Ingles Markets, Inc. — FY2015 Form 10-K
Business and period. Ingles operates 201 supermarkets across six Southeastern states, principally in North Carolina, Georgia and South Carolina. Its fiscal year ended September 26, 2015, comprised 52 weeks. The company also operates a fluid dairy business and shopping centers; retail grocery is its primary segment.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $3.779 billion | $3.836 billion |
| Gross profit / margin | $893.3 million / 23.6% | $845.2 million / 22.0% |
| Operating income / margin | $139.2 million / 3.7% | $123.3 million / 3.2% |
| Net income / net margin | $59.4 million / 1.6% | $51.4 million / 1.3% |
| Diluted EPS, Class A | $2.93 | $2.28 |
| Cash from operations | $153.5 million | $154.3 million |
| Capital expenditures | $104.1 million | $108.3 million |
| Total debt | $895.3 million | $937.3 million |
Gross margin improvement and higher operating income lifted earnings to a company record, despite lower total sales. Comparable-store sales excluding gasoline increased 2.1%; excluding gasoline, transactions rose 0.2% and average transaction size rose 2.6%. Gasoline revenue fell to $498.2 million from $618.1 million as per-gallon prices declined 27.9%, although gallons sold increased and gasoline gross profit was significantly higher. Non-foods and perishables sales grew, while grocery-category sales declined.
Operating and administrative expenses rose 4.7% to $756.3 million; as a share of sales they increased to 20.0% from 18.8%. The filing attributes notable increases to wages, insurance, depreciation, repairs and maintenance. Interest expense was nearly flat at $47.0 million. The effective tax rate increased to 37.2% from 35.5%, primarily due to discrete items not expected to recur.
Liquidity, debt and capital allocation
Year-end cash was $7.5 million; current assets were $432.3 million and current liabilities $253.2 million. The company generated $153.5 million from operations and used $99.7 million in investing activities. Cash flow from operations less capital expenditures was approximately $49.4 million. Financing activities used $54.9 million, mainly for dividends and debt reduction.
Total debt was $895.3 million, including $700 million of 5.75% senior notes due 2023 and $90.7 million of variable-rate Recovery Zone bonds. The $175 million revolving line had $0.5 million outstanding and approximately $164.1 million available. The company reported compliance with debt covenants and substantial headroom; debt agreements include cross-default provisions and restrictions on dividends. Debt fair value was $914.6 million versus carrying value of $895.3 million. The company paid annual dividends of $0.66 per Class A share and $0.60 per Class B share.
Outlook, risks and unusual items
- Management expected FY2016 non-gasoline sales to exceed FY2015 and planned one or more new stores. FY2016 capital expenditures were projected at approximately $100–$140 million, including two or more new or remodeled stores. Longer-term annual capital spending was expected to be approximately $100–$160 million, subject to financing and project decisions.
- Management highlighted intense competition, uncertain consumer conditions, volatile gasoline prices and petroleum costs, and continued focus on balancing sales growth with gross-margin maintenance excluding gasoline.
- Key risks include high indebtedness and interest-rate exposure, reliance on the Southeastern region, competitive pricing pressure, execution and returns on store expansion and renovations, food safety and distribution disruption, labor and self-insurance costs, environmental liabilities related in part to fuel facilities, and information-security risks.
- FY2015 included $2.2 million in gains from asset sales and disposals, none individually significant. FY2013 included $43.1 million of debt-extinguishment costs, making that year’s earnings an unusual comparison. Legal claims arising in the ordinary course were not expected by management to materially affect results.
- Management and Deloitte reported effective disclosure controls and internal control over financial reporting; Deloitte gave unqualified opinions on the financial statements and internal controls.
Key facts for investors to verify
- Whether improved grocery and perishable margins can persist amid competitive pricing and rising operating expenses.
- How lower gasoline prices and changes in gasoline margins affect reported revenue, earnings and customer traffic.
- Debt-service capacity, refinancing needs and covenant or dividend restrictions, particularly given the large debt balance and maturities after five years.
- Whether planned capital expenditures and new or remodeled stores generate the expected sales and returns.
- Potential changes in self-insurance reserves, environmental exposures, and other estimates or contingencies.