AMCON Distributing Company — Q3 2014 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2014; fiscal year ends September 30. AMCON operates a wholesale consumer-products distribution business and 16 natural/health-food stores. Unless stated otherwise, comparisons are with the corresponding 2013 period.
Financial performance
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Sales | $322.6 million, up 2.1% | $900.7 million, up 0.9% |
| Gross profit / gross margin | $19.3 million / 6.0% (6.3% prior year) | $56.6 million / 6.3% (6.4% prior year) |
| Operating income | $2.4 million, down 22.4% | $6.1 million, down 25.0% |
| Net income | $1.3 million, down 22.8% | $3.1 million, down 28.5% |
| Diluted EPS available to common shareholders | $1.73 (prior year $2.19) | $4.18 (prior year $5.73) |
Cash flow and liquidity: Nine-month operating cash flow was $1.2 million, versus cash used of $8.3 million a year earlier. Investing used $3.3 million, including $2.3 million of capital expenditures and approximately $1.0 million for acquired inventory. Financing provided $2.1 million; net credit-facility borrowings were $6.3 million. Cash was $0.3 million at June 30. Working capital was $60.0 million, compared with $53.4 million at September 30, 2013; the current ratio was approximately 3.2.
Debt: Credit-facility borrowings were $21.2 million, up from $14.8 million at September 30, 2013. Current and long-term debt totaled approximately $4.2 million; total reported borrowings were therefore approximately $25.3 million. The revolving facility had a $70 million commitment, subject to borrowing-base limits; $42.3 million was available at June 30. Its stated maturity is July 2018, and its average interest rate at period-end was 2.33%.
Material changes and management commentary
- Quarterly wholesale sales rose 2.4%, mainly from cigarette manufacturer price increases and higher sales of other products; lower cigarette carton volume and mix partly offset growth. Wholesale gross profit was nearly flat, and gross margin slipped to 5.0% from 5.1%.
- Retail sales fell 8.8% in the quarter and 6.0% year to date. Existing-store sales weakened amid competition; new stores partly offset the decline. Retail gross profit fell 11.6% in the quarter and 7.2% year to date, with margins of 42.5% and 43.0%, respectively.
- Consolidated operating expenses increased 1.1% in the quarter and 2.6% year to date, including higher compensation and insurance costs; year-to-date expenses also reflected new-store costs. Lower gross profit and higher operating expenses contributed to lower operating income.
- During the first nine months, AMCON acquired approximately $1.0 million of inventory and began servicing customers of two small North Dakota distributors; the filing says the transactions were not material to consolidated financial statements.
- AMCON repurchased 33,887 common shares for approximately $2.6 million during the nine months. The balance sheet also reflects treasury stock of $5.9 million, versus $3.3 million at September 2013.
Outlook, risks, and other matters
No quantified earnings or revenue guidance is provided. Management believes liquidity should be adequate to sustain operations, while warning that a sharp change in conditions could affect revenue, collections, and access to bank credit. Management described wholesale distributor margins as pressured and retail competition as intense, particularly in Midwestern markets; it expects the retail competitive environment to persist or potentially accelerate.
Key disclosed risks include tobacco and cigarette demand, excise taxes and regulation (including FDA oversight of tobacco and vaping products), competition and industry consolidation, manufacturer pricing and incentives, customer credit risk, inventory and commodity costs, fuel prices, weather, and access to capital. The company does not hedge interest-rate or fuel-cost exposure. The filing reports no material change to previously disclosed risk factors, no legal proceedings, and no off-balance-sheet arrangements. Disclosure controls were considered effective; no material internal-control changes were reported. No material unusual charge is identified in the supplied filing text.
Important facts for investors to verify
- Whether lower cigarette volumes and ongoing wholesale margin pressure persist despite reported sales growth.
- Whether retail same-store sales and gross profit stabilize amid intensified competition.
- Working-capital and seasonal inventory needs, and the resulting effect on operating cash generation and facility availability.
- Facility borrowing-base availability, covenant status, and debt levels as borrowings have increased since September 2013.
- Execution and returns from the North Dakota customer acquisitions and recent retail-store openings.