Ingles Markets, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 28, 2013 (52 weeks), compared with FY2012 (53 weeks). The filing also reports fourth-quarter results; it is an annual report, not a quarterly filing.
Business context
Ingles operated 203 supermarkets across six Southeastern states, alongside a fluid dairy business and shopping-center rentals. Grocery sales represented about 96% of revenue. The company owns 154 supermarkets and emphasizes store modernization, competitive pricing, fuel stations, pharmacies, and private-label products.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $3.739 billion | $3.718 billion |
| Gross profit / margin | $827.8 million / 22.2% | $820.8 million / 22.1% |
| Operating income / margin | $125.6 million / 3.4% | $123.8 million / 3.3% |
| Net income | $20.8 million | $43.4 million |
| Diluted EPS, Class A | $0.87 | $1.79 |
| Cash from operations | $145.2 million | $133.8 million |
| Capital expenditures | $101.5 million | $180.6 million |
FY2013 net income included $43.1 million of pretax debt-extinguishment charges ($26.2 million after tax). Excluding those charges, management said FY2013 net income would have exceeded FY2012, despite the prior year’s extra week. Fourth-quarter FY2013 revenue was $948.9 million and net income was $15.6 million; the third quarter recorded a $14.4 million net loss, primarily reflecting the refinancing charges.
At year-end, cash was $16.8 million, current assets $434.5 million, and current liabilities $251.3 million. Borrowed debt totaled $912.5 million; $893.5 million was classified as long-term. The $175 million revolving credit line had no borrowings outstanding, with $165.6 million available. Total assets were $1.669 billion and stockholders’ equity was $410.6 million.
Material changes and unusual items
- Revenue increased 0.5% year over year; on a comparable 52-week basis, grocery comparable-store sales rose 2.1% including gasoline and 1.8% excluding gasoline. Customer transactions excluding gasoline increased 1.7%; average transaction size was essentially unchanged.
- Gross margin improved modestly, while operating and administrative expenses rose 1.3% to $706.5 million. Operating costs included higher wages, store supplies, taxes, and self-insurance claims.
- The company issued $700 million of 5.75% senior notes due 2023, using proceeds in part to repay $575 million of 8.875% notes due 2017 and line-of-credit borrowings. Management reported the effective senior-note rate decreased from 9.5% to 5.75%; reported interest expense declined to $59.1 million despite higher total debt.
- FY2013 included a $3.9 million pretax gain on the sale of a former store property. Capital spending fell from the prior year, which included completion of a major distribution-center addition.
- The company repurchased 1.5 million Class B shares for $37.1 million from a trust associated with the former CEO’s estate. It paid $30.4 million in dividends during FY2013.
Outlook, risks, and contingencies
Management expected FY2014 sales growth to exceed FY2013 growth, citing anticipated increases in retail square footage and benefits from store improvements. Planned FY2014 capital expenditures were approximately $100–$140 million, including two or more new or remodeled stores; longer-term annual net capital expenditures were expected at approximately $100–$160 million. These expectations depend on financing availability, competition, economic conditions, and gasoline, milk, and commodity prices.
Key disclosed risks include substantial debt and related covenant/cross-default provisions; intense grocery price competition and thin margins; regional concentration in the Southeast; volatility in fuel, energy, food, and labor costs; execution risk on store expansion and distribution efficiencies; food safety and supply-chain disruption; environmental liabilities, including gasoline-storage sites; and uncertainty in self-insurance estimates. Management said it was in compliance with debt covenants and believed available liquidity and operating cash flows would meet foreseeable needs. Pending ordinary-course legal matters were not expected by management to materially affect the company.
Robert P. Ingle II controlled approximately 81% of combined voting power, and the company qualified as a Nasdaq controlled company. Management and the auditor reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Reconcile reported earnings with the $43.1 million refinancing charge and assess normalized profitability and cash generation.
- Review debt maturities, annual mandatory redemptions on the Recovery Zone bonds, covenant headroom, and the economics of the 2023 notes.
- Track comparable-store sales and margins excluding gasoline, and distinguish FY2013’s 52 weeks from FY2012’s 53 weeks.
- Assess whether planned store investments and distribution improvements deliver expected returns, and whether the higher FY2014 sales outlook materialized.
- Examine self-insurance reserve assumptions, environmental exposures, related-party share repurchases, and dividend restrictions under financing agreements.