SpartanNash Company (SPTN) Q4 2020 Earnings Call Transcript

SpartanNash Company (NASDAQ: SPTN) Q4 2020 earnings call dated Feb. 25, 2021

Corporate Participants:

Chris Mandeville — Managing Director, ICR

Tony Sarsam — President and Chief Executive Officer

Mark Shamber — Executive Vice President and Chief Financial Officer

Analysts:

Caitlin Howard — Barclays — Analyst

Spencer Hanus — Wolfe Research — Analyst

Damon Polistina — Deutsche Bank — Analyst

Chuck Cerankosky — Northcoast Research — Analyst

Kelly Bania — BMO Capital Markets — Analyst

Scott Mushkin — R5 Capital — Analyst

Matt Fishbein — Jefferies — Analyst

Presentation:

Operator

Good day, and welcome to the SpartanNash Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Chris. Please go ahead.

Chris Mandeville — Managing Director, ICR

Good morning, and welcome to the SpartanNash Company Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. On the call today from the company are Tony Sarsam, President and Chief Executive Officer; and Mark Shamber, Executive Vice President and Chief Financial Officer.

By now, everyone should have access to the earnings release, which was issued yesterday at approximately 4:30 p.m. Eastern Time. For a copy of the earnings release, please visit SpartanNash’s website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company’s website for approximately 10 days.

Before we begin, the company would like to remind you that today’s discussion will include a number of forward-looking statements. If you will refer to SpartanNash’s earnings release from yesterday as well as the company’s most recent SEC filings, you will see a discussion of factors that could cause the company’s actual results to differ materially from these forward-looking statements. Please remember SpartanNash undertakes no obligation to update or revise these forward-looking statements.

The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business. And it is included in yesterday’s earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.

And with that, it is now my pleasure to turn the call over to Tony Sarsam.

Tony Sarsam — President and Chief Executive Officer

Thank you, Chris, and good morning. Before covering a few highlights on the quarter and offering some comments on our strategies for 2021, let me begin by giving a salute to our dedicated and hard-working team of associates in our distribution centers and retail stores. Nothing about navigating the COVID-19 pandemic has been easy, but I am tremendously proud of our team’s performance and our ability to serve our local communities. Our essential workers are truly heroes, and I remain committed to supporting them with a safe working environment. I had such a pleasure getting to know many of these frontline associates over the course of the last several months and I’m excited to see how they will continue to contribute to our company’s objectives and growth in the coming year.

Turning to a couple of highlights in our financial performance. We are pleased with our top line results of 12.5% growth in the quarter, which of course, includes the impact of the 53rd week. Although the pandemic has contributed to our overall increase in sales volume, our team continues to deliver new business wins, which will contribute to our company’s growth for years to come.

With record demands across most of our businesses, merely keeping the shelves stocked was no small achievement, and I am proud of our team’s tenacity and their ability to keep our communities fed.

We also generated a substantial amount of free cash flow during 2020, mostly due to improved profitability, which allowed us to pay down a significant portion of our long-term debt balance. As a result, we ended the year with a net debt-to-adjusted-EBITDA leverage ratio of 2 times compared to 3.7 times to start the year. Naturally, this improvement provides increased flexibility and affords us the ability to reinvest in the business to support future growth and drive greater efficiencies. It will also enable us to deploy capital for other projects as opportunities present themselves.

On our last quarterly call, I promised to share strategies for 2021 and I spoke to the need to act with a certain level of urgency in making meaningful improvements to our supply chain. Having visited the front lines and carried out a dialogue with leaders at all levels of the organization, I’ve gained great insight into the areas which require focus. And at the same time, I have gained an appreciation what our team is capable of achieving.

Despite the truly valued efforts put forward by our associates during COVID-19, the pandemic has highlighted where we require investments in our efforts to grow sales and operate efficiently in the coming years.

In the last few months, many of our warehouses have been strained as they operate at or above capacity. On top of that, we have held our teams to heighten safety protocols and often been required to manage through staffing challenges associated with the pandemic. While we’ve been limited in our ability to make progress on improvement initiatives during the pandemic, over this period, our team has identified several areas that offer us potential for measurable process improvements.

As I learned during my long history in this industry, the strength of an operator comes from having the foundation of great people, processes and products. Our team will be laser-focused on making sustainable improvements in certain key performance indicators in 2021. These areas include: investing in our associate experience through initiatives related to safety and retention; improving distribution service levels; improving our private brand assortment and penetration; and taking other actions to sustain improvements in gross margin levels.

These KPIs will be utilized to measure ourselves internally and to evaluate our progress. Improvements in these areas require some operational investments in people and processes, along with a bit of elbow grease.

In addition, to support our continued growth in the Food Distribution segment and the expanding capabilities of our supply chain network, we recently opened a new distribution center in Severn, Maryland. This strategic investment represents our most significant addition to the supply chain network in many years. It will alleviate the stress on some of our other facilities in the short-term and support our growth in the long term.

In connection with our KPIs, we have renewed our focus on the training of our supply chain associates to promote their growth as efficient operators. So to give you an example, a newly hired order selector within our distribution center moves a significantly lower rate of cases than the more experienced and trained counterparts. Ensuring that we execute the appropriate training of these associates early on will ensure that they achieve greater efficiency and longevity with the organization. We’ll also undertake initiatives to refresh the flow of our distribution center and to support these associates and enhance productivity in these facilities.

These initiatives, along with many others, and together with improvements in execution, will support our supply chain in recovering from the demand to the pandemic. It will also result in improvement in our company’s growth and profitability over the next several years.

