Business Context and Reporting Period
Company: Village Super Market, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: 13 and 39 weeks ended April 28, 2007 (Fiscal Year 2007)
Business Overview: The Company operates 23 Shop Rite supermarkets in New Jersey and eastern Pennsylvania. It is the second-largest member of Wakefern Food Corporation, a retailer-owned food cooperative. The Company recently completed a two-for-one stock split of its Class A and Class B common stock on April 26, 2007.
Key Financial Metrics
| Metric (in thousands) | 13 Wks Ended Apr 28, 2007 |
39 Wks Ended Apr 28, 2007 |
39 Wks Ended Apr 29, 2006 |
|---|---|---|---|
| Sales | $255,314 | $777,179 | $754,356 |
| Gross Profit | $69,679 | $208,629 | $199,124 |
| Gross Margin % | 27.29% | 26.84% | 26.40% |
| Operating Income | $8,055 | $23,815 | $20,605 |
| Net Income | $4,888 | $14,171 | $11,463 |
| Net Income Margin % | 1.91% | 1.82% | 1.52% |
| Cash from Operations | N/A | $23,576 | $21,775 |
| Cash & Equivalents (End) | $51,424 | $51,424 | $66,066 |
| Total Debt (Current + Long-term) | $27,292 | $27,292 | $32,737 |
| Working Capital | $21,999 | $21,999 | $44,096 |
Note: Debt figures include current portion of long-term debt ($5,617) and long-term debt ($21,675). Working capital is calculated as Total Current Assets ($94,777) minus Total Current Liabilities ($72,778).
Material Changes vs. Prior Period
- Sales Growth: Sales increased 4.3% in the quarter and 3.0% for the nine-month period compared to the prior year. Same-store sales mirrored these increases, driven by remodeled stores (Springfield, Bernardsville) and a replacement store in Somers Point.
- Profitability: Net income rose 20.7% for the quarter and 23.6% for the nine-month period. Net income margin improved to 1.91% (quarter) and 1.82% (nine-month) from 1.65% and 1.52% respectively in the prior year.
- Margin Drivers: Gross profit margin improved due to higher margins in meat, grocery, and produce departments and better product mix. This was partially offset by increased promotional spending and LIFO charges.
- Expense Management: Operating expenses as a percentage of sales decreased in the quarter (22.91% vs 23.16%) due to lower payroll and fringe benefit costs, and proceeds from debit/credit card fee litigation. Utility costs increased.
- Liquidity Shift: Cash and cash equivalents decreased by $23.2 million over the nine-month period. This was primarily due to a $28.7 million investment in notes receivable from Wakefern and $9.8 million in capital expenditures.
- Debt Reduction: Total debt decreased as the Company made principal payments of $6.5 million, including a $4.3 million installment on unsecured Senior Notes.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The Company has budgeted $19 million for capital expenditures in fiscal 2007. A new leased store in Franklin, NJ, is under construction with an expected opening in November 2007. The Company is loaning the developer up to $6.7 million for this project.
- Competitive Landscape: Sales were partially offset by reduced sales in two stores due to competitive openings. An additional competitive store opened in early May 2007, expected to impact the fourth quarter.
- Pension Obligations: The Company expects to contribute an additional $1.3 million in the fourth quarter to fund defined benefit pension plans. Future funding beyond fiscal 2007 is uncertain and dependent on investment performance and legislation.
- Investment in Wakefern: The Company invested $27.7 million in notes receivable from Wakefern in September 2006. These notes mature on June 17, 2008, with half earning a fixed 7% rate and half earning prime less 1.25%.
- Risks: Key risks include local economic conditions, competitive pressures, rising energy and utility costs, increased cost of goods sold from Wakefern, and the results of union contract negotiations.
Investor Verification Checklist
- Working Capital Decline: Verify the impact of the $28.7 million Wakefern note investment on the reduction of working capital from $44.1 million to $22.0 million.
- Competitive Impact: Assess the potential revenue erosion from the new competitive store opening in May 2007 and its effect on Q4 guidance.
- Pension Funding: Confirm the sufficiency of cash flow to meet the expected $1.3 million pension contribution in Q4 and future minimum funding requirements.
- Franklin Store Loan: Review the terms and repayment security of the $6.7 million loan to the developer of the new Franklin store.
- EPS Calculation: Note the revision of prior period EPS to the "two-class method" following an SEC review, which altered the allocation of earnings between Class A and Class B stock.