer. I mean, that's part of the reason we gave as wide of a range as we did. I think there is probably some fairness to that and what I would say is that, we think, we referenced in a couple of slides that we had some benefits with health insurance and I don't expect those benefits to continue in the second half.

And I expect that that will be more of a headwind. And just based on the number of associates we have in the Company, that's probably going to negatively impact the Retail business more than Food Distribution because north -- well north of 10,000 of our associates are within Retail. And so that's probably a fair way to think of it, but it's more likely by virtue of some of the expenses than it is in the gross margins.

Stephen Caputo -- BMO Capital Markets -- Analyst

Okay, thank you very much.

Mark Shamber -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

The next question comes from Corey Grady of Jefferies. Please go ahead.

Corey Grady -- Jefferies LLC -- Analyst

Hi, thanks for taking my question. I wanted to ask about the fill rates. How did fill rates from vendors trend from the beginning to the end of the quarter and how did that impact promotions? And then how do you expect that dynamic to trend in the second half?

Mark Shamber -- Executive Vice President and Chief Financial Officer

Yes so I mean, I think, let me try to answer couple of that. I mean, I think, fill rates in general improved during the quarter. But look, the items that you couldn't get at the -- some of the items that you couldn't get at the start of the second quarter, you still can't get at the end of the second quarter, items like toilet paper, you're certainly seeing those start to return to the shelves, but some of the various cleaning products are still very hard to get.

And category specific or perhaps CPG specific, there are certainly SKUs within the mix that are more difficult. I don't think, other than the fact that you can't promote what you don't have that it impacted the promotion level. So I think it was more a component of the demand whether it's strong that speaking for -- speaking only for ourselves, I mean we continue to promote, we continue to run a paper ad whereas a number of our competitors went strictly to digital and promoted far less.

But I don't know that the fill rates, other than, again, not being able to secure the product, drove the promotional levels in that regard. And I'll maybe let Dennis answer the question about how we maybe view the second half for fill rates or promotion. Was it fill rate or promotions Corey? I'm sorry, the way you were thinking on the second half.

Corey Grady -- Jefferies LLC -- Analyst

I guess promotions. But if you have a view on both, that would be great.

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah. So I would just add to Mark's comments, going back to fill rate, because when I walk in a store, the stores look fairly good, right. There are some spots cleaners, disinfectants, that were challenged everywhere, but it's not -- the supply chain is not for the industry. It's not just running back on its normal footing. And so we've got up to 5,000 SKUs that are either on a location from the manufacturers or have been temporarily discontinued by manufacturers.

And that makes the supply chain lumpy and the fill rate challenging, right. So allocations and then they sometimes change, so almost with each P&O -- each PO has its own DNA. We have to do a PO and then redo a PO and when you're running a $9 billion business and the tens of thousands of SKUs, it is very, very difficult to have a smooth system in place.

So fill rates are better. We think fill rates will continue to get better, although we have some manufacturers that have already signaled to us that it will be until sometime in 2021 until they get back to a place where they can satisfy demand for product that we're giving them.

So I think going forward, it continues to get better. Now, I will tell you this, if there is a significant spike in the virus and we get more of a lockdown mentality, all bets are off on that. And nobody knows the answer to that, right. We hope that doesn't happen, but if it does, I think we'll be challenged, for sure, on the fill rate side.

Promotions, I think, are morphing more back to a typical pace, other than the stuff you can't get, right. So we're not putting bad tissue on the cover at a higher price or cleaners etc. They've left the promotional portfolio. But I think for the most part, the team has adjusted what we promote to try and be consistent with the new lifestyle, right. So eating at home, quick meals, convenience and of course we're tailoring all of that against availability.

As Mark pointed out, proteins and meat were like significantly inflationary in the quarter. There was panic buying at the beginning of that kind of episode with meat being at risk for availability. It's just we scrambled everywhere and our fill rate wasn't where we wanted it to be. Those circumstances, as they pop up, we will be able to react to. But on balance, I think the toughest times are behind us.

Corey Grady -- Jefferies LLC -- Analyst

Got it. That's very helpful. And then for my second question, I wanted to ask about the use of cash. I guess now that your leverage is down around your target level. What are your plans for use of cash in the second half and how should we think about the buyback?

