Business context and reporting period
Ingles Markets, Incorporated operates supermarkets primarily in the Southeastern United States, alongside fluid dairy operations and shopping-center rentals. This Form 10-K covers the fiscal year ended September 30, 2017. Fiscal 2017 had 53 weeks; fiscal 2016 had 52 weeks. The fourth quarter of 2017 had 14 weeks versus 13 weeks in the prior-year quarter.
At year-end, Ingles operated 199 supermarkets, 103 pharmacies and 97 fuel stations. It owned 156 supermarkets and operated one primary business segment, retail grocery.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $4.003 billion | $3.795 billion |
| Gross profit / margin | $963.6 million / 24.1% | $924.4 million / 24.4% |
| Operating income / margin | $127.9 million / 3.2% | $128.6 million / 3.4% |
| Net income / margin | $53.9 million / 1.3% | $54.2 million / 1.4% |
| Diluted EPS, Class A | $2.66 | $2.68 |
| Cash from operations | $156.3 million | $159.0 million |
| Capital expenditures | $127.7 million | $137.6 million |
Revenue rose 5.5%, but the comparison includes an extra week. On a comparable 53-week basis, retail comparable sales excluding gasoline increased 1.5%; transactions rose 0.8% and average transaction size rose 1.1%. Gasoline gallons increased 4.5% and per-gallon prices increased 11.6% on that basis.
At September 30, 2017, cash was $23.9 million, current assets were $445.8 million and current liabilities were $245.6 million. Total debt was $877.9 million, compared with $876.5 million a year earlier; no borrowings were outstanding under the $175 million revolving credit line, with $165.5 million available. Interest expense was $47.5 million, up from $46.3 million. The company reported $156.3 million of operating cash flow and $125.4 million of cash used in investing activities.
Material changes versus the prior comparable period
- Sales increased $207.7 million, partly reflecting the 53rd week and higher gasoline revenue. Gross profit dollars rose, but gross margin declined 0.3 percentage points.
- Operating and administrative expenses increased $42.5 million, including a $27.4 million increase in salaries and wages. Management cited a tighter labor market, higher sales volume and added operating costs from modernization and expanded product offerings.
- Operating income decreased $0.7 million and net income decreased $0.3 million. Comparable earnings comparisons are affected by the extra fiscal week in 2017.
- Cash from operations declined $2.7 million, primarily due to changes in working capital. Capital expenditures declined $9.9 million.
- Asset disposals produced a $1.5 million gain in 2017, versus a $1.2 million loss in 2016. No individual 2017 transaction was significant.
- The store count fell from 201 to 199: two stores opened and four closed in 2017, excluding replacement-store effects.
Guidance, outlook, risks and contingencies
Management expected non-gasoline sales to be higher in fiscal 2018, anticipated adding one or more stores, and expected benefits from store improvements and additional fuel centers. It projected fiscal 2018 capital expenditures of approximately $100 million to $140 million and a longer-term annual range of approximately $100 million to $160 million. Management emphasized balancing sales growth with gross-margin maintenance.
Key uncertainties include intense grocery competition and price pressure; labor, food, utility and fuel costs; gasoline price and availability volatility; regional economic or severe-weather disruptions; execution and returns on store expansion and remodeling; interest rates and access to financing; information-system and data-security risks; and environmental exposure, including underground fuel tanks. The company is significantly leveraged and has cross-default provisions in debt agreements. It reported covenant compliance with significant headroom at year-end. Ordinary-course legal proceedings were not expected by management to materially affect the company.
Management expected regular quarterly dividends to continue, subject to Board discretion, results, financial condition and debt restrictions. The annual dividend was $0.66 per Class A share and $0.60 per Class B share. The company stated its available resources should be sufficient for planned capital expenditures and working capital for the foreseeable future, while noting financing may not be available on acceptable terms.
Fourth-quarter FY2017 sales were $1.089 billion and net income was $19.4 million; the quarter contained 14 weeks versus 13 weeks in FY2016, so the reported quarterly figures are not directly comparable.
Most important facts for investors to verify
- How much of reported sales growth and quarterly performance reflects the extra fiscal week, gasoline prices and gallons, versus underlying comparable-store trends.
- Whether labor and other operating-cost increases continue to pressure gross margin and operating profit.
- Debt maturities, floating-rate exposure, refinancing terms, covenant headroom and the availability of the revolving credit facility.
- Returns from the elevated store modernization and expansion program relative to planned capital spending.
- Potential changes in self-insurance estimates, environmental liabilities, and the terms or restrictions affecting dividends.
The filing reports effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.