Ingles Markets, Inc. — Q2 FY2012 Form 10-Q
Reporting period: The 13-week quarter and 26-week first half ended March 24, 2012. Comparisons are with the periods ended March 26, 2011, except balance-sheet comparisons, which are with September 24, 2011. The company operated 203 supermarkets, alongside fluid dairy processing and shopping-center rental businesses.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | First half FY2012 | First half FY2011 |
|---|---|---|---|---|
| Net sales | $881.7 million | $870.4 million | $1,799.9 million | $1,743.1 million |
| Gross profit / margin | $192.4 million / 21.8% | $194.6 million / 22.4% | $394.2 million / 21.9% | $388.1 million / 22.3% |
| Operating income / margin | $23.8 million / 2.7% | $26.6 million / 3.1% | $54.2 million / 3.0% | $53.2 million / 3.1% |
| Net income | $6.5 million | $7.7 million | $17.1 million | $15.4 million |
| Class A diluted EPS | $0.27 | $0.32 | $0.70 | $0.63 |
| Interest expense | $14.9 million | $15.7 million | $30.0 million | $31.6 million |
- Quarterly sales grew 1.3%, but net income declined about 16%; management attributed the earnings decline to milder winter weather, lower income from gasoline sales and relatively flat gross margins. The quarter’s net margin was 0.7% as presented in the income statement percentages (approximately 0.8% in management’s discussion).
- First-half sales rose 3.3% and net income rose about 11%. Growth in sales and gross profit dollars, lower interest expense and a lower effective tax rate more than offset higher operating expenses. First-half net margin was 1.0%.
- First-half grocery comparable-store sales increased 3.1%, including gasoline, and 1.6% excluding gasoline. In Q2, comparable sales increased 1.2% including gasoline but declined 0.1% excluding gasoline. Gasoline prices and sales mix affected reported sales and margins.
- Cash from operations was $73.7 million, versus $48.1 million in the prior first half. Investing used $50.3 million, including $103.5 million of capital expenditures; financing used $32.0 million. Cash declined $8.5 million to $3.9 million. Capital expenditures exceeded operating cash flow by $29.8 million.
Balance sheet, debt and liquidity
- At March 24, 2012, total debt was $833.5 million, comprising $30.1 million current and $803.4 million long-term. Total debt was $875.6 million at March 26, 2011. The reported fair value of debt at quarter-end was $895.5 million.
- Cash was $3.9 million; current assets were $383.2 million and current liabilities $281.0 million. The company had a $175 million revolving credit facility with no borrowings outstanding and $8.2 million of letters of credit issued.
- Senior notes total $575 million principal, bear 8.875% interest and mature in 2017. Recovery Zone bonds of approximately $99.7 million mature in 2036; annual mandatory redemptions of $4.53 million begin in 2014. The company reported compliance with debt covenants and approximately $568 million of additional borrowing capacity under its most restrictive covenant.
- Restricted investments declined to $23.2 million from $75.7 million at September 24, 2011, as bond proceeds were redeemed to fund approved project costs. Stockholders’ equity was $438.7 million, compared with $431.9 million at fiscal year-end.
Outlook, risks and other notable items
- Management expected fiscal 2012 capital expenditures of approximately $160 million and estimated ongoing annual net capital expenditures of $110 million to $180 million. Most current spending related to an approximately 830,000-square-foot distribution center and related equipment. Construction commitments were $21.3 million.
- The new distribution center was expected to begin operating later in fiscal 2012; start-up costs were already affecting distribution expenses. The company did not expect to open additional stores during the remainder of FY2012, though stores under construction were expected to open in FY2013.
- Management said sales growth for the rest of FY2012 would depend on economic improvement, inflation, and gasoline and raw-milk prices. It expected new and expanded stores to contribute to growth, but at a slower pace amid economic conditions. Management believed available financing and operating cash flows would meet foreseeable needs, while noting financing may not be available on acceptable terms.
- Key risks include competition and pricing pressure, economic conditions, gasoline and energy prices, labor and utility costs, weather and food supply, execution and returns on store and distribution projects, financing availability, and real-estate market conditions. Self-insurance reserves were $26.2 million; estimates of incurred-but-not-reported claims may change. Certain state tax returns for 2006–2009 were under examination; gross unrecognized tax benefits were approximately $131,000.
- No long-lived asset impairments were recorded in the quarter or first half. Interim adjustments were described as normal and recurring. Management reported disclosure controls effective at a reasonable assurance level; it was testing controls and designing controls for the new distribution center.
Important facts for investors to verify
- Whether sales and comparable-store momentum excluding gasoline can improve, and how gasoline prices, volume and margins affect reported results.
- Distribution-center project costs, completion and ramp-up timing, and whether planned capital spending converts into expected operating efficiencies and returns.
- Cash generation and liquidity given low cash balances, planned capital expenditures, debt service and the dependence on external financing availability.
- Debt covenant headroom, the terms and availability of the revolving facility, and the cost of the 8.875% senior notes.
- Developments in state tax examinations and self-insurance claims, and the company’s ability to sustain its regular dividends while funding investment and debt obligations.