As we look to 2021, it will be a year that will undoubtedly bring uncertainty; uncertainty related to the evolving consumer behavior and uncertainty related to the duration of the pandemic and the timing of the vaccine distribution amongst other things. However, we are poised to focus on what we can control, the fundamentals of our business and making efforts to streamline operations in order to be — to best respond to any environment and to position SpartanNash for profitable long-term growth.

With that, I will now turn the call over to Mark to review the fourth quarter performance and provide our fiscal 2021 guidance.

Mark Shamber — Executive Vice President and Chief Financial Officer

Thanks, Tony, and welcome to everyone joining us on today’s call. Net sales for the fourth quarter of fiscal 2020 increased by 12.5% or $249 million to $2.25 billion versus 2019’s fourth quarter sales of $2 billion, which includes the impact of the 53rd week. Adjusting for the 53rd week sales of $158.9 million, our fourth quarter sales growth accelerated to 4.5% compared to third quarter sales growth of 3.1%.

Our adjusted EPS for the fourth quarter came in at $0.43 per diluted share, an increase of 87% compared to adjusted EPS of $0.23 per diluted share in 2019’s fourth quarter. GAAP EPS came in at $0.34 per diluted share in the quarter compared to $0.15 per share in the fourth quarter of fiscal 2019.

The increase in our profitability from the prior year quarter was driven by the higher sales volume, particularly from the higher-margin retail segment, gross margin rate expansion across all our business segments and increased leverage of our operating expenses, particularly in retail store labor and various fixed costs. These positive contributions were partially offset by the previously announced noncash warrant expense of $6.5 million related to the transaction with Amazon; increased corporate administrative expenses, including incentive compensation; and a higher rate of supply chain expenses, which were compounded by the effects of COVID-19. As a reminder, the warrant expense was recorded as a reduction to net sales in accordance with GAAP.

Turning to our business segments, net sales in Food Distribution increased by $167 million or approximately 18% to $1.11 billion in the fourth quarter, driven by the combination of continued sales growth with existing customers, incremental volume associated with the impact of COVID-19 as well as the contribution from the 53rd week. These increases were partially offset by the company’s decision to exit its remaining fresh production operations in early 2020.

Inflation declined to 80 basis points in Food Distribution in the fourth quarter, a decrease both from the third quarter rate of 1.12% and 2019’s fourth quarter inflation rate of 1.39%, primarily as a result of inflation moderating significantly in produce, while dairy shifted from inflationary in Q3 to deflationary in Q4.

Reported operating earnings for Food Distribution in the fourth quarter totaled $11 million compared to $10.9 million for the prior year quarter. The increase in reported operating earnings for the segment was largely due to higher sales volume, favorable margin rates, lower asset impairment charges and cycling prior year losses in the fresh distribution — Fresh Production business, largely offset by the previously mentioned noncash warrant expense, the higher rate of supply chain costs and higher corporate administrative expenses, which were allocated to the business segments.

Adjusted operating income totaled $13.1 million in the quarter versus the prior year’s fourth quarter adjusted operating income of $15.7 million. Adjusted operating earnings exclude asset impairment and restructuring charges in both fiscal years. Losses associated with the Fresh Kitchen operations have also been excluded in 2019’s fourth quarter.

Retail net sales came in at $627 million for the quarter compared to $548 million in 2019’s fourth quarter, an increase of 14.5% or $79 million, including the impact of the extra week.

Our comparable store sales were 8.7% for the fourth quarter. Comparable store sales continued to benefit from the consumer shift towards food at home during the pandemic. Consistent with our third quarter results, these results also reflect an increase of nearly 180% in our eCommerce sales for the quarter and the continued favorability in our private label sales compared to the overall industry.

Retail shifted to deflation of 14 basis points compared to inflation of 1.35% during the third quarter and inflation of 1.33% in the prior year as most categories moderated in the fourth quarter, and the grocery, dairy, produce and frozen categories all turned deflationary.

Fourth quarter adjusted operating earnings in the Retail segment came in at $9.4 million compared to $3 million in 2019’s fourth quarter. Retail reported GAAP operating earnings of $6.9 million for the quarter compared to $4.2 million in 2019’s fourth quarter, an increase of 64%.

Our profitability improvement was driven primarily by the sales increase, while we also benefited from improvements in our margin rates including lower inventory shrink as well as favorable variances in labor rates. Partially offsetting these items was higher incentive compensation due to the improved segment performance. Fuel sales were down almost 29% from the prior year fourth quarter due to a combination of fewer gallons sold and a lower average price per gallon.

Military net sales of $514 million in the fourth quarter increased by $3 million compared to prior year revenues of $511 million. The contributions from the 53rd week in growth in private label sales were offset by the continued impact of domestic base access and commissary shopping restrictions associated with COVID-19, which have led to a significant decline in defense commissary agency sales as a whole.

Military reported an operating loss of $0.5 million in the fourth quarter compared to a reported loss of $3.5 million in 2019’s fourth quarter, while adjusted operating loss was $0.4 million compared to a loss of $3.5 million in the prior year. These changes were driven by improvements in both gross margin and supply chain expense rates.

Interest expense decreased by $3 million in the prior year quarter due to multiple rate cuts implemented by the Federal Reserve as well as the company’s pay down of long-term debt resulting from strong free cash flow during the year.

For the full year, we generated consolidated operating cash flows of $307 million compared to $180 million in the prior year. This improvement was driven largely by our increased profitability, reductions in working capital, the deferral of payroll taxes in connection with the CARES Act and increases in crude compensation. These improvements collectively resulted in free cash flow generation of $239 million in fiscal 2020 compared to $105 million in fiscal 2019.

