Weis Markets, Inc. 2022 Form 10-K Summary
Business context and reporting period
Weis Markets operates 197 conventional supermarkets across Pennsylvania and six surrounding states, with approximately 23,000 associates. The Company also operates pharmacy, fuel, online ordering and delivery services, three manufacturing facilities, and distribution operations. Fiscal 2022 ended December 31, 2022 and included 53 weeks, compared with 52 weeks in fiscal 2021. The Company reports one operating segment.
At year-end, Weis owned 101 stores and leased 96. The Weis family beneficially owned approximately 65% of outstanding shares and voting power. The Company’s common stock trades on the NYSE under the symbol WMK.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $4.696 billion | $4.224 billion | 11.2% |
| Gross profit | $1.182 billion | $1.116 billion | 5.9% |
| Gross margin | 25.2% | 26.4% | Down 120 bps |
| Operating income | $157.1 million | $146.7 million | 7.0% |
| Operating margin | 3.3% | 3.5% | Down 20 bps |
| Net income | $125.2 million | $108.8 million | 15.0% |
| Net margin | 2.7% | 2.6% | Up 10 bps |
| Basic and diluted EPS | $4.65 | $4.05 | 14.8% |
| Cash flow from operations | $218.0 million | $227.7 million | Down $9.7 million |
| Capital expenditures | $122.2 million | $151.8 million | Down $29.6 million |
| Dividends paid | $35.0 million | $33.6 million | Up $1.3 million |
Sales growth reflected higher comparable-store sales, an additional selling week, increased pharmacy prescription volume, COVID-19 vaccinations, and higher fuel sales. Comparable-store sales increased 10.9%, or 8.8% excluding the additional week; excluding fuel, comparable-store sales increased 9.5%, or 7.5% on an additional-week-adjusted basis.
Cost of sales increased faster than revenue, driven by product and supply-chain cost inflation, sales mix, and higher pharmacy and fuel sales, which carry lower margins than grocery sales. A $29.2 million unfavorable non-cash LIFO inventory adjustment reduced 2022 gross profit, compared with a $4.0 million unfavorable adjustment in 2021.
Operating, general and administrative expenses increased 5.8% but declined to 21.8% of sales from 22.9%. Employee-related costs represented approximately 60.7% of these expenses. Depreciation and amortization was $94.6 million, or 2.0% of sales.
The effective tax rate declined to 22.1% from 26.6%, primarily because Pennsylvania House Bill 1342 reduced the Company’s projected state tax rate; the change reduced 2022 tax expense by approximately $5.5 million.
Financial position, liquidity and debt
- Cash and cash equivalents were $158.0 million at December 31, 2022, compared with $86.0 million at the prior year-end.
- Marketable securities totaled $186.4 million, consisting primarily of corporate and municipal bonds, plus equity securities.
- Total assets were $1.959 billion and shareholders’ equity was $1.302 billion.
- Inventories increased to $293.3 million from $269.6 million, contributing to the decline in operating cash flow.
- The Company had no borrowings under its revolving credit facility. The facility provides for $30.0 million of aggregate principal capacity, with an additional discretionary amount of up to $70.0 million; availability was $25.5 million after $4.5 million of letters of credit.
- The credit agreement matures September 1, 2024.
- Operating lease liabilities totaled $186.0 million on a present-value basis, with $208.6 million of undiscounted future lease payments.
- Net cash provided by operating activities was $218.0 million; investing cash usage was $111.1 million and financing cash usage was $35.0 million, resulting in a $71.9 million increase in cash.
The Company expects to continue paying quarterly dividends, subject to Board approval. The quarterly dividend increased from $0.32 to $0.34 per share in the fourth quarter of 2022.
Material changes versus the prior comparable period
- Net sales rose 11.2%, supported by inflation, fuel pricing, pharmacy activity, comparable-store growth, and the additional fiscal week.
- Gross margin contracted 120 basis points, primarily due to lower-margin sales mix, higher costs, and the unfavorable LIFO adjustment.
- Operating income increased despite lower operating margin because sales growth and expense leverage more than offset margin pressure.
- Net income and EPS increased partly because of the lower effective tax rate.
- Operating cash flow declined as inventories increased by $23.7 million.
- Capital expenditures declined to $122.2 million from $151.8 million because labor and supply-chain disruptions delayed projects.
- The Company opened or relocated two stores and closed or relocated one, increasing the store count from 196 to 197. It completed nine additions or major remodels versus 13 in 2021.
- Accumulated other comprehensive income declined to a $6.4 million loss, primarily due to unrealized losses on available-for-sale securities.
Guidance, outlook, risks and unusual items
Management planned approximately $150 million of capital expenditures in 2023, including projects carried over from 2022. Priorities include new stores, remodels, technology, distribution facilities, transportation, productivity, customer convenience, human capital, and sustainability.
The filing does not provide formal revenue or earnings guidance. Management expressed confidence in long-term sales growth but noted that the business remains exposed to intense price competition and competitors with greater financial resources.
- Key operating risks include food safety, labor availability and wage inflation, utilities and fuel costs, vendor promotional funding, supply-chain disruptions, weather, regional economic conditions, and changes in government benefits.
- Cybersecurity or information-technology disruptions could affect operations, customer data, payment information, personal health information, reputation, liquidity, and financial results.
- The Company is substantially self-insured for workers’ compensation, general liability, vehicle accidents, and medical claims; actuarial estimates may be affected by inflation, litigation trends, legal interpretations, and claim settlement patterns.
- The investment portfolio is exposed to credit, liquidity, interest-rate, and market risks. At year-end, corporate and municipal bonds had approximately $10.9 million of gross unrealized losses.
- The Company had $13.7 million of unrecognized tax benefits at year-end, of which $3.6 million would affect the effective tax rate if recognized.
- Routine legal proceedings and other contingencies were not expected by management to have a material adverse effect.
- The 2022 results include a material $29.2 million unfavorable non-cash LIFO adjustment and a $5.5 million tax benefit from Pennsylvania tax-law changes.
RSM US LLP issued an unqualified audit opinion on the financial statements and internal control over financial reporting. The auditors identified state income taxes and retail inventory valuation as critical audit matters.
Most important facts for investors to verify
- Whether comparable-store sales growth continues after adjusting for inflation, fuel, pharmacy activity, and the extra 2022 selling week.
- Whether gross-margin pressure from LIFO adjustments, product costs, supply-chain expenses, and sales mix persists.
- The pace and returns of the planned approximately $150 million 2023 capital program, including delayed projects.
- Inventory levels, working-capital requirements, and conversion of earnings into operating cash flow.
- The composition, duration, unrealized losses, and liquidity of the $186.4 million investment portfolio.
- Availability and maturity terms of the revolving credit facility, including the $4.5 million of outstanding letters of credit.
- Labor, utility, fuel, lease, self-insurance, cybersecurity, food-safety, and competitive pressures.
- The effect of Pennsylvania tax-rate reductions and the resolution or expiration of unrecognized tax benefits.
- Governance and control implications of the Weis family’s approximately 65% voting ownership.