Smart & Final Reports Fourth Quarter 2005 Income From Continuing Operations of $9.4 Million

LOS ANGELES, Feb. 14 /PRNewswire-FirstCall/ -- Smart & Final Inc. today reported sales for its twelve-week fourth quarter ended January 1, 2006 of $456.8 million, as compared with its 2004 thirteen-week fourth quarter sales of $471.2 million. On a common weekly basis, 2005 fourth quarter comparable store sales increased by 2.9 percent over the prior year period.

Income from continuing operations was $9.4 million for the fourth quarter of 2005, an increase of $4.8 million over the fourth quarter of 2004. Income from continuing operations for the fourth quarter of 2005 included $2.6 million, net of tax, related to the favorable adjustment to a litigation charge recorded in the third quarter of 2005. As adjusted for the partial reversal of the litigation charge net of tax, fourth quarter 2005 income from continuing operations was $6.8 million, or $0.21 per diluted share, as compared with $4.6 million, or $0.14 per diluted share, in the prior year's fourth quarter. [This adjusted income from continuing operations and adjusted earnings per diluted share is a Non-GAAP financial measure as defined by SEC Regulation G. See attached reconciliation of the Non-GAAP Financial Measures.]

Etienne Snollaerts, president and chief executive officer stated, "Although comparisons with the prior year fourth quarter are a little more difficult because of a difference in the number of weeks, we had continuing good performance with total adjusted sales growth of 5.3 percent and comparable store sales growth of 2.9 percent. In both of our store formats we had growth in the average transaction amounts, despite a continued strong competitive environment and some deflationary price pressure."

Snollaerts continued, "In the fourth quarter we opened eight new stores, bringing the 2005 total new stores to 15, including two new stores in our successful Mexico joint venture operations. Also in the fourth quarter, we opened a new high velocity products distribution facility in Rancho Cucamonga, Calif., supporting store operations in our key Southern California markets. This facility is part of our strategic initiatives to better control distribution costs as the company continues to grow. In mid-2005 we implemented new supply chain software, which initially impacted our operating efficiency and store in-stock conditions. By the end of the year, we had restored shipment rates from our principal distribution center to prior levels, helping to improve our store in-stock conditions, although our warehouse labor productivity and per case costs continue to remain higher than target. Our actions to increase warehouse capacity and more fully utilize the capabilities of the supply chain system are key steps in an overall plan to become more efficient in 2006."

Gross margin from continuing operations was $76.8 million for the fourth quarter of 2005 as compared with $80.2 million for the prior year fourth quarter. The year-to-year decrease of $3.4 million is largely due to one less week in the 2005 fourth quarter, and also from higher distribution expense. As a percentage of sales, gross margin was 16.8 percent for fourth quarter 2005 compared with 17.0 percent for fourth quarter 2004. The year-to-year decrease in gross margin rate was primarily due to increased distribution costs and higher occupancy costs resulting from new stores and remodels, partially offset by improved gross profit rates on sales.

As a percentage of sales, operating and administrative expenses decreased to 14.3 percent for the 2005 fourth quarter from 15.4 percent for the 2004 fourth quarter. The decrease as a percentage of sales was largely attributable to the favorable effects of lower incentive compensation costs and real estate gains realized in the fourth quarter of 2005, together with a $2.5 million pretax software impairment charge recorded in the fourth quarter of 2004, partially offset by increased store operating costs and information system costs in the current year's fourth quarter. Total operating and administrative expenses from continuing operations were $65.3 million for the fourth quarter of 2005, as compared with $72.7 million for the prior year fourth quarter.

In the fourth quarter 2005, the company reversed $4.3 million pretax of a $19.0 million pretax litigation charge previously recorded in the third quarter 2005, associated with the settlement of a previously disclosed class action litigation matter. A court hearing to finalize the settlement of the litigation matter is scheduled to be held on February 16, 2006. Accordingly, the charge recorded by the company to date may be subject to further refinement and adjustment.

Interest expense decreased to $2.2 million for the 2005 fourth quarter as compared with $2.3 million for the prior year fourth quarter, primarily as a result of the shorter quarter in 2005. At the end of the fourth quarter 2005, the balance outstanding on the revolving credit facility was $20.0 million compared with $25.0 million at the end of the fourth quarter 2004.

Also in the fourth quarter 2005, the company revised its effective income tax rate for the full year 2005 to 36.7 percent, approximately 2.0 percentage points lower than the income tax provision rate recorded through the third quarter 2005. This change in the full year effective tax rate resulted in an effective tax rate in the fourth quarter of 33.9 percent.