In fiscal 2020, SpartanNash declared $27.7 million in quarterly cash dividends equal to $0.1925 per common share. The company also repurchased 860,752 shares during 2020 for a total of $10 million at an average price of $11.62 per share.

Our higher adjusted EBITDA of $239.1 million, combined with the reduction in net long-term debt by $198 million during fiscal 2020, resulted in a significant improvement in our net long-term debt to adjusted EBITDA leverage ratio. The company’s leverage ratio finished fiscal 2020 at just under 2 times, coming in at 1.95 times compared to 3.7 times as of fiscal 2019’s year-end.

As covered in yesterday’s press release, we are providing our initial guidance for fiscal 2021, which incorporates our current expectations as we begin to cycle the impact of COVID-19.

Overall, given market conditions and the uncertainty that COVID’s influence will have on fiscal 2021, we expect consolidated net sales to decline by approximately 4% to 6% for fiscal 2020 to a range of $8.8 billion to $9 billion. In Food Distribution, we expect sales to decline 1% to 3%. In Retail, we expect first quarter comparable sales to decline by 7% to 9%, while full year comparable sales are expected to decline by 6% to 8%.

Within our Military business, we expect a continued decline in the DeCA comparable sales trends, which will be partially offset by growth in DeCA’s private brands, resulting in a net 3% to 5% sales decline.

We expect the company’s profitability to decrease over the prior year, with fiscal 2021 adjusted earnings per share from continuing operations to range from $1.65 to $1.80 per diluted share compared to $2.53 in 2020.

Excluding the estimated restructuring and asset impairment, merger acquisition and integration, organizational realignment and severance expenses provided in Table 8 in today’s press release, we expect fiscal 2021 adjusted EBITDA to be in the range of $195 million to $210 million compared to 2020’s adjusted EBITDA of $239 million, consistent with the company’s projected decrease in operating earnings.

From a GAAP perspective, we expect that reported earnings from continuing operations will be in the range of $1.48 to $1.67 per diluted share in comparison to earnings from continuing operations of $2.12 in fiscal 2020. Our guidance reflects assumptions that health care cost — health insurance costs will increase and return to pre-pandemic levels while incentive compensation will similarly moderate to historical levels of achievement in fiscal 2021.

Our fiscal 2021 guidance also reflects capital and IT capital expenditures in the range of $80 million to $90 million for the fiscal year; depreciation and amortization of $90 million to $100 million; and interest expense of $14 million to $15 million.

Finally, we expect our reported and adjusted effective tax rate to range from 23% to 24.5%.

And now I’d like to turn the call back over to Tony.

Tony Sarsam — President and Chief Executive Officer

Thank you, Mark. In closing, we are pleased with our fiscal 2020 performance and our team’s contribution while continuing to deliver results during the COVID-19 pandemic. However, as we emerge from the impact of the pandemic in 2021, we recognize that there are many opportunities we will need to capitalize on in order to live up to our potential.

As I look to an uncertain 2021 environment and think about the focus areas I outlined earlier, I realize that the benefits will not come overnight. However, I’m confident that we will make the right investments and better position our platform for more prosperous growth in the years to come.

With that, I’d like to turn the call back over to the operator and open it up for your questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question comes from the line of Karen Scott from Barclays. Please go ahead.

Caitlin Howard — Barclays — Analyst

This is Cait on for Karen. Good morning. First, I was just hoping to talk about the competitive landscape and what you saw during 4Q? And if anything has changed post-holiday and thoughts on as we’re moving into 2021?

Tony Sarsam — President and Chief Executive Officer

And Cait, just to make sure we’re answering the question, you’re — I presume you’re referencing at retail, not on the wholesale front?

Caitlin Howard — Barclays — Analyst

At retail. But if you could give color to both, that would be great.

Tony Sarsam — President and Chief Executive Officer

Sure. So I mean, I think on the retail front, we’ve seen that as 2020 has progressed, that folks have started to work their way back towards, say, pre-COVID promotional levels. I don’t think that everyone is all the way back, but the holiday period is usually relatively heavily promoted in general by retailers. And so I would say that it was maybe a little bit lighter than what might have been historical, but it was much closer than it might have been, say, in the second or third quarter. And I don’t know that we’ve seen anything year-to-date in the first six to seven weeks of the year that would say anyone’s deviating significantly. Maybe certain categories or maybe certain items in a given week, but nothing broad-based.

And then on the wholesale front, I think that we’re starting to see — we’re starting to see customers who maybe were contemplating making a change before. Having those conversations again, and we’re optimistic that there is some market share out there to be gained on our end.

Caitlin Howard — Barclays — Analyst

Great. Thank you. And then I kind of missed the comments on the drivers of inflation turning negative at retail. Could you maybe repeat those? And also maybe talk about what you’re thinking in terms of cost inflation versus retail inflation for 2021?

Tony Sarsam — President and Chief Executive Officer

Yes. So as it relates to retail, what we’re saying is that in the third quarter, we had about 135 basis points of inflation. In the fourth quarter, we went to 14 basis points deflationary. But specifically, as related to certain categories, grocery, produce, dairy and frozen, all went from being at varying levels of inflationary to deflationary in the quarter. And then some of the categories that were already deflationary, an example like seafood, got more deflationary in some of the categories that had higher inflation, such as meat, their inflation cut in half from the third quarter to the fourth quarter.

