Ingles Markets, Inc. — Q1 FY2020 Form 10-Q
Reporting period: 13 weeks ended December 28, 2019, compared with the 13 weeks ended December 29, 2018. Interim financial statements are unaudited. Ingles operated 198 supermarkets across six southeastern states.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $1,078.4 million | $1,061.8 million | +1.6% |
| Gross profit / margin | $257.5 million / 23.9% | $258.4 million / 24.3% | Profit -0.4%; margin -0.4 percentage points |
| Operating income / margin | $38.5 million / 3.6% | $39.5 million / 3.7% | -2.5% |
| Net income / net margin | $17.7 million / 1.6% | $22.2 million / 2.1% | -20.1% |
| Class A basic / diluted EPS | $0.90 / $0.87 | $1.12 / $1.09 | Lower |
| Cash from operations | $16.2 million | $63.6 million | Lower by $47.3 million |
| Capital expenditures | $31.1 million | $71.0 million | Lower |
At December 28, 2019, cash was $23.0 million; total assets were $1.90 billion; and total liabilities were $1.22 billion. Current assets of $481.1 million exceeded current liabilities of $235.2 million. Debt was approximately $850.0 million, including $20.2 million current and $829.8 million long-term. The $175 million credit line had no borrowings outstanding; $10 million of letters of credit had been issued.
Business performance and material changes
- Net sales rose $16.5 million. Excluding gasoline, comparable-store sales increased 2.4%; customer transactions rose 0.2% and average transaction size rose 2.3%.
- Gasoline sales declined as per-gallon prices fell. Gasoline gross profit and margin were below the unusually high prior-year quarter, contributing to the lower gross profit and margin.
- Operating and administrative expenses increased 1.5% to $222.0 million, while remaining 20.6% of sales. Management cited higher labor, maintenance and insurance costs, partly offset by lower store-supply costs.
- Operating cash flow fell, primarily due to lower earnings, the prior-year receipt of refundable income taxes, and cash use from working-capital changes, including lower vendor payables. Investing cash use was $25.9 million, largely capital expenditures.
Debt, liquidity and unusual items
- In December 2019, Ingles used a new $155 million, ten-year amortizing real-estate loan to redeem an equal principal amount of its 5.75% senior notes due 2023. The new loan matures in January 2030, amortizes monthly, and carries floating-rate LIBOR-based interest.
- The redemption resulted in a $3.7 million early-extinguishment loss, including a $3.0 million premium and $0.7 million of written-off loan costs. Management said the refinancing extended the debt and lowered its interest rate.
- Management reported compliance with debt covenants and approximately $564.5 million of additional borrowing capacity under the most restrictive covenant calculation. Debt agreements include cross-default provisions and restrictions on additional cash dividends.
- Cash dividends were $0.165 per Class A share and $0.150 per Class B share. Management expects regular quarterly dividends to continue, subject to board discretion, financial condition and debt restrictions.
- Cash flows from financing included $155.0 million of new long-term debt, $157.4 million of long-term principal payments, and $3.0 million of redemption premium payments.
Outlook, risks and contingencies
- Fiscal 2020 capital expenditure plans are approximately $120 million to $160 million; the company expects annual capital expenditures of approximately $100 million to $160 million going forward. First-quarter spending was $31.1 million.
- Management believes operating cash flow, available credit and expected financing will be sufficient for planned capital spending, working capital and debt service for the foreseeable future, but cautions that financing may not be available on acceptable terms.
- Risks identified include competition, regional economic conditions, gasoline-price changes, labor and utility cost increases, adverse weather affecting food production or delivery, financing availability, and the performance of new, remodeled or expanded stores. Grocery sales are seasonal, generally stronger in the first fiscal quarter.
- Self-insurance reserves were $32.0 million, based partly on estimates of incurred-but-not-reported claims; management noted worsened claims experience and the potential for estimates to fluctuate.
- Management said pending ordinary-course legal proceedings are not expected to materially affect financial position, results or cash flows. No asset impairments were recorded in the quarter.
- The company adopted lease accounting on September 29, 2019, recognizing operating lease assets and liabilities; management said adoption did not materially affect net income or cash flows. At quarter-end, operating lease liabilities had a present value of $45.9 million.
- In November 2019, the company sold two land parcels for $4.3 million to an LLC in which its chairman had a financial interest. Independent fair-market-value appraisals were obtained and the Audit Committee approved the transaction. The quarter included a $3.0 million gain from asset sales.
Important facts for investors to verify
- Whether grocery comparable-store growth and improved non-gasoline trends persist, and whether gasoline margins recover from the prior-year comparison.
- How the refinancing affects future interest expense and exposure to floating LIBOR-based rates, including the status and terms of the company’s interest-rate swaps.
- Whether operating cash flow recovers from the working-capital-driven decline and supports the planned $120 million to $160 million FY2020 capital program and dividends.
- Debt covenant headroom, refinancing availability, and the effect of lease obligations and self-insurance claims on liquidity.
- The terms and governance of the related-party land sale, and whether asset-sale gains recur; the filing does not provide full-year earnings guidance.