Nash Finch reveling in the calm

The good news about Nash Finch Co. is that there hasn't been much news lately.

That's probably a welcome relief to the Edina-based food distributor and retailer. Over the past few years, Nash Finch has endured management turmoil, slumping sales, a federal insider trading investigation and lawsuits from competitors, investors, and shareholders. Several Wall Street analysts have stopped covering the company.

Yet Nash Finch stock shows signs of life. From July to late September, Nash Finch shares jumped 35 percent to $46 before dropping back to $36, a descent that mirrors the broader meltdown on Wall Street. As Nash Finch prepares to report third-quarter earnings Thursday, investors are once again bidding up the stock: Nash Finch closed Friday at $39.43.

The reason behind the resurgence? The company is expected to report positive sales growth in both its core food distribution and military businesses, a feat that once seemed unthinkable given Nash Finch's past misfortunes.

"We do expect that our sales will become positive ... in the third quarter companywide, as well as both in our military divisions and in our food distribution group," CEO Alec Covington told investors in July. "That is the first time that we've been able to say that for a long time in this company."

Under Covington, Nash Finch has also boosted profitability, invested millions of dollars in marketing and retooling retail stores, and -- perhaps most importantly -- cleaned up the mess left behind by former CEO Ron Marshall.

"Morale seems to have improved," said David Livingston, managing director of DJL Research in Pewaukee, Wis. Nash Finch "has more clear-cut objectives in terms of what they want to do. They certainly stopped going in the wrong direction. They seem to be on the right path."

Nash Finch's woes began in fall 2005 when the company released a gloomy profit forecast that contradicted earlier optimistic statements. Wall Street punished the stock: Shares fell from $42 to $30.

A few months later, Marshall and Kathleen McDermott, general counsel, resigned amid a probe of inside trading by the Securities and Exchange Commission. Marshall had made $10.3 million from selling company stock before the bad news came out. The investigation is ongoing.

In December 2005, a group of shareholders filed a lawsuit, alleging that the company lied to inflate its stock price. In March, Nash Finch paid $6.75 million to settle the suit.

To make matters worse, Carter's supermarket chain, a major Nash Finch customer, filed for bankruptcy in 2006. The company also had trouble integrating two food-distribution centers it purchased from Roundy's.

When Covington joined Nash Finch in April 2006, he took steps to bolster employee and investor confidence in the company. He took time to carefully recruit top executives, including Christopher Brown, the former CEO of Simon Delivers, and Bob Diamond, who previously served as chief financial officer at Wild Oats Markets. Nash Finch also decided to reduce the size of the board and require directors to stand for election every year.

To jump-start growth, Covington launched Operation Fresh Start, which called for careful investments in niche retail formats like Avanza and Family Fresh Market, strong expertise in perishables and health-and-wellness products, and more efficient supply-chain services for wholesale customers.

For the first half of 2008, food distribution sales, excluding the loss of a major customer last year, are up 1.4 percent while operating profits in the unit jumped 13.3 percent to $50.2 million, due largely to careful cost controls. Thanks to increased marketing, sales to military commissaries grew 5.2 percent to $601.9 million; operating profits in that segment rose 11.2 percent to $22.8 million.

"We are pleased with the progress we are making on Operation Fresh Start as evidenced by our performance and growth in recent quarters," Covington said in an e-mail. "While we still have a long way to go to completely implement the strategy, we are seeing good leading indicators that we are on the right track. In some cases, we have delayed the implementation of certain initiatives such as our new upstream warehouse facility in order to concentrate our efforts on managing new customer additions and growth."

Nash Finch's retail stores have a longer way to go. Sales are down 2.9 percent to $268.1 million. But the company says recent store conversions to Avanza, a Hispanic-themed grocery format, and Family Fresh Market, which focuses on perishable products and prepared foods, look promising.

Livingston of DJL Research said Nash Finch has done a much better job with Avanza. In the past, the company lumped together all Hispanic customers, trying, for example, to sell Mexican food to Puerto Rican communities, he said.

"Today, Nash Finch understands the [Hispanic] neighborhoods better," Livingston said.

He said the company still faces uphill challenges. Nash Finch has to work pretty hard to keep its wholesale customers, he said. "There are a lot of musical chairs, a lot of competition. Loyalty to a wholesaler is not as strong as it used to be."

And analysts say independent retailers, Nash Finch's core customers, still face enormous pressure from large chains and big box retailers.

But Covington is confident that independent retailers will continue to thrive.

"The independent retailer has proven to be an extremely resilient breed of entrepreneur," Covington said. "While competition remains fierce in the retail grocery business, it is clear that independent retailers are finding the proper niche for themselves in the marketplace.  The shortage is not one of successful independent retailers, it is rather a shortage of companies dedicated to their success.''

Thomas Lee • 612-673-7744