SpartanNash Co - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 28, 2019.

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 check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the 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 14, 2019 (which was the last trading day of the registrant’s second quarter in the fiscal year ended December 28, 2019) was $410,841,351.

The number of shares outstanding of the registrant’s Common Stock, no par value, as of February 25, 2020 was 36,348,831, 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 and Estimates” 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 and Estimates” 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 a diverse group of independent and chain retailers, its corporate owned retail stores, and U.S. military commissaries and exchanges. SpartanNash serves customer locations in all 50 United States (“U.S.”), the District of Columbia, Europe, Cuba, Puerto Rico, Honduras, Bahrain, Djibouti and Egypt. Through its Military segment, the Company is the exclusive worldwide supplier of private brand products to U.S. military commissaries. The Company’s Retail segment operates supermarkets that have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores. The Company operates three reportable segments: Food Distribution, Military and Retail.

The Company’s fiscal year end is the Saturday closest to December 31. The following discussion is as of and for the fiscal years ending or ended January 2, 2021 ("2020"), December 28, 2019 (“2019” or “current year”), December 29, 2018 (“2018” or “prior year”) and December 30, 2017 (“2017”), all of which include 52 weeks, with the exception of 2020, which will include 53 weeks. All fiscal quarters are 12 weeks, except for the Company’s first quarter, which is 16 weeks and will usually include the Easter holiday. Fiscal 2020 will contain 53 weeks; therefore, the fourth quarter of fiscal 2020 will contain 13 weeks. The fourth quarter includes the Thanksgiving and Christmas holidays, and depending on the fiscal year end, may include the New Year’s holiday.

Established in 1917 as a cooperative grocery distributor, Spartan Stores Inc. 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. While the Company supports overseas commissaries and exchanges, all of the Company’s sales and assets are in the United States of America.

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The Company’s differentiated business model of Food Distribution, Military and Retail operations utilizes the complementary nature of each segment and enhances the ability of the Company’s independent retailers to compete in the grocery industry long-term. The model produces operational efficiencies, helps stimulate distribution product demand, and provides sharper visibility and broader business growth options. In addition, the diversification of the Food Distribution, Military and Retail segments provides added flexibility to pursue the best long-term growth opportunities in each segment.

SpartanNash’s mission is to leverage its expertise in food distribution and retail to develop, activate and provide impactful solutions that exceed expectations for customers, business partners and associates. In addition, the Company strives to create value for the Company's shareholders, retailers, and customers. To support these objectives, the Company has the following priorities and strategies within its Food Distribution, Military, and Retail segments:

Food Distribution Segment:

Military Segment:

Retail Segment:

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Supply Chain Network:

Food Distribution Segment

The Company’s Food Distribution segment uses a multi-channel sales approach to distribute grocery products to independent retailers, national retailers, food service distributors, e-commerce providers, 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, totaled approximately $5.0 billion for 2019. As of the end of 2019, the Company believes it is the fifth largest wholesale distributor, in terms of annual revenue, to supermarkets in the United States.

Customers. The Company’s Food Distribution segment supplies grocery products to a diverse group of approximately 2,100 independent retail locations with operations ranging from a single store to regional supermarket chains, food service distributors and the Company’s corporate owned retail stores. As of December 28, 2019, the Company operates in all 50 states by leveraging a platform of 18 distribution centers, as well as third party shipping partners, servicing the Food Distribution and Military segments, with the greatest sales concentration in the Midwest and South regions. This extensive geographic reach drives economies of scale and provides opportunities for independent retailers to purchase products at competitive prices in order to effectively compete in the grocery industry long-term.

Through its Food Distribution segment, the Company also services national retailers, including Dollar General. Sales to Dollar General are made to approximately 16,000 of its retail locations, with sales representing 17%, 16%, and 14% of consolidated net sales for 2019, 2018 and 2017, respectively. The Company’s Food Distribution customer base is diverse, and no other single customer exceeded 10% of consolidated net sales in any of the years presented.

The Company’s ten largest Food Distribution customers (excluding corporate owned retail stores) accounted for approximately 60% of total Food Distribution net sales for 2019. Approximately 85% of Food Distribution net sales for 2019 are covered under supply agreements with retailer customers.

Products. The Company’s Food Distribution segment provides a selection of approximately 52,000 stock-keeping units (SKUs) of nationally branded and private brand grocery products 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. The product offering also includes value-added products such as fresh-cut fruits and vegetables and prepared wraps and 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.

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Valued-Added Services. The Company provides a comprehensive menu of valued-added services designed to assist independent retailers in becoming more profitable, efficient, competitive, and informed. The Company’s Support Services Group consists of strategic partners who provide solutions when time and resources are limited for the independent customers. The Company is committed to sharing the expertise gained in its Retail operations with its independent customers. From real estate and site surveys to a full spectrum of merchandising and marketing solutions, independent retailers are offered support to more effectively operate their businesses. The Company provides over 100 distinct value-added services, some of which are not offered by its competition, including the following:

Military Segment

The Company’s Military segment contracts with manufacturers and brokers to distribute a wide variety of grocery products, including dry groceries, beverages, meat, and frozen foods, primarily to U.S. military commissaries and exchanges. The Company’s Military segment, together with its third-party partner, Coastal Pacific Food Distributors (“CPFD”), represents the only delivery solution to service DeCA worldwide.

