Ingles Markets, Inc. — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2013, ended June 29, 2013; comparative periods ended June 23, 2012. Unaudited results. Ingles operated 204 supermarkets, plus fuel centers, pharmacies, a fluid dairy business and shopping centers.
Key financial results
| Metric | Three months 2013 | Three months 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $931.9 million | $917.8 million | $2,783.3 million | $2,717.7 million |
| Gross profit / margin | $210.3 million / 22.6% | $206.0 million / 22.4% | $616.5 million / 22.2% | $600.1 million / 22.1% |
| Operating income / margin | $32.9 million / 3.5% | $34.7 million / 3.8% | $94.1 million / 3.4% | $88.9 million / 3.3% |
| Net income (loss) | $(14.4) million | $13.1 million | $5.2 million | $30.2 million |
| Interest expense | $16.0 million | $14.9 million | $47.3 million | $44.9 million |
Quarterly diluted EPS was $(0.62) for Class A and $(0.56) for Class B, versus $0.54 and $0.51, respectively, in the prior-year quarter. Nine-month diluted EPS was $0.21 for each class, versus $1.24 for Class A and $1.18 for Class B in 2012. The quarter and nine-month results include a $43.1 million pretax loss on early debt extinguishment. Excluding that charge, nine-month pretax income was $48.9 million, up 4.5% from $46.8 million.
- Cash flow: Nine-month operating cash flow was $82.1 million, compared with $84.9 million. Investing cash outflow was $69.0 million, including $76.8 million of capital expenditures and $7.7 million of property-sale proceeds. Financing cash outflow was $13.1 million. Cash ended at $4.6 million, down from $4.7 million at fiscal year-end.
- Liquidity and debt: At June 29, current assets were $439.4 million and current liabilities $235.2 million. Total debt was $934.5 million, versus $846.1 million at June 2012. The company had $3.5 million outstanding under its $175 million revolving credit line and $9 million of letters of credit issued.
- Equity and distributions: Stockholders’ equity was $398.7 million, down from $457.4 million at September 29, 2012. During the period Ingles paid $26.8 million in dividends and repurchased 1.5 million Class B shares for $37.1 million. Quarterly dividends were $0.165 per Class A share and $0.15 per Class B share.
Changes and management commentary
- Sales rose 1.5% in the quarter and 2.4% year to date. Comparable-store sales excluding gasoline and adjusting for the prior-year Easter timing increased 1.4% in the quarter; nine-month comparable-store sales excluding gasoline grew 1.9%.
- Quarterly gross margin improved, but operating and administrative expenses rose to 19.1% of sales from 18.8%; management cited higher labor, depreciation, taxes, supplies and maintenance. For nine months, operating expenses also increased as a share of sales, to 19.0% from 18.9%.
- In June, Ingles issued $700 million of 5.75% senior notes due 2023, using proceeds principally to repay $575 million of 9.5% notes due 2017, repay $52 million of credit-line borrowings and cover offering costs. The company reported estimated annual interest savings of $21.6 million on the refinanced $575 million. It also extended the credit-line maturity to June 2018 and the bond covenant agreement to June 2021.
- Management expected comparable-store sales growth for the remainder of fiscal 2013 to approximate the first nine months’ rate. It cited gasoline and milk prices, commodity prices, economic conditions and unusually wet weather as factors affecting sales; maturation of new and remodeled stores was expected to support growth.
- Fiscal 2013 capital spending was projected at approximately $100–$130 million; longer-term annual net capital expenditures were expected to range from $110–$180 million. Management said resources should be sufficient for planned spending and working capital, while noting financing may not be available on acceptable terms.
Risks, contingencies and unusual items
- The refinancing charge consisted of $27.8 million in debt-extinguishment costs and $15.3 million of unamortized loan costs. The charge drove the quarterly pretax loss and substantially reduced reported nine-month net income.
- Debt agreements include financial covenants and cross-default provisions that could permit acceleration or termination of credit in specified circumstances. Ingles reported covenant compliance at June 29, 2013, with significant headroom and approximately $571 million of additional borrowing capacity under the most restrictive covenant.
- Self-insurance reserves totaled $28.8 million; estimates depend on claims filed and incurred-but-not-reported claims. The company also identified competition, regional economic conditions, weather, commodity and fuel prices, labor and utility costs, financing availability, and store expansion execution as risks.
- Management reported effective disclosure controls as of June 29, 2013 and no material change in internal control over financial reporting during the quarter. No asset impairments were recorded in the three- or nine-month periods.
Important facts for investors to verify
- Whether the expected interest savings from refinancing materialize and how the new notes and floating-rate bonds affect future interest expense.
- Comparable-store sales trends, especially results excluding gasoline and the impact of weather, fuel prices, and commodity costs.
- Operating expense growth, margins, and the development of self-insurance claims and reserves.
- Capital-spending plans, cash generation, dividend capacity, and the remaining authorization under the four-million-share repurchase program.
- Future covenant compliance, refinancing access, and the terms and registration status of the privately placed 2023 notes.