Business Context and Reporting Period
Weis Markets, Inc. operates 162 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia, supported by distribution, transportation and manufacturing operations. The company reports one operating segment.
This Form 10-Q covers the 13 weeks and 39 weeks ended September 24, 2011, compared with the periods ended September 25, 2010. The financial statements are unaudited.
Financial Performance and Position
| Metric | 13 Weeks Ended Sept. 24, 2011 | Year-to-Date 2011 | Change vs. Prior Comparable Period |
|---|---|---|---|
| Net sales | $678.6 million | $2,014.7 million | +6.0% quarter; +2.9% year to date |
| Gross profit | $183.1 million | $544.3 million | +3.1% quarter; +0.5% year to date |
| Gross margin | 27.0% | 27.0% | Down from 27.8% and 27.7%, respectively |
| Operating income | $26.1 million | $86.1 million | +4.5% quarter; +2.2% year to date |
| Net income | $17.0 million | $56.3 million | +4.1% quarter; +3.8% year to date |
| Basic and diluted EPS | $0.63 | $2.09 | Up from $0.61 and $2.02 |
Quarterly operating and net margins were 3.9% and 2.5%; year-to-date margins were 4.3% and 2.8%. The effective tax rate was 35.6% for the quarter and 36.3% year to date.
At September 24, 2011, cash and cash equivalents were $78.3 million and marketable securities were $71.0 million, compared with $109.1 million and $25.8 million, respectively, at December 25, 2010. Current assets were $426.8 million and current liabilities were $175.0 million. Total assets were $1.018 billion, total liabilities were $256.9 million, and shareholders’ equity was $761.1 million.
The filing does not report outstanding debt or borrowings. Liquidity was supported by cash, marketable securities and internally generated operating cash flow. Outstanding letters of credit totaled $13.6 million, and management did not anticipate drawing on them.
Cash Flow, Capital Allocation and Liquidity
- Operating cash flow was $103.9 million for the first 39 weeks, compared with $112.0 million in the prior year.
- Investing activities used $111.4 million, including $72.2 million for property and equipment and $56.2 million for marketable securities.
- Capital expenditures increased from $33.6 million to $72.2 million, or from 1.7% to 3.6% of sales.
- Financing activities used $23.4 million for dividends, unchanged from the prior year.
- Cash declined by $30.9 million from the beginning of the year to $78.3 million at September 24, 2011.
- Management estimated approximately $100 million of 2011 development investment, while continuing to support a broader capital expansion program previously expected to require approximately $110 million as project completion dates shifted into 2012.
- The regular dividend was $0.87 per share through the first three quarters. After quarter-end, the board approved a quarterly dividend of $0.30 per share and a special one-time dividend of $1.00 per share, payable November 21, 2011.
Material Changes and Management Commentary
- Third-quarter comparable-store sales increased 6.5%; excluding fuel, they increased 5.3%. Year-to-date comparable-store sales increased 4.0%, or 3.2% excluding fuel.
- Sales benefited from a 6.3% increase in average transaction size and a 1.3% increase in identical customer visits during the quarter. Year to date, transaction size increased 4.4% and identical visits increased 0.1%.
- Sales were affected by the divestiture of 25 underperforming SuperPetz stores and three supermarkets.
- Cost inflation and fuel expense pressured margins. Diesel fuel costs increased 48.8% in the quarter and 34.1% year to date. Management expected slight diesel price increases through the remainder of 2011 and 2012.
- Employee-related costs increased 3.0% in the quarter and 1.1% year to date, but declined as a percentage of sales. Electricity expense decreased 10.0% in the quarter and 9.3% year to date.
- Investment income increased 52.0% year to date, partly due to gains on equity-security sales and increased investment in municipal bonds. Management expected higher marketable-securities returns through 2011.
- Management continued its Price Freeze and Gas Rewards programs and expected dairy sales to remain above the prior year at least through the fourth quarter, although inflation could require retail price increases to preserve margins.
- A Fair and Accurate Credit Transactions Act lawsuit was settled for a court-approved cap of $2.0 million. The company accrued $750,000 and paid $554,000 during the third quarter; remaining third-party administrator charges were expected not to exceed $50,000 and were fully accrued.
Outlook, Risks and Contingencies
Management expressed confidence in generating sales growth while recognizing intense competition, cautious consumer spending, high unemployment and pressure to maintain value-oriented pricing. Risks include food and fuel inflation, utilities and labor costs, healthcare legislation, competitive pricing, economic conditions, regulatory changes and the ability to recover higher expenses through retail prices.
The company expected to fund working capital and its capital program through cash and investment reserves and future operating cash flow. Management remained receptive to maintaining a credit facility for potential acquisitions. Store operating leases extend through various dates to 2028. The filing states that there were no material changes in market risk and that disclosure controls and procedures were effective as of September 24, 2011.
Investor Verification Checklist
- Verify whether margin pressure from food inflation, diesel costs and promotional programs continued after the reporting date.
- Assess the cash impact and execution risk of the approximately $100 million 2011 capital plan and projects shifted into 2012.
- Confirm the funding effect of the $1.00 special dividend and ongoing $0.30 quarterly dividend.
- Review the company’s debt and credit-facility position, because the filing does not present a debt balance but notes possible future use of a credit facility.
- Monitor competitive conditions, consumer spending, fuel prices, healthcare costs and the company’s ability to pass cost increases to customers.
- Confirm the final costs and closure of the credit-reporting lawsuit settlement.