Ingles Markets, Inc. — Q2 FY2018 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2018 (13 weeks); six-month results cover the first half of fiscal 2018. Ingles operated 201 supermarkets across six Southeastern states, plus a fluid dairy business and shopping-center rentals. Grocery retail is its primary business.
Key financial results
| Metric | Three months ended Mar. 31, 2018 | Six months ended Mar. 31, 2018 |
|---|---|---|
| Net sales | $984.6 million; up 4.1% | $1,998.3 million; up 3.6% |
| Gross profit / margin | $235.2 million / 23.9% (24.1% prior year) | $479.8 million / 24.0% (24.1% prior year) |
| Operating income / margin | $23.6 million / 2.4% (2.6% prior year) | $59.4 million / 3.0% (3.0% prior year) |
| Net income | $9.3 million, versus $9.2 million | $54.4 million, versus $23.0 million |
| Class A basic / diluted EPS | $0.47 / $0.46 | $2.76 / $2.69 |
| Operating cash flow | Not presented by quarter | $67.8 million, versus $65.5 million |
| Capital expenditures | Not presented by quarter | $88.8 million, versus $59.4 million |
Liquidity and debt. Cash was $6.9 million at March 31, down from $23.9 million at September 30, 2017. Current assets were $454.0 million and current liabilities $250.6 million. Total debt was approximately $888.9 million, including $19.2 million drawn on the $175 million revolving credit line. The company reported compliance with debt covenants. Cash used in investing activities was $88.7 million, largely reflecting capital spending; financing activities provided $3.9 million.
Changes and management commentary
- Quarterly sales growth reflected higher gasoline sales and Easter falling in March in 2018 rather than April in 2017. Excluding gasoline and Easter timing, comparable grocery sales rose 1.7%; transactions increased 0.7% and average transaction size 2.6%.
- For the six months, comparable retail sales excluding gasoline and Easter timing increased 1.9%; transactions were flat and average transaction size rose 2.6%. Gasoline sales benefited from a 13% increase in average price per gallon and 3% more gallons sold in the quarter.
- Quarterly net income was nearly flat despite sales growth: operating and administrative expenses increased 4.2%, chiefly from wages and insurance costs, while operating margin declined. Excluding gasoline, grocery gross margin improved 15 basis points in the quarter and eight basis points for the first half.
- First-half net income rose sharply, primarily because the Tax Cuts and Jobs Act reduced deferred tax liabilities by $26.7 million, recorded as a reduction in deferred tax expense. The reported six-month tax benefit was $16.8 million, versus $12.7 million of tax expense in the prior-year period; therefore, the earnings increase is not solely operating-driven.
Outlook, risks, and other matters
- Management planned fiscal 2018 capital expenditures of approximately $140 million to $160 million; it expects annual net capital expenditures generally in the $100 million to $160 million range. Spending targets store improvements, new stores, equipment, technology, and the milk plant. Construction commitments were $5.2 million at quarter-end.
- Management expects available operating cash flow, the credit line, and financing to cover planned capital expenditures and working capital for the foreseeable future, but cautions financing may not be available on acceptable terms.
- Sales outlook depends on economic conditions, inflation, gasoline and raw-milk prices, new-store maturation, and remodeling. Disclosed risks include competition, labor and utility cost increases, adverse weather affecting food supply and delivery, and execution of expansion plans.
- Regular quarterly dividends were $0.165 per Class A share and $0.15 per Class B share; continuation is subject to board discretion and debt restrictions. Ordinary-course legal claims were not expected by management to have a material effect. Self-insurance reserves totaled $35.4 million.
- The company had entered a swap to hedge floating-rate debt; the filing gives inconsistent notional amounts in different sections ($58.5 million and $57.5 million). Management reported no material change in market-risk factors and said disclosure controls were effective.
Important facts for investors to verify
- How much of first-half earnings growth reflects the one-time $26.7 million deferred-tax remeasurement, and what earnings level is representative absent that benefit?
- Whether grocery margins and labor, insurance, and other operating costs improve or continue to pressure profitability.
- How planned capital spending will be funded, and the resulting effect on cash, revolver usage, and debt.
- The correct interest-rate-swap notional amount and the company’s exposure to variable rates, gasoline-price changes, and self-insurance claims.
- Whether comparable sales growth persists after adjusting for Easter timing, gasoline, store openings, and closures.