Village Super Market, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended July 29, 2017 (52 weeks). Unless otherwise noted, dollar amounts are in millions; fiscal 2016 included 53 weeks. The company operated 29 ShopRite supermarkets, primarily in New Jersey, and was a major member of Wakefern, its principal supplier and the ShopRite cooperative.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $1,604.6 | $1,634.9 |
| Gross profit / margin | $436.7 / 27.22% | $445.0 / 27.22% |
| Operating income / margin | $40.7 / 2.54% | $44.3 / 2.71% |
| Net income / net margin | $22.9 / 1.43% | $25.0 / 1.53% |
| Diluted EPS, Class A | $1.60 | $1.77 |
| Operating cash flow | $46.2 | $64.1 |
| Capital expenditures | $27.7 | $20.0 |
- Sales declined 1.9%, principally because FY2016 had an extra week. Comparable-store sales were flat after excluding that extra week. Sales per selling square foot were $1,186, down from $1,208.
- Gross margin was unchanged. Operating margin fell 0.17 percentage points; management attributed the pressure principally to higher payroll and reduced operating leverage, partly offset by lower fringe-benefit costs.
- Cash and cash equivalents were $87.4 at year-end; working capital was $85.3 and the current ratio was 1.89. Operating cash flow decreased $17.9 year over year, with working-capital movements contributing to the decline. Cash decreased $0.9 to $87.4.
- Long-term debt was $42.6, primarily capital and financing lease obligations. The company had no borrowings on its $25.0 revolving facility and was in compliance with its covenants. Contractual capital/financing and operating lease payments totaled $157.5, including interest where applicable.
- Village held $44.7 of notes receivable from Wakefern and $60.0 of Wakefern demand deposits. The company is therefore materially exposed to its cooperative counterparty; the demand deposits are included in reported cash and cash equivalents.
- FY2017 cash uses included $12.8 of dividends and $4.1 of treasury-stock purchases. Class A and Class B annual dividends were $1.00 and $0.65 per share, respectively.
Changes, unusual items, and management outlook
- Excluding identified one-time items, management said net income decreased 7% from FY2016, primarily due to flat comparable sales and increased operating expenses. FY2017 included a $0.465 after-tax nonrecurring credit related to multi-employer health and welfare benefits; FY2016 included a $0.545 after-tax Sandy-insurance recovery and estimated $0.280 of income from its extra week.
- Deflation, particularly in meat, produce, and dairy, and several competitor openings offset benefits from competitor closures and sales growth at remodeled stores. Management reported continued competitive pressure on retail price inflation.
- For FY2018, management expected comparable-store sales to range from a 2.0% decrease to flat, citing local competitor openings and competitive price pressure. It budgeted $50.0 of capital spending for a Bronx store, a replacement store, remodels, and technology upgrades.
- Management expected an effective tax rate of 41%–42%, higher medical and other fringe-benefit costs, and $3.5 of contributions to company-sponsored defined-benefit plans. The board intended to continue quarterly dividends at the most recent rates: $0.25 per Class A share and $0.1625 per Class B share. Management stated that operating cash flow and other liquidity sources should meet foreseeable needs.
- Risks include intense price competition and narrow margins; concentration in New Jersey; dependence on Wakefern for substantially all merchandise, services, and patronage dividends; union negotiations and rising benefit costs; underfunded multi-employer pension plans and potential withdrawal liability; food-safety exposures; and information-system or cybersecurity disruptions.
- The company had collected $3.583 of Sandy-related insurance proceeds through year-end. Further recovery was uncertain; prior remaining receivables had been written off, although Wakefern continued to pursue recovery. Management said other ordinary-course litigation was not expected to materially affect financial position, results, or liquidity. The New Jersey tax dispute for 2000–2014 had been settled in 2015; tax authorities were auditing certain years and the company reported $0.648 of gross unrecognized tax benefits.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Key facts for investors to verify
- Whether comparable sales and margins meet the FY2018 outlook amid competitor openings and deflation or pricing pressure.
- Progress, total cost, and expected returns from the $50.0 FY2018 capital program, including the Bronx and replacement stores.
- Wakefern’s financial condition and the company’s exposure through deposits, notes receivable, purchasing dependence, and patronage dividends.
- Lease obligations, pension funding needs, union contract renewals, and any changes in multi-employer plan contributions or withdrawal exposure.
- Actual dividend payments, cash generation, and use of the revolving credit facility; reported liquidity includes substantial balances held at Wakefern.