And so as we look at things right now, when we look at both food distribution on the wholesale side and retail, we’ve seen the inflation in the case of Food Distribution decline further in the first period of fiscal ’21. And we’ve seen the deflation that we experience in retail worsen, not much, maybe another 10, 15 basis points, but it did worsen slightly from Q4 to Q1.

And so our numbers are probably closer to 1% as we’re looking at FY ’21. I know there’s been reports that the CPG’s back half of the year are looking at some more significant price increases coming out of CAGNY and some of the other conferences. But that’s what we’re expecting today. And to the extent that it needs to be updated, we’ll do that as the year goes along.

Caitlin Howard — Barclays — Analyst

Great. That’s really helpful. Thank you. And then just last one for me. Can you talk about how you’re positioned from a wage standpoint? And if you foresee the need to invest, given the backdrop and certain retail announcements of recent?

Mark Shamber — Executive Vice President and Chief Financial Officer

Yes. A great question. And there’s also, of course, the minimum wage legislation they’re paying very close attention to. We have — in this budget, we have not contemplated minimum wage change. As you can imagine from what you’ve seen, that we have a number of associates that — whose earnings are between $12 and $16 an hour. And even the early phases of a minimum wage change would have compression effects that we would have to take into consideration. We have sort of a standard wage inflation plan in our current budget. We are obviously very watchful of the — both the legislation and other actions in the marketplace that we can stay competitive. But I think that’s — that is certainly part of the uncertainty I mentioned a few minutes ago. So we will stay vigilant on that front.

Caitlin Howard — Barclays — Analyst

Thank you very much.

Operator

Thank you. The next question comes from Greg Badishkanian from Wolfe Research. Please go ahead.

Spencer Hanus — Wolfe Research — Analyst

This is Spencer Hanus on for Greg. My first question was on retail. I was just hoping you guys could provide a little more color on what led to the sequential change in retail EBITDA margins during the 4Q? And how should we think about the cadence of margins in retail during 2021?

Mark Shamber — Executive Vice President and Chief Financial Officer

Yes. So I mean there’s a couple of items there. And I think as we look at the change from the third quarter to fourth quarter, yes, I mean, there certainly was a step back, whether you look at it from an EBIT or an EBITDA perspective. Some of that is associated with the allocation of corporate expenses and adjusting for incentive compensation as we get to the end of the year, but then there also were some — we’re not calling them out as onetime, but there are some expenses that were incurred in the retail business in the fourth quarter as we aligned some of the benefits to the Martin’s portion of retail that we’d acquired two years ago to the rest of our business. And so there were some onetime expenses in the forms of accruals to record for vacation and sick pay and align those policies.

And then the last item was that during the course of the year, we’ve been accruing for — we’ve a lot of folks by virtue of what was going on with COVID, to carry over some of their vacation from one year to the next because it was difficult for people to take vacations or go anywhere, I guess, and taking vacations. And so we had some incremental expense there.

So I would say, look, it’s — you’re not going to see the levels that you saw over the course of fiscal ’20, as we’re not going to get some of the benefits the levels of shrink benefits that we got in fiscal ’20 will start to moderate in ’21. Health insurance costs will be higher in ’20 and our expectation will be higher in ’21 than they were in ’20 as folks go back and have more of the elective procedures. But I would say that for the fourth quarter, specifically, it was some of the items that I just mentioned that really drove the sequential decline in EBIT and EBITDA in retail.

As for the cadence, I mean, since it’s a tough question simply because we’re forecasting in our end that the sales lift that we’re getting from COVID will moderate during the course of the year, although we’ll still retain a portion of that as of the end of the year and how accurate we are about that cadence will dictate how much the retail margins will be above what they might have been say, in ’19.

So I don’t know that I can answer that and give you something to model easily. Other than we’ve tried to set a cadence on the top line that we think will correspond to the operating margins.

Spencer Hanus — Wolfe Research — Analyst

Got it. That’s helpful. And then you guys outlined some productivity initiatives that you guys are going to be rolling out this year. How should we think about the amount of reinvestment back in the business to implement some of those? And what is some of the — what are some of the limiting factors for determining when that will start to show up in the P&L in terms of improved margin and better flow through in the business of some of these initiatives?

Tony Sarsam — President and Chief Executive Officer

Great. So the investment, we’re still putting that together, but it’s a multifaceted approach to improving our overall operations. There are a lot of investments that will come in the form of increasing or improving the talent in the organization and breaking spans and adding some technical expertise. And we are very confident there’s a terrific payback on that. We will see relatively little of it in 2021, though these are mostly ’22 and ’23 paybacks.

So, yes, we’re still in the midst of putting that together, but we’ve got a handful of those components in place. It will be operating expense versus capital largely. It will be largely around people that will include the processes of our distribution centers and our transportation operations.

Spencer Hanus — Wolfe Research — Analyst

Great. Thank you.

Chris Mandeville — Managing Director, ICR

Operator, we’re ready for the next question [Technical Issues]

Operator

The next question is from the line of Damon Polistina from Deutsche Bank. Please go ahead.

Damon Polistina — Deutsche Bank — Analyst

Good morning. I was wondering if you could [Speech Overlap] the quarter-to-date trends you’re seeing in retail and in food distribution. And within that, just speak to as vaccines roll out in the various regions you operate, if you’re seeing a difference in performance in the regions?

Mark Shamber — Executive Vice President and Chief Financial Officer

Yes. Damon, we typically don’t comment on intra-quarter trends as to what we’ve seen to date. However, I guess, I would say, in providing our FY ’21 guidance, the — what we’ve experienced to date is in line with what we’re guiding. So if we’re referencing down 7% to 9% in the first quarter from retail, once we cycle COVID starting in our week 10, I mean, I think that, that would imply that we’re still on track. I mean there is the big unknown that comes when we start to cycle things. But as we sit here today, that’s our current expectations.

