AMCON Distributing Company — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015. AMCON distributes consumer products to retail outlets and operates 16 natural-food stores. Unless noted, comparisons are with the three months ended December 31, 2014.
Financial performance and position
| Metric | Q1 FY2016 | Prior-year comparison |
|---|---|---|
| Sales | $322.0 million | Up 2.1% from $315.4 million; includes excise taxes of $97.3 million |
| Gross profit / margin | $19.0 million / 5.9% | Down from $19.5 million / 6.2% |
| Operating income | $2.55 million | Down 7.9% from $2.77 million |
| Net income | $1.36 million | Down 12.3% from $1.55 million |
| Common EPS | Basic $2.09; diluted $1.85 | Basic $2.44; diluted $2.11 |
| Operating cash flow | $12.72 million | Compared with $4.91 million used in the prior-year quarter |
- Wholesale sales rose 2.3% to $314.7 million, while segment gross profit fell 2.1% to $15.9 million and gross margin declined to 5.1% from 5.3%.
- Retail sales declined 6.4% to $7.3 million; segment gross profit fell 7.0% to $3.0 million, with gross margin at 41.9% versus 42.1%.
- At December 31, cash was $0.34 million and working capital was $59.3 million, versus $0.22 million and $68.8 million at September 30, 2015. Current assets were $83.5 million and current liabilities $24.2 million.
- Credit-facility borrowings were $11.1 million, down from $20.9 million at September 30; long-term debt, including current maturities, was about $3.65 million. The company reported $57.6 million of facility availability, subject to borrowing-base limits.
- Cash from operations was driven mainly by a $17.0 million reduction in inventory. Investing activities used $0.35 million; financing activities used $12.24 million, including $9.75 million of credit-facility repayments and $2.15 million of share repurchases. Ending cash increased to $0.34 million.
Changes, outlook, and risks
- Wholesale sales growth primarily reflected manufacturer cigarette price increases and higher sales of other products, partly offset by lower cigarette carton volume and mix. Management cited cigarette volume/mix and vendor programs as contributors to lower wholesale gross profit.
- Retail sales were pressured by increased competition from conventional retailers and expanding natural-food chains. Management plans to refine the retail model and emphasize differentiated products and customer expertise.
- Management expects intense wholesale margin pressure to continue. It plans targeted investment in refrigerated trucks and technology, and continues to consider strategic acquisitions and ways to monetize its retail-network platform. No quantified earnings or revenue guidance was provided.
- Management said liquidity should be adequate to sustain operations, but warned that a sharp change in conditions could affect revenue, receivable collections, or access to bank credit. Operating cash flow is sensitive to inventory timing and seasonality; prepaid and other current assets included approximately $3.8 million of prepaid inventory.
- The company does not hedge interest-rate or fuel-cost exposure. Cited risks include competition, tobacco regulation and excise taxes, product demand, commodity and fuel prices, customer credit, and retail expansion risks. The credit facility’s conditional fixed-charge covenant was not triggered; management reported availability above the 10% threshold and a ratio above 1.0.
- AMCON repurchased 25,402 shares for approximately $2.2 million at an average $84.82 per share and reauthorized repurchases of up to 50,000 shares. It paid $0.2 million in common and preferred dividends. Preferred stock with a $2.9 million total liquidation preference remained outstanding.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were concluded effective as of December 31, 2015.
Key facts for investors to verify
- Whether sales growth reflects sustainable volume gains or largely supplier price increases, and how cigarette mix affects gross margins.
- Whether the large inventory-driven operating cash inflow recurs or reverses with seasonal purchasing and inventory needs.
- Retail sales trends and competitive pressures across the company’s store markets.
- Ongoing credit-facility availability, borrowing-base capacity, covenant status, and exposure to unhedged rates and fuel costs.
- The economics and remaining authorization of share repurchases, alongside preferred dividends and potential dilution from convertible preferred stock and equity awards.