SpartanNash Co - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2016.

OR

For the transition period from              to             .

Commission File Number: 000-31127

SPARTANNASH COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (616) 878-2000

Securities registered pursuant to Section 12(b) of the Securities Exchange Act:

Securities registered pursuant to Section 12(g) of the Securities Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requirement to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates based on the last sales price of such stock on the NASDAQ Global Select Market on July 15, 2016 (which was the last trading day of the registrant’s second quarter in the fiscal year ended December 31, 2016) was $1,131,571,729.

The number of shares outstanding of the registrant’s Common Stock, no par value, as of February 28, 2017 was 37,519,304, all of one class.

DOCUMENTS INCORPORATED BY REFERENCE

Forward-Looking Statements

The matters discussed in this Annual Report on Form 10-K, in the Company’s press releases and in the Company’s website-accessible conference calls with analysts and investor presentations include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of SpartanNash Company and subsidiaries (“SpartanNash” or “the Company”). These forward-looking statements are identifiable by words or phrases indicating that SpartanNash or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” or that a particular occurrence or event “will,” “may,” “could,” “should,” or “will likely” result, occur or be pursued or “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” “priority,” “strategy,” “focus,” that the Company is “positioned” for a particular result, or similarly stated expectations. Accounting estimates, such as those described under the heading “Critical Accounting Policies” in Item 7 of this Annual Report on Form 10-K, are inherently forward-looking. The Company’s asset impairment and restructuring cost provisions are estimates and actual costs may be more or less than these estimates and differences may be material. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of the Annual Report, other report, release, presentation, or statement.

In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission (“SEC”), there are many important factors that could cause actual results to differ materially. These risks and uncertainties include general business conditions, changes in overall economic conditions that impact consumer spending, the Company’s ability to integrate acquired assets, the impact of competition and other factors which are often beyond the control of the Company, and other risks listed in Part I, “Item 1A. Risk Factors,” of this report and risks and uncertainties not presently known to the Company or that the Company currently deems immaterial.

This section and the discussions contained in Item 1A. “Risk Factors,” and in Item 7, subheading “Critical Accounting Policies” in this report, both of which are incorporated here by reference, are intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect the Company’s expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to SpartanNash or that SpartanNash currently believes are immaterial also may impair its business, operations, liquidity, financial condition and prospects. The Company undertakes no obligation to update or revise its forward-looking statements to reflect developments that occur or information obtained after the date of this Annual Report.

PART I

Item 1.Business

Overview

SpartanNash Company (together with its subsidiaries, “SpartanNash” or “the Company”) is a Fortune 400 company whose core businesses include distributing grocery products to independent grocery retailers (“independent retailers”), select national retailers, food service distributors, its corporate owned retail stores, and United States (“U.S.”) military commissaries. SpartanNash serves customer locations in 47 states and the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain and Egypt. As of December 31, 2016, the Company operated 157 supermarkets, primarily under the banners of Family Fare Supermarkets, VG’s Food and Pharmacy, D&W Fresh Market, Sun Mart and Family Fresh Market. Through its Military division, SpartanNash is the leading distributor of grocery products to military commissaries in the United States. The Company operates three reportable business segments: Food Distribution, Military and Retail. For the fiscal year ended December 31, 2016, the Company generated net sales of approximately $7.7 billion.

Established in 1917 as a cooperative grocery distributor, Spartan Stores Inc. (“Spartan Stores”) converted to a for-profit business corporation in 1973. In January 1999, Spartan Stores began to acquire retail supermarkets in its focused geographic regions. In August 2000, Spartan Stores common stock became listed on the NASDAQ Stock Market under the symbol “SPTN.” On November 19, 2013, Spartan Stores merged with Nash-Finch Company (“Nash-Finch”) and the combined company was named SpartanNash Company. Unless the context otherwise requires, the use of the terms “SpartanNash,” and “the Company” in this Annual Report on Form 10-K refers to the surviving corporation SpartanNash Company and, as applicable, its consolidated subsidiaries.

On January 6, 2017, the Company acquired certain assets and assumed certain liabilities of Caito Foods Service (“Caito”), a leading supplier of fresh fruit and vegetables as well as value-added solutions for retailers, and its affiliate, Blue Ribbon Transport (“BRT”), which provides temperature-controlled distribution and logistics services throughout North America. The acquisition strengthens the Company’s fresh product offerings and value-added services, such as freshly-prepared centerplate and side dish categories, and also complements the Company’s existing supply chain network.

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The Company’s hybrid business model supports the close functioning of its Food Distribution, Military and Retail operations, optimizing the natural complements of each business segment while also enhancing the ability of the Company’s independent retailers to compete long-term in the grocery industry. The model produces operational efficiencies, helps stimulate distribution product demand, and provides sharper visibility and broader business growth options. In addition, the Food Distribution, Military and Retail diversification provides added flexibility to pursue the best long-term growth opportunities in each segment.

SpartanNash has established key management priorities for the longer-term strategy of the Company, including establishing a well-differentiated product offering for its Food Distribution, Military and Retail segments, and additional strategies designed to create value for its shareholders, retailers and customers. These priorities are:

Food Distribution:

Military:

Retail:

Supply Chain:

Food Distribution Segment

The Company’s Food Distribution segment uses a multi-platform sales approach to distribute grocery products to independent retailers, select national retailers, food service distributors, and the Company’s corporate owned retail stores. Total net sales from the Company’s Food Distribution segment, including sales to corporate owned retail stores that are eliminated in the consolidated financial statements, were approximately $4.4 billion for the fiscal year ended December 31, 2016. As of the end of fiscal 2016, the Company believes it is the sixth largest wholesale distributor, in terms of annual revenue, to supermarkets in the United States.

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Customers. The Company’s Food Distribution segment supplies grocery products to a diverse group of approximately 2,100 independent retailers with operations ranging from a single store to supermarket chains with over 30 stores, food service distributors and the Company’s corporate owned retail stores. As of December 31, 2016, the Company operates in 47 states by leveraging a platform of 17 distribution centers servicing the Food Distribution and Military segments. This extensive geographic reach drives economies of scale and provides opportunities for independent retailers to purchase products at competitive prices in order to compete long-term in the grocery industry.

Through its Food Distribution segment, the Company also services select national retailers, including Dollar General. Sales to Dollar General are made to approximately 13,000 of its retail locations, with sales representing 11.2% and 10.7% of consolidated net sales for fiscal 2016 and 2015, respectively. Except for these two fiscal years, sales to this customer did not exceed 10% of consolidated net sales for any other year presented. The Company’s Food Distribution customer base is diverse, and no other single customer exceeded 5% of consolidated net sales in any of the years presented.

The Company’s five largest Food Distribution customers (excluding corporate owned retail stores) accounted for approximately 39% of total Food Distribution net sales for the fiscal year ended December 31, 2016. In addition, approximately 83% of Food Distribution net sales for the fiscal year ended December 31, 2016, including sales to corporate owned retail stores, are either covered under supply agreements with independent retailers or are intercompany sales.

The recent acquisition of Blue Ribbon Transport on January 6, 2017 expanded the Company’s capability to offer temperature-controlled distribution and logistics services throughout North America.

Products. The Company’s Food Distribution segment provides a selection of approximately 60,000 stock-keeping units (SKUs) of nationally branded and private brand grocery products (see “Marketing and Merchandising – Private Brands”) and perishable food products, including dry groceries, produce, dairy products, meat, delicatessen items, bakery goods, frozen food, seafood, floral products, general merchandise, beverages, tobacco products, health and beauty care products and pharmacy. With the acquisition of Caito, the product offering will include fresh protein-based foods, prepared meals, and value-added products such as fresh-cut fruits and vegetables and prepared salads. These product offerings, along with best in class services, allow independent retailers the opportunity to support the majority of their operations with a single supplier. Meeting consumers’ needs will continue to be SpartanNash’s priority as it executes its hybrid business model of Food Distribution, Military and Retail operations.

Additional Services. The Company offers and provides many of its independent Food Distribution customers with value-added services, including:

Military Segment

The Company’s Military segment contracts with manufacturers and brokers to distribute a wide variety of grocery products primarily to U.S. military commissaries and exchanges.