So I think that’s probably the best that I can provide in that regard is that the guidance that we gave, we’re tracking towards that through the first 7 weeks of the year.

Damon Polistina — Deutsche Bank — Analyst

Thanks. And then can you just help understand kind of the gross margin dynamics in 2021, the puts and takes there we should be thinking about?

Mark Shamber — Executive Vice President and Chief Financial Officer

Yes. I mean I think, look, so as we focus specifically on gross margin, and we go to the retail business and the distribution, on the distribution side, really, a lot of the benefit we saw at margin is improvements in shrink in some regards, where during that surge in the March-April-May time frame, where we’re north of 20% during those weeks, your shrink really declined significantly because you were selling everything you had in certain categories in the warehouse. There was product that wasn’t coding out. And perishable product, you were going through that similarly at a rapid rate. So shrink levels were much lower, which then, in turn, helps the gross margin.

And that’s a similar case at retail, right? We take perishable and fresh inventories every month. You’re getting a lot less shrink during those inventories, simply because there’s greater consumption. And so that carried on for all of fiscal ’20, but as the levels went from being we did — it was only for a few weeks, right? But we did that 15% in the first quarter, then we saw an acceleration in Q2 up to 17%, and then we went to the 10%. I mean you’re seeing that an improved shrink of retail. I think the other portion of it, which I think we were maybe a bit less than some of our competitors is that we kept running an ad and maybe we weren’t as promotional as we might have been, but we still — I think we’re more promotional than many of our peers. And so I think you got some benefit there because you weren’t discounting to the same extent simply because you didn’t have some of the products.

So I think you’ll see some of that come back in ’21 because when your comps at 17% versus your comps at — on a two-year stack basis is maybe mid-single digits, you’re going to have modestly more shrink.

Damon Polistina — Deutsche Bank — Analyst

Understood. Thank you.

Operator

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

Chuck Cerankosky — Northcoast Research — Analyst

Tony, could you talk a little bit about the broader retail strategy at SpartanNash? You focused a lot of the things you want to do on the Food Distribution segment, but Retail has a number of banners, different geographies, indeed different ways to go to market. And I was wondering if some of that might be simplified going forward?

Tony Sarsam — President and Chief Executive Officer

Sure. On retail, so I’ll take it a couple of ways at your question. On one, the operating strategy overall also strengthens our retail. I think that’s important to note that we are our biggest customer. So as we get better at fill rates and better at providing great service and great cost overall, it actually strengthens our overall retail offering.

We have, within the strategy of the stores, we are looking at a continuing our performance and focus on our own brands and believe that there is a great upside there. We saw significant growth in 2020. We believe we can continue that pace, and we are looking to make offers of new products and new categories and frankly, looking at getting a more simplified representation of our brands to our consumers, and we see great growth there.

We have — we also the — again, a number of ways to strengthen our overall e-commerce from our stores. We think that’s going to also be a great growth for us in the future. There was terrific growth in that for us in 2020 as well.

And then as far as the banners goes, and there’s no definitive plan right now to change any banners to consolidate those, we are always looking for ways to strengthen our business, and as I mentioned earlier, we will be opportunistic, both in terms of the way we look at potential acquisitions. And as you know, there are periodic store closures. There may be some of those as we move along here, but there’s still — there isn’t a holistic view of consolidating banners at this point.

Chuck Cerankosky — Northcoast Research — Analyst

Thank you.

Operator

Thank you. The next question is from the line of Kelly Bania from BMO Capital Markets. Please go ahead.

Kelly Bania — BMO Capital Markets — Analyst

Hi, Good morning. I wanted to ask just about — a little bit about the distribution channel. And if you are expecting most of your independent customers to experience more of a similar decline on a year-over-year basis as your own Retail business? And I guess, the difference there, would that be made up from growth of larger customers? Or is there any assumption of new business wins there?

Tony Sarsam — President and Chief Executive Officer

Yeah. I mean, I would say — I’d say there’s a bit of all of the above. So I mean, I think that we do expect that our independents will probably move in the same direction that we have. There may be some nuances as we look at folks that, hey, maybe they’ve done a little bit better, maybe there are some that have done a little bit worse and sort of taking that trend and playing it out during the course of the year. I would say that to the last part of the question about new business, yes, there are certainly some new business wins there. And I mean, we always have a portion of our growth that we think will come from new business. But at this point in the year, as we’ve got some more firm customers coming on, on the horizon, I think that it’s maybe a little bit bigger than it might be in some years and/or we’re lapping some business that we took on in the back half of 2020, that will be helpful.

But one other things that I’d call out, Kelly, is that we’ve started to see in the fourth quarter and continuing into the first few weeks of FY ’21, that we’re starting to see some nice gains within the fill rate in some of the categories, some of the products that have been out for extended periods of time. We’re starting to get more fill in those areas, either allocations are being reduced or products that you couldn’t get are now being on allocation. And so as a result, I mean, there is some fill to occur on the customer shelves, where they might have been covering or filling in or maybe not stocking as deep, where we think there’ll be some lift and some continued gains on that front as well. And then I think to your last — to the other part of your question, yeah, I mean, in some of the larger customers, we expect that there will be some outsized growth there. And so when you put all of that together, I mean, that’s what’s giving us the confidence around the guide that we’ve made. And I would say on fill rate while it’s been nice progress, and we’re still not back to where we were, say, pre-pandemic, but we think that we’ve got a trajectory that will get us there later in the fiscal year.

