Ingles Markets, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 29, 2014. The interim financial statements are unaudited. Ingles operated 203 supermarkets across six southeastern states.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $947.8 million, up 2.9% | $1,892.9 million, up 2.0% |
| Gross profit / margin | $206.1 million / 21.7% (21.6% prior year) | $409.6 million / 21.6% (21.9% prior year) |
| Operating income | $27.8 million, versus $27.7 million | $54.0 million, versus $61.2 million |
| Net income | $10.5 million, versus $8.1 million | $20.0 million, versus $19.7 million |
| Class A diluted EPS | $0.46, versus $0.33 | $0.88, versus $0.81 |
| Interest expense | $11.7 million, versus $15.7 million | $23.5 million, versus $31.3 million |
Quarterly operating margin was approximately 2.9% and net margin 1.1%; first-half margins were approximately 2.9% and 1.1%, respectively. The filing reports first-half operating income margin as 2.8% in its percentage table. Prior-year property-sale gains materially boosted operating income: $3.9 million from a former store sale in the prior-year second quarter.
Cash flow, liquidity and debt
- Six-month operating cash flow was $50.7 million, compared with $45.0 million. Investing cash outflow was $51.6 million, including $51.8 million of capital expenditures. Financing cash outflow was $8.6 million.
- Cash declined $9.5 million from fiscal year-end to $7.4 million. At March 29, current assets were $430.8 million and current liabilities $227.6 million.
- Total debt was approximately $911.1 million, including $13.8 million current and $897.3 million long-term. The $175 million revolving credit facility had no borrowings outstanding; $9.7 million of letters of credit were issued.
- The $700 million senior notes due 2023 carry a 5.75% rate. Management attributes lower interest expense to refinancing higher-rate notes in 2013, partly offset by higher total debt. The company reported covenant compliance and approximately $403 million of additional borrowing capacity under its most restrictive covenant.
Changes, outlook and risks
- Quarterly comparable-store sales excluding gasoline and the prior-year Easter timing effect rose 2.5%; the comparable measure rose 0.8% for the first half. Ex-gasoline sales increased 2.5% for the quarter and 1.1% for the first half.
- Quarterly gross margin improved slightly, with higher non-gasoline grocery margins offsetting lower gasoline gross profit. First-half gross margin declined, also reflecting weaker gasoline contribution. Lower self-insurance costs helped operating expenses.
- Management plans fiscal 2014 capital expenditures of approximately $100–$140 million; it expects net annual capital expenditures of approximately $100–$160 million going forward. Spending is focused largely on store modernization, remodels, equipment, technology and selected new stores. Management expects maturing new and expanded stores to contribute to sales, while future sales growth depends on economic conditions, inflation, gasoline prices and raw milk prices.
- The company expects to continue regular quarterly dividends, subject to board discretion and debt restrictions. First-half dividends paid totaled $7.2 million; the prior-year comparison included a special dividend and accelerated payment.
- Risks include competition, regional economic conditions, labor and utility costs, gasoline and commodity-price movements, financing availability, store expansion performance, weather and self-insurance estimates. Self-insurance reserves totaled $29.4 million. The company reported no asset impairments in the first half and no material off-balance-sheet arrangements.
- The filing revised prior-year rental presentation from net to gross, increasing reported sales and cost of goods sold; management said the correction was not material. Expiration of certain federal tax credits increased the effective tax rate.
Important facts for investors to verify
- Whether comparable-store sales and non-gasoline margins remain resilient, given the modest first-half growth and weaker gasoline contribution.
- Capital-spending pace, cash generation and liquidity as cash declined and six-month capital expenditures exceeded operating cash flow.
- Debt levels, refinancing terms, covenant headroom and the availability of financing for planned investment.
- Potential variability in self-insurance claims and the impact of expiring tax credits on future earnings.
- Dividend continuity and capacity under board discretion and debt-document restrictions.