DeCA operates a chain of 236 commissaries on U.S. military installations across the world that sells approximately $4.4 billion of grocery products annually. The Company distributes grocery products to 160 military commissaries and over 400 exchanges located in 39 states across the United States and the District of Columbia, Europe, Cuba, Puerto Rico, Honduras, Bahrain, Djibouti 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 is also the DeCA exclusive worldwide supplier of private brand grocery and related products to all U.S. military commissaries. In accordance with its contract with DeCA, the Company procures the grocery and related products from various manufacturers and upon receiving customer orders from DeCA either delivers the products to the U.S. military commissaries itself or engages CPFD to deliver the products on its behalf. There are over 900 SKUs of private brand products in the DeCA system as of December 28, 2019.

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 28, 2019, 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 which 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 50% of the Company’s Military segment sales for 2019.

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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. Due to the unique terms of this arrangement, working capital requirements are significant.

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. In some instances, invoices may be based on a dollar amount per case or per pound of product sold. The Company’s order handling and invoicing activities are facilitated by its procurement and billing systems developed specifically for the Military business, which address the unique aspects of its business, and provide the Company’s manufacturer customers with a web-based, interactive means of accessing critical order, inventory and delivery information.

Retail Segment

As of December 28, 2019, the Company operates 156 corporate owned retail stores in eight states, predominantly in the Midwest, primarily under the banners of Family Fare, Martin’s Super Markets, D&W Fresh Market, VG’s Grocery and Dan’s Supermarket. Retail banners and store counts are fully detailed in Item 2, “Properties”. The Company’s corporate owned retail stores range in size from approximately 14,000 to 90,000 total square feet, or on average, approximately 44,000 total square feet per store.

The Company’s neighborhood market strategy distinguishes its corporate owned retail stores from supercenters and limited assortment stores. The Company’s Customer First strategy is focused on meeting changing customer needs and preferences through a data-based decision-making process, while also increasing customer satisfaction through quality service and convenience. Through the Company’s e-commerce solutions, including Fast Lane, as well as other third-party providers, the Company offers online grocery shopping and curbside pickup or delivery at 110 of its corporate owned retail locations.

The Company’s corporate owned retail stores offer nationally branded and private brand grocery products, 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. Many of the Company’s stores contain franchised Starbucks or Caribou Coffee coffee shops, which the Company believes drives additional customer traffic. Private brand grocery products typically generate higher retail margins while also improving customer loyalty by offering quality products at affordable prices.

As of December 28, 2019, the Company offers pharmacy services in 97 of its corporate owned retail stores (of which 86 of the pharmacies are owned) and operates one free-standing pharmacy location. The Company believes the pharmacy service offering in its corporate owned retail stores is an important part of the consumer experience. Most of the Company’s pharmacies offer free medications (antibiotics, diabetic medications and prenatal vitamins) along with low cost generic drugs, and meal planning solutions for preventative health and education for its customers.

As of December 28, 2019, the Company operates 37 fuel centers primarily at its corporate owned retail stores operating predominantly under the banners Family Fare Quick Stop, Martin’s Fuel, and D&W Quick Stop. Many of these fuel centers offer refueling facilities and in the adjacent convenience store, a limited variety of popular consumable products. The Company’s prototypical convenience stores are approximately 1,100 square feet in size.

The following chart details the changes in the number of corporate owned retail stores over the last five fiscal years:

In the first quarter of 2019 the Company acquired Martin’s, a leading family-owned and operated Midwest independent supermarket chain. This acquisition expanded the Company’s corporate retail footprint into northern Indiana and southwestern Michigan. Martin’s was previously a Food Distribution segment customer, and SpartanNash’s and Martin’s merchandising, marketing, and operations teams had a history of working collaboratively on many business improvement projects.

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During 2019, the Company completed ten major remodels. The Company expects to continue making targeted capital investments during 2020 in connection with its retail brand positioning initiative. Where opportunities arise, the Company may open new retail and fuel center locations or enter into partnerships with existing fuel center operations. The Company will continue to evaluate its store base and may close or sell stores in 2020 in line with its ongoing store rationalization processes.

Supply Chain Network

The Company continues to evaluate its supply chain organization for opportunities to optimize the network, increase asset utilization and leverage programs that will drive more value for its retailers, customers, and shareholders. The Company continually focuses on network optimization and is centralizing the distribution of certain product categories and utilizing upstream/downstream facilities in order to improve its efficiency and capabilities and reduce inventory levels. 

The Company’s distribution network is composed of 18 distribution centers, which are utilized to service the Food Distribution and Military segments. The distribution centers provide for approximately 8.4 million total square feet of warehouse space. The Company has new and ongoing initiatives to improve the efficiency of its supply chain through process improvement, investments in technology and property and equipment, and standardization of systems.