Dennis Eidson -- Interim President and Chief Executive Officer

So, I would say, as we think about our use of cash and I mean the team has done a remarkable job getting that leverage down from 3.7 times to 2.5 times and yes, the additional volume and the profitability, but we've been working on working capital since a year ago. When I came back in, it was a key initiative for the Company and we made huge progress there.

So I think their uses of cash might include things like optimizing our network a little bit going forward. I mean I think improving efficiencies is going to be important for us and potentially even expanding our geographic presence. You know that could happen through M&A at this kind of leverage and thinking we can get more leverage off the P&L, we could see something on that front as well. And then there was a second part of the question?

Mark Shamber -- Executive Vice President and Chief Financial Officer

On the buyback and so I think we've been -- we've had a consistent program on the buyback, and in general, we've used it to offset some of the dilution on an annual basis. And so I wouldn't comment about any specific plans in the second half of that, but we still do have a fair amount of our last repurchase program available still to execute.

Corey Grady -- Jefferies LLC -- Analyst

Got it. And sorry, but if I could just squeeze one last one and what were your fuel gallon comps this quarter and do you know the exit rate?

Dennis Eidson -- Interim President and Chief Executive Officer

Exit rate as to how much we were down? I mean we -- I would say on the gallons part, we were down a little bit north of 19%. As to the exit rate, I actually don't know that off the top. But I would say that it was probably below the average, because I think as we got -- we saw that the rate started to improve during the course of the quarter, but I couldn't tell you the exact week. I mean our last week of the quarter is the week after the fourth, and so it can be a little bit distorted by holidays and such. But I would say it's below the 19%, but I couldn't tell you the exact number.

Corey Grady -- Jefferies LLC -- Analyst

Got it. Thank you.

Dennis Eidson -- Interim President and Chief Executive Officer

You're welcome.

Operator

Next question comes from Peter Saleh of BTIG. Please go ahead.

Peter Saleh -- BTIG -- Analyst

Great, thanks for taking the question. I was hoping you guys could provide a little bit more color on the consumer trends in the Retail segment as it relates to transactions and basket size, maybe just compare and contrast the start of the pandemic versus what you guys are seeing today in that Retail segment? Thanks.

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah. So at the start of the pandemic, our sales per transaction for that first six weeks was up nearly 50% and so that was pretty amazing and our transactions were negative mid-single digits in that same six-week period. What we've seen is a continuation of negative transactions as consumers are taking -- wanting to take less shopping trips and more in their basket vis-a-vis a year ago. So those trends remain in place, although they are moderating as we have moved through the quarter.

Peter Saleh -- BTIG -- Analyst

Great, thank you very much.

Operator

The next question comes from Chuck Cerankosky with Northcoast Research. Please go ahead.

Chuck Cerankosky -- Northcoast Research -- Analyst

Good morning, everyone. Dennis and Mark, when you're looking at private label, which -- they had a pretty good sales increase compared to grocery overall -- so the food distribute -- Food Retail overall. Can you talk about what you're planning over the rest of the year for new product introductions and categories you might enter as well as, how does it look on the supply side for private label manufacturers? Are those places that is just tough to get product, private label products? Are there bottlenecks out there to get the private label to your stores and into the distribution facilities?

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah. So let me talk about availability, we've been pretty fortunate with availability. But there are some categories where our suppliers have run into some roadblocks and product has become unavailable. Some of them, obviously, the categories that are under intense pressure, like we talked about earlier, a little bit of paper and then with cleaners and disinfectants etc.

So that continues to be there. I think we're fortunate with our relationship with Topco, as a co-op, a large co-op, where we are able to aggregate our purchasers. And I think maybe are a little bit advantaged than being off on our own with regard to that supply piece.

And then, I would say as we look at the go forward, Chuck, on private brand. I am of the opinion that we can continue to improve our private brand business as a percentage of the total private brand national brand pie.

First of all, we've -- we haven't been exceeding the national average in the recent past, and historically, Spartan had that reputation of having a more powerful brand than maybe the averages. And I think we can get back there and our team is focused on doing that. I think our most current relationship with Dunnhumby is really helping us with some insights and how important private brands are.

And not only that, I think as you look at the economy moving forward and who knows what's going to happen with the unemployment level, but it's probably likely many consumers are going to feel even more stretched in the near term than they did in the most recent past and they're going to be seeking value and private brand is a great place to find that value.