The distributed grocery products are delivered to over 160 military commissaries and over 440 exchanges located in more than 45 states across the United States and the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain and Egypt. The Company’s distribution centers are strategically located among the largest concentration of military bases in the areas the Company serves and near Atlantic ports used to ship grocery products to overseas commissaries and exchanges. The Company’s Military segment has an outstanding reputation as a distributor focused on U.S. military commissaries and exchanges, based in large measure on its excellent service metrics, which include fill rate, on-time delivery and shipping accuracy.

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DeCA operates a chain of over 238 commissaries on U.S. military installations throughout the world that sell approximately $5.2 billion of grocery products annually. DeCA contracts with manufacturers to obtain grocery products for the commissary system. Manufacturers either deliver the products to the commissaries themselves or, more commonly, contract with distributors such as SpartanNash to deliver the products. Manufacturers must authorize the distributors as their official representatives to DeCA, and the distributors must adhere to DeCA’s frequent delivery system (“FDS”) procedures governing matters such as product identification, ordering and processing, information exchange and resolution of discrepancies. The Company obtains distribution contracts with manufacturers through competitive bidding processes and direct negotiations.

As of December 31, 2016, the Company has approximately 250 distribution contracts representing approximately 600 manufacturers that supply products to the DeCA commissary system and various exchange systems. Generally, larger contracts or those subject to a request-for-proposal process have definitive durations, whereas smaller contracts generally have indefinite terms; and all contract types allow for termination by either party without cause upon 30 days prior written notice to the other party. The contracts typically specify the commissaries and exchanges to supply on behalf of the manufacturer, the manufacturer’s products to be supplied, service and delivery requirements, and pricing and payment terms. The Company’s ten largest manufacturer customers represented approximately 43% of the Company’s Military segment sales for the fiscal year ended December 31, 2016.

As commissaries need to be restocked, DeCA identifies the manufacturer with which an order is to be placed, determines which distributor is the manufacturer’s official representative for a particular commissary or exchange location, and then places a product order with that distributor under the auspices of DeCA’s master contract with the applicable manufacturer. The distributor selects that product from its existing inventory, delivers it to the commissary or commissaries designated by DeCA, and bills the manufacturer for the product shipped. The manufacturer then bills DeCA under the terms of its master contract. Overseas commissaries are serviced in a similar fashion, except that a distributor’s responsibility is to deliver products as and when needed to the port designated by DeCA, which in turn bears the responsibility for shipping the product to the applicable commissary or overseas warehouse.

After the Company ships a particular manufacturer’s products to commissaries in response to an order from DeCA, the Company invoices the manufacturer for the product price plus a drayage fee that is typically based on a percentage of the purchase price, but may in some cases be based on a dollar amount per case or pound of product sold. The Company’s order handling and invoicing activities are facilitated by procurement and billing systems developed specifically for the Military business, which address the unique aspects of its business, and provides the Company’s manufacturer customers with a web-based, interactive means of accessing critical order, inventory and delivery information.

On December 8, 2016, the Company was competitively awarded by DeCA to be the exclusive worldwide supplier of a variety of private brand products to U.S. military commissaries for the first time in the agency’s history. DeCA stated that its key selection criteria in choosing its partner were simplicity, ease and efficiency of implementation, cost savings, and ability to support and grow the program in the future. The Company will begin distribution of certain private brand products in the first half of fiscal 2017.

Retail Segment

As of December 31, 2016, the Company operated 157 corporate owned retail stores in the Midwest and Great Lakes regions primarily under the banners of Family Fare Supermarkets, VG’s Food and Pharmacy, D&W Fresh Markets, Sun Mart and Family Fresh Market. Retail banners and numbers of stores are more fully detailed in Item 2, “Properties,” of this report.

The Company’s neighborhood market strategy distinguishes its corporate owned retail stores from supercenters and limited assortment stores by emphasizing convenient locations, demographically-targeted merchandise selections, high-quality fresh offerings, customer service, value pricing and community involvement.

The Company’s corporate owned retail stores offer nationally branded and private brand grocery products (see “Marketing and Merchandising – Private Brands”), as well as perishable food products including dry groceries, produce, dairy products, meat, delicatessen items, bakery goods, frozen food, seafood, floral products, general merchandise, beverages, tobacco products and health and beauty care products. The private brand grocery products provide higher retail margins and may help improve customer loyalty by providing quality products at affordable prices. The Company also offered pharmacy services in 90 of its corporate owned retail stores as of December 31, 2016. The Company’s corporate owned retail stores range in size from approximately 14,000 to 89,800 total square feet, or on average, approximately 41,000 total square feet per store.

As of December 31, 2016, the Company operated 30 fuel centers primarily at its corporate owned retail stores operating under the banners Family Fare Quick Stop, D&W Quick Stop, VG’s Quick Stop, Forest Hills Quick Stop and Sun Mart Express Fuel. These fuel centers offer refueling facilities and in the adjacent convenience store, a limited variety of popular consumable products. The Company’s prototypical Quick Stop stores are approximately 1,100 square feet in size. The Company has experienced increased supermarket sales upon opening fuel centers and initiating cross-merchandising activities.

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The Company’s corporate owned retail stores are primarily the result of acquisitions prior to June 2015, including the merger with Nash-Finch Company in November 2013. The following chart details the changes in the number of corporate owned retail stores over the last five fiscal years, including the transition year ended December 28, 2013:

During the fiscal year ended December 31, 2016, the Company completed twelve major remodels, four of which were initiated in fiscal 2015, and also opened one new fuel center. In connection with the remodeling efforts, the Company converted eight corporate owned retail stores to the Family Fare Supermarkets banner.

The Company expects to continue making targeted capital investments during fiscal 2017 by performing a number of major remodels at select corporate owned retail stores and, if opportunities arise, by either opening additional fuel centers or entering into partnerships with existing fuel operations. The Company will continue to evaluate its store base and may close or sell up to ten stores during the course of 2017 depending on circumstances and opportunities. In February 2017, two low-performing stores were closed upon lease expiration. The Company evaluates proposed capital projects based on demographics and competition within each geographic area, and prioritizes projects based on their expected returns on investment. Approval of proposed capital projects requires a projected internal rate of return that meets or exceeds the Company’s policy; however, the Company may undertake projects that do not meet this standard to the extent they represent required maintenance or necessary infrastructure improvements. In addition, the Company performs a post completion review of financial results versus its expectation on all major projects. The Company believes that focusing on such measures provides an appropriate level of discipline in its capital expenditures process.

Supply Chain Network

The Company has further integrated its supply chain organization to optimize the network, increase asset utilization and leverage programs that will drive more value for its retailers, customers, and shareholders. The Company believes its distribution facilities are strategically located to efficiently serve current customers and also have the available capacity to support future growth. The Company continually evaluates inventory movement and assigns SKUs to appropriate areas within its distribution facilities to reduce the time required to stock and pick products and to achieve additional efficiencies.

The Company has several projects planned for the fiscal year ending December 30, 2017. These projects are designed to further integrate the Company’s supply chain capabilities across distribution centers and thereby increase efficiency of both inbound and outbound distribution operations. To demonstrate the Company’s commitment across the entire network, the Company has invested in uniformly branding all tractors with a new logo that embodies the Company’s tagline, “Taking Food Places®.” Newly purchased trailers will also receive the new logo layout. In 2017, the Company expects to complete the branding of all existing trailers within the SpartanNash supply chain. This will allow the Company to increase asset utilization by sharing resources across all facilities.

Supply Chain Functions. The Company’s distribution network is comprised of 17 distribution centers, which are utilized to service the Food Distribution and Military segments. The distribution centers provide for approximately 8.3 million total square feet of warehouse space.

The Company operates a fleet of approximately 500 over-the-road tractors, 500 dry vans, and 1,000 refrigerated trailers. Through routing optimization systems, the Company carefully manages the more than 50 million miles its fleet drives annually servicing military commissaries, exchanges, independent retailers, select national retailers and corporate owned retail stores. The Company is also expanding its effort to equip a portion of its refrigerated trailers with a refrigeration unit that has the capability to run on electric standby, offering an economical and environmentally friendly alternative to diesel fuel. The Company remains committed to the ongoing investment required to maintain a best in class fleet while focusing on low cost and environmentally friendly solutions.