The Company operates a fleet with over 550 over-the-road tractors, 550 dry vans, and 1,250 refrigerated trailers and is in the process of adding a fleet of multi-temperature straight trucks to improve its delivery performance to its growing number of smaller format store customers. The Company carefully manages the more than 75 million miles driven by its fleet and third-party carriers annually servicing military commissaries, exchanges, independent retailers, national retailers and corporate owned retail stores.

Discontinued Operations

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

Marketing and Merchandising

The Company continues to align its marketing and merchandising strategies with consumer behavior. During 2019, the Company began a new customer data and insights partnership with dunnhumby, as part of its development of a data-based decision-making process in order to deliver a competitive shopping experience for its customers within its corporate owned Retail stores. The Company has developed a Customer First strategy. A process to implement, measure and track the strategy is in place to respond to evolving customer needs.

The Company’s strategies seek to use consumer data and insights to deliver products, promotions, content and experiences to satisfy the consumer’s needs by improving price perception, leveraging the Company’s private brands and providing its customers a relevant assortment while supported by its best-in-class wholesale and retail business model.

In addition, the Company believes that data from its “yes”™ loyalty program gives it competitive insight into consumer shopping behavior. This provides the Company the flexibility to adapt to rapidly changing conditions by making more effective tactical and strategic adjustments to its marketing and merchandising programs. During fiscal 2019, the Company began using artificial intelligence to develop and optimize its weekly circular. The Company will continue to leverage learnings from artificial intelligence to accelerate its Customer First strategy.

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. Additionally, the Company continues to focus on the growth of its e-commerce platforms which enable a highly personalized digital shopping experience. These enhancements will help the Company build longer-term customer loyalty through convenience and value, maintain efficient marketing spend, increase return on investment, improve its sales growth opportunities, and further strengthen its business position. As the Company builds these capabilities, along with its other strategies, the Company will continue to share its best practices across its independent customer base within the Food Distribution segment.

As the Company works to better differentiate its Retail stores and implement its Customer First strategy, the Company is selectively adding products and services to better meet customers’ changing needs and enhance their experience. The Company has been refreshing its in-store messaging and décor in order to increase foot traffic and drive sales. As consumers increasingly emphasize an interest in healthy choices, the Company believes that it can be a reliable provider for products and services that will support their needs. The Company increased its retail product offering and assortment for organic, gluten-free, meat-free, non-GMO products and other healthier food options. Additionally, the Company offers a best in class pharmacy program, including low cost generics, free diabetic and prenatal prescriptions as well as its Timely Meds service, which is a personalized pill punch pack designed for customers who take multiple medications.

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In support of its commitment to local products and caring for the community and environment, the Company is proud to work with local farmers and vendors to provide a selection of locally grown produce and other local products in many of its stores, well in excess of competitor’s offerings. In some of its stores, the Company collects items from customers for recycling, and the Company has been recognized as a best-in-class recycler of its own waste. Also, in an effort to reduce costs and reduce its environmental footprint, the Company is working to reduce energy usage through the installation of energy efficient lighting and refrigeration in its stores among other initiatives.

Competition

The Company’s Food Distribution, Military and Retail segments operate in a highly competitive industry, which typically results 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, deep discount retailers, limited assortment stores and wholesale membership clubs, many of whom have greater resources than the Company. The Company also faces competition from rapidly growing alternative retail channels, such as dollar stores, discount supermarket chains, Internet-based retailers and meal-delivery services.

The Food Distribution segment competes directly with a number of traditional and specialty grocery wholesalers and retailers that maintain or develop self-distribution systems for the business of independent grocery retailers. In addition, the Company’s independent customers face intense competition from supercenters, deep discounters, mass merchandisers, limited assortment stores, and e-commerce providers. The Company partners with its customers to help them compete effectively. The primary competitive factors in the Food Distribution business include price, service level, product quality, variety and other value-added services.

The Company is one of fewer than five 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 low 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 generally 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 strong with respect to all of these factors within the geographic areas where it competes. Despite the ongoing commissary sales challenges, the Company has been working diligently to realize opportunities and has expanded vendor relationships to new military bases and continues to roll out DeCA’s private brand product offerings. The Company believes that the private brand offering, when fully executed, will help drive more traffic and business into the commissaries as a whole. By providing a combination of national and private brand products, the commissaries are offering one-stop shopping for military consumers, which should benefit all of the constituents of the DeCA system.

The principal competitive factors in the Retail business include the location and image of the store; the price, quality and variety of the fresh offering; and the quality, convenience and consistency of service. In addition to competing with traditional grocery stores, the Company competes with supercenters, deep discounters, mass merchandisers, limited assortment stores, and e-commerce providers. The Company believes it has developed and implemented strategies and processes that allow it to be competitive in its Retail segment by providing convenience, customer experience, and the assortment consumers demand. The Company monitors planned competitive store openings and uses established proactive strategies to respond to new competition both before and after competitive store openings. 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, six competitor supercenters opened in geographic areas in which the Company currently operates corporate owned retail stores and one additional opening is expected to occur during 2020. As a result of these openings, the Company believes the majority of its supermarkets compete with one or more supercenters. The Company has continued to respond to growing competition from online and non-traditional retailers by adding options and services such as online ordering, curbside pick-up, and home delivery.

