Business context and reporting period
Ingles Markets, Inc. operates 200 supermarkets in the southeastern United States, alongside fuel centers, pharmacies, a fluid dairy operation and shopping-center rentals. This unaudited Form 10-Q covers the 13-week second quarter and 26-week first half of fiscal 2019, ended March 30, 2019; comparisons are to periods ended March 31, 2018.
Financial performance and position
- Second-quarter sales and earnings: Net sales increased 1.8% to $1.002 billion. Net income was $15.0 million, versus $9.3 million; Class A basic and diluted EPS were $0.76 and $0.74, versus $0.47 and $0.46.
- First-half sales and earnings: Net sales rose 3.3% to $2.064 billion, while net income fell to $37.2 million from $54.4 million. Class A basic and diluted EPS were $1.88 and $1.83, compared with $2.76 and $2.69.
- Margins: Gross margin was 24.4% in the quarter versus 23.9% a year earlier, and 24.4% for the first half versus 24.0%. Operating margin was 3.1% and 3.4%, respectively, versus 2.4% and 3.0%.
- Cash flow and investment: First-half operating cash flow was $108.2 million, compared with $67.8 million. Investing cash outflow was $86.9 million, including $94.2 million of capital expenditures; financing cash outflow was $15.1 million. Cash increased to $16.7 million from $10.5 million at fiscal year-end.
- Debt and liquidity: Total debt was approximately $857.5 million at March 30, 2019, including $12.8 million current and $844.6 million long-term, versus approximately $865.6 million at September 29, 2018. The company had $0.7 million drawn on its $175 million credit line and $9.0 million of letters of credit issued. Current assets were $480.9 million and current liabilities $248.5 million.
- Dividends: Quarterly dividends remained $0.165 per Class A share and $0.15 per Class B share.
Material changes and management commentary
- Quarterly comparable-store sales, excluding gasoline and Easter timing, increased 3.4%; first-half comparable-store sales on the same basis increased 3.8%. In the quarter, excluding gasoline, customer transactions rose 0.5% and average transaction size rose 2.3%.
- Management said Easter fell in March in 2018 but in April in 2019, shifting the prior-year sales benefit out of the current second quarter and into fiscal 2019’s third quarter. Retail sales and gross profit excluding gasoline increased despite that comparison.
- Quarterly results included a $3.2 million gain on the sale of a former store property. First-half 2019 net income was also compared with a prior-year period that included a $26.7 million tax benefit from the federal tax-rate reduction.
- First-half operating expenses increased 3.5% to $435.2 million; management cited higher wages, repairs and maintenance, and bank charges, partly offset by lower advertising expense. First-half interest expense increased to $24.2 million, partly due to greater seasonal credit-line use.
Outlook, risks and contingencies
- Fiscal 2019 capital expenditure plans are approximately $140 million to $180 million; management expects ongoing net annual capital expenditures of approximately $100 million to $160 million. Construction commitments were $16.8 million at quarter-end.
- Management expects sales growth to depend on economic conditions, inflation, gasoline prices and raw-milk prices; it also cited new-store openings and maturation of newer and expanded stores as potential contributors. The company expects to continue regular quarterly dividends, subject to board discretion and debt restrictions.
- The company reported compliance with borrowing covenants and approximately $480 million of additional borrowing capacity under the most restrictive covenant calculation. It believes available resources can fund foreseeable needs, but cautioned that financing may not be available on acceptable terms.
- Key risks cited include competition, regional and national economic conditions, labor and utility cost increases, fuel-price changes, adverse climate effects on food production and delivery, financing availability, and the performance of new or remodeled stores. Legal claims are pending in the ordinary course; management does not expect them to materially affect the company.
- The company is self-insured for several liabilities; reserves totaled $33.7 million, based partly on estimates of incurred-but-not-reported claims. A $51.5 million interest-rate swap hedges floating-rate debt. Lease accounting adoption was planned for fiscal 2020, with its impact still under evaluation.
Important facts for investors to verify
- Whether comparable-store sales and gross-margin trends persist after accounting for Easter timing, gasoline performance and product mix.
- How much of quarterly earnings improvement reflects recurring operations versus the $3.2 million property-sale gain, and how the prior-year $26.7 million tax benefit affects year-over-year comparisons.
- Execution, timing and returns on the planned fiscal 2019 capital expenditures and store projects, alongside cash generation and debt reduction.
- Debt covenant headroom, credit-line availability, interest-rate exposure and restrictions on future dividends.
- Potential changes in self-insurance claims, financing costs, labor expenses and other disclosed operating risks.