Ingles Markets, Inc. — Q1 FY2022 Form 10-Q
Reporting period: 13 weeks ended December 25, 2021; comparison is the 13 weeks ended December 26, 2020. Ingles operated 198 supermarkets across six southeastern states and reported one primary business segment, retail grocery sales.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $1,391.5 million | $1,190.4 million | +16.9% |
| Gross profit / margin | $350.5 million / 25.2% | $314.2 million / 26.4% | +11.6% profit; margin down 1.2 points |
| Operating income / margin | $90.4 million / 6.5% | $76.4 million / 6.4% | +18.3% income |
| Net income | $66.2 million | $53.8 million | +23.0% |
| Class A basic / diluted EPS | $3.57 / $3.48 | $2.73 / $2.66 | Higher |
| Cash from operations | $95.0 million | $57.8 million | +$37.2 million |
| Capital expenditures | $21.3 million | $34.2 million | Lower by $12.9 million |
Net cash used in investing was $131.1 million, including $110.0 million invested in short-term financial instruments. Cash declined to $27.6 million from $70.3 million at fiscal year-end; short-term investments rose to $115.0 million from $5.0 million. Cash provided by operations less capital expenditures was approximately $73.6 million, compared with $23.5 million in the prior-year quarter.
At December 25, 2021, total assets were $2.08 billion, total liabilities $1.03 billion, and stockholders’ equity $1.05 billion. Debt was approximately $586.1 million, versus $587.9 million at December 26, 2020; the $150 million revolving credit line had no borrowings outstanding. The company reported covenant compliance. Current assets were $649.2 million and current liabilities $307.8 million.
Changes and operating drivers
- Comparable grocery sales excluding gasoline increased 10.0%. Excluding gasoline, transactions rose 7.3% and average transaction size rose 3.4%.
- Gasoline sales increased to $190.8 million from $110.5 million, reflecting higher fuel prices and gallons sold. Gasoline’s lower gross margin contributed to the consolidated margin decline; retail gross profit excluding gasoline improved 18 basis points.
- Operating and administrative expenses rose 9.2% in dollars but declined to 18.7% of sales from 20.0%, as sales grew faster than expenses. Salaries, supplies, insurance, bank charges, and professional fees were notable expense increases.
- Interest expense declined to $5.4 million from $6.4 million, which management attributed to reducing or refinancing higher-rate debt. In June 2021, the company issued $350 million of 4.00% senior notes due 2031 and redeemed its remaining $295 million of 5.75% notes due 2023.
Outlook, risks, and other notable items
- Management planned fiscal 2022 capital expenditures of approximately $100–$120 million, and expected annual capital expenditures of approximately $100–$160 million thereafter. Current-quarter spending was constrained by higher costs and limited availability of labor and materials.
- Management said pandemic-related grocery demand continued to support sales. It could not predict how long or to what extent COVID-19 would affect sales and performance; supply disruptions and tight labor conditions were also noted.
- Management highlighted elevated inflation: December 2021 year-over-year CPI increases were 7.0% overall, 6.5% for food at home, and 49.6% for gasoline. Inflation may affect product, labor, transportation, energy, and other costs.
- Other risks cited include competition, changing economic conditions, food distribution disruptions, financing availability, labor and utility costs, and execution of store expansion and remodeling plans.
- The company amended its warehouse-related bond agreement during the quarter to extend the holding period and reduce the interest rate. It had $173.2 million of interest-rate swaps outstanding in aggregate. Legal proceedings in the ordinary course were not expected by management to materially affect the company.
- Management expected to continue regular quarterly dividends, subject to board approval and debt-agreement restrictions. The quarter’s declared dividends were $0.165 per Class A share and $0.150 per Class B share.
Important facts for investors to verify
- How much of sales growth and comparable-store growth reflects sustained demand versus fuel-price inflation and pandemic-related shifts in eating patterns.
- Whether the lower consolidated gross margin, particularly in gasoline, persists as input costs and selling prices change.
- Whether inflation, labor availability, and supply constraints affect operating costs, store projects, and the planned capital expenditure program.
- Debt maturities, interest-rate exposure, swap terms, covenant and dividend restrictions, and the availability of the undrawn revolving facility.
- The sustainability of operating cash generation and earnings as pandemic impacts and seasonal patterns evolve. Management cautioned that quarterly results are not necessarily indicative of full-year results.