Seasonality

In certain geographic areas, the Company’s sales and operating performance for each reportable segment 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. Sales may also vary based on the timing of certain holidays.

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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, trade names, and other proprietary information, some of which are of material importance to its business.

Technology

In 2019, the Company focused on the efficiency and effectiveness of both operational and administrative processes. The Company is taking action to upgrade and modernize its systems and improve their integration, while enhancing security. As part of these initiatives, the Company expects to transition some applications which were historically hosted on premises to cloud-based solutions.  

Supply Chain. During 2019, the Company completed the deployment of a forecasting solution which relies on artificial intelligence to significantly improve forecasting accuracy and began developing an integrated replenishment solution to automate the subsequent creation of purchase orders. The Company also deployed new “On-Board Computer” hardware across its fleet to improve route planning, efficiency and service levels as well as to comply with a federal mandate on driver compliance.

Retail. The Company made significant enhancements to improve the checkout experience for its customers and associates. The enhancements include improved ability to accept additional methods of payment, improvements to the online shopping experience, and integration with a third-party that provides independent retailers the ability to offer discounts to their shoppers and increase customer loyalty.

In 2020, the Company’s focus includes further integration and modernization of retail applications including centralized item management, a real time loyalty and promotion engine, and a modern cloud-enabled point-of-sale system.

Administrative Systems, Infrastructure and Security. The Company has begun the development and implementation of tools to improve both the efficiency and effectiveness of internal reporting and administrative functions. Robotic process automation (“RPA”) initiatives are underway to eliminate errors and to improve efficiency in repetitive, manual processes. Additionally, a centralized data analytics solution is being developed to consolidate the Company’s analysis and reporting platforms, introducing predictive data analytics capabilities to provide better business insights. The Company is in the process of transitioning to a Software-defined Wide Area Network (SD-WAN) solution, which will significantly increase current bandwidth across all locations and will improve network availability. The Company also expects enhancements in collaboration tools and day-to-day functionality through upgrades to the Microsoft 365 bundle, including Microsoft Enterprise Mobility + Security.

The Company is deploying an upgraded Human Capital Management system (“HCM”) to be the backbone of significantly simplified digital human resources operations. The HCM will digitize the Company’s HR function, and the Company expects to complete the launch in 2020. A major initiative in workforce time and schedule management is also underway and is expected to be completed in the first half of 2020. Improved automation in timekeeping, together with a revamp of wage and incentive structures, are expected to contribute to improved hiring and retention.

In the second half of 2019, an Identity Access Management (IAM) program was launched, which is a multi-year, companywide initiative that will protect user and customer data, while increasing associate productivity, security and ease of access. This program will also provide centralized access control across multiple applications and services.

Associates

As of December 28, 2019, the Company employs approximately 17,200 associates, 10,400 on a full-time basis and 6,800 on a part-time basis. Approximately 1,200 associates, or 7% of the total workforce, were represented by unions under collective bargaining agreements. The collective bargaining agreements covering these associates will expire between February 2021 and October 2022. The Company considers its relations with its union and non-union associates to be good and has not had any material work stoppages in over twenty-five 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 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

SpartanNash’s web address is www.spartannash.com. The inclusion of the Company’s web 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 website 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 website. 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 the Company’s competitors are much larger 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, deep discount retailers, limited assortment stores and wholesale membership clubs. The Company’s Military segment faces competition from large national and regional food distributors and smaller distributors. Many of the Company’s competitors have greater resources than the Company.

Industry consolidation, alternative store formats, nontraditional competitors and e-commerce have contributed to market share losses for traditional grocery stores. The Company’s Food Distribution, Military and Retail segments are primarily focused on traditional retail grocery trade, which faces competition from faster growing alternative retail channels, such as dollar stores, discount supermarket chains, Internet-based retailers and meal-delivery services. The Company expects these trends to continue. If the Company is not successful in competing with these alternative channels, or growing sales into such channels, its business or financial results may be adversely impacted.

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The 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 private brand product program. Private brand products had not previously been offered in the Agency’s commissaries. The Company has invested and will continue to invest significant resources as it partners with DeCA to continue to expand the program, however there is no guarantee of its success, that the program will continue or that DeCA will continue to partner with SpartanNash. 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 drive traffic and business at the commissaries by offering one-stop shopping for military customers through a combination of both national and private brand offerings, 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 or successfully integrate acquired businesses.

