Ingles Markets, Inc. — Fiscal 2023 First Quarter Form 10-Q
Reporting period: 13 weeks ended December 24, 2022, compared with the 13 weeks ended December 25, 2021. Results are unaudited. Ingles operated 198 supermarkets across six Southeastern states and reports retail grocery sales as its primary business segment.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,493.3 million | $1,391.5 million | +7.3% |
| Gross profit / margin | $371.2 million / 24.9% | $350.5 million / 25.2% | Profit +5.9%; margin -0.3 pts |
| Operating income / margin | $95.8 million / 6.4% | $90.4 million / 6.5% | Income +5.9%; margin -0.1 pts |
| Net income / net margin | $69.4 million / 4.6% | $66.2 million / 4.8% | Net income +4.8% |
| Interest expense | $5.3 million | $5.4 million | Down slightly |
| Operating cash flow | $57.3 million | $95.0 million | Down $37.7 million |
| Capital expenditures | $59.3 million | $21.3 million | Up $38.0 million |
Class A basic and diluted EPS were $3.73 and $3.65, respectively, versus $3.57 and $3.48. Class B basic and diluted EPS were both $3.40, versus $3.24. Comparable store sales excluding fuel increased 7.3%. Management attributed sales growth to consumer trends and inflation; inflation and raw-material shortages also pressured gross margin. Retail gross profit, excluding fuel, declined 84 basis points.
Operating and administrative expenses rose 6.2% to $276.2 million, but declined as a share of sales to 18.5% from 18.7%. Higher wages, repairs and maintenance, store supplies, and bank charges were partly offset by lower insurance expense.
Cash, debt, and liquidity
Cash and cash equivalents were $255.6 million at December 24, 2022, compared with $267.2 million at fiscal year-end. Current assets were $858.6 million and current liabilities were $321.9 million. Total debt was approximately $564.5 million, down from $586.1 million at December 25, 2021; interest expense was broadly stable. The company had no borrowings outstanding on its $150 million revolving line of credit, which matures in June 2026.
Cash from operations declined primarily because of higher working-capital needs. Investing activities used $58.2 million, principally reflecting $59.3 million of capital spending; financing activities used $10.7 million, including debt principal payments and dividends. Cash decreased by $11.6 million during the quarter.
Management reported compliance with debt covenants and stated it believes available cash, operating cash flows, and financing sources will meet foreseeable requirements. Debt agreements include restrictive covenants and cross-default provisions. The company uses interest-rate swaps with aggregate notional principal of $159.5 million to hedge floating-rate debt.
Outlook, risks, and notable items
- Management expects fiscal 2023 capital expenditures of approximately $120 million to $140 million, focused largely on store improvements, one planned store opening, technology, equipment, and the milk-processing plant. It expects annual spending of approximately $100 million to $160 million over time to maintain its store base.
- No specific sales or earnings guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results. Grocery sales are seasonally higher in the first fiscal quarter due to Thanksgiving and Christmas.
- Management cited persistent inflation, supply-chain and transportation disruption, labor-market tightness, and rising food, energy, and labor costs. It said these conditions’ future duration and effects are uncertain. CPI inflation for the 12 months ended December 2022 was 6.5% overall, 11.8% for food at home, and 8.3% for energy.
- Other disclosed risks include competition, fuel-price changes, weather affecting food production and delivery, financing availability, expansion execution, and possible disruptions in product distribution. Self-insurance reserves totaled $31.1 million, including expected recoveries; estimates depend partly on claims incurred but not reported.
- The company reported no asset impairments in the quarter. Ordinary-course legal proceedings were not expected by management to materially affect financial position, results, or cash flows. Management concluded disclosure controls were effective as of December 24, 2022.
- Quarterly dividends paid were $0.165 per Class A share and $0.150 per Class B share. Management expects regular quarterly dividends to continue, subject to board discretion and debt restrictions.
Important facts for investors to verify
- How much comparable-sales growth reflects inflation and pricing versus customer traffic and unit volumes, including the contribution from fuel.
- Whether gross-margin pressure from product costs and shortages persists, and whether wage and other operating-cost growth remains manageable.
- Whether working-capital needs and the elevated capital-spending pace affect operating cash flow, cash balances, or planned investments.
- Debt covenant capacity, refinancing and interest-rate exposure, and the transition of LIBOR-based debt and hedges to replacement reference rates.
- Future claims experience and estimates underlying self-insurance reserves, as well as dividend capacity under debt agreements.