Weis Markets, Inc. 2012 Form 10-K Summary
Business context and reporting period
Weis Markets operates conventional supermarkets and one Save-A-Lot store across Pennsylvania and four surrounding states. The company reported one operating segment and operated 163 retail food stores at December 29, 2012, including three former Genuardi’s locations acquired from Safeway on June 11, 2012. Fiscal 2012 comprised 52 weeks, compared with 53 weeks in fiscal 2011. The filing was signed March 14, 2013.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $2.701 billion | $2.753 billion | (1.9%) |
| Gross profit | $742.6 million | $735.9 million | 0.9% |
| Gross margin | 27.5% | 26.7% | +80 basis points |
| Operating income | $127.0 million | $114.3 million | 11.2% |
| Operating margin | 4.7% | 4.2% | +50 basis points |
| Net income | $82.5 million | $75.6 million | 9.2% |
| Basic and diluted EPS | $3.07 | $2.81 | 9.3% |
| Cash flow from operations | $124.0 million | $152.4 million | $(28.4) million |
Fourth-quarter 2012 net sales were $694.3 million and net income was $22.1 million, or $0.83 per diluted share, compared with $737.8 million, $19.3 million and $0.72 per share, respectively, in the fourteen-week fourth quarter of 2011.
At year-end, cash and cash equivalents were $21.4 million, marketable securities were $82.5 million, working capital was $229.7 million, total assets were $1.090 billion and shareholders’ equity was $795.7 million. The filing reports no outstanding borrowings under the company’s $50 million short-term credit facility. Letters of credit totaled $12.8 million.
Capital expenditures, including the acquired business, were $115.9 million, or 4.3% of sales. Management estimated approximately $125 million of capital investment for 2013. Cash dividends were $1.20 per share in 2012, compared with $2.17 per share in 2011, which included a special dividend.
Material changes versus the prior comparable period
- Reported sales declined because 2012 had one fewer week than 2011. After adjusting for the extra week, total sales were unchanged; comparable-store sales decreased 0.1%, or 0.5% excluding fuel.
- Gross margin improved to 27.5%, aided in part by a lower LIFO charge of $1.2 million versus $8.7 million in 2011.
- Operating income and net income increased despite lower sales. Operating expenses decreased 1.0%, while depreciation declined following a prospective change from accelerated depreciation to straight-line depreciation.
- Had the prior accelerated depreciation method continued, 2012 depreciation would have been $11.5 million higher and net income would have been approximately $6.8 million lower, or $0.25 per share lower, after tax.
- Pharmacy sales declined 3.1% on an adjusted basis, including a $10.4 million sales reduction from the conversion of branded drugs to lower-priced generics. Comparable pharmacy units increased 0.4%.
- Cash flow from operations declined primarily due to a $17.9 million increase in inventories and lower operating working-capital contributions.
- The company acquired three stores for $6.1 million, recognized a $414,000 bargain-purchase gain and attributed $22.1 million of 2012 sales to the acquired locations.
Guidance, outlook, risks and unusual items
Management expected moderate wholesale price inflation and relatively steady diesel fuel prices in 2013. It planned to fund the approximately $125 million 2013 expansion program through cash and investment reserves and internally generated operating cash flow. The company continued price-freeze, promotional, loyalty and gas-rewards programs to address cautious consumers and intense competition.
- Key risks include intense price competition, regional economic weakness, weather disruptions, food-safety events, labor and healthcare costs, fuel and utility costs, payment-card interchange fees, regulatory changes, information-technology disruptions and vendor promotional allowances.
- The company held $82.5 million of marketable securities, including municipal bonds and equity securities, exposed to credit, liquidity, interest-rate and market risks. Gross unrealized gains were $9.0 million and gross unrealized losses were $497,000 at year-end.
- Operating lease commitments totaled $224.2 million through 2028, including $32.2 million due in 2013. These obligations were off balance sheet under the accounting rules then in effect. Potential lease-accounting changes could materially increase reported assets and liabilities and affect expense classification.
- The company is substantially self-insured. It was liable for associate health claims up to $1.25 million per member before March 1, 2013 and $2.0 million per member thereafter; workers’ compensation exposure was capped at $2.0 million per claim.
- Closed-store lease liabilities were $635,000. Routine legal proceedings were not expected by management to have a material adverse effect.
- The effective tax rate increased to 37.0% from 35.7%, primarily due to a reduced Section 199 domestic production deduction.
Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements and reported that internal control over financial reporting was effective as of December 29, 2012.
Important facts for investors to verify
- Assess underlying sales trends after normalizing for the 53rd week in 2011, fuel sales and the three-store acquisition.
- Evaluate whether improved margins and earnings are sustainable without the benefit of lower LIFO charges and reduced depreciation expense from the accounting-method change.
- Monitor inventory growth, operating cash conversion and funding capacity for the planned 2013 capital program.
- Review pharmacy generic-drug pressure, promotional spending and vendor allowances for potential effects on sales and margins.
- Quantify the economic impact of the $224.2 million operating lease portfolio and any subsequent lease-accounting changes.
- Review marketable-securities exposure, self-insurance estimates, tax contingencies and the company’s 65% family voting control.