Village Super Market, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended July 26, 2014 (52 weeks). The filing is an annual report, not a standalone Q4 filing; selected Q4 figures are included below. Dollar amounts are in millions unless stated otherwise.
Business context
Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. It is a 13.7% owner of Wakefern, its principal supplier and the ShopRite cooperative. In FY2014, the company opened replacement stores in Hanover Township and Union, New Jersey. Sales per store were $52.4 million and sales per average selling square foot were $1,153.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $1,518.6 | $1,476.5 |
| Same-store sales growth | 0.2% | 2.9% |
| Gross profit / margin | $408.5 / 26.90% | $397.8 / 26.94% |
| Operating income / margin | $29.8 / 1.96% | $44.2 / 2.99% |
| Net income / net margin | $5.0 / 0.33% | $25.8 / 1.75% |
| Operating cash flow | $52.4 | $51.3 |
| Capital expenditures | $50.3 | $21.9 |
| Cash and cash equivalents | $77.4 | $109.6 |
| Working capital / current ratio | $16.8 / 1.11 | $94.3 / 1.85 |
| Long-term debt | $45.2 | $42.7 |
FY2014 diluted EPS was $0.36 for Class A and $0.26 for Class B. Q4 sales were $396.8 million, gross profit was $109.0 million and net income was $5.9 million; comparable Q4 2013 amounts were $376.3 million, $101.9 million and $6.2 million, respectively.
The $45.2 million of long-term debt chiefly comprised capital and financing lease obligations; the company had no borrowings under its $25 million revolving credit facility. Cash flow funded elevated store investment, dividends of $12.4 million and investments in Wakefern notes. Working capital fell substantially, primarily due to the $40.6 million long-term Wakefern note receivable, higher tax liabilities and capital spending. Cash includes $52.9 million of demand deposits at Wakefern.
Material changes and unusual items
- Sales increased 2.9%, mainly reflecting the two replacement-store openings; same-store growth slowed to 0.2%. Management cited competitor openings, prior-year storm-related shopping, and uneven recovery after Superstorm Sandy.
- Gross margin was nearly flat year over year, while operating and administrative expense rose from 22.57% to 23.47% of sales. Costs included $3.5 million for the closed Morris Plains store lease and $0.9 million for the closed Union store lease, as well as higher payroll, healthcare, repairs and store pre-opening expenses.
- Net income fell to $5.0 million. Results included a $10.1 million tax charge related to prior-year tax positions and the New Jersey Tax Court ruling, plus closure and pre-opening costs. Excluding specified unusual items, management said net income declined 17% year over year.
- FY2013 included $12.0 million of special dividends; total dividends declined to $12.4 million in FY2014 from $24.0 million in FY2013.
- Company-sponsored pension plans had a $27.0 million funded deficit at year-end, compared with $20.1 million a year earlier. The company expected to contribute $6.0 million to these plans in FY2015; FY2014 contributions to multi-employer pension plans were $5.1 million.
Outlook, risks and contingencies
- Management forecast FY2015 same-store sales ranging from flat to up 2%, modest retail price inflation, and $25 million of capital expenditures, including three major remodels and smaller projects. It expected a 46.0%–47.0% effective tax rate, or 41.5%–42.5% excluding interest and penalties on unrecognized tax benefits.
- The board’s stated intention was to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expected operating cash flow and other liquidity sources to meet foreseeable needs.
- The New Jersey tax dispute remained under appeal. No payment was due while unresolved; a favorable outcome could reduce gross unrecognized tax benefits by up to $29.0 million. The filing reports $28.993 million of gross unrecognized tax benefits at year-end. The ultimate resolution could materially affect earnings and cash flows.
- For Superstorm Sandy, the company reported a $2.3 million insurance receivable, net of payments, and noted that final claim resolution could materially affect results.
- Key risks include narrow supermarket margins and intense competition; concentration in New Jersey; weaker-than-projected Maryland store performance; dependence on Wakefern; union contract renewals and healthcare and pension costs; food safety; and information-system or cybersecurity disruptions. About 91% of employees were union-represented, and contracts for about 29% of associates expired within one year.
Most important facts for investors to verify
- Track the New Jersey tax appeal, potential settlement timing and the relationship between the disclosed tax charge, accrued liability and possible exposure.
- Assess whether same-store sales and operating margins improve as new replacement stores mature and competitive price investment continues.
- Monitor liquidity after heavy FY2014 capital spending, including the recoverability and terms of Wakefern deposits and notes, and the company’s dependence on Wakefern.
- Review pension funding, upcoming union negotiations and the effects of healthcare legislation and multi-employer plan underfunding.
- Confirm recovery of the Sandy insurance receivable and the expected FY2015 capital plan and dividend policy.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.