Ingles Markets, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 24, 2016 (52 weeks). This is an annual filing, not a standalone Q4 filing; selected Q4 figures are included below. Ingles operated 201 supermarkets across six Southeastern states, alongside fluid dairy and shopping-center rental businesses.
Financial results and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $3,795.0 million | $3,778.6 million | +0.4% |
| Gross profit / margin | $924.4 million / 24.4% | $893.3 million / 23.6% | +3.5%; margin +0.8 percentage points |
| Operating income / margin | $128.6 million / 3.4% | $139.2 million / 3.7% | -7.6% |
| Net income | $54.2 million | $59.4 million | -8.7% |
| Diluted EPS, Class A | $2.68 | $2.93 | -8.5% |
| Cash from operations | $159.0 million | $153.5 million | +$5.6 million |
| Capital expenditures | $137.6 million | $104.1 million | +$33.6 million |
- Comparable-store sales excluding gasoline increased 2.0%; transactions rose 1.5% and average transaction size rose 1.1%. Grocery, non-foods and perishables sales grew, while gasoline revenue declined to $435.6 million from $498.2 million as per-gallon prices fell 13%.
- Operating and administrative expenses rose 5.1% to $794.6 million, outpacing sales growth. Salaries and wages increased $24.7 million, reflecting a tighter labor market, higher sales volume, expanded offerings and store modernization.
- Cash used in investing activities was $136.9 million. Cash used in financing activities was $24.0 million, mainly dividends and debt reduction. Year-end cash was $5.7 million.
- Total debt was $876.5 million, down from $886.1 million. The company had no line-of-credit borrowings and $165.6 million available under its $175 million facility. The $700 million senior notes carry a 5.75% coupon and mature in 2023. Debt fair value was reported as $899.2 million.
- Current assets were $418.5 million and current liabilities $241.6 million. Stockholders’ equity was $470.2 million.
- Class A and Class B annual cash dividends were $0.66 and $0.60 per share, respectively. Management expected regular quarterly dividends to continue, subject to board discretion and financing restrictions.
Fourth-quarter selected results
For the 13 weeks ended September 24, 2016, net sales were $962.4 million, gross profit $237.2 million and net income $14.2 million. In Q4 FY2015, the comparable figures were $952.8 million, $228.1 million and $16.2 million, respectively.
Outlook, risks and notable items
- Management expected FY2017 non-gasoline sales to exceed FY2016, anticipated one or more new stores, and expected benefits from recent store improvements. It forecast FY2017 capital expenditures of approximately $100 million to $140 million and a longer-term annual range of approximately $100 million to $160 million.
- Management cited intense competition, regional economic and weather exposure, volatile gasoline prices and energy costs, labor and other operating-cost pressures, and risks to store expansion and remodeling. It also noted food safety, distribution disruption, information-security and environmental risks.
- The company reported a material weakness in controls over review and approval of changes to vendors’ bank-account information. Management said remediation actions began in mid-September 2016 and operated effectively after year-end, but the weakness was not considered fully remediated at year-end because the enhanced control had not operated long enough. The auditor issued an adverse opinion on internal control over financial reporting; its opinion on the financial statements was unqualified. Management reported no significant financial-statement impact from the deficiency.
- Management said pending ordinary-course legal proceedings were not expected to materially affect the company. Construction commitments were $10.9 million. The company was in compliance with debt covenants at year-end and reported substantial headroom under the most restrictive covenant.
- Other notable changes included the March 2016 appointment of James W. Lanning as CEO, with Robert P. Ingle II remaining chairman, and FY2016 loss on asset disposals of $1.2 million versus a $2.2 million gain in FY2015.
Key facts for investors to verify
- Whether operating-cost growth, particularly wages, can be contained while preserving sales and gross-margin gains.
- Whether the FY2017 sales and capital-spending expectations were met, and whether store modernization and expansion generate adequate returns.
- Debt-service capacity, refinancing needs, covenant headroom and the effect of variable-rate borrowing and gasoline-price changes on cash flow.
- Subsequent evidence that vendor bank-account change controls were fully remediated and remain effective.
- The continued sustainability of dividends given capital investment, leverage and debt-agreement restrictions.