Products

The Company offers a wide variety of grocery products, general merchandise and health and beauty care, pharmacy, fuel and other items and services. Consolidated net sales include the net sales of its Food Distribution business, which exclude sales to corporate owned retail stores, the net sales of its Military segment, and the net sales of its corporate owned retail stores and fuel centers in its Retail segment.

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Refer to Part II, Item 8 of this report under the Reporting Segment Information section in the notes to consolidated financial statements for additional information about the Company’s sales by type of similar products and services, which is herein incorporated by reference.

Reporting Segment Financial Data

More detailed information about the Company’s reporting segments can be found in Part II, Item 8 of this report under the Reporting Segment Information section in the notes to consolidated financial statements, which is herein incorporated by reference. All of the Company’s sales and assets are in the United States of America.

Discontinued Operations

Certain of the Company’s Food Distribution and Retail operations have been recorded as discontinued operations. Discontinued operations consist of certain locations that have been closed or sold.

Marketing and Merchandising

General. The Company continues to align its marketing and merchandising strategies with current consumer behaviors by delivering initiatives centered on personalization, value beyond price, and health and wellness – all designed to deliver a superior shopping experience for customers. These strategies seek to use consumer data and insights to deliver products, promotions, content and experiences to satisfy the consumer’s needs.

The Company believes that data from its “yes” loyalty program gives it competitive insight into consumer shopping behavior. This gives the Company the flexibility to adapt to rapidly changing conditions by making tactical and more effective adjustments to its marketing and merchandising programs. In fiscal 2016, the Company expanded its yes program to the remaining Family Fare stores in the Omaha market and to the remaining Family Fresh Markets stores in Minnesota and Wisconsin.  

The Company’s investment to further strengthen its knowledge of the consumer has continued to drive process improvements in several areas: a robust self-serve data tool that enables category managers to make consumer centric merchandising and marketing decisions; new Key Value Items analyses that align pricing for the most price sensitive items with the most price sensitive customer segments; the development of a customer strategy that will be used to guide its internal business processes and go-to market strategy; and the evolution of its customer segmentation that takes it beyond the purchase and transactional behavior to lifestyle. These accomplishments better position the Company to deliver a shopping experience that constantly responds to the changing needs of its consumers.  

The Company has been building tools and capabilities to enable relevant, personalized content across its marketing channels and focusing on expanding its digital, social and mobile capabilities. The Company also implemented a number of capabilities that enables it to more effectively target consumers and more efficiently develop and execute campaigns. This will help the Company to further build longer-term customer loyalty, maintain efficient marketing spend and increase return on investment, improve its sales growth opportunities, and further strengthen its business position. As the Company continues to build these capabilities, along with its other strategies, the Company will continue to share its marketing and merchandising learnings and best practices across its wholesale customer base.  

The Company believes it can differentiate itself from its competitors by offering a full set of services, from value added services in its Food Distribution segment to the inclusion of fuel centers and Starbucks Coffee or Caribou Coffee shops in certain corporate owned retail stores. The Company also provides consumers with fuel purchase discounts at fuel centers through its corporate owned retail stores or by partnering with third party fuel centers. In addition, the Company has refined its fuel promotions and executed several pilots to further enhance the program’s value to the customer.

As of December 31, 2016, the Company offered pharmacy services in 90 of its corporate owned retail stores and operates three free-standing pharmacy locations. The Company believes the pharmacy service offering in its corporate owned retail stores is an important part of the consumer experience. In its Michigan pharmacies and a number of its pharmacies in Minnesota and Nebraska, the Company offers free medications (antibiotics, diabetic medications and prenatal vitamins) along with generic drugs for $4 and $10, and food solutions for preventative health and education for its customers.

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As consumers increasingly emphasize health and wellness, the Company believes that it can be a provider and resource for products and services that will support their needs. In fiscal 2016, the Company continued to expand its offerings and partnerships and undertook the following key initiatives. First, the Company continued to expand its “Living Well” product offerings through store-within-a-store and in-line merchandising concepts. Second, the Company established partnerships with health systems and providers to provide wellness specialists-led store tours to help educate consumers to make healthier food choices. Third, the Company increased its retail product offering and assortment for organic, gluten-free, meat-free, non-GMO products and other healthier food options. The Company is also proud to work with local farmers and vendors to provide as many locally grown produce and products possible in its stores.  

Private Brands. SpartanNash currently markets and distributes over 7,100 total private brand items primarily under the following brands: Spartan™ and Our Family™ (national brand equivalent or better grocery products); Open Acres™ (fresh products); Top Care (health and beauty care); Tippy Toes (baby); Full Circle™ (organic and wellness); B-leve (premium bath and beauty); PAWS Premium (pet supplies); and Valu Time (value). Open Acres is a new proprietary “fresh” brand launched in fiscal 2016 that includes produce, meat, delicatessen items, bakery goods and seafood. The Company believes that its private brand offerings are some of its most valuable strategic assets, demonstrated through customer loyalty and profitability.

The Company has worked to develop a best in class private brand program. The Company added approximately 700 private brand products to its consumer offerings in the past year and plans to introduce approximately 300 additional new items in fiscal 2017. The Company’s products have been frequently recognized for excellence in packaging design and product development. These awards underscore the Company’s continued commitment to providing the consumer with quality products at exceptional value. The Company’s focus is and will continue to be the pursuit of new opportunities and expansion of private brand offerings to its customers.

Competition

The Company’s Food Distribution, Military and Retail segments operate in a highly competitive industry, which typically result in low profit margins for the industry as a whole. The Company competes with, among others, regional and national grocery distributors, large chain stores that have integrated wholesale and retail operations, mass merchandisers, e-commerce providers, limited assortment stores and wholesale membership clubs, many of whom have greater resources than the Company.

The primary competitive factors in the Food Distribution business include price, service, product quality, variety and other value-added services. The Company believes its overall service level, which is defined as actual units shipped divided by actual units ordered, is among industry leaders in terms of performance.

The Company is one of less than ten distributors in the United States with annual sales to the DeCA commissary system in excess of $100 million that distributes products via the frequent delivery system. The remaining distributors that supply DeCA tend to be smaller regional and local providers. In addition, manufacturers contract with others to deliver certain products, such as baking supplies, produce, delicatessen items, soft drinks and snack items, directly to DeCA commissaries and service exchanges. Because of the narrow margins in this industry, it is of critical importance for distributors to achieve economies of scale, which is typically a function of the density or concentration of military bases within the geographic area(s) a distributor serves. As a result, no single distributor in this industry, by itself, has a nationwide presence. Rather, distributors tend to concentrate on specific regions, or areas within specific regions, where they can achieve critical mass and utilize warehouse and distribution facilities efficiently. In addition, distributors that operate larger non-military specific distribution businesses tend to compete for DeCA commissary business in areas where such business would enable them to more efficiently utilize the capacity of their existing distribution centers. The Company believes the principal competitive factors among distributors within this industry are customer service, price, operating efficiencies, reputation with DeCA and location of distribution centers. The Company believes its competitive position is very strong with respect to all of these factors within the geographic areas where it competes.

The principal competitive factors in the retail grocery business include the location and image of the store; the price, quality and variety of the perishable products; and the quality, convenience and consistency of service. The Company believes it has developed and implemented strategies and processes that allow it to be competitive in its Retail segment. The Company monitors planned competitor store openings and uses established proactive strategies to respond to new competition both before and after the competitive store opening. Strategies to react to competition vary based on many factors, such as the competitor’s format, strengths, weaknesses, pricing and sales focus. During the past three fiscal years, 13 competitor supercenters opened in geographic areas in which the Company currently operates corporate owned retail stores with three additional openings expected to occur during fiscal 2017. As a result of these openings, the Company believes the majority of its supermarkets compete with one or more supercenters.

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Seasonality

In certain geographic areas, the Company’s sales and operating performance varies with seasonality. Many stores are dependent on tourism and therefore, are most affected by seasons and weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months. The Company’s first quarter is typically its lowest sales quarter. Therefore, operating results are generally lower during this quarter. All fiscal quarters are 12 weeks, except for the Company’s first quarter, which is 16 weeks and will generally include the Easter holiday. The fourth quarter includes the Thanksgiving and Christmas holidays. Fiscal year ended January 3, 2015 contained 53 weeks; therefore, the fourth quarter of fiscal 2014 consisted of 13 weeks rather than 12 weeks.

