Weis Markets, Inc. 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 30, 2023, comprising 52 weeks. The prior fiscal year ended December 31, 2022, comprised 53 weeks; comparisons should be adjusted for the extra week. The filing is an annual 10-K rather than a standalone fourth-quarter report.
Business Context
Weis Markets operates 197 conventional supermarkets in Pennsylvania and six surrounding states, with approximately 23,000 associates. The Company reports one operating segment and sells groceries, fresh foods, pharmacy services, fuel, prepared foods, general merchandise, beer and wine. The Weis family owns approximately 65% of outstanding shares and controls shareholder voting matters.
- 118 stores are in Pennsylvania; 79 are in Delaware, Maryland, New Jersey, New York, Virginia and West Virginia.
- Approximately 49% of stores are leased; the remainder are owned.
- Weis self-distributes approximately 56% of products supplied to stores and operates three manufacturing facilities.
- Online ordering was available at 188 stores and home delivery at all 197 stores.
Financial Performance and Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $4.697 billion | $4.696 billion | 0.0% |
| Gross profit | $1.162 billion | $1.182 billion | (1.7%) |
| Gross margin | 24.7% | 25.2% | Down 50 bps |
| Operating income | $137.2 million | $157.1 million | (12.6%) |
| Operating margin | 2.9% | 3.3% | Down 40 bps |
| Net income | $103.8 million | $125.2 million | (17.1%) |
| Net margin | 2.2% | 2.7% | Down 50 bps |
| Basic and diluted EPS | $3.86 | $4.65 | (17.0%) |
| Operating cash flow | $201.6 million | $218.0 million | (7.5%) |
| Capital expenditures | $104.0 million | $122.2 million | (14.9%) |
Pharmacy revenue increased to $527.0 million, or 11.2% of sales, from $441.8 million, or 9.4%, in 2022. Fuel revenue declined to $239.7 million, or 5.1% of sales, from $263.3 million, or 5.6%, reflecting lower gasoline prices. Grocery revenue declined to $3.921 billion from $3.978 billion.
Comparable-store sales increased 0.3% excluding fuel and declined 0.2% including fuel. Adjusted for the additional week in 2022, comparable-store sales increased 2.3% excluding fuel and 1.7% including fuel.
The gross margin decline reflected a greater mix of lower-margin pharmacy and fuel sales, higher product and supply-chain costs, and a $6.7 million unfavorable non-cash LIFO inventory valuation adjustment. Operating, general and administrative expense was essentially unchanged at $1.025 billion, while depreciation and amortization increased to $98.0 million from $94.6 million.
Investment income and interest expense contributed $13.2 million in 2023 versus a nominal net expense in 2022. Other income changed to a $3.7 million expense from $3.8 million of income. The effective tax rate increased to 29.2% from 22.1%, partly because 2022 benefited from a $5.5 million Pennsylvania tax-rate change.
Liquidity, Capital Resources and Debt
- Cash and cash equivalents were $184.2 million at year-end, compared with $158.0 million in 2022.
- Marketable securities totaled $226.0 million, up from $186.4 million.
- Total current assets were $832.2 million versus current liabilities of $340.8 million.
- Total shareholders’ equity was $1.374 billion; total liabilities were $665.3 million.
- The Company had no outstanding obligation under its revolving credit facility since the second quarter of 2018.
- The amended unsecured revolving credit facility matures October 1, 2027, with $30.0 million of committed capacity and an additional discretionary $70.0 million. Availability at year-end was $22.3 million, with $7.7 million of letters of credit outstanding.
- Operating lease commitments totaled $209.0 million, including $47.9 million due within one year; present-value lease liabilities were $183.0 million.
- Cash dividends paid were $36.6 million, or $1.36 per share, compared with $35.0 million, or $1.30 per share, in 2022.
Operating cash flow funded capital expenditures and dividends. Investing cash flow was negative $138.8 million, including $104.0 million of property and equipment purchases and approximately $33.5 million net purchases of marketable securities. Financing cash flow was negative $36.6 million, consisting of dividends paid.
Material Changes Versus the Prior Comparable Period
- Sales were flat on a reported basis, but 2023 had one fewer week than 2022; adjusted comparable sales were modestly positive excluding fuel.
- Profitability weakened: gross margin declined 50 basis points, operating income fell 12.6%, and net income fell 17.1%.
- Pharmacy became a larger revenue contributor, while fuel revenue declined due to lower gasoline prices.
- Operating cash flow decreased by $16.4 million, primarily reflecting lower net income; inventory was a smaller use of cash than in 2022.
- Capital expenditures declined, but delayed store development, relocation, remodeling and other projects are expected to carry into 2024 and 2025.
- Marketable securities increased by approximately $39.5 million, strengthening liquid assets but increasing exposure to interest-rate, credit and market risks.
- The effective tax rate rose materially after the prior-year benefit from Pennsylvania tax legislation.
- The Company implemented a new enterprise resource planning system for human capital and financial management in the fourth quarter. Management stated that controls remained effective but will continue to evaluate implementation-related risks.
Outlook, Commentary, Risks and Unusual Items
Management expects continued long-term sales growth and plans to invest in new stores, remodels, technology, distribution facilities and transportation. Projects delayed by labor and supply-chain disruptions are expected to be completed in 2024 and 2025. Management expects regular quarterly dividends to continue, subject to Board approval and the Company’s financial condition.
- Food inflation, commodity volatility, competitive pricing and changing customer purchasing patterns may pressure sales and margins.
- Labor availability, wage and benefit inflation, supply-chain interruptions, weather and fuel costs could increase operating expenses.
- Vendor promotional allowances and cooperative marketing credits are material to cost of sales and profitability; vendor changes could affect margins.
- The Company is self-insured for substantial workers’ compensation, liability, vehicle and healthcare exposures. Reserve estimates depend on actuarial assumptions and claims trends.
- Cybersecurity and data-privacy risks remain significant because systems process payment data and personal health information. The Company reported no material cybersecurity incident during the period.
- Tax matters remain judgmental. Unrecognized tax benefits declined to $6.4 million from $13.7 million, and state income tax treatment was identified as a critical audit matter.
- Routine litigation is outstanding, but management does not expect pending matters to have a material adverse effect.
- The Weis family’s approximately 65% voting interest limits minority shareholder influence over directors, mergers and other significant corporate actions.
The Company’s auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Critical audit matters were state income taxes and retail inventory valuation, including the LIFO-based retail inventory method.
Important Facts for Investors to Verify
- Assess whether sales growth excluding fuel is sufficient to offset continued gross-margin pressure from pharmacy mix, fuel volatility, inflation and supply-chain costs.
- Review the sustainability of the $1.36-per-share dividend against operating cash flow, planned capital expenditures and delayed project spending.
- Monitor the $226.0 million investment portfolio for interest-rate, credit and equity-market volatility.
- Evaluate execution and control effectiveness following the fourth-quarter ERP implementation.
- Track completion costs and returns from store remodels, new stores and other projects carried into 2024 and 2025.
- Review self-insurance reserves, lease commitments, vendor allowances and LIFO inventory adjustments for potential effects on future margins and cash flow.
- Consider the implications of concentrated geographic exposure and Weis family voting control.