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We reiterate our neutral recommendation on Nash Finch Company as the company continues to face the peer pressure in its military segment.

The company’s second-quarter 2012 earnings (excluding one-time items) of 69 cents per share plunged 25.0% from prior-year quarter’s earnings of 92 cents per share, due to the ongoing macro-economic headwinds and increasing competition. Moreover, total comparable sales dipped 1.5% year over year in the reported quarter, due to the impact of lower sales due to regular sale/closing of retail stores.

However, we are encouraged by the company’s long-term initiatives, which seems well on track to achieve the long-term targets set at the time of the launch of its strategic growth plan ‘Operation Fresh Start’.

Moreover, Nash Finch continues to build long-term relationships with local players, owing to which the company can gain market share and establish a leading position in the particular regions.

The company acquired ‘Bag n Save’ supermarkets and ‘No Frills’ supermarket in the Omaha region during May 2012, which has already contributed to the year-over-year growth in retail sales during the first half of 2012.

The private label program started by the company in April 2012 is aimed at increasing the penetration of its private label products like Our Family or Value Choice or Nash Brothers Trading (a natural and organic line) and thus reduce competition.

However, the military segment, which is an important part of the company’s business, is facing increased competition which is exerting pressure on the company’s profit.  

Nash Finch is vulnerable to a weak U.S. economy and declining consumer spending in the U.S. markets because the company has no stores outside the U.S. and does not have an international presence to serve as a buffer to fluctuations in the U.S. economy.

Based in Minneapolis, Minnesota, Nash Finch Company is a wholesale food distributor in the U.S. Currently Nash Finch carries a Zacks #2 Rank (short-term Buy rating). Close peers including Supervalu Inc. (SVU - Analyst Report) provides special services to the commissaries.

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