Village Super Market, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended July 27, 2019 (52 weeks); comparisons are with the 52-week year ended July 28, 2018. Dollar amounts are in thousands unless stated otherwise. Village operated 30 ShopRite supermarkets and acquired three Manhattan Gourmet Garage markets on June 24, 2019.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $1,643,502 | $1,615,045 | +1.8% |
| Gross profit / margin | $456,716 / 27.79% | $443,029 / 27.43% | Margin +0.36 percentage points |
| Operating income / margin | $34,676 / 2.11% | $33,453 / 2.07% | Margin +0.04 percentage points |
| Net income / margin | $25,539 / 1.55% | $25,080 / 1.55% | +1.8%; margin unchanged |
| Class A diluted EPS | $1.77 | $1.74 | +$0.03 |
| Operating cash flow | $55,788 | $58,884 | -$3,096 |
| Cash and cash equivalents | $101,121 | $96,108 | +$5,013 |
| Long-term debt | $47,725 | $48,186 | -$461 |
| Working capital | $56,307 | $89,201 | -$32,894 |
Same-store sales declined 0.5%, compared with 0.2% growth in FY2018. Sales growth reflected the Bronx store opened in June 2018 and the Gourmet Garage acquisition, partly offset by lower comparable sales. Gross margin benefited from higher Wakefern patronage dividends and rebates, lower promotional spending, favorable product mix and improved departmental margins. Operating and administrative costs rose as a share of sales, principally from payroll and self-insured workers’ compensation costs. Depreciation and amortization increased to $27,290 from $24,999.
Cash used in investing activities was $36,280, including $27,988 of capital expenditures, $5,267 for Gourmet Garage and net investment in Wakefern notes. Cash used in financing activities was $14,495, including $12,890 of dividends. The current ratio was 1.50, down from 1.88; management attributed much of the working-capital decline to reinvesting a matured $24,937 Wakefern note in a long-term note. The company had no borrowings on its $25,000 revolving credit facility at year-end. Long-term debt includes capital and financing lease obligations and New Markets Tax Credit notes.
Material changes and unusual items
- Gross margin improved, but comparable sales weakened amid three competitor store openings. Company-reported net income rose modestly; excluding specified unusual items in both years, management said net income increased 9%.
- FY2019 included a $290 after-tax Sandy insurance recovery gain and a $777 tax benefit from settling a New Jersey tax audit. FY2018 included a $3,300 deferred-tax benefit from federal tax reform, an $822 after-tax multi-employer pension credit, $877 in after-tax Wakefern assessments and $695 in after-tax Bronx store pre-opening costs.
- Gourmet Garage was acquired for reported net cash consideration of $5,267. The purchase-price allocation recorded $593 of goodwill and a $1,485 trade-name intangible; final working-capital adjustments remained pending. The acquired business represented 0.1% of consolidated sales for the year.
- Adoption of revenue-recognition guidance retrospectively reclassified certain revenue and expense items in the comparative period. The filing presents FY2018 sales of $1,615,045 in its statements; other selected-data figures differ, so comparisons should use consistent, restated presentation.
Liquidity, outlook and risks
- Management budgeted $55,000 for FY2020 capital expenditures, including a replacement Stroudsburg store, three major remodels, ShopRite from Home expansion, and technology and facility upgrades. The company expects operating cash flow and other liquidity sources to cover foreseeable requirements.
- FY2020 same-store sales are expected to range from a 2.0% decline to flat, including planned investment in pricing and expanded private-label offerings. The expected effective tax rate is 30%–31%; net periodic pension cost is expected to be approximately $1,600, with defined-benefit plan contributions expected to be immaterial. The board’s stated intention was to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- Village depends heavily on Wakefern for merchandise, services, patronage dividends and financing placements; it is obligated to source at least 85% of specified merchandise requirements from the cooperative. Wakefern exposure included $50,208 of notes receivable and $73,879 of demand deposits at year-end.
- Other key risks include intense price competition and narrow grocery margins; union labor and benefit costs (about 88% of employees were covered by collective bargaining agreements); underfunded multi-employer pension plans; self-insurance claims; food safety; impairment of store assets or goodwill; and cybersecurity or information-system interruptions. The Sandy insurance litigation remains ongoing; Village had received $3,998 in total recoveries, and any further proceeds will be recognized when received.
- FY2020 adoption of the new lease standard was estimated to add approximately $75,222 of assets and $70,322 of lease liabilities, with no material effect expected on operating results or cash flows. The audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective; Gourmet Garage was excluded from the FY2019 control assessment during integration.
Important facts for investors to verify
- Whether comparable-sales performance and the FY2020 outlook materialize, particularly given planned pricing investment and local competitor openings.
- The sustainability and estimation of Wakefern patronage dividends, rebates, demand deposits and notes receivable, given the company’s reliance on the cooperative.
- Actual Stroudsburg and remodel spending versus the $55 million budget, and the effect of the new lease standard on reported leverage and liquidity measures.
- Gourmet Garage’s post-acquisition contribution, final purchase-price allocation and integration progress.
- Union contract negotiations, multi-employer plan funding and potential increases in benefit or self-insurance costs.
- Any additional Sandy insurance recoveries, and the status and potential exposure of the New York tax audit and other contingencies.