Weis Markets, Inc. 2019 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Weis Markets, Inc. is a conventional supermarket chain operating 200 stores and approximately 23,000 associates in Pennsylvania and six surrounding states. The company reports one operating segment and generates revenue primarily from grocery, pharmacy, fuel and manufacturing activities.
This unaudited Form 10-Q covers the 13 and 26 weeks ended June 29, 2019, compared with the periods ended June 30, 2018. The filing was signed August 6, 2019. The company had 26,898,443 common shares outstanding as of that date.
Financial Performance and Position
| Metric | 13 Weeks Ended June 29, 2019 | 13 Weeks Ended June 30, 2018 | 26 Weeks Ended June 29, 2019 | 26 Weeks Ended June 30, 2018 |
|---|---|---|---|---|
| Net sales | $888.0 million | $871.1 million | $1,764.7 million | $1,747.2 million |
| Gross profit | $236.7 million | $240.3 million | $466.2 million | $475.2 million |
| Income from operations | $25.9 million | $26.0 million | $41.8 million | $48.9 million |
| Net income | $20.5 million | $19.1 million | $34.8 million | $35.3 million |
| Diluted EPS | $0.76 | $0.71 | $1.29 | $1.31 |
- Second-quarter sales increased 1.9%; first-half sales increased 1.0%.
- Second-quarter gross margin declined to 26.7% from 27.6%; first-half gross margin declined to 26.4% from 27.2%.
- Second-quarter operating margin was 2.9% versus 3.0%; first-half operating margin was 2.4% versus 2.8%.
- Second-quarter net income increased 7.2%, supported partly by higher investment income and a lower effective tax rate. First-half net income declined 1.4%.
- Second-quarter and first-half effective tax rates were 24.0% and 24.1%, respectively, compared with 27.0% and 27.2% in the prior-year periods.
- Comparable-store sales, adjusted for the Easter holiday shift, increased 1.4% in both the quarter and first half; excluding fuel, increases were 1.5% and 1.6%, respectively.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $79.0 million in the first half of 2019, down from $84.2 million in the prior-year period. Management attributed the decrease primarily to a $9.1 million increase in associate incentive payments and other accounts-payable changes.
- Capital expenditures were $44.3 million, compared with $46.4 million in the prior-year period. Management plans approximately $86 million of capital investment for 2019.
- Cash used in financing activities was $16.7 million, consisting primarily of dividends. The prior-year period included $35.0 million of long-term debt repayment.
- Cash and cash equivalents increased to $51.6 million at June 29, 2019 from $37.8 million at December 29, 2018. Marketable securities totaled $57.4 million, and the company stated that its broader investment portfolio totaled approximately $56.7 million.
- The company had no outstanding obligation under its revolving credit agreement at quarter-end. The facility has a stated principal limit of $50 million plus an additional discretionary amount of $50 million; availability was $88.5 million net of $11.5 million of letters of credit.
- The credit agreement was scheduled to mature September 1, 2019, and management anticipated amending and extending it.
- The company paid $16.7 million in dividends during the first half and approved a quarterly dividend of $0.31 per share payable August 12, 2019. Future dividends remain subject to quarterly board approval.
Material Changes, Outlook and Risks
- The company adopted ASC 842, Leases, effective December 30, 2018. Adoption added significant operating lease assets and liabilities to the balance sheet; reported operating lease right-of-use assets were $190.0 million at June 29, 2019, with operating lease liabilities totaling $199.0 million.
- Approximately 53% of open store facilities were leased as of December 30, 2018. Future minimum operating lease payments totaled $234.8 million, with a present value of lease liabilities of $199.0 million, before sublease income.
- Gross-margin pressure reflected declining retails and costs in fuel, fruits, vegetables and eggs, pharmacy industry changes, and weaker seasonal general merchandise sales due to rainy weather. The company also cited competitive pricing pressures.
- Non-cash LIFO inventory expense was $0.4 million in the first half of 2019 versus $1.4 million in the first half of 2018.
- Management cited customer acceptance of its Low, Low Price private-brand strategy and continued expansion of Weis 2 Go Online and home delivery. Online pickup and delivery services were available in 150 locations, with delivery-only service in an additional 27 locations.
- The Easter holiday shift benefited second-quarter 2019 sales by an estimated $9.7 million; management excluded this amount when presenting comparable-store sales.
- The company closed two stores from its acquired store group during the first quarter and continues to evaluate acquisitions and organic growth opportunities.
- Management expects operating cash flow and available credit to fund working capital, debt requirements, capital expenditures, acquisitions and dividends. Risks include retail competition, price pressure, economic conditions, regulatory changes, technology changes and the ability to extend the credit agreement.
- Management reported no material changes in market risk, no material subsequent events requiring disclosure, and effective disclosure controls as of quarter-end.
Key Facts Investors Should Verify
- Whether the revolving credit agreement was successfully amended or extended before its September 1, 2019 maturity.
- Whether gross-margin pressure from pharmacy practices, commodity pricing and competitive activity persists.
- Progress against the approximately $86 million 2019 capital expansion plan and its effect on operating cash flow.
- The sustainability of comparable-store sales growth after removing the favorable Easter timing impact.
- The effect of ASC 842 lease obligations and approximately $234.8 million of future minimum lease payments on long-term liquidity.
- Whether store closures, acquisitions and digital fulfillment initiatives improve returns and margins.
- The continued funding and board approval of the $0.31 quarterly dividend and any potential share repurchases.