Roundy’s, Inc. Reports Third Quarter 2014 Financial Results

Roundy’s, Inc. (“Roundy’s”) (NYSE: RNDY), a leading grocer in the Midwest, today reported financial results for the thirteen and thirty-nine weeks ended September 27, 2014.

Q3 20141

• Net sales from continuing operations increased 16.4% to $973.8 million
• $247.1 million after-tax, non-cash goodwill impairment charge incurred
• Net loss from continuing operations was $249.9 million, or $5.19 net loss per diluted common share, compared to net income from continuing operations of $3.2 million, or $0.07 diluted net earnings per common share
• Adjusted net loss from continuing operations2 was $3.5 million, or $0.07 adjusted net loss per diluted common share2, compared to adjusted net income from continuing operations2 of $2.6 million, or $0.06 adjusted diluted net earnings per common share2
• Adjusted EBITDA from continuing operations2 was $25.6 million compared to $29.5 million

Year-to-Date 20141

• Net sales from continuing operations increased 11.2% to $2,779.4 million
• Net loss from continuing operations was $260.4 million, or $5.47 net loss per diluted common share, compared to net income from continuing operations of $22.6 million, or $0.50 diluted net earnings per common share
• Adjusted net loss from continuing operations2 was $5.5 million, or $0.12 adjusted net loss per diluted common share2, compared to adjusted net income from continuing operations2 of $22.0 million, or $0.49 adjusted diluted net earnings per common share2
• Adjusted EBITDA from continuing operations2 was $82.3 million compared to $111.1 million

“During the third quarter we continued to focus on improving sales and operational efficiencies in our core business. While we still need to address key challenges in our core market, we believe the strategic initiatives we have in place facilitated progress during the quarter and will allow us to continue to improve,” said Robert A. Mariano, chairman, president and chief executive officer of Roundy’s. “We opened three additional Mariano’s stores during the quarter and we currently have a total of 29 stores in the Chicagoland area. We closed our Stevens Point distribution facility and we finalized the sale of certain Rainbow stores along with the closure of the remaining nine Rainbow stores. We will continue to focus on our goals of improving operational efficiency and delivering sustainable top-line growth to our business.”

1 All comparisons are to the thirteen and thirty-nine weeks ended September 28, 2013. See “Discontinued Operations” for a discussion of the 27 Rainbow stores that are included in discontinued operations for the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014.

2 Adjusted Net Income (Loss) from Continuing Operations, Adjusted Net Earnings (Loss) per Common Share from Continuing Operations and Adjusted EBITDA are non-GAAP financial measures. See the tables herein for important information about these measures and a full reconciliation to the most comparable GAAP measure.

Financial Results for Third Quarter of 2014

Results from Continuing Operations

Net sales from continuing operations for the third quarter of 2014 were $973.8 million, an increase of $137.3 million, or 16.4%, from $836.6 million for the third quarter of 2013. The increase primarily reflects the benefit of new and acquired stores, partially offset by a decrease in same-store sales. Same-store sales from continuing operations declined 2.7%, which was due to a 5.2% decrease in the number of customer transactions, partially offset by a 2.6% increase in average transaction size. Same-store sales continue to be negatively impacted by competitive store openings and the weak economic environment in the Company’s core markets.

Gross profit for the third quarter of 2014 increased 21.0% to $258.2 million, from $213.4 million in the same period last year. Gross profit as a percentage of net sales was 26.5% for the third quarter of 2014, compared to 25.5% in the same period last year. The increase in gross profit as a percentage of net sales primarily reflects reduced promotional spend, a benefit for the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point distribution facility and an increased perishable sales mix, partially offset by increased shrink, including the effect of the higher perishable mix of Illinois stores and the start-up impact of new or acquired Illinois stores.

Operating and administrative expenses for the third quarter of 2014 increased to $248.4 million, from $197.7 million in the same period last year. Operating and administrative expenses as a percentage of net sales increased to 25.5% in the third quarter of 2014, from 23.6% in the same period last year. The increase in the rate as a percentage of net sales was primarily due to increased start-up labor costs and higher occupancy and labor costs in new or acquired Illinois stores relative to the chain average. The Company also experienced reduced fixed cost leverage in its core business resulting from lower sales.

