Business context and reporting period
Ingles Markets, Inc. operates 202 supermarkets across six Southeastern states, along with a fluid dairy business and shopping-center rentals. This unaudited Form 10-Q covers the 13 weeks and 26 weeks ended March 28, 2015, compared with the periods ended March 29, 2014. The company reported 202 stores at quarter-end.
Key financial results
| Metric | Three months ended Mar. 28, 2015 | Six months ended Mar. 28, 2015 |
|---|---|---|
| Net sales | $915.3 million | $1,879.8 million |
| Gross profit / margin | $218.7 million / 23.9% | $443.1 million / 23.6% |
| Operating income / margin | $33.6 million / 3.7% | $71.2 million / 3.8% |
| Interest expense | $11.6 million | $23.6 million |
| Net income / margin | $14.3 million / 1.6% | $29.3 million / 1.6% |
| Class A diluted EPS | $0.71 | $1.45 |
For the six months, operating cash flow was $58.9 million, capital expenditures were $44.3 million, and cash dividends paid were $6.5 million. Cash at March 28 was $8.7 million. Total debt was $928.5 million, versus $937.3 million at September 27, 2014; current liabilities were $232.0 million and current assets were $425.4 million. The $175 million revolving credit facility had $29.7 million drawn. The company said it was in compliance with debt covenants.
Material changes versus the prior comparable periods
- Quarterly sales declined 3.4% to $915.3 million, principally because lower retail gasoline prices reduced gasoline sales dollars 28.0%. Gasoline volume increased 10.4%. Excluding gasoline, comparable-store sales rose 1.2%; transactions fell 0.7% while average transaction size increased 3.2%.
- Quarterly gross profit increased 6.1%, and gross margin rose to 23.9% from 21.7%. Excluding gasoline, grocery-segment gross margin improved 47 basis points. Operating income rose to $33.6 million from $27.8 million, and net income increased to $14.3 million from $10.5 million.
- For the first half, sales decreased 0.7%, while sales excluding gasoline increased 2.0% and comparable-store sales excluding gasoline increased 1.8%. Gross profit rose 8.2%; net income increased to $29.3 million from $20.0 million.
- Operating and administrative expenses rose 4.0% in the quarter and $16.7 million in the first half. Management cited higher wages, insurance claims, and depreciation; vendor advertising support and related expenses decreased.
- Operating cash flow increased to $58.9 million from $50.7 million in the first half. Investing used $43.6 million and financing used $15.2 million, including net debt repayments and dividends.
Outlook, risks and notable items
- Fiscal 2015 capital expenditures were estimated at $100–$140 million; the company expected annual net capital expenditures of approximately $100–$160 million thereafter. Spending is directed mainly toward store improvements, equipment, technology, distribution, and planned store openings.
- Management expected cash from operations, available credit and financing to fund planned capital spending, working capital and debt service, but cautioned that financing may not be available on acceptable terms. It expected to continue quarterly dividends, subject to board discretion and debt restrictions.
- Sales growth was described as dependent on economic conditions, inflation, gasoline and raw-milk prices, and maturation of new or remodeled stores. Risks include competition, labor and utility costs, adverse weather affecting food supply and delivery, and execution of expansion plans.
- Self-insurance reserves totaled $30.3 million; management noted that claims estimates may differ from actual outcomes. The company reported no asset impairments in the first half and no material changes in contractual obligations or market-risk factors. A higher first-half effective tax rate reflected discrete items management did not expect to recur.
Important facts for investors to verify
- Whether improved grocery margins and comparable-store sales excluding gasoline persist, and how gasoline prices and volumes affect reported sales and profitability.
- Whether higher labor and self-insurance costs continue to pressure expenses and margins.
- Progress, cost and returns on the planned capital program and new, expanded or remodeled stores.
- Debt maturities, covenant headroom, interest-rate exposure and availability of the revolving credit facility; debt agreements contain cross-default provisions.
- Actual cash generation, capital spending, dividend payments and any changes to management’s outlook. Interim results are not necessarily indicative of full-year results.