Eight new stores were opened during the 2005 fourth quarter, in Gilroy, Calif., Modesto, Calif., San Rafael, Calif., Torrance, Calif., Whittier, Calif., Everett, Wash., and Tijuana and Mexicali, Mexico. The total number of new stores opened in 2005 was 15. Additionally, two stores were relocated during the year. At year-end 2005 the company operated 249 stores, compared with 234 stores at the end of 2004.

Full Year Results

For the full year 2005, 52-week sales were $2,002.9 million, an increase of $47.4 million or 2.4 percent over full year 2004 sales of $1,955.6 million based on a 53 week period. The total sales growth rate adjusted for the difference in weeks was approximately 4.4 percent. Full year 2005 comparable sales, adjusted for the effect of the extra week in 2004, increased 2.6 percent over the 2004 level.

Full-year gross margin from continuing operations decreased $5.0 million, or 1.5 percent, to $334.1 million for 2005 as compared with $339.1 million for 2004. As a percentage of sales, gross margin decreased to 16.7 percent for 2005 as compared with 17.3 percent for 2004 due primarily to higher distribution costs. As a percentage of sales, operating and administrative expenses decreased to 13.8 percent for 2005 as compared with 14.1 percent for 2004. Income from continuing operations for the full year 2005 was $22.0 million, or $0.69 per diluted share, which included a $14.7 pretax litigation charge. For the full year 2004, income from continuing operations was $31.5 million, or $0.99 per diluted share. As adjusted for the 2005 litigation charge net of tax, full year 2005 income from continuing operations was $30.8 million or $0.96 per diluted share. [This adjusted income from continuing operations and adjusted earnings per diluted share is a non-GAAP financial measure as defined by SEC Regulation G. See attached reconciliation of the Non-GAAP Financial Measures.]

Founded in 1871 in downtown Los Angeles, Smart & Final Inc. currently operates 250 non-membership warehouse stores for food and foodservice supplies in California, Oregon, Washington, Arizona, Nevada, Idaho and northern Mexico. For more information, visit the company's website at http://www.smartandfinal.com/.

A telephone conference call with Smart & Final's senior management will be held on Wednesday February 15, 2006 at 8:00 a.m. Pacific Standard Time. The conference call is available in a listen-only mode through http://www.ccbn.com/. Replays of the conference call will also be available.

Forward-Looking and Cautionary Statements

This Smart & Final press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other expressions of management's belief or opinion which reflect its current understanding or belief with respect to such matters. Such statements are subject to certain risks and uncertainties, including known and unknown factors as included in the company's periodic filings with the Securities and Exchange Commission that could cause actual results to differ materially and adversely from those projected. All of these forward-looking statements are based on estimates and assumptions made by management of the company, which although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such statements. Current and future operating trends and results may be impacted by important factors, including the implementation of key information system initiatives and their potential effect on company operations. There can be no assurance that the company will not incur new or additional unforeseen costs in connection with the ongoing conduct of its business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Except as specifically set forth herein, the company undertakes no obligation to update any such forward-looking or other statement.