During the third quarter, the Company’s market capitalization experienced a significant decline. As a result, management updated its annual review of goodwill for impairment and concluded that the carrying amount of goodwill exceeded its estimated fair value, resulting in a pre-tax, non-cash goodwill impairment charge of $280.0 million ($247.1 million, net of income taxes). The non-cash impairment charge will not affect the Company's liquidity or operating cash flows.

For the third quarter of 2014, net loss from continuing operations was $249.9 million, or $5.19 net loss per diluted common share, compared to net income from continuing operations of $3.2 million, or $0.07 diluted net earnings per common share, for the third quarter of 2013. Adjusted net loss from continuing operations for the third quarter of 2014 was $3.5 million, or $0.07 adjusted net loss per diluted common share, compared to adjusted net income from continuing operations of $2.6 million, or $0.06 adjusted diluted net earnings per common share, for the third quarter of 2013. Adjusted net loss for the third quarter of 2014 excludes a $247.1 million after-tax goodwill impairment charge, or $5.13 per diluted common share, a $1.1 million after-tax charge, or $0.02 per diluted common share, for severance and one-time costs related to the closure of the Stevens Point distribution facility, a $1.0 million valuation allowance for deferred income taxes, or $0.02 per diluted common share, a $0.3 million after-tax charge, or $0.01 per diluted common share, for losses on the disposal of obsolete assets acquired in the acquisition of the Dominick’s stores, a $0.1 million after-tax charge, or $0.00 per diluted common share, for other severance costs and a $3.1 million after-tax benefit, or $0.06 per diluted common share, related to the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point distribution facility. Adjusted net income from continuing operations for the third quarter of 2013 excludes a $0.6 million benefit, or $0.01 per diluted common share, related to the reversal of a pension withdrawal liability recorded during the fourth quarter of 2012.

Adjusted EBITDA from continuing operations for the third quarter of 2014 was $25.6 million, compared to $29.5 million in the third quarter of 2013. The decrease was primarily due to the decrease in same-store sales in the Company’s core markets, start-up costs related to the Dominick’s stores acquired from Safeway and the increase in operating and administrative expenses previously mentioned during the third quarter of 2014.

During the third quarter 2014, the Company recorded a $1.2 million valuation allowance related to certain federal income tax credits that are no longer considered probable of being fully utilized prior to expiration. Of this amount, $1.0 million is included in the provision for income taxes for continuing operations.

Year-to-Date Financial Results

Results from Continuing Operations

Net sales were $2,779.4 million for the thirty-nine weeks ended September 27, 2014, an increase of $279.5 million, or 11.2%, from $ 2,499.9 million for the thirty-nine weeks ended September 28, 2013. The increase primarily reflects the benefit of new and acquired stores, partially offset by a decrease in same-store sales. Same-store sales from continuing operations declined 3.1%, which was due to a 5.2% decrease in the number of customer transactions, partially offset by a 2.2% increase in average transaction size. Same-store sales continue to be negatively impacted by competitive store openings and the weak economic environment in the Company’s core markets.

For the thirty-nine weeks ended September 27, 2014, net loss from continuing operations was $260.4 million, or $5.47 net loss per diluted common share, compared to net income from continuing operations of $22.6 million, or $0.50 diluted net earnings per common share, for the thirty-nine weeks ended September 28, 2013. Adjusted net loss from continuing operations for the thirty-nine weeks ended September 27, 2014 was $5.5 million, or $0.12 adjusted net loss per diluted common share, compared to adjusted net income from continuing operations of $22.0 million, or $0.49 adjusted diluted net earnings per common share, for the thirty-nine weeks ended September 28, 2013. Adjusted net loss for the thirty-nine weeks ended September 27, 2014, excludes a $247.1 million after-tax goodwill impairment charge, or $5.19 per diluted common share, an after-tax asset impairment charge of $3.0 million, or $0.06 per diluted common share, a $1.1 million after-tax charge, or $0.02 per diluted common share, for severance and one-time costs, related to the closure of the Stevens Point distribution facility, a $1.0 million valuation allowance for deferred income taxes, or $0.02 per diluted common share, a $0.3 million after-tax charge, or $0.01 per diluted common share, for losses on the disposal of obsolete assets acquired in the acquisition of the Dominick’s stores, a $0.8 million after-tax charge, or $0.02 per diluted common share, for employee severance costs, a $4.7 million after-tax charge, or $0.10 per diluted common share, for the extinguishment of debt that occurred during the first quarter of 2014 and a $3.1 million after-tax benefit, or $0.06 per diluted common share, related to the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point distribution facility. Adjusted net income from continuing operations for the thirty-nine weeks ended September 28, 2013 excludes a $0.6 million benefit, or $0.01 per diluted common share, related to the reversal of a pension withdrawal liability recorded during the fourth quarter of 2012.