Kelly Bania — BMO Capital Markets — Analyst

Okay. That’s helpful. A couple more questions. Just curious on COVID kind of related costs and where that ended for the year and what you are planning for in 2021.

Mark Shamber — Executive Vice President and Chief Financial Officer

Yeah. We stopped kind of guiding after the second quarter trying to call it out because now it’s just the cost of doing business and operating. So I mean, I would say, based on what we talked about in the first quarter and said in the second quarter, we’re probably somewhere between $15 million and $20 million during the course of FY ’20, just because we were saying $6 million to $8 million for the first — each of the first two quarters. So I think that’s probably in the range of where we finished the year because we took some of the items in-house that we’re paying for a lot of third-party services. And then some of the PPE that you were buying during the spring phase when the prices were astronomical, those prices have come back in, and a lot of folks are opting for sort of permanent versus disposable personal protective equipment. So I think with all that said, that’s probably in the range of where we finished for the year. But we’ve stopped tracking and calling it out at our end because it’s just the cost of doing business now.

Kelly Bania — BMO Capital Markets — Analyst

Okay. That’s helpful. And then in terms of the new DC that you referenced, can you just talk about the capacity that, that will provide you and if there’s any start-up costs we should be thinking about, I guess, in Q1?

Mark Shamber — Executive Vice President and Chief Financial Officer

Yeah. I mean, the start-up costs, we’ve incorporated into the guidance. So I’m not sure that I’m calling anything out or we’re calling anything else specific in that respect. So it’s in the numbers. The capacity, I think I want to be a little careful there just by virtue of how that’s coming on board because we’ve started shipping already in Ambient [Phonetic], but there’s another tenant that’s leaving later in the calendar year. That will give us the full control of the building, and our capacity will go up significantly at that point. But suffice to say, it’s a few hundred million dollars.

Kelly Bania — BMO Capital Markets — Analyst

Okay. And then one more, if I can. Just curious, the guidance, so you gave the full year kind of sales declines by channel, but then you also gave the outlook for Retail comps in Q1, but not the other segments. And I was just curious what the thought process was there, if there’s anything relative to consensus that made you kind of call that out for Retail in Q1 or just anything you’re seeing? Just thought process there.

Mark Shamber — Executive Vice President and Chief Financial Officer

Yeah. I mean, I think we generally tried with Retail to give folks a little bit of an idea on the cadence for the quarters as to what we’re — as to what we expect to see, what we’re seeing. And obviously, this year, with it being particularly challenging, we thought it would be helpful to have a starting point. And then I think one of the folks asked before about the cadence of things. I mean, I think I’m comfortable with where Q1 is, but quite honestly, in two weeks, we’re going to find out how well we, as a company, forecasted from that standpoint. But we wanted to try to at least set some of the direction there. And I don’t know that it’s as easy to do on the other segments. With the Retail side with how we’ve tracked it it’s a little more straightforward, even if it’s difficult with the Distribution businesses, particularly with the Military, where they’ve got different levels of lockdown. I mean going from threat level Charlie to threat level Bravo, can make a pretty big impact on the sales for the remainder of the quarter. And so Retail, we felt we could get a relatively good range. The other parts of the business maybe a bit more difficult. And it’s kind of like an EPS, right? I mean, you can look at the full year guidance and take it on a 52-week or 53-week basis and say, “Hey, the ranges have us down somewhere 29% to 35%.” Trying to put a cadence there, is the first quarter going to — is the first quarter less or more than that? it’s a bit challenging in that regard.

Kelly Bania — BMO Capital Markets — Analyst

Gotcha. Thank you.

Mark Shamber — Executive Vice President and Chief Financial Officer

You’re welcome.

Operator

Thank you. The next question is from Scott Mushkin from R5 Capital. Please go ahead.

Scott Mushkin — R5 Capital — Analyst

Yeah. Hey, guys. Thanks for taking my questions. So I actually wanted to go back to something that was talked about earlier, and it’s more short-term in nature and then I want to get into some strategy stuff. So just want to make sure I understood the inflation comments. I think you — Mark, you said about a 1% increase for ’21? Or maybe I was off there, maybe it’s a decrease. I didn’t catch that. But I think also, I wanted to understand the government and some of the CPG companies are reporting decent inflation, if I’m correct, and you guys are talking about deflation. So I wanted to understand what you think the difference is between that, especially even the Nielsen data would imply or the IRI data would imply some inflations going on.

Mark Shamber — Executive Vice President and Chief Financial Officer

Yeah. I mean — well, I think, look, there’s probably a couple of things on that. So yes, I mean, for us, we did sort of reference sort of a 1% number. And I think that’s our average for the year, right? And so I mean, to the point, it can be a variety of different things that come into it. I think at our end, when we’re seeing the deflation, right, there are some categories that move significantly from quarter-to-quarter, right? So you can see, as an example, produce can shift by virtue of a growing season from being inflationary to deflationary. You can see, if we go back to last year’s — I think last year’s second quarter, when all the meat packaging plants were shut down, we saw huge inflation on the protein side, where I think we blended north of 6% for the second quarter of 2020. And so for us, there’s a bit of some of the commodities that can move around from quarter-to-quarter and relative to what they are as a percentage of our sales, that can move us versus what you might see in center store and some of the other packaging-type products. So I mean, I think there’s that component, plus with our Retail, there’s always a chance that as we’re making different marketing strategies that can impact to some degree. But again, that’s going to be on the grocery and some of the other price points that we’re setting. It’s not going to impact some of the perishable categories. But I mean, look, I can only give you the data, and I can say that when we look at where produce was both on a wholesale and on a retail perspective, I saw from the third quarter to the fourth quarter of more than 200 basis point move in both. It was — it’s about 220 basis points in Food Distribution. In Retail, it was almost 400 basis points.

