Weis Markets, Inc. 2016 Form 10-K Summary
Business context and reporting period
Weis Markets, Inc. operates conventional supermarkets, pharmacies, fuel locations and related food retail businesses in Pennsylvania and six surrounding states. At December 31, 2016, the Company operated 204 stores, compared with 163 at December 26, 2015, and employed approximately 23,000 associates. Operations are reported as one segment. Fiscal 2016 comprised 53 weeks, versus 52 weeks in fiscal 2015. The Weis family owned approximately 65% of outstanding shares and voting power.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $3,136.7 million | $2,876.7 million | 9.0% |
| Gross profit | $872.2 million | $786.7 million | 10.9% |
| Gross margin | 27.8% | 27.3% | +50 bps |
| Income from operations | $98.3 million | $90.8 million | 8.3% |
| Operating margin | 3.1% | 3.2% | Down 10 bps |
| Net income | $87.2 million | $59.3 million | 46.9% |
| Basic and diluted EPS | $3.24 | $2.21 | 46.6% |
| Operating cash flow | $151.6 million | $136.7 million | +$14.9 million |
| Capital expenditures | $142.1 million | $90.2 million | +$51.9 million |
| Cash and cash equivalents | $14.7 million | $17.6 million | Down $2.9 million |
| Long-term debt | $64.5 million | None reported | New borrowing |
Gross margin benefited from a sales mix shift toward higher-margin grocery products and away from fuel. Operating, general and administrative expenses increased 11.2% to $773.8 million, or 24.7% of sales, compared with 24.2% in 2015. Employee-related expenses represented approximately 60% of operating, general and administrative expenses; the $9 hourly base wage and related wage compression had an estimated $6.6 million cost in 2016.
Working capital was $207.7 million at year-end, compared with $232.7 million in 2015. Total assets increased to $1.43 billion from $1.24 billion, while shareholders’ equity increased to $926.7 million from $871.7 million. The Company paid $32.3 million of dividends, or $1.20 per share, and did not repurchase shares.
Material changes versus the prior comparable period
- Total store sales increased 9.0%; excluding the extra week, sales increased 6.9%. Comparable-store sales increased 2.9%, adjusted for the additional week.
- Sales growth was driven primarily by the acquisition of 44 stores: five Mars Super Market stores, 38 former Food Lion stores and one Nell’s Family Market store.
- Acquired locations contributed approximately $133.5 million of 2016 sales: $38.0 million from Mars, $92.5 million from Food Lion and $3.0 million from Nell’s.
- The Company recognized a $23.9 million bargain-purchase gain from the Food Lion acquisition, materially increasing pretax income and reducing the effective tax rate to 30.1% from 35.7%.
- Net cash used in investing activities increased to $186.7 million from $109.8 million, reflecting acquisitions and higher capital spending.
- The Company entered into a $100.0 million unsecured revolving credit facility in September 2016 and had borrowed $64.5 million at year-end. On March 13, 2017, the facility was increased to $120.0 million.
- Pharmacy comparable sales increased 8.4%, while comparable produce sales increased 4.8%. Comparable dairy, meat and fuel sales decreased 2.0%, 0.2% and 7.7%, respectively.
Guidance, outlook, risks and unusual items
Management planned approximately $90 million of capital investment in 2017, funded through cash generated from operations and the revolving credit facility. Management expected wholesale price inflation and diesel fuel prices to increase slightly in 2017. The Company remained focused on acquisitions, store construction and remodels, pricing programs, supply-chain improvements, technology investment and customer loyalty initiatives.
Notable unusual items included the $23.9 million bargain-purchase gain, a $2.2 million LIFO credit, and an $894,000 pretax impairment charge on one property. The Company also reported a 15.4% increase in self-insured health-care costs, primarily related to acquired employees and higher overall health costs.
Key risks include intense price competition, pressure on sales and gross margins, regional economic and weather conditions, labor availability and wage costs, food safety, information-technology disruptions or data breaches, regulatory changes, self-insurance claim volatility, market and interest-rate risk on investments, vendor promotional allowances, and the execution and integration of acquired stores. The Weis family’s controlling ownership may limit minority shareholders’ influence.
Contractual obligations included $252.1 million of operating lease payments and $64.5 million of long-term debt payments. Outstanding letters of credit totaled $16.7 million. Management stated that it did not expect material adverse effects from routine litigation and reported no material unresolved SEC staff comments. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Assess whether sales and earnings growth excluding the 53rd week and the bargain-purchase gain supports the reported 46.9% net-income increase.
- Review the operating performance, integration costs and future profitability of the 44 acquired stores.
- Verify the Company’s ability to fund the planned $90 million 2017 capital program while maintaining dividends and managing debt.
- Monitor the revolving credit facility’s September 2019 maturity, LIBOR-based interest rate, $75 million minimum EBITDA covenant and available capacity after letters of credit.
- Evaluate margin sensitivity to labor costs, vendor allowances, commodity deflation or inflation, fuel prices and competitive pricing.
- Consider the future balance-sheet impact of adopting lease accounting guidance, which management expected to be significant.