Village Super Market, Inc. — Q1 FY2020 Form 10-Q
Reporting period: 13 weeks ended October 26, 2019; unaudited. Financial amounts below are in thousands of dollars unless otherwise noted. The company operates ShopRite supermarkets and Gourmet Garage specialty markets.
Key financial results
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $407,402 | $401,550 | +1.5% |
| Gross profit / margin | $113,546 / 27.87% | $112,113 / 27.92% | Margin down 0.05 percentage points |
| Operating income / margin | $2,968 / 0.73% | $8,922 / 2.23% | Down 66.7% |
| Net income / margin | $2,567 / 0.63% | $6,269 / 1.56% | Down 59.1% |
| Operating cash flow | $3,375 | $6,125 | Down $2,750 |
| Capital expenditures | $22,349 | $8,571 | Up $13,778 |
Class A basic and diluted earnings per share were $0.20 and $0.18; Class B basic and diluted earnings per share were $0.13. Interest expense was $567, while interest income was $1,259. The effective tax rate was 29.9%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $77,941 at quarter-end, down $23,180 from the fiscal-year-end balance of $101,121. Net cash used in investing was $23,145, principally reflecting capital spending; net cash used in financing was $3,410, including $3,220 of dividends.
- Current assets were $151,810 and current liabilities were $120,421, producing working capital of $31,389 and a current ratio of 1.26, compared with $56,307 and 1.50 at July 27, 2019.
- Reported long-term debt was $127,633, including $97,092 of long-term operating lease obligations, $23,595 of finance lease obligations, and Wakefern and New Markets Tax Credit notes. Current operating lease obligations were $11,325. Lease-standard adoption means prior-year balance-sheet comparisons are not restated.
- The company had no borrowings under its $25,000 unsecured revolving credit facility. It held $52,945 in Wakefern demand deposits and $51,004 in notes receivable from Wakefern, a related party.
Material changes and unusual items
- Sales increased 1.5%, including the June 2019 acquisition of three Gourmet Garage stores and 0.1% same-store sales growth. Growth was partly offset by competitor openings, lower Maryland promotions, and sales softness at the old Stroudsburg store before its replacement opened November 1, 2019.
- Gross margin was nearly flat overall, but excluding Gourmet Garage it declined 0.26 percentage points. Management cited lower departmental margins—particularly pharmacy reimbursement pressure and pricing investments—along with increased Wakefern warehouse assessments.
- Operating and administrative expense rose to $103,140 from $96,293. Management cited payroll, benefit and occupancy cost increases, as well as Stroudsburg replacement-store pre-opening costs and a lease-asset write-off. The quarter also reflects lease costs presented in operating expenses following adoption of the new lease standard.
- Management reported that, excluding specified Stroudsburg costs and the prior-year Superstorm Sandy insurance recovery, net income declined 44%, primarily due to lower gross margins and higher operating expenses. The filing reports $594 of after-tax pre-opening costs and $191 of after-tax lease-asset write-off costs in the current quarter, versus a $290 after-tax Sandy insurance gain in the prior-year quarter.
- The June 2019 Gourmet Garage acquisition cost $5,267, net of cash acquired; purchase-price allocation remained subject to finalization of working-capital adjustments. The company adopted ASC 842 on July 28, 2019, recognizing operating lease assets and liabilities and recording a $3,514 after-tax reduction to opening retained earnings.
Outlook, risks and contingencies
- Management expects FY2020 same-store sales to range from a 2.0% decrease to flat, and budgeted $55,000 of capital expenditures, including the Stroudsburg replacement store, three major remodels and ShopRite from Home expansion.
- The board’s current intention is to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expects the effective tax rate to be 29.5%–30.5%, pension costs of approximately $1,600, and immaterial contributions to its defined-benefit pension plans. It believes available cash, operating cash flow and other liquidity sources will meet foreseeable needs.
- Risks highlighted include intense competition and thin grocery margins; economic and regional concentration; reliance on Wakefern for merchandise, services and patronage dividends; labor agreements covering approximately 88% of employees; food safety, pension, self-insurance, asset-impairment, tax and cybersecurity risks.
- Wakefern-led litigation seeking additional recovery of Superstorm Sandy insurance claims remains ongoing; Village had received $3,998 in recoveries through the amounts described in the filing. Other ordinary-course litigation is not expected by management to materially affect the company’s financial position, results or liquidity.
Important facts for investors to verify
- Whether same-store sales and margin performance meet management’s FY2020 outlook, especially amid pricing investments and pharmacy reimbursement pressure.
- Actual spending against the $55,000 capital budget and the operating performance of the Stroudsburg replacement store and Gourmet Garage.
- Cash generation and liquidity after elevated capital expenditures, dividends and the recognition of substantial lease liabilities.
- The company’s financial and operational exposure to Wakefern, including demand deposits, notes receivable and its role as principal supplier.
- Developments in the Sandy insurance litigation and any changes to the acquisition purchase-price allocation or other contingencies.