Part of the Company’s growth strategy involves selected acquisitions of additional distribution operations, and to a lesser extent, retail grocery stores. Given the recent consolidation activity and limited number of potential acquisition targets within the food industry, the Company may not be able to identify suitable targets for acquisition and may make acquisitions which do not achieve the desired level of profitability or sales. Additionally, 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. If the Company fails to successfully integrate business acquisitions and realize planned synergies, the business may not perform to expectations.

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.

From time to time, the Company may advance funds, extend credit and lend money to certain independent retailers and guarantee loan or lease obligations of certain customers. 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.

A significant portion of the Company’s sales are with a major customer and the Company’s success may be dependent on retaining this business and its customers’ ability to grow their business.

Dollar General accounted for 17% of the Company’s net sales in 2019. The Company serves as the primary distributor of various products and product categories to Dollar General under the terms of its distribution arrangements. The Company’s ability to maintain a close, mutually beneficial relationship with Dollar General is an important determinant of the Company’s continued growth.

The loss of business with Dollar General, including from increased self-distribution to its own facilities, closures of its stores, or reductions in the amount of products that Dollar General sells to its customers could materially and adversely affect the Company. Similarly, if Dollar General is not able to grow its business, or if Dollar General does not continue its relationship with the Company, the Company may be materially and adversely affected.

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 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.

Operational improvements from the Company’s Project One Team Initiative may be less than expected.

In 2019 the Company began implementing operational improvements that were identified through a Company initiative called Project One Team. While the Company expects to achieve run rate savings through these initiatives over approximately two years, the amount and timing of expected savings are based on projections, estimates, and assumptions regarding future costs, revenues, risks, competitive activity, and other factors, and may be beyond the control of the Company. If the assumptions and projections underlying the initiatives prove to be inaccurate, then actual Project One Team savings may be significantly less than expected.

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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. It also employs mobile devices, social networking and other online activities to connect with customers, associates, suppliers, and business partners. The Company receives, transmits, and stores many types of sensitive information, including consumers’ personal information, information belonging to vendors, business partners, and other third parties, and the Company’s proprietary, confidential, or sensitive information. As a result, the Company faces risks of security breaches, system disruption, theft, espionage, inadvertent release of information, and other technology-related disruptions. The Company could incur significant losses due to any such event.

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 consumers, vendors, business partners, associates 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 its 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 long-lived 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 other long-lived tangible and 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 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 – for goodwill – 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 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 assets become impaired, the Company’s financial condition and results of operations may be adversely affected.

The Company may not successfully manage the transition associated with the resignation of the Company’s former chief executive officer and the appointment of a new chief executive officer, which could have an adverse impact on the Company.

David Staples resigned from his position as the Company’s chief executive officer (“CEO”) and resigned from the board of directors effective August 8, 2019. The board of directors appointed Dennis Eidson, the Company’s Chairman of the Board of Directors and former CEO, as interim chief executive officer until a permanent successor can be named. The board of directors has initiated a search process to select the next CEO. Although the board of directors is confident in the interim leadership of Mr. Eidson, leadership transitions can be inherently difficult to manage, and an inadequate transition to a permanent CEO may cause disruption within the Company. In addition, if the Company is unable to attract and retain a qualified candidate to become the permanent CEO in a timely manner, its financial performance and ability to meet operational goals and strategic plans may be adversely impacted. This may also impact the Company’s ability to retain and hire other key members of management.

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It may be difficult for the Company to attract and retain well-qualified associates, which would adversely affect the Company’s profitability and growth.

Recent low levels of unemployment have made it increasingly difficult to attract and retain qualified associates and have caused upward pressure on wages. If the Company is unable to attract and retain quality associates to meet its needs, the Company could be required to increase its compensation offering, reduce staffing below optimal levels, or rely more on higher-cost third-party providers, which could adversely affect the Company’s profitability and growth. 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.

The Company’s level of indebtedness could adversely affect its financial condition and its ability to raise additional capital or obtain financing in the future, respond to business opportunities, react to changes in its business, and make required payments on its debt.

As of December 28, 2019, the Company had outstanding indebtedness of $688.6 million (net of unamortized debt issuance costs), primarily related to its asset-based lending facility (the "Revolving Credit Facility"). Refer to Note 7 in the accompanying notes to the consolidated financial statements for further information. If the Company is not able to generate cash flow from operations sufficient to service its debt, it may need to refinance its debt, dispose of assets or issue equity to obtain necessary funds. The Company may not be able to take any of such actions on a timely basis, on satisfactory terms or at all.

Indebtedness could have important consequences, including the following:

Covenants in its debt agreements restrict the Company’s operational flexibility.

The agreements governing the Revolving Credit Facility contain usual and customary restrictive covenants relating to the management and operation of the Company, including restrictions on its ability to borrow, pay dividends, or consummate certain transactions. Failure to comply with the covenants in the Company’s debt agreements could result in all of its indebtedness becoming immediately due and payable.

The Company is exposed to interest rate risk due to the variable rates on its indebtedness. Debt service obligations may increase if interest rates rise.

