| NASH FINCH CO ITEM 1A RISK FACTORS In addition to the other information in this Form 10-K, you should carefully consider the specific risk factors set forth below in evaluating Nash Finch because any of the following risks could materially affect our business, financial condition, results of operations and future prospects |
| Additional risks and uncertainties not currently known to us may also materially and adversely affect us |
| We face substantial competition and our competitors may have superior resources, which could place us at a competitive disadvantage |
| The food distribution and retail businesses are intensely competitive, characterized by high inventory turnover, narrow profit margins and increasing consolidation |
| Our food distribution business competes not only with local, regional and national food distributors, but also with vertically integrated national and regional chains that employ a variety of formats, including supercenters, supermarkets and warehouse clubs |
| Our retail business, focused in the Upper Midwest, has historically competed with traditional grocery stores and is increasingly competing with alternative store formats such as supercenters (primarily those operated by Wal-Mart), warehouse clubs, dollar stores and extreme value food stores |
| The military food distribution business is also highly competitive |
| Because of the narrow margins in the military food distribution industry, it is of critical importance for distributors to achieve economies of scale, 7 _________________________________________________________________ [60]Table of Contents which is typically a function of the density or concentration of military bases in the geographic markets a distributor serves and a distributor’s share of that market |
| As a result, no distributor in this industry has a nationwide presence and it is very difficult, other than through acquisitions, to expand operations in this industry beyond the geographic regions where we currently can utilize our warehouse and distribution capacity |
| We face competition in our military business from large national and regional food distributors as well as smaller food distributors |
| Some of our competitors are substantially larger and may have greater financial resources and geographic scope, lower merchandise acquisition costs and lower operating expenses than we do, intensifying price competition at the wholesale and retail levels |
| Industry consolidation and the expansion of alternative store formats, which have gained and continue to gain market share at the expense of traditional grocery stores, tend to produce even stronger competition for our food retail business and for the independent customers of our distribution business |
| To the extent our independent customers are acquired by our competitors or are not successful in competing with other retail chains and non-traditional competitors, sales by our distribution business will also be affected |
| If we fail to effectively implement strategies to respond to these competitive pressures, our operating results could be adversely affected by price reductions, decreased sales or margins, or loss of market share |
| Our results of operations and financial condition could be adversely affected if we are unable to improve the competitive position of our retail operations |
| Primarily due to intensely competitive conditions, same store sales in our retail business decreased 4dtta1prca during fiscal year 2005 as compared to fiscal year 2004, and 7dtta0prca in fiscal 2004 as compared to the fiscal year 2003 |
| We are taking or expect to take initiatives of varying scope and duration with a view toward improving our response to and performance under these difficult competitive conditions |
| To complement these initiatives, we periodically evaluate and assess strategic alternatives for retail stores that could be operated more profitably by independent customers of our food distribution segment or that otherwise do not meet return objectives, provide long-term strategic opportunities or justify additional capital investments |
| As a result of this process we expect to continue to downsize our retail segment through opportunistic sales of retail stores to existing or prospective food distribution customers and by closing underperforming stores as deemed necessary or as leases expire |
| In connection with these efforts, there are numerous risks and uncertainties, including our ability to successfully identify which course of action will be most financially advantageous for each retail store, our ability to identify those initiatives that will be the most effective in improving the competitive position of the retail stores we retain, our ability to efficiently and timely implement these initiatives, and the response of competitors to these initiatives |
| If we are unable to improve the overall competitive position of our remaining retail stores and dispose of other stores in an advantageous or cost-effective manner, the operating performance of that segment may continue to decline, we may have to recognize additional impairments of our long-lived assets and goodwill, and we may be compelled to close or dispose of additional stores and may incur restructuring or other charges to our earnings associated with such closure and disposition activities |
| In addition, we cannot assure you that we will be able to replace any of the revenue lost from these closed or sold stores from our other operations |
| We may not be able to achieve the expected benefits of the operations we acquired from Roundy’s due to factors such as the inability to successfully integrate those operations into our business or to retain its customer base, which may adversely affect our results of operations and financial condition |
| Achieving the expected benefits of the distribution operations we acquired from Roundy’s in March 2005 will depend in large part on factors such as our ability to successfully integrate such operations and personnel in a timely and efficient manner and to retain the customer base of the acquired operations |
| If we cannot successfully integrate these operations and retain its customer base, we may experience material adverse consequences to our results of operations and financial condition |
| The integration of separately managed businesses operating in different markets involves a number of risks, including the following: • demands on management related to the significant increase in our size after the acquisition of these operations; 8 _________________________________________________________________ [61]Table of Contents • difficulties in the assimilation of different corporate cultures and business practices, such as those involving vendor promotions, and of geographically dispersed personnel and operations; • difficulties in the integration of departments, information technology systems, technologies, books and records and procedures, as well as in maintaining uniform standards and controls, including internal accounting controls, procedures and policies; and • expenses of any undisclosed liabilities, such as those involving environmental or legal matters |
| Successful integration of these new operations will depend on our ability to manage those operations, fully assimilate them into our distribution network, realize opportunities for revenue growth presented by strengthened product offerings and expanded geographic market coverage, maintain the customer base and, to some degree, eliminate redundant and excess costs |
| We may not realize the anticipated benefits or savings from the acquisition to the extent or in the time frame anticipated, if at all, or such benefits and savings may include higher costs than anticipated |
| Substantial operating losses may occur if the customers to whom we extend credit or for whom we guarantee loan or lease obligations fail to repay us |
| In the ordinary course of business, we extend credit, including loans, to our food distribution customers, and provide financial assistance to some customers by guaranteeing their loan or lease obligations |
