Village Super Market, Inc. — Q2 FY2018 Form 10-Q
Reporting period: 13 and 26 weeks ended January 27, 2018. The company operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. Financial statement amounts below are in millions unless otherwise indicated; comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | 13 weeks | 26 weeks |
|---|---|---|
| Sales | $417.4, up 1.3% | $803.9, up 0.2% |
| Gross profit / margin | $112.3 / 26.90% (26.99% prior year) | $216.2 / 26.89% (26.92% prior year) |
| Operating income / margin | $9.8 / 2.35% ($10.6 / 2.57% prior year) | $15.2 / 1.89% ($18.1 / 2.25% prior year) |
| Net income | $9.5 ($6.0 prior year) | $12.5 ($10.1 prior year) |
| Net income per share, basic | Class A $0.74; Class B $0.48 | Class A $0.97; Class B $0.63 |
Quarterly operating income declined despite higher sales, as operating and administrative costs rose and gross margin eased. The six-month decline was also driven by higher operating and administrative expense. Net income benefited significantly from a $2.726 million non-cash deferred-tax benefit related to the Tax Cuts and Jobs Act (Tax Act). Excluding that benefit, management reported net income up 13% for the quarter and down 3% for the six months versus the prior year.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $28.4 million, versus $15.1 million a year earlier. Investing activities used $18.6 million, including $12.7 million of capital expenditures; financing activities used $1.0 million, including $6.4 million of dividends.
- At January 27, 2018, cash and cash equivalents were $89.7 million. An additional $6.6 million of restricted cash related to the Bronx store NMTC financing was included in other assets; cash, cash equivalents and restricted cash totaled $96.3 million.
- Working capital was $59.9 million, versus $85.3 million at July 29, 2017; the current ratio was 1.61 versus 1.89. The decline mainly reflected the maturity of Wakefern notes, most proceeds of which were reinvested in long-term notes.
- Long-term debt was $48.7 million, including $42.2 million of capital and financing lease obligations and $6.6 million of NMTC-related notes. No amounts were drawn on the $25 million revolving credit facility, extended to December 31, 2020.
- The company held $45.7 million of variable-rate notes receivable from Wakefern and $69.6 million of overnight demand deposits at Wakefern, creating meaningful related-party and interest-rate exposure.
Changes, outlook and risks
- Same-store sales increased 0.2% in the first half. Management attributed growth to remodeled and expanded stores, inflation and increased promotions; competitor openings partly offset those factors. Management expects FY2018 same-store sales between a 0.5% decrease and a 0.5% increase.
- Gross margin fell 0.09 percentage points for the quarter, mainly due to lower Wakefern patronage dividends, increased promotions and lower departmental margins. Operating and administrative expense increased as a share of sales, largely reflecting payroll investments in service departments, training and other initiatives.
- The Tax Act reduced the federal corporate tax rate and prompted a $2.726 million deferred-tax remeasurement benefit. The company reported a 15.0% effective tax rate for the first half; excluding the remeasurement benefit, management cited 33.5%. Management expects a 33.0%–34.0% effective tax rate for FY2018. The company noted that estimates for certain Tax Act effects could change.
- FY2018 capital spending was revised down to approximately $30 million due to project delays. Planned uses include the Bronx store, two major remodels, smaller remodels and technology upgrades. The board’s current intention is to maintain quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management believes liquidity will be adequate for foreseeable needs.
- The company expects approximately $100,000 of net periodic pension cost and $3.5 million of pension contributions in FY2018. Key risks include intense competition and local store openings, dependence on Wakefern, labor and benefit costs (about 91% of employees are covered by collective bargaining agreements), underfunded multi-employer plans, food safety, cyber and systems disruption, and potential asset impairment.
- The Bronx project uses New Markets Tax Credit financing subject to a seven-year recapture period. Noncompliance could require indemnification of Wells Fargo; management said it did not anticipate recapture. Ordinary-course litigation was not expected by management to materially affect the company.
Important facts for investors to verify
- Whether same-store sales remain within management’s FY2018 range amid competitor openings and promotional activity.
- How operating costs, gross margins and payroll investments affect earnings as the year progresses.
- The final tax effects of the Tax Act and the extent to which reported earnings growth depends on the one-time deferred-tax benefit.
- Use and timing of the approximately $30 million capital budget, including the Bronx store and NMTC compliance obligations.
- Wakefern’s financial condition and the company’s exposure through deposits, notes receivable, purchasing dependence and patronage dividends.