Business Context and Reporting Period
Weis Markets, Inc. operates 163 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia, supported by a distribution facility, transportation fleet and manufacturing facilities. The company reports one operating segment. This unaudited Form 10-Q covers the 13 and 39 weeks ended September 26, 2015, compared with September 27, 2014.
Key Financial Metrics
| Metric | 13 Weeks Ended | 39 Weeks Ended |
|---|---|---|
| Net sales | $711.9 million, up 4.1% | $2.143 billion, up 3.9% |
| Gross profit | $194.1 million | $588.2 million |
| Gross margin | 27.3%, versus 27.2% | 27.5%, versus 27.2% |
| Operating income | $19.6 million, down 0.1% | $65.0 million, up 7.1% |
| Operating margin | 2.8%, versus 2.9% | 3.0%, versus 2.9% |
| Net income | $12.8 million, down 5.4% | $42.8 million, up 5.1% |
| Net margin | 1.8%, versus 2.0% | 2.0%, approximately unchanged |
| Diluted EPS | $0.48, versus $0.50 | $1.59, versus $1.51 |
Operating cash flow for the first 39 weeks was $100.5 million, compared with $91.7 million in the prior-year period. Investing cash outflow was $83.5 million, including $64.9 million of property and equipment purchases and net purchases of marketable securities. Financing cash outflow was $24.2 million, entirely consisting of dividends. Cash and cash equivalents declined to $15.9 million from $23.0 million at December 27, 2014.
At September 26, 2015, marketable securities totaled $89.7 million and total current assets were $432.8 million, compared with current liabilities of $209.5 million. Total liabilities were $339.9 million and shareholders’ equity was $863.0 million. The filing does not report outstanding long-term debt. Weis had a $30 million line of credit, with $16.4 million committed to letters of credit, and a separate $50 million short-term credit facility.
Cash dividends were $0.90 per share year-to-date, including a quarterly dividend of $0.30 per share approved for payment in December 2015.
Material Changes Versus the Prior Comparable Period
- Total store sales increased 4.1% in the quarter and 3.9% year-to-date. Comparable-store sales increased 4.0% and 3.9%, respectively; excluding fuel, comparable sales increased 4.6% and 4.8%.
- Customer visits increased 4.9% in the quarter and 4.0% year-to-date, while average sales per transaction declined 0.9% in the quarter and increased 0.1% year-to-date.
- Fuel sales declined 22.2% in the quarter and 26.5% year-to-date due to lower gasoline prices. The resulting shift toward grocery sales contributed to the year-to-date gross-margin improvement.
- Operating, general and administrative expense increased 5.1% in the quarter and 4.8% year-to-date, exceeding quarterly sales growth. Employee-related costs rose due to wage increases, health-care costs and management incentives.
- The company raised the base hourly wage to $9 effective August 2, 2015 and estimated an associated third-quarter cost of $1.2 million. Management did not increase prices to offset the wage increase.
- Investment income declined to a $422,000 loss in the quarter from income of $357,000, principally because of market-related losses in the SERP investment. Year-to-date investment income fell to $695,000 from $1.8 million.
- The company paid $7.9 million for property and equipment associated with a store acquisition in Hanover, Pennsylvania. No goodwill was recognized.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2015 capital investment of approximately $91.8 million, including new stores, remodels, technology and distribution and transportation upgrades. The company expected to fund this program and working capital through cash, investment reserves and internally generated operating cash flow.
- Management expected commodity deflation to continue through the fourth quarter of 2015 and into 2016. Diesel prices were expected to remain relatively steady through the fourth quarter.
- Key operating risks include intense competition, price pressure, changes in economic and regulatory conditions, retail-industry conditions, technology changes, fuel and commodity-price volatility, utility costs and rising employee-related expenses, including potential ACA-related costs.
- The company identified a material weakness in internal control over financial reporting related to the calculation and review of self-insurance reserves, primarily workers’ compensation and general liability reserves. Prior-period financial statements were restated, and retained earnings as of January 1, 2012 was reduced by $14.2 million.
- The self-insurance errors had understated expenses and liabilities over multiple periods. The filing states that the individual prior-period misstatements were immaterial, but their cumulative correction was material to the current-year presentation.
- As of the reporting date, remediation of the material weakness was incomplete. The company engaged an actuarial services provider and expected to complete remediation by December 26, 2015, subject to subsequent testing of control effectiveness.
- The filing states that no material subsequent events required disclosure and that no material changes in market risk occurred during the nine-month period.
Important Facts for Investors to Verify
- Confirm the effectiveness and testing results of the self-insurance reserve remediation and whether the material weakness was fully remediated.
- Reconcile the restated historical results, including the $14.2 million reduction to retained earnings and the effects on prior-period earnings and reserves.
- Assess whether operating expense growth, wage increases, health-care costs and ACA-related costs could continue to pressure operating margins.
- Review the sustainability of sales growth excluding fuel and the effect of continued fuel-price and commodity-price deflation on revenue and gross margin.
- Compare planned 2015 capital expenditures of $91.8 million with actual spending and available cash and investment reserves.
- Monitor liquidity, letters of credit and any future use of the company’s credit facilities, as the filing does not report outstanding long-term debt.