Suppliers

The Company purchases products from a large number of national, regional and local suppliers of name brand and private brand merchandise. The Company has not encountered any material difficulty in procuring or maintaining an adequate level of products to serve its customers. No single supplier accounts for more than 5% of the Company’s purchases. The Company continues to develop strategic relationships with key suppliers and believes this will prove valuable in the development of enhanced promotional programs and consumer value perceptions.

Intellectual Property

The Company owns valuable intellectual property, including trademarks and other proprietary information, some of which are of material importance to its business.

Technology

Over the last year the Company has continued to focus on the integration of various key systems from the two merged companies, Spartan Stores and Nash Finch. The integration has proceeded well and is largely complete. During the last year there were additional projects completed to accommodate business operations that were unrelated to the integration of the two companies.

Supply Chain. During fiscal 2016, the Company standardized the Master Data Management systems resulting in standardized customer, vendor and item information; installed a new centralized suggested pricing system for support of its wholesale customers; standardized the inbound scheduling system across the entire distribution network; completed a pilot of a new environmental integrity monitoring system for its transportation fleet, which will be installed in 2017; began the implementation of a standard order management system across its distribution network, which will continue over the next two years; and completed the redesign and upgrade of the communications technology in support of its distribution center network. In the non-integration area, the Company continued with additional supply chain enhancement projects to support its national accounts business.

Retail Systems. During fiscal 2016, the Company standardized the space planning system for all retail locations and Food Distribution customers; enhanced its electronic payment system for fuel centers to support fleet payment cards; upgraded its loyalty systems as it expanded their use in the Omaha, Nebraska locations; continued to enhance the mobile loyalty application for customer use; and, deployed an integrated ordering system in the western retail locations in preparation for computer assisted ordering. In non-integration projects, the Company continued a multi-year customization effort for the major upgrade of point-of-sale (“POS”) software in preparation for a pilot in 2017; completed a major upgrade to its self-check-out systems; and enhanced its pharmacy systems for support of customer interaction through various mobile platforms.

Administrative Systems. During fiscal 2016, the consolidation on to a single accounts receivable system was substantially completed and will be implemented in the first quarter of 2017; the financial reporting and planning systems installation was completed; a major upgrade of the human resources and payroll system was completed; and consolidation on to a single electronic data interface (“EDI”) system was also completed.

Information Technology Infrastructure. The consolidation of four data centers to two data centers was completed in fiscal 2016 and major enhancements to the disaster recovery and non-stop processing capabilities between the two data centers were also implemented.

Associates

As of December 31, 2016, the Company employed approximately 14,700 associates, 8,300 on a full-time basis and 6,400 on a part-time basis. Of the 14,700 associates the Company employs, approximately 1,200 associates, or 8% of the total workforce, were represented by unions under collective bargaining agreements; the collective bargaining agreements covering these associates will either expire between October 2017 and September 2019 or have been extended on their own terms and have a contemplated expiration date in either January 2019 or February 2019. The Company considers its relations with its union and non-union associates to be good and have not had any material work stoppages in over twenty years.

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Regulation

The Company is subject to federal, state and local laws and regulations concerning the conduct of its business, including those pertaining to the workforce and the purchase, handling, sale and transportation of its products. Many of the Company’s products are subject to federal Food and Drug Administration (“FDA”) and United States Department of Agriculture (“USDA) regulation. The Company believes that it is in substantial compliance in all material respects with the FDA, USDA and other federal, state and local laws and regulations governing its businesses.

Forward-Looking Statements

The matters discussed in this Item 1 include forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.

Available Information

The address of the SpartanNash web site is www.spartannash.com. The inclusion of the Company’s website address in this Form 10-K does not include or incorporate by reference the information on or accessible through the Company’s website, and the information contained on or accessible through those websites should not be considered as part of this Form 10-K. The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports (and amendments to those reports) filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 available on the Company’s web site as soon as reasonably practicable after the Company electronically files or furnishes such materials with the SEC. Interested persons can view such materials without charge by clicking on “For Investors” and then “SEC Filings” on the Company’s web site. SpartanNash is a “large accelerated filer” within the meaning of Rule 12b-2 under the Securities Exchange Act.

Item 1A.Risk Factors

The Company faces many risks. If any of the events or circumstances described in the following risk factors occur, the Company’s financial condition or results of operations may suffer, and the trading price of the Company’s common stock could decline. This discussion of risk factors should be read in conjunction with the other information in this Annual Report on Form 10-K. All of these forward-looking statements are affected by the risk factors discussed in this item and this discussion of risk factors should be read in conjunction with the discussion of forward-looking statements, which appears at the beginning of this report.

Business and Operational Risks

The Company operates in an extremely competitive industry. Many of its competitors are much larger than the Company and may be able to compete more effectively.

The Company’s Food Distribution and Retail segments have many competitors, including regional and national grocery distributors, large chain stores that have integrated wholesale and retail operations, mass merchandisers, e-commerce providers, limited assortment stores and wholesale membership clubs. Many of the Company’s competitors have greater resources than the Company.

The Company’s Military segment faces competition from large national and regional food distributors and smaller distributors. Industry consolidation, alternative store formats, nontraditional competitors and e-commerce have contributed to market share losses for traditional grocery stores. These trends have produced even stronger competition for the Company’s Retail business and for the independent retailers of the Company’s Food Distribution business. If the Company fails to implement strategies to respond effectively to these competitive pressures, its operating results could be adversely affected by price reductions, decreased sales or margins, or loss of customer base. The Company may not be able to compete successfully in this environment.

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The Company may not be able to successfully integrate the assets of Caito Foods Service and Blue Ribbon Transport, and the Company may incur significant costs to integrate and support these and other assets it acquires.

In January 2017, the Company acquired the assets of Caito Foods Service and its affiliate, Blue Ribbon Transport. The integration of acquired assets requires significant time and resources, and the Company may not manage these processes successfully. As part of this acquisition, the Company acquired a newly constructed Fresh Kitchen facility. The Fresh Kitchen has no history of operations, and the Company may incur difficulties in commencing its operation and achieving efficient levels of production volume. The Company expects that the Fresh Kitchen will not be profitable in the short-term, and there is no guarantee it will be profitable in the long-term. In addition, some grocery retailers previously serviced by Caito Foods Service were anticipated to discontinue their purchases leading up to the Company’s acquisition of the Caito assets. The Company is making investments of resources to support the acquired Caito Foods Service and Blue Ribbon Transport assets and replace any lost business, which will result in significant ongoing operating expenses and may divert resources and management attention from other areas of the business. If the Company fails to successfully integrate these assets and develop new business opportunities, it may not realize the benefits expected from the transaction and its business may be harmed.

The Company’s private brand program for U.S. military commissaries may not achieve the desired results.

In December 2016, the Defense Commissary Agency (“DeCA” or “the Agency”), which operates U.S. military commissaries worldwide, competitively awarded the Company the contract to support and supply products for the Agency’s new private brand product program. Private brand products have not previously been offered in the Agency’s commissaries. The Company expects to invest significant resources as it partners with DeCA to develop and roll out the new program, and there is no guarantee of its success. The Company expects that DeCA will face significant competition in each product category from national brands that are familiar to consumers. If the Agency is unable to shift consumer preferences from national brands to the new private brand, then both DeCA and the Company may be unable to achieve expected returns from this program, which could have a material adverse effect on the Company’s business. The success of the program will depend in part on factors beyond the Company’s control, including the actions of the Agency.

The Company may not be able to implement its strategy of growth through acquisitions.

Part of the Company’s growth strategy involves selected acquisitions of additional retail grocery stores, grocery store chains or distribution facilities. Because the Company operates in the Food Distribution business, future acquisitions of retail grocery stores could result in the Company competing with its independent retailers and could adversely affect existing business relationships with those customers. As a result, the Company may not be able to identify suitable acquisition candidates in the future, complete acquisitions or obtain the necessary financing and this may adversely affect the Company’s ability to grow profitably.

Substantial operating losses may occur if the customers to whom the Company extends credit or for whom the Company guarantees loans or lease obligations fail to repay the Company.