SMART & FINAL INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share amounts) January 1, January 2, 2006 2005 ASSETS (Unaudited) Current assets: Cash and cash equivalents $31,887 $28,672 Accounts receivable, less allowance for doubtful accounts of $273 in 2005 and $254 in 2004 18,410 16,717 Inventories 158,553 142,360 Prepaid expenses and other current assets 16,333 16,428 Deferred tax assets 13,036 11,646 Assets of discontinued operations 2,129 2,129 Total current assets 240,348 217,952 Property, plant and equipment: Land 70,860 66,275 Buildings and improvements 62,335 62,583 Leasehold improvements 137,467 125,206 Fixtures and equipment 209,751 194,554 480,413 448,618 Less -- Accumulated depreciation and amortization 221,951 197,443 Net property, plant and equipment 258,462 251,175 Assets under capital leases, net of accumulated amortization of $5,106 in 2005 and $7,669 in 2004 1,423 2,085 Goodwill 34,775 34,775 Deferred tax assets 28,749 18,237 Equity investment in joint venture 7,481 6,258 Cash held in real estate trust 120 116 Other assets 66,960 56,833 Total assets $638,318 $587,431 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital leases $54,076 $1,353 Notes payable to affiliate 33,146 -- Accounts payable 99,694 83,103 Accrued salaries and wages 19,898 19,882 Other accrued liabilities 56,251 48,147 Liabilities of discontinued operations 1,101 2,476 Total current liabilities 264,166 154,961 Long-term liabilities: Obligations under capital leases 1,848 2,638 Bank debt 20,000 25,000 Notes payable -- 53,396 Notes payable to affiliate -- 33,133 Other long-term liabilities 35,086 30,324 Postretirement and postemployment benefits 43,275 35,566 Total long-term liabilities 100,209 180,057 Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value (authorized 10,000,000 shares; no shares issued) -- -- Common stock, $0.01 par value (authorized 100,000,000 shares; 31,903,478 shares issued and outstanding in 2005 and 30,752,118 in 2004) 319 308 Additional paid-in capital 231,775 219,768 Retained earnings 67,523 46,157 Accumulated other comprehensive loss (15,822) (12,361) Notes receivable for common stock (18) (75) Treasury stock, at cost, 729,475 shares in 2005 and 86,475 shares in 2004 (9,834) (1,384) Total stockholders' equity 273,943 252,413 Total liabilities and stockholders' equity $638,318 $587,431 SMART & FINAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts) Twelve Thirteen Weeks Ended Weeks Ended Fiscal Year Ended January 1, January 2, January 1, January 2, 2006 2005 2006 2005 (Unaudited) (Unaudited) Sales $456,833 $471,151 $2,002,934 $1,955,579 Cost of sales, buying and occupancy 380,061 390,923 1,668,880 1,616,490 Gross margin 76,772 80,228 334,054 339,089 Operating and administrative expenses 65,312 72,723 276,756 276,655 Litigation and other charges (4,300) -- 14,700 -- Income from operations 15,760 7,505 42,598 62,434 Interest expense, net 2,188 2,319 9,450 13,178 Income from continuing operations before income taxes 13,572 5,186 33,148 49,256 Income tax provision (4,595) (1,089) (12,180) (18,718) Equity earnings of joint venture 408 508 1,060 993 Income from continuing operations 9,385 4,605 22,028 31,531 Discontinued operations, net of tax (128) (415) (662) (1,337) Net income $9,257 $4,190 $21,366 $30,194 Earnings (loss) per common share Earnings per common share from continuing operations $0.30 $0.15 $0.71 $1.04 Loss per common share from discontinued operations -- (0.01) (0.02) (0.04) Earnings per common share $0.30 $0.14 $0.69 $1.00 Weighted average common shares 31,083,398 30,605,517 30,841,019 30,206,190 Earnings (loss) per common share, assuming dilution Earnings per common share, assuming dilution, from continuing operations $0.29 $0.14 $0.69 $0.99 Loss per common share, assuming dilution, from discontinued operations -- (0.01) (0.02) (0.04) Earnings per common share, assuming dilution $0.29 $0.13 $0.66 $0.95 Weighted average common shares and common share equivalents 32,256,850 32,332,075 32,153,630 31,868,983 SMART & FINAL INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AS A PERCENTAGE OF SALES Twelve Thirteen Weeks Ended Weeks Ended Fiscal Year Ended January 1, January 2, January 1, January 2, 2006 2005 2006 2005 (Unaudited) (Unaudited) Sales 100.0% 100.0% 100.0% 100.0% Cost of sales, buying and occupancy 83.2 83.0 83.3 82.7 Gross margin 16.8 17.0 16.7 17.3 Operating and administrative expenses 14.3 15.4 13.8 14.1 Litigation charge (0.9) -- 0.7 -- Income from operations 3.4 1.6 2.1 3.2 Interest expense, net 0.5 0.5 0.5 0.7 Income from continuing operations before income taxes 3.0 1.1 1.7 2.5 Income tax provision (1.0) (0.2) (0.6) (1.0) Equity earnings of joint venture 0.1 0.1 0.1 0.1 Income from continuing operations 2.1 1.0 1.1 1.6 Discontinued operations, net of tax -- (0.1) -- (0.1) Net income 2.0% 0.9% 1.1% 1.5% * Totals may not aggregate due to rounding. SMART & FINAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Fiscal Year Ended January 1, January 2, 2006 2005 (Unaudited) Cash Flows from Operating Activities: Income from continuing operations $22,028 $31,531 Adjustments to reconcile income from continuing operations to net cash provided by continuing activities: Non-cash litigation charge, net of tax 8,799 -- Asset impairment, at gross 828 2,500 Gain on disposal of property, plant and equipment (2,609) (390) Depreciation 18,319 17,951 Amortization 13,387 12,167 Amortization of deferred financing costs 335 1,358 Restricted stock and stock option expense 983 549 Deferred tax (benefit) provision (6,691) 2,899 Equity earnings of joint venture (1,060) (993) Decrease (increase) in: Accounts receivable (841) (1,193) Inventories (16,193) (18,933) Prepaid expenses and other assets 54 9,731 Increase (decrease) in: Accounts payable 16,591 (9,345) Accrued salaries and wages 15 2,946 Other accrued liabilities 8,552 (9,108) Net cash provided by continuing activities 62,497 41,670 Net cash used in discontinued activities (2,038) (4,340) Net cash provided by operating activities 60,459 37,330 Cash Flows from Investing Activities: Acquisition of property, plant and equipment (42,426) (25,487) Proceeds from disposal of property, plant and equipment 3,611 4,386 Investment in capitalized software (11,843) (12,080) Change in cash held in real estate trust (4) 14,241 Other (434) 5,518 Net cash used in continuing activities (51,096) (13,422) Net proceeds from divestitures -- 325 Net cash provided by discontinued activities -- 226 Net cash used in investing activities (51,096) (12,871) Cash Flows from Financing Activities: Payments on bank line of credit (30,000) (40,000) Borrowings on bank line of credit 25,000 5,000 Payments on notes payable (1,353) (1,751) Payments in connection with debt amendments (215) (1,070) Stock repurchases (2,428) -- Proceeds from issuance of common stock, net of costs 2,848 5,442 Net cash used in financing activities (6,148) (32,379) Increase (decrease) in cash and cash equivalents 3,215 (7,920) Cash and cash equivalents at beginning of the period 28,672 36,592 Cash and cash equivalents at end of the period $31,887 $28,672 SMART & FINAL INC. NON-GAAP FINANCIAL MEASURES The following schedules contain supplemental information regarding our income from continuing operations for the twelve and fifty two weeks ended January 1, 2006 and the thirteen and fifty three weeks ended January 2, 2005, as adjusted for the exclusion of expenses associated with the litigation charge. This financial information is a non-GAAP financial measure as defined by SEC Regulation G. The GAAP financial measure most directly comparable is income from continuing operations unadjusted for these items. The reconciliation of each of the non-GAAP financial measures is as follows: SMART & FINAL INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Quarter Ended (dollars in thousands, except per share amounts) Thirteen Weeks Ended Twelve Weeks Ended January 2, January 1, 2006 2005 GAAP (a) Adjustments Non-GAAP (b) GAAP (a) Sales $456,833 $-- $456,833 $471,151 Cost of sales, buying and occupancy 380,061 -- 380,061 390,923 Gross margin 76,772 -- 76,772 80,228 Operating and administrative expenses 65,312 -- 65,312 72,723 Litigation charge (4,300) 4,300(c) -- -- Income from operations 15,760 (4,300) 11,460 7,505 Interest expense, net 2,188 -- 2,188 2,319 Income from continuing operations before income taxes 13,572 (4,300) 9,272 5,186 Income taxes (4,595) 1,726 (2,869) (1,089) Equity earnings in joint venture 408 -- 408 508 Income from continuing operations $9,385 $(2,574) $6,811 $4,605 Earnings per common share, assuming dilution, from continuing operations $0.29 $0.21 $0.14 (a) Reflects operating results from continuing operations in accordance with U.S. generally accepted accounting principles ("GAAP"). (b) Non-GAAP amounts exclude expenses associated with the litigation charge. (c) Amount represents expenses associated with the litigation charge. SMART & FINAL INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Fiscal Years Ended (dollars in thousands, except per share amounts) January 2, January 1, 2006 2005 GAAP (a) Adjustments Non-GAAP (b) GAAP (a) Sales $2,002,934 $-- $2,002,934 $1,955,579 Cost of sales, buying and occupancy 1,668,880 -- 1,668,880 1,616,490 Gross margin 334,054 -- 334,054 339,089 Operating and administrative expenses 276,756 -- 276,756 276,655 Litigation charge 14,700 (14,700)(c) -- -- Income from operations 42,598 14,700 57,298 62,434 Interest expense, net 9,450 -- 9,450 13,178 Income from continuing operations before income taxes 33,148 14,700 47,848 49,256 Income taxes (12,180) (5,901) (18,081) (18,718) Equity earnings in joint venture 1,060 -- 1,060 993 Income from continuing operations $22,028 $8,799 $30,827 $31,531 Earnings per common share, assuming dilution, from continuing operations $0.69 $0.96 $0.99 (a) Reflects operating results from continuing operations in accordance with U.S. generally accepted accounting principles ("GAAP"). (b) Non-GAAP amounts exclude expenses associated with the litigation charge. (c) Amount represents expenses associated with the litigation charge.