Weis Markets, Inc. — Form 10-Q Summary
Business context and reporting period
Weis Markets operated 165 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia as of September 28, 2013. The company reports one operating segment and generates revenue from grocery, pharmacy, fuel, prepared foods and other retail products. This filing covers the 13 and 39 weeks ended September 28, 2013, compared with the corresponding periods ended September 29, 2012.
Key financial metrics
| Metric | 13 weeks ended Sept. 28, 2013 | 13 weeks ended Sept. 29, 2012 | 39 weeks ended Sept. 28, 2013 | 39 weeks ended Sept. 29, 2012 |
|---|---|---|---|---|
| Net sales | $661.4 million | $668.4 million | $2,006.2 million | $2,007.1 million |
| Gross profit | $182.8 million | $181.3 million | $564.2 million | $552.0 million |
| Gross margin | 27.6% | 27.1% | 28.1% | 27.5% |
| Operating income | $17.8 million | $26.5 million | $86.4 million | $92.2 million |
| Operating margin | 2.7% | 4.0% | 4.3% | 4.6% |
| Net income | $11.7 million | $17.2 million | $56.0 million | $60.4 million |
| Net margin | 1.8% | 2.6% | 2.8% | 3.0% |
| Diluted EPS | $0.43 | $0.64 | $2.08 | $2.25 |
Operating cash flow for the first 39 weeks was $109.0 million, compared with $95.6 million in the prior-year period. Capital expenditures were $89.3 million, versus $75.4 million, and investing cash outflow was $78.0 million. Dividends paid were $24.2 million, or $0.90 per share year to date.
At September 28, 2013, cash and cash equivalents were $28.2 million, marketable securities were $73.7 million and total current assets were $412.4 million. Total liabilities were $307.7 million and shareholders’ equity was $826.0 million. The filing does not report outstanding funded debt; liquidity consisted principally of cash, marketable securities and internally generated operating cash flow.
Material changes versus the prior comparable period
- Third-quarter sales decreased 1.0%; year-to-date sales were essentially unchanged.
- Comparable-store sales decreased 2.9% in the third quarter and 2.3% year to date. Excluding fuel, comparable sales decreased 2.8% and 2.5%, respectively.
- Gross margin improved by 50 basis points in the quarter and 60 basis points year to date.
- Operating income decreased 32.6% in the quarter and 6.3% year to date, primarily because operating, general and administrative expenses increased 6.5% in the quarter and 3.9% year to date.
- Third-quarter net income declined 31.9%, while year-to-date net income declined 7.3%. The effective tax rate increased to 38.4% in the quarter and 38.0% year to date, compared with 36.9% and 36.8%.
- Identical customer visits decreased 3.7% in the quarter and 3.4% year to date, partially offset by higher average sales per transaction of 0.8% and 1.1%, respectively.
- Pharmacy sales were affected by brand-to-generic conversions, including Lipitor and Plavix. Pharmacy sales declined $0.8 million in the quarter and $12.3 million year to date from these conversions.
Guidance, outlook, risks and unusual items
- Management estimated that 2013 development plans would require approximately $120.0 million of investment, while remaining committed to a previously reported $135.0 million capital expansion program; project completion dates shifted from 2013 to 2014.
- Management expected to fund working capital and capital investments through cash and investment reserves and future operating cash flow.
- Management cited slow economic growth, high unemployment, declining household income, customer price sensitivity and intense competition as continuing pressures. Promotional initiatives included the Price Freeze, Gas Rewards and targeted value programs.
- Operating expenses included an estimated $6.1 million charge related to the September 21, 2013 separation agreement with former President and Chief Executive Officer David J. Hepfinger.
- The company recorded a $2.1 million pre-tax impairment charge for four properties during the third quarter.
- Investment income increased due partly to gains on sales of equity securities. Year-to-date investment income was $3.9 million, compared with $3.0 million.
- Outstanding letters of credit totaled $16.9 million, primarily supporting performance, payment, deposit or surety obligations. Management did not expect to draw on them.
- Key risks include retail competition, economic conditions, price pressures, fuel and utility costs, labor and health-care expenses, regulatory changes, technology requirements and the potential inability to recover rising costs through retail pricing.
- The company had no material changes in market risk. Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess whether the decline in comparable-store traffic and sales persists and whether promotional spending can restore sales growth without eroding margins.
- Determine whether the $6.1 million executive separation charge is a one-time item and review the related agreement for additional obligations.
- Evaluate the scale, timing and returns of the capital expansion program, including the difference between the $120.0 million current estimate and the previously reported $135.0 million plan.
- Monitor pharmacy revenue effects from additional brand-to-generic conversions and the effectiveness of immunization and pet-prescription initiatives.
- Review property impairment assumptions and whether additional store or asset impairments may be required.
- Confirm liquidity after capital expenditures and dividends, including the company’s reliance on marketable securities and internally generated cash flow.