Village Super Market, Inc. — Q1 FY2017 Form 10-Q
Business and period: The filing reports unaudited results for the 13 weeks ended October 29, 2016, compared with the 13 weeks ended October 24, 2015. Village operated 29 ShopRite supermarkets in New Jersey, Maryland, and northeastern Pennsylvania. It relies substantially on Wakefern, its principal supplier and cooperative partner.
Financial results
| Metric | Q1 FY2017 | Comparable period | Change / context |
|---|---|---|---|
| Sales | $389.7 million | $389.5 million | Up 0.04%; same-store sales flat |
| Gross profit | $104.6 million | $105.5 million | Gross margin 26.85%, down 23 basis points |
| Operating income | $7.5 million | $8.2 million | Operating margin 1.91%, versus 2.11% |
| Net income | $4.1 million | $4.4 million | Down 7%; net margin 1.05%, versus 1.14% |
| EPS | Class A: basic $0.32, diluted $0.29; Class B: basic and diluted $0.21 | Class A: basic $0.35, diluted $0.31; Class B: basic and diluted $0.23 | Lower for both classes |
| Operating cash flow | $(12.3) million | $5.4 million | Working-capital changes used $23.3 million, largely due to timing of estimated tax payments |
Other key metrics: Cash and cash equivalents were $65.9 million at October 29, down from $88.4 million at July 30, 2016. Working capital was $81.9 million and the current ratio was 1.91, versus $60.5 million and 1.61 at fiscal year-end; the working-capital increase primarily reflects a $21.5 million Wakefern note receivable classified as current. Capital expenditures were $6.8 million. Total reported capital and financing lease obligations and Wakefern notes payable were approximately $44.8 million, including $43.6 million of long-term debt; no borrowings were outstanding under the $25 million revolving credit facility. Village also held $43.2 million of notes receivable from Wakefern.
Changes and management commentary
- Sales were essentially unchanged. Same-store sales gains from four competitor closures and continued growth at expanded or replacement stores were offset by seven competitor openings, including former A&P locations, and meat and dairy deflation.
- Gross margin declined primarily from lower departmental margins and increased promotional spending. Operating and administrative expense as a percentage of sales improved modestly, reflecting lower nonunion pension expense partly offset by higher payroll.
- Net income fell primarily because same-store sales were flat and gross margin was lower, partly offset by reduced operating and administrative expenses.
- Net periodic pension cost was $0.1 million, versus $1.5 million a year earlier. A nonunion pension plan was frozen effective March 31, 2016; the associated $17.9 million curtailment gain was recognized in fiscal 2016, not this quarter.
- Cash declined by $22.5 million during the quarter. The company attributed the operating cash outflow chiefly to working-capital movements, especially tax-payment timing. Cash income-tax payments were $14.7 million, versus $0.1 million in the prior-year quarter.
Outlook, risks, and contingencies
- Management expects fiscal 2017 same-store sales to range from a 0.5% decrease to a 1.5% increase; capital expenditures are budgeted at approximately $25 million, including initial construction of a Bronx store, remodels, and energy projects.
- The board’s current intention is to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expects a 41.0%–42.0% effective tax rate, approximately $0.6 million of pension cost, and $3.0 million of pension contributions for fiscal 2017.
- Management believes operating cash flow and other liquidity sources will be adequate for anticipated working capital, capital spending, and debt payments. It also expects pressure from medical and other fringe-benefit costs.
- Principal risks include intense competition and narrow margins; geographic concentration; dependence on Wakefern for merchandise and services; collective bargaining exposure (approximately 92% of employees are covered by agreements); pension-plan costs; food safety; asset impairment; and information-system and cybersecurity disruptions.
- The company is involved in ordinary-course litigation; management does not expect its resolution to materially adversely affect financial position, results, or liquidity. No substantial change in previously disclosed contractual obligations was reported.
Important facts for investors to verify
- Whether same-store sales meet the stated fiscal 2017 range and how competitor openings, closures, and food-price deflation affect sales and margins.
- Whether the negative quarterly operating cash flow reverses as the timing of tax payments and other working-capital items normalizes.
- Execution and funding of the $25 million capital plan, including the planned Bronx store, while maintaining cash, dividends, and debt service.
- Wakefern’s financial condition and the terms, maturity, and collectability of the company’s $43.2 million in Wakefern notes receivable, as well as its broader supplier dependence.
- Future pension contributions and costs, collective bargaining developments, and potential increases in multi-employer plan obligations.