The Company’s borrowings under the Revolving Credit Facility bear interest at variable rates and expose it to interest rate risk. The Company may not be able to accurately predict changes in interest rates or mitigate their impact. If interest rates increase, debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remains the same and the Company’s profitability would decrease. A hypothetical 0.50% increase in rates applicable to borrowings under the Revolving Credit Facility as of December 28, 2019 would increase interest expense related to such debt by approximately $3.2 million per year.

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, including its supply chain, or a change in the 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 locations of bases, or DeCA’s supply chain 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 a sequestration, may impact the level of funding to DeCA and could have a material impact on the Company’s operations. If DeCA were to make material changes to its supply chain model, for example by limiting distribution authorization, then the Company’s Military segment could be affected.

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Product recalls or other safety concerns regarding the Company’s products could harm the Company’s business.

The Company faces risks related to the safety of the food products that it manufactures, distributes, and sells. It may need to recall such products for actual or alleged contamination, adulteration, mislabeling, or other safety concerns. The Company distributes fresh fruits and vegetables, as well as other fresh prepared foods. These products, and other food products that the Company sells, are at risk of contamination by disease-causing organisms such as Salmonella, E. coli, and others. These pathogens are generally found in nature, and as a result, there is a risk that they could be present in the products manufactured, distributed or sold by the Company. The Company typically has little control over proper food handling before the Company’s receipt of the product or once the product has been delivered to customers. Contamination risks may be controlled, although not eliminated, by good manufacturing practices and food safety programs. Recall costs can be material. A widespread product recall could result in significant losses due to the administrative costs of a recall, the destruction of inventory, and lost sales. Recalls and other food safety concerns can also result in product liability claims, adverse publicity, damage to the Company’s reputation, and a loss of confidence in the safety and quality of its products. Customers may 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 39% and 16% of the Company’s associates in its Food Distribution and Military business segments, respectively, are covered by collective bargaining agreements (“CBAs”) which expire between February 2021 and October 2022 or which the Company is in the process of negotiating and have a contemplated expiration date of February 2022. 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 CBAs, 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 CBAs, 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 (the “Central States Plan” or the “Plan”), a multi-employer pension plan, based on obligations arising from its CBAs 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 and declining 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.

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 28, 2019. The lease expiration dates for the distribution centers primarily servicing the Food Distribution segment range from February 2021 to December 2031, and for the Military segment range from July 2020 to November 2029. The majority of these leases contain extension options beyond these dates, if exercised. The Company believes that these facilities are generally well maintained and in good operating condition, have sufficient capacity, and are suitable and adequate to carry on its business for both of these segments.

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The following table lists the Company’s retail stores, including the adjacent fuel centers of the related stores, by retail banner, number of stores, location and approximate square footage under each banner as of December 28, 2019.

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 is one stand-alone pharmacy located in Clear Lake, Iowa as well as certain properties used to facilitate the stock and transfer of goods between retail stores.

The Company’s headquarters is located in Grand Rapids, Michigan. The company maintains offices in multiple states consisting of approximately 317,000 square feet in Company-owned buildings and 49,000 square feet in leased facilities. The Company also leases two additional off-site storage facilities consisting of approximately 50,000 square feet. The Company owns and leases to independent retailers ten stores totaling approximately 440,000 square feet and owns and leases to third parties one warehouse of approximately 400,000 square feet and office space totaling 89,000 square feet.

Item 3.   Legal Proceedings

From time-to-time, the Company is engaged 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. Additionally, 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 actions, lawsuits and claims 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. Legal proceedings, various lawsuits, claims, and other matters are more fully described in Note 9, Commitments and Contingencies, in the notes to consolidated financial statements, which is herein incorporated by reference.

Item 4.  Mine Safety Disclosure

Not Applicable.

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:

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At February 24, 2020, there were approximately 1,300 shareholders of record of SpartanNash common stock. The Company has declared a quarterly cash dividend every quarter since the fourth quarter of fiscal 2006.

The table below outlines quarterly dividends declared on SpartanNash common stock for each of the last three years:

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 (the “Board”) to declare future dividends. Each future dividend will be considered and declared by the Board at its discretion. Whether the Board 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.  During the fourth quarter of 2017, the Board authorized a $50 million share repurchase program expiring in 2022. As of December 28, 2019, $45.0 million remains available to be repurchased.

In 2018 and 2017, the Company repurchased 952,108 and 1,367,432 shares of common stock for approximately $20.0 million and $35.0 million, respectively. The Company did not repurchase common stock in 2019. There were no purchases of equity securities by the Company or affiliated purchasers in the fourth quarter of 2019.

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

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 January 3, 2015 and ending on December 28, 2019.

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.

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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 years ended January 2, 2016 through December 28, 2019, all of which were 52-week years.

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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 a diverse group of independent and chain retailers, its corporate owned retail stores, and military commissaries and exchanges in the United States. The Company operates three reportable segments: Food Distribution, Military and Retail. These reportable segments are three distinct businesses, each with a different customer base, management structure, and basis for determining budgets, forecasts, and executive compensation.