Adjusted EBITDA from continuing operations for the thirty-nine weeks ended September 27, 2014 was $82.3 million, compared to $111.1 million in the thirty-nine weeks ended September 28, 2013. The decrease was primarily due to the decrease in same-store sales in the Company’s core markets, start-up costs related to the Dominick’s stores acquired from Safeway and the increase in occupancy and labor costs for new or acquired Illinois stores during the thirty-nine weeks ended September 27, 2014, as compared to the prior year period.

Net cash flows provided by operating activities for the thirty-nine weeks ended September 27, 2014 was $16.5 million, compared to $63.0 million during the thirty-nine weeks ended September 28, 2013. The decrease in cash provided by operating activities was due primarily to lower operating income and higher interest payments, partially offset by lower payments for income taxes.

Stevens Point

During the third quarter of 2014, the Company closed its Stevens Point distribution center (“Stevens Point Warehouse”). The Stevens Point Warehouse is currently being marketed for sale. With the closing of the Stevens Point Warehouse, Roundy’s consolidated supply chain operations previously performed at the Stevens Point Warehouse into its Oconomowoc distribution center, allowing the Company to maximize its distribution efficiencies. The Company recorded severance and other one-time charges of $1.8 million related to the closure of the Stevens Point Warehouse during the third quarter of 2014.

Discontinued Operations

During the second quarter of 2014, the Company entered into definitive agreements to sell 18 Rainbow stores in the Minneapolis / St. Paul market to a group of local grocery retailers (the “Buyers”), including SUPERVALU INC. (“Rainbow Store Sale”). The Rainbow Store Sale closed during the third quarter of 2014. In addition, during the second quarter of 2014, the Company announced its intention to exit the Minneapolis / St. Paul market entirely. The remaining nine Rainbow stores which were not included in the Rainbow Store Sale were closed during the third quarter of 2014. The 27 Rainbow stores are included in discontinued operations in the Consolidated Statement of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ending September 28, 2013 and September 27, 2014. The Company has provided revised historical quarterly results for Fiscal 2013 and Fiscal 2014 which include the 27 Rainbow stores in discontinued operations, which are included within this press release.

As a result of the Rainbow Store Sale and the exit from the Minneapolis / St. Paul market, the Company expects to incur a withdrawal liability related to the multi-employer pension plans in which the effected employees participate. The Company recorded a pre-tax charge of $23.9 million during the third quarter of 2014, for the estimated multi-employer pension withdrawal liability related to the nine Rainbow stores that were closed during the third quarter of 2014, which represents the Company’s best estimate absent the demand letters from the multi-employer plans. Demand letters from the impacted multi-employer pension plans may be received in 2015, or later and the ultimate withdrawal liability may change from the currently estimated amount. Any future charge will be recorded in the period when the change is identified. The Company expects the liability will be paid out in quarterly installments, which vary by plan, over a period of up to 20 years. The Company has not made any payments for the withdrawal liability during the thirteen and thirty-nine weeks ended September 27, 2014.

Fiscal 2014 Guidance

The Company updated its guidance from continuing operations for the remainder of fiscal 2014. The following table provides information on the Company’s current estimated 2014 results (excluding Rainbow):

Conference Call

The Company will host a conference call and audio webcast today, November 5, 2014 at 4:30 p.m. ET (3:30 p.m. CT) to discuss financial results for the third quarter of fiscal 2014. To access the conference call, participants should dial (888) 949-2791; passcode is 6486936. Participants are encouraged to dial in to the conference call ten minutes prior to the scheduled start time. The call will be also broadcast live over the Internet and accessible through the Investor Relations section of the Company’s website at www.roundys.com, where it will be archived and accessible through November 19, 2014. A telephone replay will be available through November 19, 2014 by calling (866) 403-7097 to access the playback.

About Roundy’s

Roundy’s is a leading grocer in the Midwest with nearly $4 billion in sales and more than 23,000 employees. Founded in Milwaukee in 1872, Roundy’s operates 148 retail grocery stores and 97 pharmacies under the Pick ’n Save, Copps, Metro Market and Mariano’s retail banners in Wisconsin and Illinois. Roundy’s is committed to helping the communities its stores serve through the Roundy’s Foundation. Chartered in 2003, the Roundy’s Foundation mission is to support organizations working to relieve hunger and helping families in crisis due to domestic abuse, neglect and other at-risk situations.

