Ingles Markets, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 24, 2022, comprising 52 weeks. This is an annual report, not a standalone fourth-quarter report. Comparisons are primarily with the 52-week fiscal year ended September 25, 2021.
Business context
Ingles operated 198 supermarkets across six southeastern states, with 112 pharmacies and 107 fuel stations. Its business is primarily retail grocery; other operations include fluid dairy processing and shopping-center rentals. The company owns 164 supermarkets and operates its own distribution network and milk plant.
Key financial metrics
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net sales | $5.679 billion | $4.988 billion | Up 13.9% |
| Gross profit | $1.416 billion | $1.303 billion | Up 8.6%; gross margin 24.9%, down from 26.1% |
| Income from operations | $376.9 million | $350.1 million | Up 7.7%; operating margin 6.6%, versus 7.0% |
| Net income | $272.8 million | $249.7 million | Up 9.2%; net margin 4.8%, versus 5.0% |
| EPS, Class A | $14.69 basic; $14.36 diluted | $13.06 basic; $12.73 diluted | Both increased |
| Cash from operations | $339.5 million | $306.3 million | Up $33.2 million |
| Capital expenditures | $119.6 million | $140.6 million | Down $21.0 million |
| Cash and cash equivalents at year-end | $267.2 million | $70.3 million | Up $196.9 million |
| Total debt at year-end | $571.9 million | $589.5 million | Down $17.6 million; no borrowings on the $150 million credit line |
Current assets were $838.1 million and current liabilities were $333.8 million at year-end. The company paid annual dividends of $0.66 per Class A share and $0.60 per Class B share. The filing reports an effective tax rate of 24.5%, compared with 23.8% in FY2021.
Material changes versus FY2021
- Comparable-store sales excluding gasoline increased 7.7%. Excluding gasoline, transactions rose 3.5% and average transaction size rose 4.2%.
- Retail sales growth reflected higher gasoline prices and inflation as well as comparable-store gains. Gasoline gallons sold increased 5.0%, while average per-gallon prices increased 44.9%.
- Gross margin declined as a share of sales. Management cited inflation, product mix, supply-chain pressures, higher inbound freight, and increased distribution costs. Gasoline gross profit increased $13.0 million.
- Operating and administrative expenses increased $76.9 million, including higher wages, store supplies, bank charges, repairs and maintenance, and utilities and fuel. Sales growth reduced these expenses as a percentage of sales.
- Interest expense declined to $21.5 million from $24.3 million, alongside lower year-end debt. FY2021 included a $1.1 million debt-extinguishment loss and $9.3 million of gains from sales of former store properties; FY2022 had no debt-extinguishment loss and $1.4 million of asset-sale gains.
- Cash from operations increased, while investing outflows fell with lower capital expenditures. FY2022 financing outflows were lower in part because FY2021 included $80.0 million of stock repurchases.
Outlook, risks and unusual items
- Outlook: The company gave no quantified sales or earnings forecast. It expects FY2023 capital expenditures of approximately $120–$160 million, including store modernization, one or more new or remodeled stores, equipment, technology, distribution, and dairy-plant investments. It expects annual net capital expenditures of approximately $100–$160 million going forward.
- Management expects to add stores, remodel existing locations, and add fuel stations and pharmacies, but construction activity has been slowed by inflation, materials and equipment supply constraints, and tight construction labor.
- Management said future sales will depend substantially on food and gasoline inflation and supply-chain conditions. It expects traditional seasonal patterns may resume as pandemic effects ease, but the timing and extent remain uncertain.
- Key risks include intense competition and narrow grocery margins; labor and truck-driver shortages; food, energy, freight and wage inflation; supply and distribution disruptions; gasoline price and availability volatility; regional concentration in the Southeast; cybersecurity and information-system risks; and environmental obligations related in part to fuel stations and underground tanks.
- Robert P. Ingle II beneficially controlled approximately 71% of combined voting power, making the company a controlled company under Nasdaq rules. Cash dividends are subject to board discretion and debt-agreement restrictions.
- Management said pending ordinary-course legal claims are not expected to have a material effect. Construction commitments totaled $6.5 million. The company had supply contracts covering approximately 84% of fuel sold, subject to supplier modification or termination provisions.
- Approximately $262.3 million of deposits at five banks exceeded the $250,000 FDIC insurance limit per bank. The independent auditor issued unqualified opinions on the financial statements and internal control; vendor allowances were identified as a critical audit matter because of the number and diversity of vendor agreements.
Important facts for investors to verify
- Whether comparable-store growth and sales levels persist as pandemic-related demand effects fade, and how much reported growth reflects inflation and gasoline prices.
- Whether gross margins recover or remain pressured by labor, freight, product costs, supply disruptions, and competitive pricing.
- Execution, timing, and returns on the planned FY2023 capital expenditures and store modernization program.
- Debt maturities, variable-rate exposure, interest-rate swaps, covenant terms, and the availability of the credit line; management reported covenant compliance at year-end.
- The sustainability of dividends given capital needs, debt restrictions, and board discretion, as well as the implications of concentrated voting control.
- Vendor allowance accounting and estimates, self-insurance reserves, environmental exposures, and the concentration of uninsured bank deposits.