Scott Mushkin — R5 Capital — Analyst

Okay. That’s perfect. And when you’re referencing these numbers, you’re referencing year-over-year or quarter-to-quarter?

Mark Shamber — Executive Vice President and Chief Financial Officer

Quarter-to-quarter. So it is year-over-year, but from quarter-to-quarter, right? So produce in the third quarter of 2020 was a tick under 2%. It was 1.98% inflationary. But in the fourth quarter, it was minus 2%.

Scott Mushkin — R5 Capital — Analyst

Deflation year-over-year?

Mark Shamber — Executive Vice President and Chief Financial Officer

Year-over-year.

Scott Mushkin — R5 Capital — Analyst

Okay. Perfect. Okay. I just wanted to make sure I understood that. So then my next questions are really much more strategic in nature. And just want to understand your guys’ visibility vis-a-vis Amazon and what they’re doing. I mean, do you guys have a line of sight to where they may be in 2022, 2023, as far as store count or do you not get that from them?

Tony Sarsam — President and Chief Executive Officer

Yeah. I appreciate the desire to have a greater understanding of one of our customers and certainly one of the bigger retailers out there, but it’s not something we’re really — to the extent that I would even know, I wouldn’t be sharing. But I think, look, with all of our customers, we work closely with them to understand what they’re doing and what their plans are, and we’re always grateful for any additional information that they’re willing to share that will help us plan in the near-term and the longer term. So I’m not going to provide any specific customer details, but I would say that if customers are willing to share information to help us as to where they’ve got plans to open new stores or other operating centers, we’ll always try to take that into consideration to help us better serve them.

Scott Mushkin — R5 Capital — Analyst

So as a follow-up to that question, if Amazon were to open an additional 100 stores this year, would you guys have the capacity to deal with that type of thing? Or is that something that you really — if that were to happen, you wouldn’t have the capacity or would cause issues?

Mark Shamber — Executive Vice President and Chief Financial Officer

Again, I mean, I think I’ve shared before, when we talk about our distribution centers, and supporting customers, whether it’s new stores opening or new business that we win, it’s really a function of where that’s based, right? I mean we have a Distribution [Technical Issues] in West Virginia that’s only 40,000 square feet. Adding $100 million of volume to that DC would be difficult. Whereas here in Grand Rapids, where we’ve got over 1 million square feet worth over — almost 1 million square feet worth of distribution, we could absorb $100 million a lot easier. So new business is always a function of where it’s located and the type of business. I mean, doing it for a relatively low number of SKUs versus the full assortment of SKUs also impacts how much volume can churn on it. So I would say — I mean, it’s a non-answer answer, but it’s really a function of where does the volume come and how much SKU expansion is there, and that dictates how easily we can assume it.

Scott Mushkin — R5 Capital — Analyst

Is Chicago served out of Grand Rapids or no, Mark?

Mark Shamber — Executive Vice President and Chief Financial Officer

To the extent we have business in that area, yes.

Scott Mushkin — R5 Capital — Analyst

Okay. All right. So then my final question here is around the Military business. I mean, obviously, [Technical Issues] been a little bit of thorn on your guys’ side. We’ve seen the margins come down and some challenges in the revenues as well. So what are we doing with that business? Like how — I mean, we talked about, I know, about a year or two ago about private label being kind of a potential bullet in getting profitability up. But strategically, what are we going to do with that business as it kind of drags the organization?

Tony Sarsam — President and Chief Executive Officer

Well, the — and you’re correct, it has been, I guess, a thorn prior to beginning here and even my recent time here, just to try to really understand that and understand how we can make that business stronger. First and foremost, we’re very committed to actually making it stronger. We’re committed to figuring out how to get that business in a situation where it’s profitable and therefore us, and we do a great job of serving our military folks here and abroad. There are — there’s a couple of things that we did to focus on. One is, like other parts of our business, but probably more acutely, though, in military, we have operational gaps. We have our performance in terms of the way that our efficiencies do also have to provide some hampering to that to the overall profitability. So we’re going to be laser-focused on that. That’s something we can control, and can work on and fix, and we will get after that.

There’s — if you compare to the very recent experience, and I’d say there’s probably good news and bad news in 2020, while 2020 also is not a particularly strong year for our Military business, it finished off a little better than it was performing in 2019. And that was amidst a — not only a large number of base closures, but also they’re highly unpredictable when those closures occurred, how long they last. And the fact that our team dealt with that and was stable, although low profit, gives us some confidence to improve the operation that will take effect. And finally, we’re also — we’re working with our suppliers and with DeCA to find ways to improve the way we go-to-market and the types of things we offer in the market. That could also help the business. Everything, from thinking about the number of items, dray rates, the route-to-market, all those things are being discussed now, again, as we intend to make sure that business can be strong and part of our — and a long-term part of our future.

Scott Mushkin — R5 Capital — Analyst

So Tony, is there a path back to 1% margins? Or is that impossible? And what got us down to 0%-ish?

Tony Sarsam — President and Chief Executive Officer

Well, I think the — there’s people here better for it. I think the short answer is there’s a flurry of new competitors in the marketplace that went to pretty aggressive pricing over the course of, call it, the last seven or eight years. And that — those — that price competitive offers from some folks who’ve since exited has changed the overall profit profile of that business, at least for the short term. And your question, is there a path to 1%. I believe there’s a path back to 1%.