Non-GAAP Financial Measures

This press release presents Adjusted Net Income (Loss), Adjusted Net Earnings (Loss) Per Common Share and Adjusted EBITDA, which are non-GAAP financial measures within the meaning of applicable SEC rules and regulations, as defined under “Consolidated Statements of Comprehensive Income (Loss).” For a reconciliation of Adjusted Net Income (Loss) from continuing operations and Adjusted EBITDA from to net income (loss) from continuing operations under generally accepted accounting principles and for a discussion of the reasons why the Company believes that these non-GAAP financial measures provide information that is useful to investors see the tables below under “Reconciliation of Non-GAAP Amounts.”

Forward-Looking Statements

This release contains forward-looking statements about the Company’s future performance, which are based on Management’s assumptions and beliefs in light of the information currently available to it. The Company assumes no obligation to update the information contained herein.These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including, but not limited to: competitive practices and pricing in the food industry generally and particularly in the Company’s principal markets; employee relationships and the terms of future collective bargaining agreements; the costs and other effects of legal and administrative cases and proceedings; the nature and extent of continued consolidation in the food industry; changes in the financial markets which may affect the cost of capital and our ability to access capital; supply or quality control problems with vendors; and changes in economic conditions which affect the buying patterns of customers. Additional factors that could cause actual results to differ materially from such statements are discussed in the Company’s periodic reports and filings with the Securities and Exchange Commission.

Reconciliation of Non-GAAP Amounts

Adjusted Net Income (Loss) from Continuing Operations and Adjusted Net Earnings (Loss) Per Common Share from Continuing Operations (Unaudited)

The following is a summary of the calculation of Adjusted Net Income (Loss) from Continuing Operations and Adjusted Net Earnings (Loss) Per Common Share from Continuing Operations for the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014 (in thousands, except per share amounts):

The Company presents Adjusted Net Income (Loss) and Adjusted Net Earnings (Loss) Per Common Share, non-GAAP measures, to provide investors with a view of operating performance excluding significant and non-recurring items.

Adjusted EBITDA (Unaudited)

The following is a summary of the calculation of Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014 (in thousands):

The Company presents Adjusted EBITDA, a non GAAP measure, to provide investors with a supplemental measure of its operating performance. The Company believes that Adjusted EBITDA is a useful performance measure and is used by the Company to facilitate a comparison of its operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting the Company’s business than measures under U.S. generally accepted accounting principles (‘‘GAAP’’) can provide alone. The Company’s board of directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including its senior executives.

The Company defines Adjusted EBITDA as earnings before interest expense, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, costs incurred in connection with the Company’s IPO (or subsequent offerings of Roundy’s common stock), loss on debt extinguishment, certain non-recurring or unusual employee and pension related costs, costs related to acquisitions, costs related to debt financing activities, goodwill and asset impairment charges, loss on the disposition of assets, one-time costs due to the closing of a distribution facility and Adjusted EBITDA from discontinued operations. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of the Company’s results of operations with those of companies having different capital structures. Since the levels of indebtedness, tax structures, and methodologies in calculating LIFO expense that other companies have are different from the Company’s, it omits these amounts to facilitate investors’ ability to make these comparisons. Similarly, the Company omits depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because in the Company’s experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that such store makes to operating performance. The Company believes that investors, analysts and other interested parties consider Adjusted EBITDA an important measure of the Company’s operating performance. Adjusted EBITDA should not be considered as an alternative to net income as a measure of the Company’s performance. Other companies in the Company’s industry may calculate Adjusted EBITDA differently than the Company does, limiting its usefulness as a comparative measure.

Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. The limitations of Adjusted EBITDA include: (i) it does not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, the Company’s working capital needs; (iii) it does not reflect income tax payments the Company may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

2013-2014 Quarterly Information Revised for Discontinued Operations (Unaudited)

The following table presents revised historical quarterly results for Fiscal 2013 and Fiscal 2014 with the 27 Rainbow stores included in discontinued operations (in thousands).

Adjusted EBITDA (Unaudited)

The following table presents revised Adjusted EBITDA for Fiscal 2013 and Fiscal 2014 with the 27 Rainbow stores included in discontinued operations (in thousands):