Ingles Markets, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 26, 2022; comparative periods ended March 27, 2021. Ingles operated 198 supermarkets across six southeastern states and reported one primary business segment: retail grocery sales.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | First six months FY2022 | First six months FY2021 |
|---|---|---|---|---|
| Net sales | $1.377 billion | $1.185 billion | $2.769 billion | $2.375 billion |
| Gross profit | $348.6 million | $310.5 million | $699.1 million | $624.7 million |
| Operating income | $95.1 million | $74.3 million | $185.5 million | $150.8 million |
| Net income | $68.6 million | $52.2 million | $134.8 million | $106.0 million |
| Operating cash flow | Not presented for the quarter | $155.5 million | $114.7 million |
Quarterly sales grew 16.3% and net income 31.5% year over year; first-half sales grew 16.6% and net income 27.2%. Excluding gasoline, comparable-store sales increased 10.1% in Q2 and 10.2% in the first half. In the first half, customer transactions rose 6.3% and average transaction size 4.2%, excluding gasoline.
Gross margin declined to 25.3% from 26.2% in Q2 and to 25.3% from 26.3% for the first half. Operating margin improved to 6.9% from 6.3% in Q2 and to 6.7% from 6.3% for the first half; operating and administrative expenses declined as a share of sales. Class A diluted EPS was $3.61 for Q2 and $7.10 for the first half, versus $2.58 and $5.24, respectively, in the prior-year periods.
Liquidity, debt and capital
At March 26, 2022, cash and cash equivalents were $65.6 million and short-term investments were $115.0 million, compared with $70.3 million and $5.0 million, respectively, at September 25, 2021. Current assets were $701.4 million and current liabilities $288.0 million. Total debt was approximately $578.5 million, including $17.6 million current and $560.8 million long-term, versus $647.8 million at March 2021. The $150 million revolving credit line, maturing in June 2026, had no borrowings outstanding. The company reported compliance with financial covenants.
First-half operating cash flow was $155.5 million; investing activities used $142.6 million, including $110.0 million of short-term investment purchases and $34.1 million of capital expenditures. Financing activities used $17.6 million. Capital expenditures were $34.1 million versus $69.4 million a year earlier. The company expects FY2022 capital expenditures of approximately $100–$120 million and indicates a longer-term annual range of $100–$160 million. It expects to continue regular quarterly dividends, subject to Board discretion and debt restrictions.
Management commentary, outlook and risks
- Management attributed sales growth to continued pandemic-era consumer trends, inflation, and higher gasoline sales and prices. Gasoline sales rose to $200.2 million in Q2 from $130.7 million; the filing also reports increased gallons sold.
- Inflation and supply-chain pressures raised product costs. Labor-market tightness affected recruitment and retention, while food, energy, labor, and transportation costs were rising. Management said these labor impacts had not materially affected operations to date, but inflation could pressure results.
- Management expects capital spending to increase as labor and material availability and costs normalize. It believes operating cash flow, available financing, and existing resources should fund planned spending and working capital for the foreseeable future, while noting financing may not be available on acceptable terms.
- Interest expense declined year over year, which management attributed to lower debt and refinancing higher-rate debt. Debt includes $350 million of 4.00% senior notes due 2031, secured borrowings, and facility bonds. LIBOR-based debt and swaps create reference-rate transition considerations; the company said those arrangements had not yet discontinued LIBOR.
- Other disclosed risks include competition, fuel-price changes, adverse weather affecting food supply, distribution disruption, pandemic effects, and the performance of new or remodeled stores. Legal claims arising in the ordinary course were not expected by management to materially affect financial position, results, or cash flows. No asset impairments were recorded in the first half.
Important facts for investors to verify
- Whether sales growth and higher comparable-store sales persist, and how much results depend on gasoline prices, volumes, and inflation.
- Whether the lower gross margin reflects continuing cost pressure and the extent to which pricing or vendor allowances offset it.
- Execution and funding of the $100–$120 million FY2022 capital plan amid labor and materials constraints, alongside debt service and dividend commitments.
- Debt covenant headroom, floating-rate exposure, and transition arrangements for LIBOR-linked debt and swaps.
- The sustainability of improved operating leverage and cash generation as pandemic-related demand patterns change.