Scott Mushkin — R5 Capital — Analyst

Thanks, guys.

Tony Sarsam — President and Chief Executive Officer

Thanks, Scott.

Operator

Thank you. The next question is from Matt Fishbein from Jefferies. Please go ahead.

Matt Fishbein — Jefferies — Analyst

Hey, good morning. Thanks for the question. Just two quick ones for me. First, on the Martin’s accruals within the sequential retail margin step down, I was hoping you can help us parse out how many basis points that represented. And second, if maybe you can elaborate a little bit more on the operational investments planned for ’21. The priorities that you’ve outlined all makes sense. But wondering if you have any incremental color you can give on specific initiatives, maybe particularly around the increasing operational efficiency, what additional employee safety projects need to be worked on next year? Just trying to get a sense of is it software? Is it more trucks? Is it optimizing warehouse space? Any help you can give there would be great. Thank you.

Mark Shamber — Executive Vice President and Chief Financial Officer

Okay. I’ll answer the first one, and I’ll let Tony share as much as he would like or not like on the question on the investments. As it relates to some of the benefit alignment, I would tell you that the impact for Retail, specifically in that area was probably in the range of 45 to 50 basis points. I’m not going to have it exact, but it was in that range, just associated with some of that benefit alignment.

Scott Mushkin — R5 Capital — Analyst

Okay. And then just the operational investments, any additional color there, Tony?

Tony Sarsam — President and Chief Executive Officer

Yeah. I can’t remember I mentioned this earlier, but in the opening, I think I mentioned the fact that it’ll be across our operating units in warehouse transportation, there’s — we’re looking at hire — not only hiring some additional expertise, we’re looking at hiring more people to — we believe we have a span of control opportunity with the size of our hourly workforce and the size of our first-line supervisor workforce. So we’ll be adding people to that mix. And that could be in the neighborhood of 35 to 45 frontline supervisors, for example. And we’re looking to actually look for a profile that has new tools and new capability to actually run those warehouses in a way that considers some of the new tools that are available for better efficiency.

We are doing a transportation management system process. There’s a lot of investment in that this year. There’s not payback this year, that will come later. That will also be a pretty big part of the investment piece. And we’re working with a third-party consultant that’s actually also helping with our training of our team and helping us uncover some opportunities that will also put — again, put people resources against. Additionally, for some of the long-term items, we’re making investments in safety, in employee safety, with both personnel and process. That, as you know, is a little bit longer lag in terms of really getting to those savings. We think there’s big opportunity there. And we want — we — it is our intention to be the safest organization in our industry, and we’re working hard toward that. We think there’s money that comes kind of more one to two years out in that realm.

Matt Fishbein — Jefferies — Analyst

Awesome. Super helpful. Thank you.

Operator

Thank you. The next question is from Chuck Cerankosky from Northcoast Research. Please go ahead.

Chuck Cerankosky — Northcoast Research — Analyst

Thanks. Tony, when we look at the Food Distribution segment this year, assume that we have some alleviation of the COVID cost pressures that had put some margin pressure on the business. Will that be about equal to the additional costs you’re bringing on to improve this segment? Or is there some hope for a little bit of margin expansion in 2021?

Tony Sarsam — President and Chief Executive Officer

Yeah. I haven’t actually done the side by side. As Mark mentioned earlier, we’ve got both of those are contemplated in the guidance. So we haven’t both incorporated there. There are some elements of some one-time costs we had associated with COVID, that was early on that we already disclosed. And we have some — the ongoing costs that we took in later, I believe, are going to be ongoing costs for the balance of the year. So I don’t see us stepping back on some of those practices. So there will be some upsides. I actually don’t know precisely one-for-one in that, but there’s certainly some costs that will come out, and there’s cost going, as I mentioned. I’m reasonably confident to say that there’s more cost going in, in these investments than the costs coming out for COVID.

Mark Shamber — Executive Vice President and Chief Financial Officer

Yes. I would agree with that statement.

Chuck Cerankosky — Northcoast Research — Analyst

So that would mean there’d be some pressure on margins this year in the segment?

Mark Shamber — Executive Vice President and Chief Financial Officer

Well, I mean, I think there’s some opportunities, Tony, as well. I mean there are some things, as we talked about some of the investments that we had to — we weren’t able to fully realize in 2020, there may be some benefits there. So I don’t want to say that that’s the case, Chuck, but I mean, because we don’t give guidance by BU. But there’s a mix of investments, as well as some returns both for what we’re doing this year versus what we were cycling last year. And without knowing — without having any good sense of how COVID sales will be retained or eased during the course of the year, it’s hard to say how that’s going to play out. I mean we’ve given ranges that we think can fall within the high ends or low ends of what we would expect based on current trends, but I mean, as we get through this and you see how quickly people get vaccinated, how quickly life returns to normal, people go back to their offices, working from home, a lot of that comes into play in the numbers. So I don’t think it’s as easy. It’s never easy in any given year in guiding for the — for any particular business segment. This year, you just add on a whole additional layer of complexity that we don’t have a guidebook for.

Chuck Cerankosky — Northcoast Research — Analyst

Understood. Thank you.

Operator

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

Tony Sarsam — President and Chief Executive Officer

Yeah. I just want to thank everybody for a great discussion here today. Thank you all for participating in today’s call. We look forward to speaking with you all again when we report our first quarter earnings in — for 2021. Have a great day.

Operator

[Operator Closing Remarks]