Business context and reporting period
Village Super Market, Inc. operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and is a major member of Wakefern Food Corporation. This unaudited Form 10-Q covers the 13 weeks and 26 weeks ended January 26, 2013; financial statement amounts below are in thousands except per-share data.
Financial performance and position
| Metric | 13 weeks ended Jan. 26, 2013 | Year-over-year | 26 weeks ended Jan. 26, 2013 | Year-over-year |
|---|---|---|---|---|
| Sales | $382.2 million | +5.4% | $740.3 million | +5.0% |
| Gross profit | $102.9 million | +$3.4 million | $198.6 million | +$6.2 million |
| Operating income | $14.4 million | -$1.8 million | $24.9 million | -$3.6 million |
| Net income | $9.1 million | -$0.04 million | $15.0 million | -$0.9 million |
| Class A diluted EPS | $0.65 | vs. $0.66 | $1.07 | vs. $1.15 |
| Class B diluted EPS | $0.49 | vs. $0.52 | $0.75 | vs. $0.90 |
Gross margin was 26.93% for the quarter and 26.82% year to date, down 0.51 and 0.45 percentage points, respectively. Operating margin was 3.78% and 3.36% (down 0.71 and 0.67 points); net margin was 2.38% and 2.02% (down 0.14 and 0.23 points).
For the six months, operating cash flow was $30.8 million (prior-year $22.6 million); capital expenditures were $10.1 million, and cash dividends were $18.0 million. Cash increased $3.5 million to $106.6 million. At January 26, 2013, working capital was $68.9 million and the current ratio was 1.6:1. Capital and financing lease obligations were $40.9 million; Wakefern notes payable totaled $2.6 million, including current maturities. The company also held a $21.7 million Wakefern note receivable at a fixed 7% rate.
Material changes and unusual items
- Quarterly sales growth reflected the Old Bridge store acquisition and 3.4% same-store sales growth. Six-month same-store sales increased 3.0%.
- Lower departmental gross margins were the main pressure on earnings. Operating and administrative expense rose as a share of sales, chiefly due to higher fringe-benefit costs; prior-year results included a favorable pension-withdrawal-liability settlement.
- Fiscal 2013 results included $1.45 million of partnership income, reflecting distributions above invested amounts. The six-month period also included after-tax income of $0.69 million from a national credit-card lawsuit settlement and an after-tax $0.38 million landlord-dispute charge. Management’s adjusted comparisons exclude these items and other specified prior-year items: adjusted net income declined 6% for the quarter and 11% year to date.
- Hurricane Sandy closed almost all stores for periods ranging from hours to eight days, caused perishable inventory losses and added repair and labor costs. Insurance recovery efforts were ongoing; management did not expect the storm’s total impact, including uninsured losses, to be material to fiscal 2013 results.
- The company paid $18.0 million in dividends during the six months, including $12.0 million of special dividends, and stated its intention to continue regular quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
Outlook, risks and contingencies
- Management expected fiscal 2013 same-store sales growth of 2.0%–3.5%, modest retail price inflation, and an effective tax rate of 41.5%–42.5%. It budgeted approximately $20 million in capital expenditures, including a replacement-store project and three major remodels.
- Management expected higher medical and pension costs, but said cash and expected operating cash flow should cover working capital, capital expenditures and debt payments for the foreseeable future. It expected to contribute a further $2.9 million to pension plans during the balance of fiscal 2013.
- Key risks include intense competition and thin supermarket margins; economic weakness and cautious consumer spending; the Maryland stores’ slower-than-expected performance; dependence on Wakefern for merchandise, services and patronage dividends; collective-bargaining and benefit costs (about 93% of employees are covered by collective bargaining agreements); food-safety exposure; and potential multi-employer pension liabilities, including possible additional liability related to the prior plan withdrawal.
- The company disclosed potential tax-rate effects from examinations and tax-law changes, and noted that insurer discussions regarding Sandy losses could take several months. It reported no significant changes in internal controls and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether same-store sales remain within the 2.0%–3.5% fiscal-year outlook, and how much growth reflects the Maryland stores and the Old Bridge acquisition.
- Whether gross-margin pressure and higher benefit costs persist, and whether the company’s adjusted earnings comparison appropriately accounts for the listed unusual items.
- The amount, timing and adequacy of insurance recoveries for Hurricane Sandy, including any uninsured losses.
- Progress and funding for the $20 million capital plan, pension contributions and any possible multi-employer withdrawal liability.
- Continuation of the stated dividend rate and the company’s liquidity after dividends and planned capital spending.