Ingles Markets, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014 (52 weeks). The filing also reports fourth-quarter results for the 13 weeks ended September 27, 2014. Ingles operates supermarkets primarily across the southeastern United States, with fluid dairy and shopping-center rental operations.
Business context and performance
Ingles operated 202 supermarkets, 96 pharmacies and 83 fuel stations at year-end. Its strategy emphasizes competitive prices, customer service, store renovations and a broad “one-stop” offering. Grocery sales represented most company revenue; “other” revenue includes fluid dairy and shopping-center rentals.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $3.836 billion | $3.739 billion |
| Gross profit / margin | $845.2 million / 22.0% | $827.8 million / 22.2% |
| Operating income / margin | $123.3 million / 3.2% | $125.6 million / 3.4% |
| Net income | $51.4 million | $20.8 million |
| Diluted EPS, Class A / Class B | $2.28 / $2.14 | $0.87 / $0.85 |
| Cash from operations | $154.3 million | $145.2 million |
| Capital expenditures | $108.3 million | $101.5 million |
| Cash and cash equivalents at year-end | $8.6 million | $16.8 million |
| Total debt at year-end | $937.3 million | $912.5 million |
Operating cash flow exceeded capital expenditures in FY2014. Current assets were $413.9 million and current liabilities were $250.7 million. The company had $134.1 million available on its $175 million revolving line of credit, with $29.9 million drawn. Debt agreements include financial covenants and cross-default provisions; Ingles reported compliance at year-end.
Changes versus prior period
- Sales rose 2.6%; comparable-store sales increased 1.9% including gasoline and 0.9% excluding gasoline. Excluding gasoline, transactions declined 0.2% while average transaction size increased 1.3%.
- Gasoline sales increased to $618.1 million from $568.7 million, reflecting more gallons sold, although per-gallon prices and gasoline gross profit were lower.
- Gross profit increased in dollars, but consolidated gross margin declined 0.2 percentage points. Grocery gross margin excluding gasoline improved 36 basis points; the filing cites broad-based product margin improvement, partly offset by gasoline.
- Operating income decreased $2.2 million as higher gross profit was more than offset by increased operating expenses and lower gains from asset sales. Wage, bank-card, utility/fuel and depreciation costs rose; insurance expense fell.
- Net income increased substantially, largely because FY2013 included $43.1 million of pretax debt-extinguishment costs. Interest expense fell $12.6 million following the 2013 refinancing. FY2014 pretax income was 15% higher than FY2013 pretax income after adding back those prior-year debt-extinguishment costs.
- FY2014 fourth-quarter sales were $964.8 million versus $948.9 million; gross profit was $220.4 million versus $210.3 million; net income was $17.6 million versus $15.6 million.
Debt, capital allocation and outlook
- The company has $700 million of 5.75% senior notes due 2023 and $95.2 million of Recovery Zone Facility Bonds, among other borrowings. FY2014 interest expense was $46.6 million.
- Capital expenditures were $108.3 million. Management expected FY2015 capital expenditures of approximately $100–$140 million, including continued store improvements and construction of two or more new or remodeled stores. It expects annual net capital expenditures of approximately $100–$160 million going forward.
- Management expected FY2015 sales growth to exceed FY2014 growth, citing anticipated additional retail square footage and benefits from store improvements. Results remain exposed to gasoline and milk prices, food commodities and general economic conditions. No earnings or margin guidance was provided.
- FY2014 financing cash use included $65.0 million of share repurchases and $14.5 million of dividends. The repurchases were 2.5 million Class B shares from a trust associated with the former CEO’s estate; the board-authorized four-million-share program was fully used. Regular annual dividends were $0.66 per Class A share and $0.60 per Class B share; the larger FY2013 dividend included a special dividend.
Risks, contingencies and other notable items
- Risks include intense price competition and narrow grocery margins, regional concentration, execution and returns on store expansion and renovation, leverage and financing access, labor and benefit costs, gasoline availability and price volatility, food safety and distribution disruptions, information security, and environmental liabilities related in part to gasoline operations and underground storage tanks.
- The company self-insures for several employee and property risks; self-insurance reserves were $29.9 million at year-end. Estimates depend on claims experience and actuarial assumptions.
- Ordinary-course legal proceedings were pending; management stated that any ultimate liability was not expected to materially affect the company. Construction commitments were $2.6 million.
- Robert P. Ingle II held approximately 75% of combined voting power, giving him substantial control over board elections and matters requiring stockholder approval. The company is a NASDAQ “controlled company.”
- Management and Deloitte & Touche reported effective disclosure controls and internal control over financial reporting; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether management’s expectation of stronger FY2015 sales growth materialized, and whether growth came from comparable-store performance, new space or gasoline.
- Whether grocery margins excluding gasoline remain improved while consolidated margins and operating income are pressured by fuel mix and operating costs.
- Debt-service capacity, revolving-credit availability, covenant headroom, refinancing terms and the impact of floating-rate debt.
- Returns from planned capital spending and store renovation, including whether new and improved stores achieve expected sales and profitability.
- The effects of the $65 million related-party share repurchase, dividend restrictions, and the controlling shareholder’s voting power.