Ingles Markets, Inc. — FY2023 Form 10-K
Business and reporting period: Ingles operates 198 supermarkets across six southeastern states, alongside fluid-dairy production and shopping-center rentals. This annual report covers the fiscal year ended September 30, 2023, which included 53 weeks; FY2022 included 52 weeks. The filing does not provide a separate Q4 financial summary.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $5.893 billion | $5.679 billion |
| Gross profit / margin | $1.405 billion / 23.8% | $1.416 billion / 24.9% |
| Operating income / margin | $292.3 million / 5.0% | $376.9 million / 6.6% |
| Net income / margin | $210.8 million / 3.6% | $272.8 million / 4.8% |
| Operating cash flow | $266.4 million | $339.5 million |
| Capital expenditures | $173.6 million | $119.6 million |
| Year-end total debt | $550.2 million | $571.9 million |
| Cash and cash equivalents | $328.5 million | $267.2 million |
Fiscal 2023 net sales increased 3.8%, while net income declined 22.7%. Retail grocery comparable sales excluding fuel rose 4.0% on management’s comparison basis, including the 53rd week: transactions increased 2.9% and average transaction size rose 0.9%. Fuel gallons sold declined 0.4% and average fuel prices fell 10.2%. Class A diluted EPS was $11.10, compared with $14.36; Class B diluted EPS was $10.32, compared with $13.35.
Gross margin contracted 1.1 percentage points. Management attributed weaker profitability primarily to inflation and supply-chain effects on costs and sales mix, higher inbound freight and distribution costs, and labor-market competition. Operating and administrative expenses rose 7.2% to $1.115 billion, with salaries and wages accounting for a $55.2 million increase. Interest expense was $22.1 million, versus $21.5 million. The effective tax rate was 24.3%, versus 24.5%.
Year-end current assets were $952.6 million and current liabilities were $330.5 million. Ingles had no borrowings outstanding under its $150 million credit line, which matures in June 2026. Operating cash flow exceeded capital expenditures by approximately $92.8 million. The company paid $12.3 million in dividends and reported annual dividends of $0.66 per Class A share and $0.60 per Class B share.
Material changes and notable items
- Revenue growth included $106.7 million attributed to the 53rd week; the comparison with FY2022 is therefore not on an equal-week basis.
- Retail grocery gross profit as a percentage of sales excluding fuel decreased 182 basis points year over year, according to management.
- Capital expenditures increased to $173.6 million, primarily reflecting purchases of sites and land parcels. Ingles bought 15 store sites or land parcels in FY2023 and added one fuel station; it opened no new stores.
- Total debt declined by $21.8 million. Debt included $350 million of 4.00% senior notes due 2031, $54.4 million of Recovery Zone Facility Bonds, and bank notes. Interest-rate debt agreements and swaps transitioned from LIBOR to SOFR without material reported financial-statement impact.
- Approximately $323.5 million of demand deposits at five banks exceeded the $250,000 FDIC insurance limit per bank.
Outlook, risks and contingencies
Management expects FY2024 capital expenditures of approximately $120 million to $170 million and expects ongoing net annual capital expenditures of approximately $100 million to $160 million to maintain and modernize its store base. Ingles expects to continue regular quarterly dividends, subject to board approval, operating results, financial condition, and debt restrictions. It plans to balance sales growth with gross-margin maintenance and monitor product mix and customer trends. No specific revenue or earnings guidance was provided.
Management says it has sufficient liquidity for planned capital expenditures and working-capital needs for the foreseeable future, but notes financing may not be available on acceptable terms. Store modernization and construction have proceeded at a temporarily slower pace amid inflation, building-material and equipment supply issues, and tight construction labor conditions.
Key risks include intense grocery competition and price pressure; food, labor, fuel, freight and utility cost volatility; supply-chain and staffing disruptions; regional concentration in the Southeast; information-technology and data-security vulnerabilities; food-safety and regulatory matters; self-insurance estimates; and possible resurgence of COVID-19 or other disruptions. The company is self-insured for several liability and employee-benefit exposures; related reserves were $32.9 million at year-end. Debt agreements contain financial covenants and cross-default provisions; Ingles reported covenant compliance. Pending ordinary-course legal proceedings are not expected by management to have a material effect. Construction commitments totaled $3.0 million, expected to be fulfilled in FY2024. Fuel supply contracts cover approximately 85% of fuel sold and are subject to minimum-purchase terms.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Vendor allowances were identified as a critical audit matter because of the volume and diversity of vendor agreements and the effort required to test whether allowances were recorded according to their terms. The company’s controlling stockholder, Robert P. Ingle II, held approximately 72.2% of combined voting power.
Investor verification priorities
- Separate underlying sales and earnings trends from the effect of FY2023’s extra week; review comparable-store calculations and the exclusion of fuel.
- Assess whether gross-margin pressure and higher labor and distribution costs persist, and how fuel-price and sales changes affect results.
- Review cash conversion, planned capital spending, debt maturities, floating-rate exposure and swap coverage, and the terms restricting dividends.
- Examine vendor-allowance accounting and its effect on inventory costs and reported margins, given its designation as a critical audit matter.
- Consider concentration of cash above FDIC insurance limits, regional operating concentration, self-insurance estimates, and the controlling shareholder’s voting power.