Village Super Market, Inc. — Q3 Fiscal 2018 Form 10-Q
Reporting period: 13 and 39 weeks ended April 28, 2018; comparisons are to the periods ended April 29, 2017. Amounts are in thousands, except per-share data and percentages. Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania.
Financial performance
| Metric | 13 weeks ended Apr. 28, 2018 | 13 weeks ended Apr. 29, 2017 | 39 weeks ended Apr. 28, 2018 | 39 weeks ended Apr. 29, 2017 |
|---|---|---|---|---|
| Sales | $394,608 | $391,984 | $1,198,464 | $1,193,891 |
| Operating income | $9,014 | $10,738 | $24,200 | $28,805 |
| Net income | $6,542 | $6,015 | $19,070 | $16,117 |
| Class A basic / diluted EPS | $0.51 / $0.45 | $0.47 / $0.42 | $1.48 / $1.32 | $1.27 / $1.13 |
| Class B basic / diluted EPS | $0.33 / $0.33 | $0.30 / $0.30 | $0.96 / $0.96 | $0.82 / $0.82 |
- Quarterly sales and same-store sales each rose 0.7%; nine-month sales and same-store sales each rose 0.4%.
- Gross margin was 27.59% for the quarter versus 27.64%, and 27.12% for the nine months versus 27.16%. Operating margin declined to 2.28% from 2.73% for the quarter and to 2.02% from 2.41% year to date.
- Quarterly operating and administrative expense increased to $93,780 from $91,536; nine-month expense rose to $282,138 from $277,060. Interest expense was broadly flat; interest income increased.
- Effective tax rates were 26.4% for the quarter and 19.3% year to date, compared with 41.9% and 41.4%, respectively. Fiscal 2018 results include a $3,300 tax benefit from remeasurement of deferred taxes under the Tax Act, including $574 in the quarter. Excluding the tax adjustments, management said net income decreased 1% quarterly and 2% year to date.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $31,723, up from $26,262. Investing activities used $28,291, including $21,883 of capital expenditures; financing activities used $4,420, including $9,656 of dividends.
- Cash and cash equivalents were $79,916 at April 28, 2018, compared with $87,435 at fiscal year-end. The cash-flow statement reports $86,447 of cash, cash equivalents and restricted cash at period-end, including $6,532 restricted for Bronx store construction.
- Working capital was $77,480, down from $85,279; the current ratio was 1.81 versus 1.89. Management attributed much of the decline to a $6,510 pension contribution.
- Long-term debt was $48,457, including $41,977 of capital and financing lease obligations and $6,480 of New Markets Tax Credit (NMTC) debt. No amounts were drawn on the $25,000 revolving credit facility, which runs through December 31, 2020. The company had $731 of current lease obligations.
- Village held $46,383 in Wakefern notes receivable and $58,042 in Wakefern demand deposits. The notes bear variable interest and are subject to Wakefern prepayment rights.
Changes, outlook and risks
- Sales growth reflected performance at remodeled and expanded stores, inflation and increased promotional spending; competitor openings were a headwind. Management cited two competitor openings affecting the quarter and four affecting the nine-month period.
- Gross margin was pressured by promotions and lower Wakefern patronage dividends. Higher payroll investments, occupancy costs, legal and consulting fees, and Bronx store pre-opening costs contributed to increased quarterly operating expenses.
- Fiscal 2018 same-store sales guidance is a decrease of 0.25% to an increase of 0.75%. Planned capital expenditures were revised upward to approximately $40,000, for the Bronx store, remodels and technology upgrades. The Board intended to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- Management expected an underlying fiscal 2018 effective tax rate of 33.0%–34.0%, excluding the $3,300 deferred-tax benefit, and approximately $100 of net periodic pension costs. It did not expect additional company-sponsored pension plan contributions in fiscal 2018. Management believed available liquidity would meet foreseeable requirements.
- The Bronx project uses NMTC financing; noncompliance during the seven-year recapture period could require indemnification of Wells Fargo for lost or recaptured tax credits. The company said it did not anticipate recapture. Management also disclosed ordinary-course litigation, which it did not expect to materially affect financial position, results or liquidity.
- Key risks include intense competition and narrow margins; dependence on Wakefern for merchandise, services and patronage dividends; union and benefit costs (about 91% of employees covered by collective bargaining agreements); food safety, self-insurance, pension-plan underfunding, asset impairment, tax uncertainty, and information-system or cybersecurity incidents.
- The company expected adoption of the new lease standard to significantly increase reported lease liabilities and right-of-use assets; it was evaluating the standard’s other effects.
Important facts for investors to verify
- How much of reported earnings growth depends on the $3,300 Tax Act-related benefit, and how underlying operating results trend after excluding it.
- Whether same-store sales meet the stated fiscal 2018 range amid competitor openings and promotional activity.
- Progress, spending and expected returns for the Bronx store and accelerated remodel program, against the approximately $40,000 capital-expenditure budget.
- Wakefern’s financial condition and the terms, maturities and prepayment exposure of Village’s deposits and notes receivable.
- Compliance with NMTC requirements and the potential financial exposure if tax credits are recaptured.