Discount grocer Smart & Final Stores Inc. saw its net income decline in 2016, it reported this week, a loss executives attributed to the company’s acquisition of dozens of bankrupt Haggen Inc. stores.
However, the Commerce company performed better than its peers with an increase in foot traffic, according to Jennifer Bartashus, retail staples analyst at Bloomberg Intelligence.
“Smart & Final had two major battles it was fighting, cannibalization and deflation, and those two things together really hurt sales and earnings,” Bartashus said.
Smart & Final had predicted that the 33 Central and Southern California Haggen Inc. stores it acquired in December 2015 after the Pacific Northwest grocer declared bankruptcy would cannibalize sales at its existing locations, but the results were a bit more pronounced than it had expected. The company now has more than 300 stores in the Western United States under its Smart & Final, Smart & Final Extra!, and Cash & Carry Smart Foodservice banners.
Revenue increased to $4.34 billion for the year ended Jan. 3 from $3.97 billion the previous year, but net income decreased to almost $13 million (18 cents a share) from $38.3 million (52 cents a share) in 2015, according to the report released Wednesday.
The company’s stock price dipped to $12.40 at the close of business Wednesday, dipping 10.5 percent from a week earlier and down 22.5 percent from a year ago. The stock closed at $10.95 a share Friday.
However, David Hirz, president and chief executive, said the company would still have bought up the Haggen stores given the chance to do it over again.
“I know the cannibalization was painful this year, but we still think that’s a good tradeoff,” he told investors in a conference call.
The Haggen stores had previously belonged to grocery chains Albertsons and Safeway, which were forced by the Securities and Exchange Commission to divest some locations in order to merge. The companies didn’t get to choose which locations to close, so they were in prime locations, Hirz said in an interview.
Bartashus said they were also recently upgraded by Haggen.
“It was a great opportunity, and it was the right thing for the company to do,” she said.
Meanwhile, food retailers have suffered since 2009 from the most prolonged period of price deflation since the middle of the last century. That has forced prices down as stores compete for shoppers. Deflation is widely expected to ease up by the summer.
Despite its difficulties, Smart & Final has continued to draw in customers. The number of same-store transactions that took place increased by 0.2 percent in the fourth quarter and 0.8 percent for the year overall.
Kroger Co. reported negative traffic for its fourth quarter last week, according to Bartashus.
Hirz credits the chain’s unique business model of appealing to both business customers and individuals. Businesses make up 30 percent of its sales, according to Hirz.
He also said the company has evolved over the years to meet customers’ increasing demand for natural and organic produce.
“We accomplished an awful lot last year,” he said, adding that the company had hired 6,000 new associates. “We had a really good year. It just didn’t show up in the metrics.”
After expanding its store count by 15 percent last year, the company plans to expand by about 7 percent this year, he said.
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