Weis Markets, Inc. — 2015 Q2 Form 10-Q Summary
Business context and reporting period
Weis Markets operated 163 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia as of June 27, 2015. The company also operated a distribution facility, transportation fleet and three manufacturing facilities, and reported one operating segment.
The filing covers the 13 and 26 weeks ended June 27, 2015, compared with the corresponding periods ended June 28, 2014. The financial statements are unaudited.
Financial performance and position
| Metric | 13 weeks ended June 27, 2015 | 13 weeks ended June 28, 2014 | 26 weeks ended June 27, 2015 | 26 weeks ended June 28, 2014 |
|---|---|---|---|---|
| Net sales | $718.4 million | $691.9 million | $1,430.8 million | $1,379.0 million |
| Gross profit | $198.9 million | $187.7 million | $394.0 million | $374.4 million |
| Gross margin | 27.7% | 27.1% | 27.5% | 27.2% |
| Income from operations | $25.2 million | $19.4 million | $44.7 million | $41.7 million |
| Operating margin | 3.5% | 2.8% | 3.1% | 3.0% |
| Net income | $16.4 million | $12.8 million | $29.5 million | $27.6 million |
| Net margin | 2.3% | 1.8% | 2.1% | 2.0% |
| Diluted EPS | $0.61 | $0.48 | $1.10 | $1.02 |
Cash flow from operations was $63.9 million in the first half of 2015, compared with $55.7 million in the prior-year period. Investing activities used $46.9 million, primarily for $39.0 million of property and equipment purchases and net purchases of marketable securities. Financing activities used $16.1 million for dividends.
Cash and cash equivalents were $23.9 million at June 27, 2015, compared with $23.0 million at December 27, 2014. Marketable securities totaled $79.6 million, and total assets were $1.19 billion. Total liabilities were $316.8 million and shareholders’ equity was $871.1 million. The filing does not report outstanding long-term debt. The company had a $30 million line of credit, with $18.1 million committed to letters of credit, and a separate $50 million short-term credit facility.
Cash dividends were $0.30 per share for the quarter and $0.60 per share year to date. The board approved another $0.30 per share quarterly dividend payable August 3, 2015.
Material changes versus the prior comparable period
- Second-quarter and year-to-date sales increased 3.8%.
- Second-quarter net income increased 28.4%; first-half net income increased 7.2%.
- Gross margin improved by 0.6 percentage points in the quarter and 0.3 percentage points year to date, primarily because grocery sales represented a larger mix than lower-margin fuel sales.
- Operating income increased 29.7% in the quarter and 7.1% year to date.
- Comparable-store sales increased 4.3% in the quarter and 3.8% year to date; excluding fuel, the increases were 5.1% and 4.9%, respectively.
- Fuel sales declined 24.1% in the quarter and 28.8% year to date because of lower retail fuel prices.
- Employee-related costs increased $4.4 million in the quarter and $12.1 million year to date. Depreciation and amortization increased because of the company’s capital expansion program.
- Capital expenditures increased to $39.0 million from $35.8 million, including $8.7 million to purchase a previously leased store location.
- Investment income declined 10.8% in the quarter and 20.7% year to date, primarily because a stock dividend received in the first quarter of 2014 did not recur.
Guidance, outlook, risks and unusual items
- Management estimated approximately $91.8 million of 2015 capital investment for new stores, remodels, site acquisitions, technology and distribution and transportation upgrades.
- Management expects to fund working capital and the capital program with cash, investment reserves and internally generated operating cash flow.
- The company increased its base hourly wage to $9 effective August 2, 2015, without increasing prices to offset the cost. Management estimated that new Affordable Care Act requirements could increase costs by approximately $1.6 million.
- Management cited competitive pressure, potential price pressure, retail-industry conditions, general economic conditions, regulatory changes, technology changes and capital-expenditure requirements as risks.
- Results remain sensitive to fuel, utility, commodity, labor, healthcare and insurance costs. Management expected diesel fuel prices to remain fairly steady through the third quarter of 2015, based on cited external projections.
- The company recognized a $441,000 pretax gain from the sale of property in the first half of 2015, compared with a $1.7 million gain in the prior-year period.
- The company stated that there were no material subsequent events requiring disclosure, no material changes in market risk, and no material changes to internal control over financial reporting.
- Adoption of the discontinued-operations guidance had no impact on the 2015 financial statements. The company was evaluating the future revenue-recognition standard, which was deferred to fiscal 2018.
Investor verification checklist
- Verify the sustainability of comparable-store sales growth and the extent to which it reflects pricing, inflation, promotions and customer traffic.
- Assess whether gross-margin improvement from the shift away from fuel sales persists as fuel prices and product mix change.
- Monitor labor, healthcare and Affordable Care Act costs, including the effect of the $9 hourly wage rate.
- Compare actual 2015 capital spending with the planned $91.8 million program and evaluate its effect on operating cash flow and liquidity.
- Review the company’s letters of credit, credit facilities and any future borrowing needs; the filing does not report long-term debt outstanding.
- Evaluate marketable-securities exposure, including municipal bonds, equity securities and related interest-rate and valuation risks.
- Review future filings for implementation effects from the revenue-recognition and inventory accounting standards.