Business Context and Reporting Period
Weis Markets, Inc. operates 162 retail food stores in Pennsylvania and four surrounding states, supported by a distribution facility, transportation fleet, manufacturing facilities and administrative operations. The company reports one operating segment. This unaudited Form 10-Q covers the 13 and 39 weeks ended September 29, 2012, compared with September 24, 2011.
Key Financial Metrics
| Metric | 13 Weeks Ended September 29, 2012 | 39 Weeks Ended September 29, 2012 |
|---|---|---|
| Net sales | $668.4 million | $2.007 billion |
| Gross profit | $181.3 million | $552.0 million |
| Gross margin | 27.1% | 27.5% |
| Income from operations | $26.5 million | $92.2 million |
| Operating margin | 4.0% | 4.6% |
| Net income | $17.2 million | $60.4 million |
| Net margin | 2.6% | 3.0% |
| Diluted EPS | $0.64 | $2.25 |
| Operating cash flow | Not provided for the quarter | $95.6 million |
| Capital expenditures | Not provided for the quarter | $75.4 million |
At September 29, 2012, cash and cash equivalents were $34.3 million and marketable securities were $83.3 million. Current assets were $417.4 million versus current liabilities of $193.9 million. Total liabilities were $291.1 million and shareholders’ equity was $782.6 million. The company had no outstanding liability under its $50 million short-term credit facility and reported $11.3 million of outstanding letters of credit.
Dividends paid were $24.2 million year-to-date, or $0.90 per share. The board approved a quarterly dividend of $0.30 per share payable November 19, 2012.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 1.5% to $668.4 million; year-to-date sales decreased 0.4% to $2.007 billion.
- Third-quarter net income increased 1.2% to $17.2 million, while year-to-date net income increased 7.3% to $60.4 million.
- Year-to-date operating income increased 7.1%, and operating margin improved from 4.3% to 4.6%.
- Gross margin increased from 27.0% to 27.1% for the quarter and from 27.0% to 27.5% year-to-date.
- Third-quarter comparable-store sales declined 1.7%, or 2.1% excluding fuel. Management attributed the decline partly to unusually strong September 2011 sales following flooding from Hurricanes Irene and Lee.
- The company acquired three former Genuardi’s stores from Safeway on June 11, 2012, for $6.1 million. The stores contributed $9.7 million of third-quarter sales and $11.7 million year-to-date, and generated a $414,000 bargain-purchase gain.
- Operating cash flow declined from $103.9 million to $95.6 million year-to-date, while investing cash use improved from $111.4 million to $74.4 million, principally because 2011 included substantially higher purchases of marketable securities.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2012 capital investment of approximately $110 million, reduced from the previously reported $125 million because some project completion dates shifted into 2013. Planned spending includes new stores, remodels, future expansion sites, technology and distribution facilities.
- Management expects to fund working capital and capital expansion through cash and investment reserves and internally generated operating cash flow.
- Sales were affected by slow economic growth, high unemployment, cautious consumer spending, price-focused promotions, pharmacy generic-drug conversion and commodity deflation. Pharmacy sales declined 3.4% in the quarter, including a $4.5 million impact from brand-to-generic conversion.
- Management expected dairy deflationary pressure to ease in the fourth quarter and diesel prices to stabilize with only modest increases, although fuel, commodity, utility, labor, health-care and regulatory costs remain risks.
- The company changed depreciation for buildings, improvements and equipment from accelerated methods to straight-line prospectively beginning January 1, 2012. Had the prior method continued, third-quarter depreciation would have been $2.9 million higher and net income would have been $1.6 million lower, or $0.06 per share lower; the comparable year-to-date impacts were $8.6 million and $4.8 million, or $0.18 per share.
- Other risks include intense competition, pricing pressure, economic conditions, regulatory developments including the Affordable Care Act, technology changes and the company’s ability to recover higher operating costs through pricing.
- Management reported no material changes in market risk, no material subsequent events requiring disclosure, effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of improved gross and operating margins after adjusting for the depreciation-method change.
- Assess comparable-store sales trends, customer traffic declines and the effect of fuel, pharmacy and commodity pricing.
- Evaluate whether the three acquired Genuardi’s stores can deliver lasting sales and profitability improvements.
- Reconcile planned 2012 capital spending of approximately $110 million with operating cash flow, cash reserves and future project timing.
- Review exposure to labor, health-care, utility, diesel, commodity and competitive pricing costs.
- Confirm the absence of borrowings under the $50 million credit facility and monitor letters of credit, lease obligations and other contingencies.