Business Context and Reporting Period
Weis Markets, Inc. filed an unaudited Form 10-Q for the 13 weeks ended March 30, 2024, compared with the 13 weeks ended April 1, 2023. The company operates 196 supermarkets in Pennsylvania and six surrounding states, with grocery, pharmacy, fuel, manufacturing and related offerings. It reports one operating segment.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1,178.2 million | $1,145.0 million | +2.9% |
| Gross profit | $291.0 million | $285.8 million | +1.8% |
| Gross margin | 24.7% | 25.0% | Down 0.3 points |
| Income from operations | $27.4 million | $32.6 million | Down 16.1% |
| Operating margin | 2.3% | 2.8% | Down 0.5 points |
| Net income | $23.2 million | $25.8 million | Down 10.3% |
| Diluted EPS | $0.86 | $0.96 | Down 10.4% |
| Operating cash flow | $34.2 million | $7.9 million | +$26.3 million |
| Capital expenditures | $35.5 million | $17.7 million | +$17.8 million |
Cash and cash equivalents were $136.2 million at March 30, 2024, compared with $184.2 million at December 30, 2023. Marketable securities totaled $261.3 million, and shareholders’ equity was $1.388 billion. The company paid $9.1 million in dividends during the quarter.
The company had no reported borrowings under its unsecured revolving credit facility. The facility matures October 1, 2027, has a stated capacity of $30.0 million plus a discretionary $70.0 million, and had $22.3 million of availability after $7.7 million of letters of credit. Operating lease liabilities totaled $174.6 million, including current and noncurrent amounts.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales increased 3.1% including fuel and 3.3% excluding fuel. Adjusted for the Easter holiday shift, comparable-store sales increased 1.9%.
- First-quarter sales benefited from Easter occurring in the first quarter of 2024 rather than the second quarter of 2023; management estimated the incremental impact at approximately $14.0 million.
- Pharmacy sales increased, but pharmacy and fresh-meat product-cost pressure and a greater mix of lower-margin pharmacy sales reduced gross margin.
- Operating, general and administrative expenses rose 4.1% to $263.6 million, or 22.4% of sales versus 22.1%. Associate wages and third-party services, including financial service fees and information technology expenses, increased; associate insurance benefits declined.
- Investment income and interest expense increased 46.2% to $5.6 million, including $4.1 million of investment gain and $1.4 million of SERP investment income. This partially offset lower operating income.
- Operating cash flow improved primarily because of lower inventory purchases and fewer working-capital obligations settled during the quarter.
- Investing cash use increased to $73.1 million, driven by higher property and equipment purchases, purchases of marketable securities and the acquisition of two previously leased store locations.
Outlook, Commentary, Risks and Unusual Items
- Management expects overall product costs to increase based on recent food-retail inflationary indicators, although commodity inflation and deflation vary by category.
- The company continues a long-term capital program involving new stores, remodels, site acquisitions, technology and distribution and transportation upgrades, including delayed projects from 2022 and 2023.
- Management expects to fund capital expenditures, potential store acquisitions, distribution-facility construction, share repurchases and dividends through cash, marketable securities, operating cash flow and the revolving credit facility.
- The company declared a quarterly dividend of $0.34 per share payable May 28, 2024. Future dividends remain subject to quarterly board approval and business conditions.
- The company has authorization to repurchase up to one million shares, with 752,468 shares remaining available under the authorization.
- Key disclosed risks include food-cost inflation, competitive pricing pressure, stronger competitors with greater resources, labor and supply-chain disruptions, regulatory developments, technology changes, general economic conditions and retail-industry conditions.
- Available-for-sale securities had $6.9 million of gross unrealized losses at quarter-end, primarily in corporate and municipal bonds. Comprehensive income was $22.7 million versus $27.5 million in the prior-year quarter.
- The filing states that interim results are not necessarily indicative of full-year results, and it provides no quantitative full-year earnings or sales guidance.
Important Facts for Investors to Verify
- Assess whether sales growth remains positive after normalizing for the approximately $14.0 million Easter benefit and the reported 1.9% adjusted comparable-store increase.
- Monitor gross-margin pressure from fresh meats, pharmacy mix and anticipated product-cost inflation.
- Evaluate whether higher capital spending and store-location purchases can be sustained while maintaining liquidity and dividends.
- Review the composition, maturities and unrealized losses of the $261.3 million marketable-securities portfolio.
- Confirm the availability and terms of the revolving credit facility, including the $7.7 million of outstanding letters of credit and absence of reported borrowings.
- Track labor, technology, insurance and other operating-cost trends that contributed to the increase in operating expenses.
- Consider the sensitivity of results to fuel prices, competitive pricing, inflation, pharmacy performance and future holiday timing.