Weis Markets, Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Weis Markets operates 204 conventional supermarkets with more than 23,000 associates across Pennsylvania and six surrounding states. The company also operates manufacturing facilities and sells fuel, pharmacy products and general merchandise. This unaudited Form 10-Q covers the 13 and 39 weeks ended September 29, 2018, compared with the periods ended September 30, 2017.
Key financial metrics
| Metric | 13 weeks ended September 29, 2018 | 13 weeks ended September 30, 2017 | 39 weeks ended September 29, 2018 | 39 weeks ended September 30, 2017 |
|---|---|---|---|---|
| Net sales | $869.1 million | $854.3 million | $2.616 billion | $2.583 billion |
| Gross profit | $232.3 million | $219.6 million | $707.5 million | $682.4 million |
| Gross margin | 26.7% | 25.7% | 27.0% | 26.4% |
| Income from operations | $17.5 million | $6.2 million | $66.4 million | $54.2 million |
| Operating margin | 2.0% | 0.7% | 2.5% | 2.1% |
| Net income | $14.2 million | $4.4 million | $49.5 million | $34.8 million |
| Net margin | 1.6% | 0.5% | 1.9% | 1.3% |
| Basic and diluted EPS | $0.53 | $0.16 | $1.84 | $1.29 |
For the first 39 weeks, operating cash flow was $112.1 million versus $95.8 million in the prior-year period. Capital expenditures were $64.5 million, dividends paid were $24.2 million, and debt repayments were $35.0 million. Net cash used in investing activities was $62.5 million and net cash used in financing activities was $59.2 million, resulting in a $9.6 million decrease in cash. Cash and cash equivalents ended at $38.3 million.
At September 29, 2018, marketable securities totaled $55.3 million. The company had no revolver borrowings and $14.2 million of outstanding letters of credit. Total liabilities were $406.7 million, including no long-term debt, compared with $35.0 million of long-term debt at December 30, 2017. Shareholders’ equity was $1.018 billion.
Material changes versus the prior comparable period
- Third-quarter sales increased 1.7%; sales for the first 39 weeks increased 1.3%.
- Gross profit increased 5.8% in the quarter and 3.7% year to date, with gross margin expanding 100 basis points and 60 basis points, respectively.
- Operating income increased 183.2% in the quarter and 22.6% year to date.
- Net income increased 219.3% in the quarter and 42.4% year to date, supported by higher operating income and lower effective tax rates.
- Comparable-store sales increased 0.7% in both the quarter and year-to-date period after adjustment for the July 4 holiday shift. Excluding fuel, adjusted comparable-store sales increased 0.2% in both periods.
- Fuel sales benefited from higher gasoline prices; comparable fuel sales increased 15.7% in the quarter and 14.7% year to date.
- Management attributed gross-margin improvement to price optimization, private-brand initiatives, inventory management and improved fresh-department sell-through.
- Depreciation and amortization increased to $69.5 million year to date from $63.5 million, reflecting the company’s capital expansion program.
- The effective tax rate declined to 26.2% year to date from 38.0%, primarily because of the Tax Cuts and Jobs Act and the reduction in the federal corporate tax rate.
Guidance, outlook, risks and unusual items
- Management planned approximately $85.5 million of 2018 capital investment, including new stores, remodels, technology, sites, distribution facilities and transportation equipment. Two new stores opened during the first 39 weeks.
- Management expects operating cash flow and available credit to fund working capital, capital expenditures, acquisitions and dividends. The company expects to continue regular quarterly dividends, subject to board approval.
- The board approved a quarterly dividend of $0.31 per share payable November 26, 2018 to shareholders of record November 9, 2018.
- On October 24, 2018, after the quarter end, the revolving credit commitment was amended from $100 million to $50 million, with an additional discretionary amount of $50 million. The facility matures September 1, 2019, and requires trailing twelve-month EBITDA of at least $75 million.
- The acquired store group was generating positive cash flow, although management continued to work on integration and cost improvements. One acquired-group store was closed during the quarter; there were no pending acquisitions.
- Weis 2 Go Online was available at 87 locations, and home delivery had been introduced at 172 locations during the third quarter.
- Adoption of revenue-recognition guidance under ASC 606 was not material. Adoption of ASU 2016-01 resulted in a $0.4 million third-quarter gain and a $0.9 million year-to-date loss from equity-security fair-value changes, with a $5.5 million reclassification from accumulated other comprehensive income to retained earnings.
- The company is evaluating the forthcoming lease standard and expects adoption to have a significant effect on the balance sheet.
- Management cited risks from economic conditions, retail-industry competition, price pressures, regulation, technology changes, capital requirements and competitors with greater financial resources. The company is self-insured for certain employee health-care and workers’ compensation costs.
Most important facts for investors to verify
- Whether gross-margin improvement and stronger operating results are sustainable after favorable pricing, mix, fuel and fresh-department factors.
- The effect of the October 2018 reduction in committed revolving-credit availability and the September 2019 maturity.
- Progress and returns from the $85.5 million capital expansion program and the performance of acquired stores.
- Future self-insurance claims, labor costs, health-care costs and competitive pricing pressures.
- The impact of lease-accounting adoption on reported assets, liabilities and leverage.
- Whether comparable-store sales remain positive excluding fuel and holiday timing effects.