Overview of 2019

In 2019, the Company executed against its long-term strategic objective of becoming a growth company that is focused on developing a national, highly efficient distribution platform known for solving unique and complex logistical issues and evolving its primary retail brand to deliver innovative solutions, both of which service a diverse customer base. The Company also began the implementation of initiatives in connection with its company-wide sales growth and cost reduction program, Project One Team. Project One Team is expected to result in more than $20 million in annual run rate efficiencies and cost reductions when fully implemented. The Company’s 2019 accomplishments and developments include:

Food Distribution

Military

Retail

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Other

The accomplishments above helped position the Company for future earnings growth, but the competitive landscape and industry trends also present challenges to the Company that could impact 2020. For fiscal 2020, the Company anticipates low-single digit percentage sales growth. The Company expects the Food Distribution segment to achieve mid-single digit sales growth driven by existing customers and new business, partially offset by attrition in the independent retail base and the closure of the Fresh Kitchen operations. In the Military segment, the Company expects a continued decline in the DeCA comparable sales trend, partially offset by growth in DeCA private brands, resulting in a mid-single digit percentage sales decline. Retail segment sales are expected to increase nominally due to a continuation of positive comparable sales of up to 0.7%. The Company will also benefit from an additional week of sales compared to the 52-week year ended December 28, 2019.

Results of Operations

The current year results of operations are presented in comparison to the prior year within the section below. For a discussion of the results of fiscal 2018 operations in comparison to fiscal 2017, refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations within the prior year Annual Report on Form 10-K. Certain prior year amounts have been adjusted to reflect recently adopted accounting standards, which are described within Note 1, Summary of Significant Accounting Policies and Basis of Presentation in the notes to the consolidated financial statements.

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

Note: Certain totals do not sum due to rounding.

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Net Sales – The following table presents net sales by segment and variances in net sales:

Net sales increased $471.5 million, or 5.8%, to $8.54 billion in 2019 from $8.06 billion in 2018. The increase in net sales was generated through the acquisition of Martin’s, as well as higher sales within the Food Distribution segment prior to the elimination of the intercompany sales for the acquired business.

Food Distribution net sales decreased $8.8 million, or 0.2%, to $3.98 billion in 2019 from $3.99 billion in the prior year. Excluding the impact of the elimination of sales to Martin’s following the acquisition at the beginning of 2019, sales grew 3.7% primarily due to sales growth with existing customers.

Military net sales increased $5.3 million, or 0.2%, to $2.17 billion in 2019 from $2.17 billion in the prior year. The increase was primarily due to incremental volume from new business with an existing customer that commenced late in the fourth quarter of 2018 and growth in DeCA’s private brand program, partially offset by lower comparable sales at DeCA operated locations.

Retail net sales increased $475.1 million, or 24.9%, to $2.38 billion in 2019 from $1.91 billion in the prior year. The increase in net sales was primarily attributable to incremental sales from the Martin’s acquisition, partially offset by the impact of closed stores and lower comparable store sales. Comparable store sales were negative 0.5% in the current year, however improved in the second half of the year and ended at positive 0.5% for the fourth quarter. 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. Acquired stores are included in the comparable sales calculation 13 periods after the acquisition date. Fuel is excluded from the comparable sales calculation due to volatility in price. 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 is described in further detail within Note 1, Summary of Significant Accounting Policies and Basis of Presentation in the notes to the consolidated financial statements. Gross profit increased $133.4 million, or 12.0%, to $1.24 billion in 2019 compared to $1.11 billion in the prior year. As a percent of net sales, gross profit increased from 13.8% to 14.6% primarily due to the acquisition of Martin’s and the resulting higher mix of sales in the Retail segment which generates a higher gross margin rate.

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 (to the extent not included in Cost of Sales), out-bound freight and other administrative expenses. SG&A expenses increased $175.0 million, or 17.5%, to $1,172.4 million in 2019 from $997.4 million in the prior year. As a percent of net sales, SG&A expenses increased from 12.4% to 13.7% primarily due to higher mix of sales in the Retail segment which has a higher SG&A rate to sales, higher supply chain costs in both the Military and Food Distribution segments, and higher corporate administrative expenses, including expenses associated with the CEO transition and a supplemental, transition incentive program for eligible associates (“Transition Costs”).

Merger/Acquisition and Integration Expenses – In 2019, $1.4 million of merger/acquisition and integration expenses were incurred primarily in connection with the acquisition and integration of Martin’s. Prior year results included $4.9 million of merger/acquisition and integration expenses primarily associated with ongoing integration activities from the Nash-Finch merger and Caito Foods Service (“Caito”) and Blue Ribbon Transport (“BRT”) acquisitions as well as costs associated with the Martin’s acquisition.

