Business Context and Reporting Period
Weis Markets, Inc. is a Pennsylvania-based conventional supermarket operator serving Pennsylvania and six surrounding states. The company operated 205 stores and employed approximately 23,000 associates at December 30, 2017. Fiscal 2017 comprised 52 weeks, compared with 53 weeks in fiscal 2016. The filing was signed March 15, 2018.
Operations are reported as one segment. Product categories represented 57.2% of sales from center-store products, 30.5% from fresh products, 8.9% from pharmacy services, 3.2% from fuel and 0.2% from other activities.
Financial Performance and Position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $3,466.8 million | $3,136.7 million | 10.5% increase |
| Gross profit | $926.5 million | $872.2 million | 6.2% increase |
| Gross margin | 26.7% | 27.8% | Down 110 basis points |
| Income from operations | $76.4 million | $98.3 million | 22.3% decrease |
| Operating margin | 2.2% | 3.1% | Down 90 basis points |
| Net income | $98.4 million | $87.2 million | 12.9% increase |
| Basic and diluted EPS | $3.66 | $3.24 | 13.0% increase |
| Net cash from operating activities | $165.8 million | $151.6 million | $14.2 million increase |
Net income benefited from a $49.3 million deferred tax reduction resulting from the Tax Cuts and Jobs Act. Excluding this unusual tax benefit, reported earnings would have been materially lower than the stated $98.4 million. The fourth quarter included net income of $63.7 million, or $2.37 per diluted share, substantially reflecting the tax benefit.
Cash and cash equivalents were $21.3 million at year-end, supplemented by $63.7 million of marketable securities. Working capital was $209.0 million, compared with $207.7 million in 2016. Total assets were $1.442 billion and shareholders’ equity was $992.8 million.
Capital expenditures were $95.9 million, compared with $142.1 million in 2016. Net cash used in investing activities was $97.4 million, while financing activities used $61.8 million, including $32.3 million of dividends and $29.5 million of debt repayments. Dividends remained $1.20 per share for the year.
Long-term debt was $35.0 million at year-end, down from $64.5 million. The revolving facility has $100.0 million of principal capacity plus $50.0 million of discretionary availability; $35.0 million was drawn and $18.2 million was committed to letters of credit. Reported unused availability was $46.8 million. The facility matures September 1, 2019 and carries interest at one-month LIBOR plus 0.65%.
Material Changes Versus the Prior Comparable Period
- Sales growth primarily reflected the full-year contribution from 44 stores acquired in 2016. Comparable-store sales, adjusted for the extra week in 2016, increased 1.6%; comparable sales excluding fuel increased 1.2%.
- Sales increased faster than gross profit because gross margin declined to 26.7%. Management cited lower winter sales volume, retail deflation combined with cost inflation, competitive pricing and inventory-management challenges in several acquired-store departments.
- Operating income declined despite higher sales, as gross-margin pressure and higher operating expenses more than offset volume growth.
- Net income increased because the 2017 tax benefit more than offset the absence of the $23.9 million bargain-purchase gain recognized in 2016.
- The company opened two stores and closed three, ending with 205 stores and approximately 9.9 million square feet, versus 204 stores and 9.8 million square feet in 2016.
- Employee-related costs represented approximately 60% of operating, general and administrative expenses. Direct store labor declined as a percentage of sales, while health-care costs increased 4.2% year over year.
Guidance, Outlook, Risks and Unusual Items
Management planned approximately $85.5 million of capital investment in 2018 for new stores, remodels, sites, technology, distribution facilities and transportation equipment. The company expected to continue regular quarterly dividends, subject to board approval, and anticipated further payments on the revolving credit facility.
Management continues to emphasize sales growth, store development and remodeling, customer loyalty and digital ordering, workforce development, private-brand offerings, technology and sustainability. No acquisitions were completed in 2017, although acquisition opportunities remained under review.
- Key risks include intense price competition, margin pressure, online and nontraditional competitors, regional economic conditions and severe weather.
- Labor availability, wage and benefit inflation, minimum-wage requirements and potential labor disruptions could increase expenses.
- Food-safety issues, regulatory changes, technology disruptions or cybersecurity breaches could adversely affect operations, reputation, liquidity and results.
- Self-insurance reserves depend on actuarial assumptions and may vary with claims, litigation, inflation and legal developments.
- The company has substantial operating-lease commitments totaling $245.5 million, including $43.8 million due within one year. Adoption of the new lease standard was expected to materially increase reported balance-sheet assets and liabilities.
- The Weis family controlled approximately 65% of voting power, allowing it to elect a majority of directors and approve shareholder actions.
- The company reported no material pending litigation beyond routine matters. The remaining closed-store lease liability was $39,000 at year-end.
The company adopted or planned adoption of several accounting standards, including revenue recognition and stored-value breakage guidance, with no material expected impact from those standards. The company early adopted the tax-effects reclassification standard for accumulated other comprehensive income.
Important Facts for Investors to Verify
- Reconcile reported 2017 net income and EPS with and without the $49.3 million Tax Cuts and Jobs Act benefit.
- Assess whether the 26.7% gross margin decline is temporary or reflects ongoing competitive, commodity, acquired-store or inventory-management pressure.
- Review performance and profitability of the 44 stores acquired in 2016, including the acquired departments cited as underperforming.
- Verify liquidity after planned 2018 capital expenditures, dividend payments, lease obligations and scheduled debt repayments.
- Monitor the revolving credit facility’s September 2019 maturity, LIBOR exposure and minimum EBITDA covenant of $75.0 million.
- Evaluate the effect of operating-lease accounting adoption on leverage, assets, liabilities and financial ratios.
- Consider the impact of labor costs, food safety, cybersecurity, weather, regulatory developments and the company’s controlled-company structure.
- Confirm that future dividends remain discretionary and depend on operating results, financial condition and board approval.