In the ordinary course of business, the Company advances funds, extends credit and lends money to certain independent retailers and guarantees some customers’ loan or lease obligations. The Company seeks to obtain security interest and other credit support in connection with these arrangements but the collateral may not be sufficient to cover the Company’s exposure. Greater than expected losses from existing or future credit extensions, loans, guarantee commitments or sublease arrangements could negatively and materially impact the Company’s operating results and financial condition.

Changes in relationships with the Company’s vendor base may adversely affect its business, margins, and profitability.

The Company sources the products it sells from a wide variety of vendors. The Company generally does not have long-term written contracts with its major suppliers that would require them to continue supplying it with merchandise. The Company depends on its vendors for appropriate allocation of merchandise, assortments of products, operation of vendor-focused shopping experiences within its stores, and funding for various forms of promotional allowances. There has been significant consolidation in the food industry, and this consolidation may continue to the Company’s commercial disadvantage. Such changes could have a material adverse impact on the Company’s revenues and profitability.

Disruptions to the Company’s information technology systems, including security breaches and cyber-attacks, could negatively affect the Company’s business.

The Company has complex information technology (“IT”) systems that are important to its business operations. The Company gathers and stores sensitive information, including personal information about its customers, vendors and associates, and other proprietary or sensitive information. The Company could incur significant losses due to disruptions in its systems and business if it were to experience difficulties accessing data stored in its IT systems or if the sensitive information stored is compromised by third parties.

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Although the Company has implemented security programs and disaster recovery facilities and procedures, cyber threats evolve rapidly and are becoming more sophisticated. Despite the Company’s efforts to secure its information and systems, cyber attackers may defeat the security measures and compromise the personal information of customers, associates, vendors and other sensitive information. Associate error, faulty password management or other problems may compromise the security measures and result in a breach of the Company’s information systems, systems disruptions, data theft or other criminal activity.

This could result in a loss of sales or profits or cause the Company to incur significant costs to restore its systems or to reimburse third parties for damages.

Threats to security or the occurrence of severe weather conditions, natural disasters or other unforeseen events could harm the Company’s business.

The Company’s business could be severely impacted by severe weather conditions, natural disasters, or other events that could affect the warehouse and transportation infrastructure used by the Company and its vendors to supply the Company’s corporate owned retail stores, and Food Distribution and Military customers. While the Company believes it has adopted commercially reasonable precautions, insurance programs, and contingency plans; the damage or destruction of Company facilities could compromise the Company’s ability to distribute products and generate sales. Unseasonable weather conditions that impact growing conditions and the availability of food could also adversely affect sales, profits and asset values.

Impairment charges for goodwill or other intangible assets could adversely affect the Company’s financial condition and results of operations.

The Company is required to perform an annual impairment test for goodwill and indefinite-lived intangible assets in the fourth quarter of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. Testing goodwill and other intangible assets for impairment requires management to make significant estimates about the Company’s future performance, cash flows, and other assumptions that can be affected by potential changes in economic, industry or market conditions, business operations, competition, or the Company’s stock price and market capitalization. Changes in these factors, or changes in actual performance compared with estimates of the Company’s future performance, may affect the fair value of goodwill or other intangible assets. This could result in the Company recording a non-cash impairment charge for goodwill or other intangible assets in the period the determination of impairment is made. The Company cannot accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other intangible assets become impaired, the Company’s financial condition and results of operations may be adversely affected. In January 2017, a new accounting standard was issued that simplifies the subsequent measurement of goodwill by eliminating Step 2 of the annual goodwill impairment test, which could significantly impact the amount of impairment charge to be recorded if goodwill was determined to be impaired. Refer to Part II, Item 8 of this report under the Summary of Significant Accounting Policies and Basis of Presentation section in the notes to consolidated financial statements for additional information.

The Company may be unable to retain its key management personnel.

The Company’s success depends to a significant degree upon the continued contributions of senior management. The loss of any key member of the Company’s management team may prevent it from implementing its business plans in a timely manner. The Company cannot assure that successors of comparable ability will be identified and appointed and that the Company’s business will not be adversely affected.

Legal, Regulatory and Legislative Risks

The Company’s Military segment is dependent upon domestic and international military operations. A change in the military commissary system, or level of governmental funding, could negatively impact the Company’s results of operations and financial condition.

Because the Company’s Military segment sells and distributes grocery products to military commissaries and exchanges in the United States and overseas, any material changes in the commissary system, the level of governmental funding to DeCA, military staffing levels, or the locations of bases may have a corresponding impact on the sales and operating performance of this segment. These changes could include privatization of some or all of the military commissary system, relocation or consolidation of commissaries and exchanges, base closings, troop redeployments or consolidations in the geographic areas containing commissaries and exchanges served by the Company, or a reduction in the number of persons having access to the commissaries and exchanges. Mandated reductions in the government expenditures, including those imposed as a result of sequestration, may impact the level of funding to DeCA and could have a material impact on the Company’s operations.

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Safety concerns regarding the Company’s products could harm the Company’s business.

It is sometimes necessary for the Company to recall unsafe, contaminated or defective products. Recall costs can be material and the Company might not be able to recover costs from its suppliers. Concerns regarding the safety of food products sold by the Company could cause customers to avoid purchasing certain products from the Company, or to seek alternative sources of supply for some or all of their food needs, even if the basis for concern is outside of the Company’s control. Any loss of confidence on the part of the Company’s customers would be difficult and costly to overcome. Any real or perceived issue regarding the safety of any food or drug items sold by the Company, regardless of the cause, could have a substantial and adverse effect on the Company’s business.

A number of the Company’s associates are covered by collective bargaining agreements, and unions may attempt to organize additional associates.

Approximately 55% and 16% of the Company’s associates in its Food Distribution and Military business segments, respectively, are covered by collective bargaining agreements which expire between October 2017 and September 2019 or which the Company is in the process of negotiating and have contemplated expiration dates in either January 2019 or February 2019. The Company expects that rising healthcare, pension and other employee benefit costs, among other issues, will continue to be important topics of negotiation with the labor unions. Upon the expiration of the Company’s collective bargaining agreements, work stoppages by the affected workers could occur if the Company is unable to negotiate an acceptable contract with the labor unions. This could significantly disrupt the Company’s operations. Further, if the Company is unable to control healthcare and pension costs provided for in the collective bargaining agreements, the Company may experience increased operating costs and an adverse impact on future results of operations.

While the Company believes that relations with its associates are good, the Company may continue to see additional union organizing campaigns. The potential for unionization could increase as any new related legislation or regulations are passed. The Company respects its associates’ right to unionize or not to unionize. However, the unionization of a significant portion of the Company’s workforce could increase the Company’s overall costs at the affected locations and adversely affect its flexibility to run its business in the most efficient manner to remain competitive or acquire new business and could adversely affect its results of operations by increasing its labor costs or otherwise restricting its ability to maximize the efficiency of its operations.

Costs related to multi-employer pension plans and other postretirement plans could increase.

The Company contributes to the Central States Southeast and Southwest Pension Fund (“Central States Plan” or “the Plan”), a multi-employer pension plan, based on obligations arising from its collective bargaining agreements with Teamsters locals 406 and 908. SpartanNash does not administer or control this Plan, and the Company has relatively little control over the level of contributions the Company is required to make. Currently, the Central States Plan is underfunded and in critical status, and as a result, contributions are scheduled to increase. The Company expects that contributions to this Plan will be subject to further increases. Benefit levels and related issues will continue to create collective bargaining challenges. The amount of any increase or decrease in its required contributions to this Plan will depend upon the outcome of collective bargaining, the actions taken by the trustees who manage the Plan, governmental regulations, actual return on investment of Plan assets, the continued viability and contributions of other contributing employers, and the potential payment of withdrawal liability should the Company choose to exit a geographic area, among other factors.

The Company maintains defined benefit retirement plans for certain of its associates that do not participate in multi-employer pension plans. These plans are frozen. Expenses associated with the defined benefit plans may significantly increase due to changes to actuarial assumptions or investment returns on plan assets that are less favorable than projected. In addition, changes in the Company’s funding status could adversely affect the Company’s financial position.

Item 1B. Unresolved Staff Comments

None.

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Item 2.Properties

The following table lists the locations and approximate square footage of the Company’s distribution centers used by its Food Distribution and Military segments as of December 31, 2016. The lease expiration dates for the distribution centers primarily servicing Food Distribution segment range from November 2017 to July 2020, and for the Military segment range from August 2017 to January 2028. The Company believes that these facilities are generally well maintained, are generally in good operating condition, have sufficient capacity, and are suitable and adequate to carry on its business for each of these segments.

