Weis Markets, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended March 30, 2019, compared with the thirteen weeks ended March 31, 2018. Weis Markets operated approximately 200 supermarkets in Pennsylvania and six surrounding states, with nearly 23,000 associates. The company reported one operating segment.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $876.7 million | $876.1 million | 0.1% |
| Gross profit | $229.6 million | $234.9 million | (2.3%) |
| Gross margin | 26.2% | 26.8% | Down 0.6 percentage points |
| Operating income | $16.0 million | $22.8 million | (30.0%) |
| Operating margin | 1.8% | 2.6% | Down 0.8 percentage points |
| Net income | $14.3 million | $16.2 million | (11.7%) |
| Net margin | 1.6% | 1.8% | Down 0.2 percentage points |
| Diluted EPS | $0.53 | $0.60 | (11.7%) |
| Cash dividend per share | $0.31 | $0.30 | Increased |
Sales mix: Grocery sales were $766.9 million, pharmacy sales $81.8 million, fuel sales $26.5 million, and manufacturing sales $1.6 million. Comparable-store sales increased 1.4% after adjusting for the Easter holiday shift, or 1.8% excluding fuel.
Cash flow: Net cash provided by operating activities was $33.7 million, down from $50.8 million. Capital expenditures were $24.4 million, compared with $21.8 million, and net cash used in investing activities was $31.3 million. Dividends paid were $8.3 million. Cash and cash equivalents decreased by $6.0 million to $31.8 million during the quarter.
Liquidity and debt: Marketable securities totaled $59.1 million, and the company reported $88.6 million of availability under its revolving credit agreement, net of $11.4 million of letters of credit. The $50.0 million unsecured facility has an additional discretionary amount of up to $50.0 million and matures September 1, 2019. The company had no payments on long-term debt during the quarter.
Balance sheet: Total assets were $1.61 billion and shareholders’ equity was $1.03 billion at March 30, 2019. Operating lease right-of-use assets of $193.8 million and operating lease liabilities of $202.8 million were recognized on the balance sheet following adoption of the new lease standard.
Material Changes Versus the Prior Period
- Sales were essentially flat, although adjusted comparable-store sales increased.
- Gross margin declined due primarily to lower retail prices and costs for fuel, fruits, vegetables and eggs, as well as pharmacy industry pressures.
- Operating expenses increased 0.7%, driven in part by supplemental executive retirement plan expense and associate health-care costs. Utilities expense declined due partly to energy-efficiency investments.
- Operating income fell 30.0%, reflecting lower gross profit and higher operating expenses.
- Investment income and interest expense improved to $2.9 million of income from a $0.5 million loss, including a $625,000 unrealized gain on equity securities versus a $780,000 unrealized loss in the prior-year quarter.
- The effective tax rate declined to 24.2% from 27.4%.
- Operating cash flow declined $17.1 million, primarily because of a $9.1 million increase in associate incentive payments and decreases in accounts payable.
- The company closed two stores from the acquired store group during the first quarter.
- The company adopted ASU 2016-02, Leases, on December 30, 2018. Management stated that the adoption materially affected the balance sheet but did not materially affect the statements of income or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately $86 million of capital investment in 2019, including new stores, remodels, site acquisitions, technology, distribution facilities and transportation equipment.
- Management expected operating cash flow and available revolver capacity to fund working capital, debt requirements, capital expenditures, acquisitions and dividends.
- Management anticipated product costs would remain stagnant. No formal earnings or sales guidance was provided.
- The Easter holiday shift benefited the first quarter of 2018 by approximately $9.7 million and is expected to adversely affect the second-quarter 2019 comparison by a similar amount.
- The company launched its “Low, Low Price” private-brand pricing strategy in January 2019 and expanded Weis 2 Go Online to 131 locations. Home delivery was available at 174 locations.
- Management cited risks from intense retail competition, price pressures, economic conditions, regulatory changes, technology, capital expenditure requirements and changing pharmacy-industry practices.
- Approximately 53% of open store facilities were operated under leases expiring at various dates through 2033. Future minimum operating lease payments totaled $246.1 million before interest, offset by $22.3 million of minimum sublease and rental income.
- The company stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting, apart from additional controls implemented for lease accounting.
Key Facts for Investors to Verify
- Whether comparable-store sales growth can offset continued gross-margin pressure, particularly in pharmacy, fuel and fresh-food categories.
- The renewal or refinancing status of the revolving credit agreement before its September 1, 2019 maturity.
- Actual 2019 capital expenditures compared with the approximately $86 million plan and the related effect on cash balances.
- Whether the Easter timing impact materially affects second-quarter 2019 sales and comparisons.
- The performance and margin trajectory of the acquired store group, including the effect of the two store closures.
- The sustainability of quarterly dividends given lower operating cash flow and planned capital investment.
- The balance-sheet and cash-flow effects of the company’s operating lease commitments.