Restructuring, Asset Impairment and Other Charges – In 2019, $13.1 million of net restructuring, asset impairment and other charges were incurred, predominantly as a result of asset impairment charges associated with the decision to reposition Fresh Production operations and losses associated with the disposition of the Fresh Kitchen, which were partially offset by gains on the sale of a previously closed distribution center. Prior year results included $37.5 million of net restructuring, asset impairment and other charges that were predominantly associated with a non-cash charge related to the collectability of a customer advance to an independent retailer of $32.0 million as well as charges incurred as part of the Company’s retail store rationalization plans, partially offset by changes in estimates of closed store liabilities and gains on sales of real estate.

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Operating Earnings (Loss) – The following table presents operating earnings (loss) by segment and variances in operating earnings (loss):

The Company reported operating earnings of $56.9 million in 2019 compared to $70.5 million in the prior year. The decrease of $13.6 million was primarily related to an increase in supply chain expense, partly due to a reliance on incremental contract labor within the warehouse and transportation operations in both the Food Distribution and Military segments, and higher administrative costs, including Transition Costs, one-time costs associated with Project One Team and healthcare costs. These factors were partially offset by lower restructuring charges and the contribution of the acquired Martin’s stores.

Food Distribution operating earnings decreased $1.3 million to $47.4 million in 2019 from $48.8 million in the prior year. The decrease was primarily attributable to the higher supply chain costs and corporate administrative expenses described above, partially offset by lower restructuring charges compared to the prior year.

Military operating earnings decreased $15.0 million to a $9.3 million operating loss in 2019 from earnings of $5.6 million in the prior year. The decrease was attributable to higher supply chain costs and higher corporate administrative expenses than in the prior year.

Retail operating earnings increased $2.7 million to $18.8 million in 2019 compared to $16.1 million in the prior year. The increase was primarily due to the contribution of the acquired Martin’s stores and the favorable impact of closing underperforming stores, partially offset by higher corporate administrative expenses as described above and higher store labor costs.

Interest Expense – Interest expense increased $4.1 million, or 13.3%, to $34.5 million in 2019 from $30.5 million in the prior year primarily due to an increase in interest rates compared to the prior year.

Postretirement Benefit Expense (Income) – Expense in the current year is primarily related to the termination of the Company’s Pension Plan, a frozen defined benefit pension plan terminated on July 31, 2018, and the resulting distribution of assets to plan participants in 2019.

Income Taxes – The Company’s effective income tax rates were -65.5% and 17.0% for 2019 and 2018, respectively. Differences from the federal statutory rate in the current year are primarily due to state tax benefits and tax credits. Differences from the federal statutory rate in the prior year are primarily due to the lapse of the statute of limitations for an uncertain tax position and tax credits, partially offset by tax expense related to stock-based compensation and state income taxes.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company also provides information regarding adjusted operating earnings, adjusted earnings from continuing operations, and adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”). These are non-GAAP financial measures, as defined below, and are used by management to allocate resources, assess performance against its peers and evaluate overall performance. The Company believes these measures provide useful information for both management and its investors. The Company believes these non-GAAP measures are useful to investors because they provide additional understanding of the trends and special circumstances that affect its business. These measures provide useful supplemental information that helps investors to establish a basis for expected performance and the ability to evaluate actual results against that expectation. The measures, when considered in connection with GAAP results, can be used to assess the overall performance of the Company as well as assess the Company’s performance against its peers. These measures are also used as a basis for certain compensation programs sponsored by the Company. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its financial results in these adjusted formats.

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Current year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude “Fresh Kitchen operating losses” subsequent to the decision to exit these operations at the beginning of the third quarter, costs associated with organizational realignment, which include significant changes to the Company’s management team, and fees paid to a third-party advisory firm associated with Project One Team, the Company’s initiative to drive growth while increasing efficiency and reducing costs. Pension termination costs, primarily related to non-operating settlement expense associated with the distribution of pension assets, are excluded from adjusted earnings from continuing operations, and to a lesser extent adjusted operating earnings. Prior year and 2017 adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude start-up costs associated with the first year of Fresh Kitchen operations, which concluded during the first quarter of 2018. The 2017 retirement stock compensation award represents incremental compensation expense in connection with an executive retirement. These items are considered “non-operational” or “non-core” in nature.

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 GAAP and should not be considered as a substitute for operating earnings and other income 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.

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Following is a reconciliation of operating earnings (loss) to adjusted operating earnings for 2019, 2018 and 2017.

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Adjusted Earnings from Continuing Operations

Adjusted earnings from continuing operations is a non-GAAP operating financial measure that the Company defines as earnings from continuing operations 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 earnings from continuing operations provide a meaningful representation of its operating performance for the Company. The Company considers adjusted earnings from continuing operations as an additional way to measure operating performance on an ongoing basis. Adjusted earnings from continuing operations 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 earnings from continuing operations is a performance measure 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 adjusted earnings from continuing operations format.

Adjusted earnings from continuing operations is not a measure of performance under GAAP and should not be considered as a substitute for earnings from continuing operations and other income statement data. The Company’s definition of adjusted earnings from continuing operations may not be identical to similarly titled measures reported by other companies.

Following is a reconciliation of earnings (loss) from continuing operations to adjusted earnings from continuing operations for 2019, 2018 and 2017.