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The following table lists the retail banner, number of stores, location and approximate square footage under each banner as of December 31, 2016.

The Company also owns one fuel center that is not reflected in the retail square footage above: a Family Fare Quick Stop in Michigan that is not included with a corporate owned retail store but is adjacent to the Company’s corporate headquarters. Also not reflected in the retail square footage above are three stand-alone pharmacies located in Cannon Falls, Minnesota; Clear Lake, Iowa; and Barron, Wisconsin.

The Company’s service centers are located in Grand Rapids, Michigan; Minneapolis, Minnesota; and Norfolk, Virginia; consisting of office space of approximately 286,100 square feet in Company-owned buildings and 26,300 square feet in leased facilities. The Company also leases two additional off-site storage facilities consisting of approximately 50,300 square feet.

Item 3. Legal Proceedings

The Company is engaged from time-to-time in routine legal proceedings incidental to its business. The Company does not believe that these routine legal proceedings, taken as a whole, will have a material impact on its business or financial condition. While the ultimate effect of such actions cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the Company’s consolidated financial position, operating results or liquidity.

Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against the Company. While the ultimate effect of such lawsuits and claims cannot be predicted with certainty, management believes that their outcome will not result in an adverse effect on the Company’s consolidated financial position, operating results or liquidity. Legal proceedings, various lawsuits, claims, and other matters are more fully described in Part II, Item 8 of this report under the Commitments and Contingencies section in the notes to consolidated financial statements, which is herein incorporated by reference.

Item 4.Mine Safety Disclosure

Not Applicable

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PART II

Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters

SpartanNash common stock is traded on the NASDAQ Global Select Market under the trading symbol “SPTN.”

Stock sale prices are based on transactions reported on the NASDAQ Global Select Market. Information on quarterly high and low sales prices for SpartanNash common stock for each of the last two fiscal years is as follows:

At February 28, 2017, there were approximately 1,305 shareholders of record of SpartanNash common stock. The Company has paid a quarterly cash dividend every quarter since the fourth quarter of fiscal 2006.

The table below outlines quarterly dividends paid on SpartanNash common stock in each of the last three fiscal years as well as the Board of Directors’ recently approved quarterly dividend:

Under its senior revolving credit facility, the Company is generally permitted to pay dividends in any fiscal year up to an amount such that all cash dividends, together with any cash distributions and share repurchases, do not exceed $35.0 million. Additionally, the Company is generally permitted to pay cash dividends and repurchase shares in excess of $35.0 million in any fiscal year so long as its Excess Availability, as defined in the senior revolving credit facility, is in excess of 10% of the Total Borrowing Base, as defined in the senior revolving credit facility, before and after giving effect to the repurchases and dividends.

Although the Company expects to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the Board of Directors to declare future dividends. Each future dividend will be considered and declared by the Board of Directors at its discretion. Whether the Board of Directors continues to declare dividends and repurchase shares depends on a number of factors, including the Company’s future financial condition, anticipated profitability and cash flows, and compliance with the terms of its credit facilities. In May 2011, the Board of Directors authorized a five-year share repurchase program for up to $50 million of SpartanNash’s common stock that expired in May 2016. During the first quarter of fiscal 2016, the Board of Directors authorized a new five-year share repurchase program for an additional $50 million of SpartanNash’s common stock.

During the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015 the Company repurchased 396,030; 282,363; and 245,956 shares of common stock under its $50 million share repurchase program that expired in May 2016 for approximately $9.0 million, $9.0 million and $5.0 million, respectively. The Company did not repurchase any shares under its new $50 million share repurchase program for the fiscal year ended December 31, 2016.

The equity compensation plans table in Part III, Item 12 of this report is herein incorporated by reference.

There were no purchases of the Company’s own common stock during the last quarter of the fiscal year ended December 31, 2016.

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Performance Graph

Set forth below is a graph comparing the cumulative total shareholder return on SpartanNash common stock to that of the Russell 2000 Total Return Index and the NASDAQ Retail Trade Index, over a period beginning March 31, 2012 and ending on December 31, 2016.

Cumulative total return is measured by the sum of (1) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (2) the difference between the share price at the end and the beginning of the measurement period, divided by the share price at the beginning of the measurement period.

The dollar values for total shareholder return plotted above are shown in the table below:

The information set forth under the Heading “Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act, except to the extent that the registrant specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.

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Item 6.Selected Financial Data

The following table provides selected historical consolidated financial information of SpartanNash for each of the five fiscal years and periods ended March 30, 2013 through December 31, 2016. For comparability purposes, the Company has also provided selected historical consolidated financial information for the 51-week period ended December 28, 2013.

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Historical data is not necessarily indicative of the Company’s future results of operations or financial condition. See discussion of “Risk Factors” in Part I, Item 1A of this report; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this report; and the consolidated financial statements and notes thereto in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

About SpartanNash

SpartanNash, headquartered in Grand Rapids, Michigan, is a leading multi-regional grocery distributor and grocery retailer whose core businesses include distributing grocery products to independent grocery retailers (“independent retailers”), select national retailers, its corporate owned retail stores, and U.S. military commissaries. Through its Military division, SpartanNash is the leading distributor of grocery products to military commissaries in the United States. The Company operates three reportable business segments: Food Distribution, Military and Retail.

The Company’s Food Distribution segment provides a wide variety of nationally branded and private brand grocery products and perishable food products to approximately 2,100 independent retailers, food service distributors and the Company’s corporate owned retail stores. The Food Distribution segment currently conducts business in 47 states, primarily in the Midwest, Great Lakes, and Southeast regions of the United States. Through its Food Distribution segment, the Company also services select national retailers, including Dollar General. Sales to Dollar General are made to approximately 13,000 of its retail locations.

The Company’s Military segment contracts with manufacturers to distribute a wide variety of grocery products primarily to military commissaries and exchanges located in the United States, the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain and Egypt. The Company has over 40 years of experience acting as a distributor to U.S. military commissaries and exchanges.

As of December 31, 2016, the Company’s Retail segment operated 157 corporate owned retail stores in the Midwest and Great Lakes regions primarily under the banners of Family Fare Supermarkets, VG’s Food and Pharmacy, D&W Fresh Markets, Sun Mart and Family Fresh Market. As of December 31, 2016, the Company also offered pharmacy services in 90 of its corporate owned stores and operated 30 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores.

The Company’s fiscal year end is the Saturday closest to December 31. All fiscal quarters are 12 weeks, except for the Company’s first quarter, which is 16 weeks and will generally include the Easter holiday. The fourth quarter includes the Thanksgiving and Christmas holidays. Fiscal year ended January 3, 2015 contained 53 weeks; therefore, the fourth quarter of fiscal 2014 consisted of 13 weeks rather than 12 weeks.

In certain geographic areas, the Company’s sales and operating performance may vary with seasonality. Many stores are dependent on tourism and therefore, are most affected by seasons and weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months. The Company’s first quarter is typically its lowest sales quarter. Therefore, operating results are generally lower during this quarter.

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Recent Developments

On January 6, 2017, the Company acquired certain assets and assumed certain liabilities of Caito Foods Service (“Caito”) and Blue Ribbon Transport (“BRT”) for $217.6 million in cash, in addition to reimbursing Caito for certain transaction costs and providing certain earn-out opportunities, which could be offset by a reimbursement of a portion of the purchase price if certain performance targets are not met. Founded in Indianapolis in 1965, Caito is a leading supplier of produce to grocery retailers and food service distributors across 22 states in the Southeast, Midwest and Eastern United States. Through its affiliate, BRT, the company also offers temperature-controlled distribution and logistics services throughout North America. Caito and BRT service customers from facilities in Indiana, Ohio and Florida.

Caito also has a central fresh cut fruit and vegetable facility in Indianapolis and a recently completed, new 118,000 square foot Fresh Kitchen facility, also in Indianapolis. The $32 million Fresh Kitchen will process, cook, and package fresh protein-based foods and complete meals, with the facility commencing production in the first half of fiscal 2017. The Company acquired Caito and BRT to strengthen its fresh product offerings to its existing customer base and to expand into fast-growing, value-added services, such as freshly-prepared centerplate and side dish categories.

