Weis Markets, Inc. 2018 Form 10-K Summary
Business context and reporting period
Weis Markets, Inc. operates conventional supermarkets in Pennsylvania and six surrounding states, with grocery, pharmacy, fuel, fresh food, prepared food and general merchandise offerings. Fiscal 2018 comprised 52 weeks ended December 29, 2018; fiscal 2017 also comprised 52 weeks, while fiscal 2016 comprised 53 weeks. The company operated 202 stores at year-end, compared with 205 in 2017, and reported as a single segment. Two former Food Lion stores were closed during 2018, and two additional stores were closed in January 2019, bringing the current count to 200.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $3.509 billion | $3.467 billion | Up 1.2% |
| Gross profit | $935.0 million | $912.5 million | Up 2.5% |
| Gross margin | 26.6% | 26.3% | Up 30 basis points |
| Operating income | $83.6 million | $76.4 million | Up 9.4% |
| Operating margin | 2.4% | 2.2% | Up 20 basis points |
| Net income | $62.7 million | $98.4 million | Down 36.3% |
| Diluted EPS | $2.33 | $3.66 | Down 36.3% |
| Cash flow from operations | $148.4 million | $160.3 million | Down $11.9 million |
| Capital expenditures | $95.7 million | $95.9 million | Approximately flat |
Comparable-store sales increased 0.7% in 2018 after adjustment for the extra week in 2016; comparable sales excluding fuel increased 0.3%. Grocery represented 87.3% of sales, pharmacy 9.0%, fuel 3.6% and manufacturing 0.1%.
Cash and cash equivalents were $37.8 million at year-end, compared with $47.9 million in 2017. Marketable securities totaled $54.3 million, and working capital was $201.9 million. Total assets were $1.432 billion and shareholders’ equity was $1.023 billion. Long-term debt was zero at year-end, compared with $35.0 million in 2017. The company had $87.1 million of availability under its revolving credit agreement, including $12.9 million of outstanding letters of credit. The facility matures September 1, 2019.
Financing cash outflows totaled $67.5 million, including $32.5 million of dividends and $35.0 million of debt repayments. The annual dividend increased to $1.21 per share from $1.20. Management expected regular quarterly dividends to continue, subject to board approval.
Material changes versus the prior comparable period
- Sales increased modestly, supported by comparable-store growth, targeted marketing, fresh-category inflation and higher fuel prices.
- Gross margin improved due to price optimization, private-brand initiatives, inventory management and stronger fresh-category sell-through.
- Operating income improved despite higher employee-related costs, rent, depreciation and amortization, self-insured health-care costs and incentive accruals. Self-insured health-care expense increased 6.6%, partly because of unusually high-dollar claims.
- Net income and EPS declined primarily because 2017 benefited from a $49.3 million deferred-tax reduction related to the Tax Cuts and Jobs Act. The 2017 quarterly results also included this tax benefit.
- Investment income and interest expense changed from $2.6 million of income in 2017 to a $1.5 million loss in 2018, including a $1.6 million loss from adopting fair-value accounting for equity securities.
- The company recorded a $1.5 million pre-tax impairment charge on one store property in 2018.
- Operating cash flow declined because of higher income-tax payments and changes in accounts payable, while capital spending remained near $96 million.
Guidance, outlook, risks and unusual items
Management planned approximately $81.7 million of capital investment in 2019 for new stores, remodels, technology, distribution facilities and transportation equipment. The company continued to investigate acquisitions but reported no pending acquisitions. It launched a private-brand “Low, Low Price” strategy in January 2019, moving from high-low pricing toward everyday-low pricing.
Online pickup was available at 89 stores and home delivery at 173 stores during 2018. Management stated that the acquired store group was generating positive cash flow and that it expected the adverse margin impact of the acquired stores to lessen as they were further developed.
Key risks include intense price and format competition, regional economic and weather volatility, food safety, labor availability and wage inflation, fuel and utility costs, execution of store expansion and remodeling, cybersecurity and technology disruptions, regulatory changes, self-insurance claim variability, vendor promotional allowances, marketable-securities volatility and the company’s dependence on the Weis family, which controlled approximately 65% of voting power. The company had $242.3 million of future operating-lease commitments, including $43.7 million due within one year.
The company expected adoption of the new lease accounting standard to add approximately $210 million of assets and liabilities to the balance sheet, without a significant effect on the income statement or cash flows. Management reported no material pending legal proceedings, and the independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the effect of the 2017 Tax Cuts and Jobs Act benefit when comparing 2018 earnings with 2017.
- Assess whether modest comparable-store sales growth and the 2018 gross-margin improvement can persist in a highly competitive market.
- Review the September 2019 revolving-credit maturity, facility availability, letters of credit and refinancing plans.
- Evaluate the company’s ability to fund approximately $81.7 million of planned 2019 capital spending while maintaining dividends.
- Monitor lease capitalization under the new lease standard and the resulting increase in reported assets and liabilities.
- Review store-level performance, impairment risk and the continued integration and profitability of the 2016 acquired stores.
- Consider exposure to labor costs, self-insured claims, vendor allowances, fuel prices, cybersecurity events and severe weather.