So I think there is a natural tailwind to private brands. Our customers, when we survey, because we have a loyalty card and we do survey results and 86% of our customers bought private brand in the quarter, 88% of them said they thought the quality was good to excellent and 30% of them said they plan on buying even more going forward. So I think that's a harbinger of good things to come. We got to work hard to get that done, but we're on it.

Chuck Cerankosky -- Northcoast Research -- Analyst

And related to private brands, because it is your product, the prepared foods in the store. Where are you at -- where is that at compared to where it had been pre-COVID and how do you see it evolving as shoppers get used to buying prepared product again? And what kind of displays are they going to find acceptable?

Dennis Eidson -- Interim President and Chief Executive Officer

Yeah, you know that whole -- would consumers are buying, and if you look at our quarter, our most recent quarter and we talked about 17% comps. We were negative in only two areas of the business and they were deil and they were bakery and deli is where we have domiciled a lot of that HMR type product over the years. And so, trying to think about that in a different way being pre-packaged is something that everybody is working.

We've lost the sales from our salad bars, our soup bars, our olive bars. We're not operational in those areas and we're trying to put together programs that are like, pick your components that the customer can take advantage of. So I think we have work to do there, but I think we're on it. And it's an opportunity for us to get some of that growth back that we kind of lost in the beginning of the pandemic here.

Chuck Cerankosky -- Northcoast Research -- Analyst

Thank you.

Operator

[Operator Instructions] We have a follow-up from Scott Mushkin from R5 Capital. Please go ahead.

Scott Mushkin -- R5 Capital LLC -- Analyst

Hey guys, thanks for taking another question from me. So the one topic I want to go into and is more short-term as the strategic, is this the -- there's a lot of talk about the government assistance going away around kind of $300 if that maybe materializes. Also, I think Food Stamp program. Just wondering how you think into the back half of the year. The unemployment rate is still pretty high. How that plays into your business. Have you seen anything yet, I guess is my -- would be my other question?

Dennis Eidson -- Interim President and Chief Executive Officer

Have we see it, what Scott, I...

Mark Shamber -- Executive Vice President and Chief Financial Officer

The unemployment...

Chuck Cerankosky -- Northcoast Research -- Analyst

Have you seen anything yet and -- yeah in other words, have you seen any change in consumer behavior as some of these government assistance programs start to roll off?

Dennis Eidson -- Interim President and Chief Executive Officer

It's hard to see that in our numbers. We'd seen Food Stamp usage decline through the quarter. And our sales moderated and we went through the quarter, we can't find a direct correlation to the sales and the Food Stamp, it feels as much about a currency exchange with that customer.

But I do think you're right that the consumer is likely going to be tighter going forward and that's the comment I said about private brands, I think, become far more important. I think what you promote and when you promote it becomes far more important and it's not like we're not that far removed from the last recession where a lot of people on the team here kind of lived through that and merchandising and marketed and operated through that period of time.

So I think making sure -- but the difference this time is, I think there is this -- there is also this concern about your own safety, right, and not wanting to shop in a store where you're not feeling safe from a virus perspective and the fact that we did some things very early in the pandemic and we were very early, really the first on our major market to put the Plexiglas up and to require masks.

And I think we've got a little bit more confidence. A part of our vision statement for the Company is to be a best-in-class company that feels local, where relationships matter and I think if you think about the Retail business that we operate and our independent customers, this feeling local and where relationships matter is really kind of right down in the middle, I think, of what consumers are looking for today.

It's that relationship with our retail store, they feel comfortable and confident in, and I think we've earned a bit of that as we've executed through the pandemic and now we've got to deliver even more on the value piece and I think we can do that.

Scott Mushkin -- R5 Capital LLC -- Analyst

All right, thanks, Dennis. Appreciate it.

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

I want to thank everybody for your participation today on the call and we certainly appreciated the opportunity to update you on our second quarter performance and we look forward to speaking with you again in the future. And everybody have a great day and stay safe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Katie Turner -- Partner at ICR

Dennis Eidson -- Interim President and Chief Executive Officer

Mark Shamber -- Executive Vice President and Chief Financial Officer

Kate Howard -- Barclays -- Analyst

Scott Mushkin -- R5 Capital LLC -- Analyst

Stephen Caputo -- BMO Capital Markets -- Analyst

Corey Grady -- Jefferies LLC -- Analyst

Peter Saleh -- BTIG -- Analyst

Chuck Cerankosky -- Northcoast Research -- Analyst

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