| We also lease store sites for sublease to independent retailers |
| Generally, our loans and other financial accommodations are extended to small businesses that are unrated and may have limited access to conventional financing |
| As of December 31, 2005 we had loans of dlra35dtta2 million outstanding to 73 of our food distribution customers, including dlra15dtta8 million of notes receivable from one retailer, and had guaranteed outstanding debt and lease obligations of food distribution customers totaling dlra9dtta3 million, including dlra3dtta8 million in loan guarantees to one retailer |
| As of December 31, 2005, our maximum contingent liability exposure with respect to subleases and assigned leases was dlra73dtta4 million and dlra22dtta7 million, respectively |
| While we seek to obtain security interests and other credit support in connection with the financial accommodations we extend, such collateral may not be sufficient to cover our exposure |
| Greater than expected losses from existing or future credit extensions, loans, guarantee commitments or sublease arrangements, which could result from factors such as business difficulties experienced by customers with the highest concentration of credit exposure or in times of general economic difficulty or uncertainty, could negatively and potentially materially impact our operating results and financial condition |
| Consumable goods distribution is sensitive to economic conditions and economic downturns or uncertainty may have a material adverse effect on our financial condition and results of operations |
| The food distribution and retail industry is sensitive to national and regional economic conditions, particularly those that influence consumer confidence, spending and buying habits |
| Economic downturns or uncertainty may not only adversely affect overall demand and intensify price competition, but also cause consumers to “trade down” by purchasing lower priced, and often lower margin, items and to make fewer purchases in traditional supermarket channels |
| These consumer responses, coupled with the impact of general economic factors such as increasingly volatile energy costs, prevailing interest rates, food price inflation or deflation, employment trends in our markets, and labor and energy costs, can also have a significant impact on our operating results |
| Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude |
| Our ability to operate effectively could be impaired by the risks and costs associated with the efforts to grow our business through acquisitions |
| Efforts to grow our distribution business may include acquisitions |
| Acquisitions entail various risks such as identifying suitable candidates, effecting acquisitions at acceptable rates of return, obtaining adequate financing on acceptable terms and conditions, timely and effectively integrating the operations, systems and personnel of the acquired business, the assumption of undisclosed liabilities and diversion of management’s 9 _________________________________________________________________ [62]Table of Contents time and attention from other business concerns |
| A failure to effectively manage these risks could increase the costs or reduce the benefits derived from expansion and, therefore, negatively impact our business and operations |
| Our distribution business could be negatively affected if we fail to retain existing customers or attract significant numbers of new customers |
| Increasing the growth and profitability of our distribution business is dependent in large measure upon our ability to retain existing customers and capture additional distribution customers through our existing network of distribution centers, enabling us to more effectively utilize the fixed assets in that business |
| Our ability to achieve these goals is dependent, in part, upon our ability to continue to provide a high level of customer service, offer competitive products at low prices, maintain high levels of productivity and efficiency, particularly in the process of integrating new customers into our distribution system, and offer marketing, merchandising and ancillary services that provide value to our independent customers |
| If we are unable to execute these tasks effectively, we may not be able to attract significant numbers of new customers and attrition among our existing customer base could increase, either or both of which could have an adverse impact on our revenue and profitability |
| Changes in vendor promotions or allowances, including the way vendors target their promotional spending, and our ability to effectively manage these programs could significantly impact our margins and profitability |
| We engage in a wide variety of promotional programs cooperatively with our vendors |
| The nature of these programs and the allocation of dollars among them evolve over time as the parties assess the results of specific promotions and plan for future promotions |
| These programs require careful management in order for us to maintain or improve margins while at the same time driving sales for us and for the vendors |
| A reduction in overall promotional spending or a shift in promotional spending away from certain types of promotions that we have historically utilized could have a significant impact on our gross profit margin and profitability |
| Our ability to anticipate and react to changes in promotional spending by, among other things, planning and implementing alternative programs that are expected to be mutually beneficial to the manufacturers and us, will be an important factor in maintaining or improving margins and profitability |
| If we are unable to effectively manage these programs, it could have a material adverse effect on our results of operations and financial condition |
| Our debt instruments include financial and other covenants that limit our operating flexibility and that may affect our future business strategies and operating results |
| Covenants in the documents governing our outstanding or future debt, including our senior secured credit facility, or our future debt levels, could limit our operating and financial flexibility |
| Our ability to respond to market conditions and opportunities as well as capital needs could be constrained by the degree to which we are leveraged, by changes in the availability or cost of capital, and by contractual limitations on the degree to which we may, without the consent of our lenders, take actions such as engaging in mergers, acquisitions or divestitures, incurring additional debt, making capital expenditures and making investments, loans or advances |
| If needs or opportunities were identified that would require financial resources beyond existing resources, obtaining those resources could increase our borrowing costs, further reduce financial flexibility, require alterations in strategies and affect future operating results |
| Our operations are linked to domestic and international military distribution, and a change in the military commissary system could negatively impact our results of operations and financial condition |
| Because our military segment sells and distributes grocery products to military commissaries in the US and overseas, any material changes in the commissary system, in military staffing levels or in locations of bases may have a corresponding impact on the sales and operating performance of this segment |
| These changes could include privatization of some or all of the military commissary system, relocation or consolidation in the number of commissaries, base closings, troop redeployments or consolidations in the 10 _________________________________________________________________ [63]Table of Contents geographic areas containing commissaries served by us, or a reduction in the number of persons having access to the commissaries |
| The foregoing discussion of risk factors is not exhaustive, and we do not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made |