On December 8, 2016, the Company announced that it had been competitively awarded by the Defense Commissary Agency (“DeCA”) the program to provide a variety of private brand products to commissaries for the first time in the agency’s history. As part of the arrangement, the Company will be the exclusive worldwide supplier of private brand products to U.S. military commissaries and will sell grocery products directly to DeCA. The Company will begin to roll out these products in the first half of fiscal 2017 and looks forward to partnering with DeCA on this new initiative to provide quality private brand products at competitive prices to military commissaries all over the world. The Company anticipates a steady ramp up of private brand products throughout fiscal 2017, but expects minimal financial benefit next year due to the anticipated costs to launch the program.

On December 20, 2016, SpartanNash Company and certain of its subsidiaries amended its senior secured credit facility (the “Credit Agreement”) at a cost of $2.4 million, which was capitalized as debt issuance costs and presented as a deduction from the carrying amount of the related liability on the consolidated balance sheet. The principal changes of the amendment were to reduce the number of tiers in the pricing grid from three to two, reset the advance rate on real estate to 75%, provide the ability to increase the size of the term loan by $33 million, and extend the maturity date of the agreement, which was set to expire on January 8, 2020, to December 20, 2021.

Overview of Fiscal 2016

In fiscal 2016, the Company continued to execute on its strategy to leverage its supply chain network to successfully drive new and existing customer supply business, as well as to drive results in its retail business through capital investments, which included the completion of twelve major store remodels, four of which were initiated in fiscal 2015, one store upgrade, and one new fuel center, and the expansion of consumer-centric merchandising and marketing programs. Consistent with its objective to pursue strategic opportunities, the Company announced the acquisition of Caito Foods Service and Blue Ribbon Transport, which closed in January 2017, as well as the selection by DeCA to be the exclusive worldwide supplier of private brand products to U.S. military commissaries, beginning in the second quarter of fiscal 2017. Despite the challenging operating environment, the Company delivered against its initiatives, strengthened its foundation and core competencies, and positioned itself for continued earnings growth in 2017 and beyond.

In addition to the recent developments outlined above, fiscal 2016 accomplishments and highlights include:

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The above developments and highlights helped position the Company for future earnings growth, but they also present other challenges and potential changes in trends that will impact fiscal 2017. By building on the results of fiscal 2016, the Company expects to see growth in year-over-year sales in the Food Distribution segment, continued challenges with sales at DeCA impacting the Military segment, and slightly negative to flat comparable retail store sales that improve throughout the course of the year. With the Caito Fresh Kitchen facility commencing production in the first half of fiscal 2017, the Company is optimistic about the opportunities to offer fresh protein-based foods and prepared meals to its customers but expects minimal contributions from the Fresh Kitchen as that operation ramps up during fiscal 2017. In the Military segment, the Company expects limited contributions from the DeCA private brand program in the second half of the year as the program is rolled out. The Company expects deflation to eventually subside in the second half of the year, and as a result, does not expect a similar deflation-related LIFO benefit in the fourth quarter of fiscal 2017. Lastly, the Company anticipates benefits from certain efficiency initiatives to be realized in the second half of the year.

The Company expects the net long-term debt to Adjusted EBITDA ratio to be under 2.5 times by the end of fiscal 2017, excluding any new merger and acquisition activity.

Results of Operations

The following table sets forth items from the Company’s consolidated statements of earnings as a percentage of net sales and the year-to-year percentage change:

* Difference due to rounding

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Results of Continuing Operations for Fiscal Year Ended December 31, 2016 Compared to Fiscal Year Ended January 2, 2016

Net Sales

Net sales for the fiscal year ended December 31, 2016 (“fiscal 2016”) increased $82.6 million, or 1.1%, from $7.65 billion in the fiscal year ended January 2, 2016 (“fiscal 2015” or “prior year”), to $7.73 billion. The increase was primarily driven by business gains from new and existing customers in the Food Distribution and Military segments, which more than offset the negative impact of food deflation on all segments; lower sales at the DeCA-operated commissaries; and lower sales attributable to both the decrease in comparable retail store sales and the closure of retail stores.

Food Distribution net sales, after intercompany eliminations, increased $149.4 million, or 4.5%, to $3.45 billion in fiscal 2016 from $3.31 billion in the prior year. The increase was primarily due to business gains from new and existing customers, which more than offset the negative impact of deflation.

Military net sales decreased $10.1 million, or 0.5%, to $2.20 billion in fiscal 2016 from $2.21 billion in the prior year. The decrease was primarily due to lower sales at the DeCA-operated commissaries, partially offset by new business gains associated with the distribution of fresh products.

Retail net sales decreased $56.7 million, or 2.6%, to $2.08 billion in fiscal 2016 from $2.14 billion in the prior year. Comparable store sales for the year, excluding fuel, improved to -2.4 percent from -2.9 percent in the prior year. Despite four consecutive quarters of improved comparable store sales trends, the ongoing deflationary environment and continued challenging economic conditions, particularly in certain western geographies, contributed to the lower sales at Retail. Specifically, the decrease in net sales was attributable to the negative comparable store sales and $40.0 million of lower sales due to the closure of retail stores and a fuel center, partially offset by $40.0 million of full-year net sales contributions from stores acquired in fiscal 2015. The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), regardless of remodels, expansions, or relocated stores.. The Company’s definition of comparable store sales may differ from similarly titled measures at other companies.

Gross Profit – Gross profit represents net sales less cost of sales, which include purchase costs, in-bound freight, physical inventory adjustments, markdowns and promotional allowances. Vendor allowances that relate to the buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for the Company’s merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.

Gross profit was $1.11 billion in fiscal 2016 compared to $1.12 billion in the prior year. As a percent of net sales, gross profit decreased from 14.6% to 14.4% primarily due to the mix of business operations and the impact of continued deflation.

Selling, General and Administrative Expenses – Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, shipping and handling, utilities, equipment rental, depreciation and other administrative costs.

SG&A expenses decreased $11.9 million, or 0.4%, to $963.7 million in fiscal 2016 from $975.6 million in the prior year, representing 12.5% of net sales in fiscal 2016 compared to 12.8% in the prior year. The decrease was primarily attributable to benefits from merger synergies and cost reduction efforts, lower depreciation associated with fully depreciated assets, and the impact of retail store closures, partially offset by higher health care and other benefit costs. The decrease in the rate to net sales was primarily due to the factors mentioned previously.

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Merger Integration and Acquisition Expenses – Merger integration and acquisition expenses consist of costs to integrate operations following the merger with Nash-Finch, primarily system upgrades and implementations, as well as costs incurred in connection with fiscal 2016 and 2015 acquisitions. Merger integration and acquisition expenses decreased in fiscal 2016 as a result of completing various merger integration activities and despite acquisition-related costs associated with the Caito and BRT acquisition.

Restructuring Charges and Asset Impairment – Fiscal 2016 included $32.1 million of restructuring and asset impairment charges primarily related to the closure of four retail stores and two distribution centers, which were part of the Company's warehouse and retail store rationalization plan, as well as asset impairment charges associated with certain underperforming retail stores. Fiscal 2015 included $8.8 million of restructuring and asset impairment charges primarily related to the closures of six retail stores and one distribution center, as well as asset impairment charges associated with certain underperforming retail stores.

Operating Earnings

Operating earnings decreased $14.1 million, or 11.5%, to $108.8 million in fiscal 2016 from $122.9 million in the prior year. The decrease was primarily due to higher restructuring and asset impairment charges of $23.3 million and the impact of food deflation, which more than offset the sales growth at Food Distribution and lower operating expenses due in part to lower depreciation and productivity and efficiency initiatives.

Food Distribution operating earnings increased $6.3 million, or 7.9%, to $85.1 million in fiscal 2016 from $78.8 million in the prior year. The increase was driven by sales growth from new and existing business, and lower operating expenses associated with supply chain improvements and lower depreciation, partially offset by higher costs for warehouse closings and health care benefits, as well as the negative impact of deflation.

Military operating earnings decreased $4.9 million, or 28.7%, to $12.2 million in fiscal 2016 from $17.1 million in the prior year. The decrease was primarily due to lower sales at the DeCA-operated commissaries and the negative impact of deflation, which more than offset new business gains associated with the distribution of fresh products as well as lower restructuring and asset impairment charges that did not recur in fiscal 2016.

