Business Context and Reporting Period
Weis Markets, Inc. operates conventional supermarkets and related manufacturing, pharmacy and fuel businesses across Pennsylvania and six surrounding states. Fiscal 2020 comprised 52 weeks ended December 26, 2020. The Company operated 196 stores at year-end and opened one additional store thereafter, bringing the current total to 197. Operations are reported as one segment. The Weis family owned approximately 65% of outstanding shares.
Fiscal 2020 results benefited materially from increased grocery demand associated with the COVID-19 pandemic. Management cautioned that this benefit may not be indicative of future results.
Financial Performance and Liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $4.113 billion | $3.543 billion | 16.1% |
| Gross profit | $1.100 billion | $938.2 million | 17.3% |
| Gross margin | 26.8% | 26.5% | +30 bps |
| Operating income | $163.2 million | $84.6 million | 92.8% |
| Operating margin | 4.0% | 2.4% | +160 bps |
| Net income | $118.9 million | $68.0 million | 74.9% |
| Net margin | 2.9% | 1.9% | +100 bps |
| Diluted EPS | $4.42 | $2.53 | 74.7% |
| Cash dividends per share | $1.24 | $1.24 | Unchanged |
Comparable-store sales increased 16.4%, or 17.5% excluding fuel. Grocery sales increased to $3.628 billion, representing 88.2% of sales, while pharmacy sales were $356.6 million, fuel sales were $117.8 million and manufacturing sales were $10.3 million.
- Cash provided by operating activities was $278.0 million, up from $171.7 million.
- Capital expenditures were $131.0 million, compared with $101.5 million, equal to 3.2% of sales.
- Net cash used in investing activities was $174.9 million, including $50.8 million of marketable-security purchases.
- Net cash used in financing activities was $33.4 million, consisting primarily of dividends.
- Cash and cash equivalents increased to $136.6 million from $66.9 million.
- Marketable securities totaled $111.9 million, compared with $63.5 million.
- Working capital was $279.9 million and shareholders’ equity was $1.146 billion.
- The Company reported no long-term debt outstanding at year-end. Its unsecured revolving facility provides up to $30.0 million, plus a discretionary $70.0 million, with $25.1 million available after $4.9 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by pandemic-related demand, increased market share and expanded online ordering and delivery services. Weis 2 Go Online was available at approximately 183 to 184 stores, and home delivery at 175 locations.
- Gross margin improved because of sales mix and improved fresh-department sell-through, which reduced product loss. A favorable non-cash LIFO adjustment increased gross profit by only $275 thousand in 2020, versus $5.8 million in 2019.
- Operating expenses increased in dollars but declined to 22.8% of sales from 24.1%, reflecting strong sales leverage. The Company paid more than $32.5 million in employee rewards, including an additional $2 per hour for 15 weeks.
- The effective tax rate increased to 27.3% from 23.3%, primarily due to state taxes, nondeductible employee expenses and the significantly higher taxable-income base.
- Inventory declined to $269.0 million from $279.8 million despite higher sales, supporting operating cash flow.
- The Company increased investment in marketable securities by approximately $43 million and increased property and equipment by approximately $37.5 million, net.
- Store count declined from 198 to 196 during the year because two stores opened and four closed; one additional store opened after year-end.
- Fourth-quarter 2020 net sales were $1.026 billion and net income was $19.4 million, compared with $902.4 million and $18.9 million, respectively, in the fourth quarter of 2019.
Guidance, Outlook, Risks and Unusual Items
Management planned approximately $135 million of capital investment in 2021 for new stores, remodels, technology, distribution facilities and transportation equipment. The Company expected to continue regular quarterly dividends, subject to Board approval, but did not provide earnings or sales guidance.
- COVID-19 created significant uncertainty regarding future demand, employee availability, supply-chain continuity, customer shopping behavior, litigation, regulation and cybersecurity. Management stated that the 2020 financial benefit may not persist.
- The Company faces intense competition from traditional grocers, supercenters, warehouse clubs, drug chains, convenience stores, specialty retailers and online providers, creating pricing and margin pressure.
- Labor is a major cost category. Wage and benefit inflation, labor shortages, regulatory wage increases and potential disruptions could adversely affect profitability.
- Supply-chain costs, fuel prices, vendor promotional allowances and commodity inflation or deflation can materially affect margins.
- Food-safety incidents, cybersecurity breaches, payment-data or health-information exposures and information-technology disruptions could damage operations and reputation.
- The Company is self-insured for significant portions of workers’ compensation, general liability, vehicle and medical claims. Reported liabilities depend on actuarial estimates and could vary from actual claims.
- Future operating-lease payments totaled $241.2 million, including $46.6 million due within one year. Operating lease liabilities totaled $208.2 million at year-end.
- Unrecognized tax benefits totaled $8.3 million, of which $1.7 million would affect the effective tax rate if recognized. State and local tax positions were identified as a critical audit matter.
- Retail inventory valuation using the retail inventory method and LIFO was also identified as a critical audit matter. Reported inventory was $70.4 million below the approximate amount that would result under average cost.
- RSM US LLP issued unqualified opinions on the financial statements and internal control over financial reporting. No material legal proceedings or off-balance-sheet arrangements were reported.
Investor Verification Checklist
- Verify the sustainability of pandemic-related sales and comparable-store growth after normalization of consumer purchasing patterns.
- Reconcile operating cash flow with net income and assess whether inventory and accounts-payable changes are repeatable.
- Review the planned $135 million 2021 capital program against free cash flow, store productivity and future dividend capacity.
- Evaluate the Company’s cash, marketable securities and revolving-credit availability relative to lease obligations and self-insurance liabilities.
- Assess exposure to wage inflation, supply-chain disruption, pharmacy margin pressure, fuel-price volatility and competitive pricing.
- Review LIFO inventory effects, vendor allowances, self-insurance estimates and state tax positions, which involve significant judgment.
- Monitor COVID-19 developments, online fulfillment costs and whether expanded digital services improve or dilute margins.