Retail operating earnings decreased $15.5 million, or 2.6%, to $11.5 million in fiscal 2016 from $27.0 million in the prior year. The decrease was primarily due to higher restructuring and impairment charges and a decrease in comparable stores sales, partially offset by favorable rebate programs, higher fuel margins, and lower occupancy costs.

Interest Expense – Interest expense decreased $2.7 million, or 12.5%, to $19.1 million in fiscal 2016 from $21.8 million in the prior year. The decrease was primarily attributable to lower debt levels and lower interest rates primarily due to the prepayment of $50.0 million of Senior Notes in the prior year.

Debt Extinguishment – A loss on debt extinguishment of $0.2 million was incurred in fiscal 2016 in connection with the amendment of the senior secured credit facility. A loss on debt extinguishment of $1.2 million was incurred in fiscal 2015 in connection with the prepayment of the Senior Notes (see Debt Management under “Liquidity and Capital Resources”).

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Income Taxes – The effective income tax rates were 36.6% and 37.0% for fiscal 2016 and 2015, respectively. The differences from the statutory Federal rates in fiscal 2016 and 2015 were primarily due to state income taxes. Effective tax rates and the components thereof are not expected to fluctuate significantly in fiscal 2017 from fiscal 2016 results.

Results of Continuing Operations for 52 Week Fiscal Year Ended January 2, 2016 Compared to 53 Week Fiscal Year Ended January 3, 2015

Net Sales

Net sales for the fiscal year ended January 2, 2016 (“fiscal 2015”) decreased $264.1 million, or 3.3%, to $7.65 billion from $7.92 billion in the fiscal year ended January 3, 2015 (“fiscal 2014”). Excluding the extra week in fiscal 2014, which accounted for $135.2 million of net sales, the decrease of 1.7% was primarily due to decreases in comparable retail store sales, excluding fuel; lower sales resulting from retail store and fuel center closures; lower retail fuel prices; and lower sales at the DeCA-operated commissaries.

Food Distribution net sales, after intercompany eliminations, decreased $51.2 million, or 1.5%, to $3.31 billion in fiscal 2015 from $3.36 billion in fiscal 2014. Excluding the extra week in fiscal 2014, which accounted for $56.5 million of net sales, and despite low inflation, net sales increased 1.7% primarily due to net new business.

Military net sales decreased $68.4 million, or 3.0%, to $2.21 billion in fiscal 2015 from $2.28 billion in fiscal 2014. Excluding the extra week in fiscal 2014, which accounted for $36.9 million of net sales, the decrease of 1.4% was primarily due to lower sales at the DeCA-operated commissaries.

Retail net sales decreased $144.5 million, or 6.3%, to $2.14 billion in fiscal 2015 from $2.28 billion in fiscal 2014. Excluding the extra week in fiscal 2014, which accounted for $41.8 million of net sales in fiscal 2014, the decrease of 4.6% was primarily due to $71.1 million of lower sales due to the closure of retail stores and fuel centers, a 2.9% decrease in comparable stores sales, excluding fuel, and significantly lower fuel prices compared to fiscal 2014, partially offset by $53.2 million of net sales from stores acquired in fiscal 2015.

The decline in comparable store sales reflects the low inflationary environment and increased competition primarily in the western geographic areas, as well as the unseasonably warm weather in the Michigan geographic area in the fourth quarter of fiscal 2015. The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), and it includes remodeled, expanded and relocated stores in comparable stores.

Gross Profit – Gross profit represents net sales less cost of sales, which include purchase costs, in-bound freight, physical inventory adjustments, markdowns and promotional allowances. Vendor allowances that relate to the buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for the Company’s merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms

Gross profit for fiscal 2015 was $1.12 billion compared to $1.16 billion in fiscal 2014, representing 14.6% of net sales in both years. Higher fuel margin rates in fiscal 2015 were offset by the net impact of low inflation related gains and LIFO expense, as well as a higher mix of lower margin Military and Food Distribution sales.

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Selling, General and Administrative Expenses – Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, shipping and handling, utilities, equipment rental, depreciation and other administrative costs.

SG&A expenses decreased $46.8 million, or 4.6%, to $975.6 million in fiscal 2015 from $1.02 billion in fiscal 2014, and were 12.8% of net sales in fiscal 2015 compared to 12.9% in fiscal 2014. Excluding the extra week in fiscal 2014, SG&A expenses decreased $31.3 million, or 3.1%, and the percent to net sales in fiscal 2014 was 12.9%. The decrease was due primarily to benefits from merger synergies, cost improvements resulting from productivity and efficiency initiatives, the impact of store closures, and lower healthcare and transportation costs. The decrease in the rate to net sales was primarily due to expense control initiatives, benefits from merger synergies and lower healthcare costs.

Merger Integration and Acquisition Expenses – Merger integration and acquisition expenses consist of costs to integrate operations following the merger with Nash-Finch as well as costs incurred in connection with fiscal 2015 acquisitions. Merger integration and acquisition expenses for fiscal 2015 decreased $4.3 million, or 33.5%, from $12.7 million in fiscal 2014 to $8.4 million.

Restructuring Charges and Asset Impairment – Fiscal 2015 consisted of $8.8 million in charges primarily related to underperforming retail stores and costs related to the closure of retail stores and distribution centers, partially offset by the gains on sales of assets related to a previously closed food distribution center and retail stores and the favorable settlements of lease terminations of previously closed stores. Fiscal 2014 included charges of $6.2 million related to underperforming retail stores and costs associated with closed retail stores and a closed distribution center.

Operating Earnings

Operating earnings increased $8.0 million, or 7.0%, to $122.9 million in fiscal 2015 from $114.8 million in fiscal 2014. The increase was primarily due to lower operating expenses due in part to productivity, efficiency and cost control initiatives as well as the mix of business operations, partially offset by lower inflation related gains and higher restructuring and asset impairment compared to fiscal 2014.

Food Distribution operating earnings increased $24.0 million, or 43.9%, to $78.8 million in fiscal 2015 from $54.8 million in fiscal 2014. The increase was primarily driven by lower operating expenses associated with productivity and efficiency initiatives, as well as lower merger integration costs and depreciation.

Military operating earnings decreased $4.7 million, or 21.5%, to $17.1 million in fiscal 2015 from $21.7 million in fiscal 2014. The decrease was primarily due to lower sales at the DeCA-operated commissaries, lower inflation related gains, and warehouse closing charges, partially offset by lower operating expenses and transportation costs.

Retail operating earnings decreased $11.3 million, or 29.6%, to $27.0 million in fiscal 2015 from $38.3 million in fiscal 2014. The decrease was primarily due to a decrease in comparable store sales, higher acquisition costs related to stores acquired in fiscal 2015, partially offset by the impact of store closures, contributions from the stores acquired in fiscal 2015, and higher fuel margins.

Interest Expense – Interest expense decreased $2.6 million, or 10.6%, to $21.8 million in fiscal 2015 from $24.4 million in fiscal 2014. The decrease in interest expense was primarily due to decreased borrowings and lower interest rates resulting from the amended senior secured credit agreement. On January 9, 2015, the Company amended its credit agreement which reduced the interest rate.

Debt Extinguishment – A loss on debt extinguishment of $1.2 million was incurred in fiscal 2015 in connection with the prepayment of the Senior Notes.

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Income Taxes – The effective income tax rates were 37.0% and 34.6% for fiscal 2015 and 2014, respectively. The difference from the statutory Federal rate in fiscal 2015 was primarily due to state income taxes. The fiscal 2014 effective rate differs from the Federal statutory rate primarily due to the favorable settlement of unrecognized tax liabilities, partially offset by state income taxes.

Non-GAAP Financial Measures

Adjusted Operating Earnings

Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because adjusted operating earnings and adjusted operating earnings by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in an adjusted operating earnings format.

Adjusted operating earnings and adjusted operating earnings by segment are not measures of performance under accounting principles generally accepted in the United States of America (“GAAP”), and should not be considered as a substitute for operating earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definitions of adjusted operating earnings and adjusted operating earnings by segment may not be identical to similarly titled measures reported by other companies.

Following is a reconciliation of operating earnings to adjusted operating earnings for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015.

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