Village Super Market, Inc. — Q3 FY2012 Form 10-Q
Reporting period: The 13 weeks and 39 weeks ended April 28, 2012; financial amounts below are in thousands of dollars unless noted. Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. It acquired the Old Bridge, New Jersey store in January 2012 and had opened two Maryland stores in July 2011.
Financial performance
| Metric | 13 weeks ended Apr. 28, 2012 | 13 weeks ended Apr. 30, 2011 | 39 weeks ended Apr. 28, 2012 | 39 weeks ended Apr. 30, 2011 |
|---|---|---|---|---|
| Sales | $347,009 | $316,594 | $1,052,384 | $953,908 |
| Gross profit | $95,248 | $86,418 | $287,628 | $255,986 |
| Operating income | $11,606 | $3,375 | $40,079 | $22,642 |
| Net income | $6,543 | $1,668 | $22,426 | $12,218 |
| Net margin | 1.88% | 0.53% | 2.13% | 1.28% |
| Operating cash flow | Not presented by quarter | $25,277 | $45,261 |
Sales increased 9.6% in the quarter and 10.3% year to date. Same-store sales rose 3.8% and 6.0%, respectively. Gross margin improved to 27.45% for the quarter from 27.30%, and to 27.33% year to date from 26.84%. Operating margin was 3.34% for the quarter and 3.81% year to date, versus 1.07% and 2.38%.
Reported net income rose substantially against prior-year periods that included a pension withdrawal charge. Excluding the prior-year $4,241 after-tax charge, management reported net income growth of 11% for the quarter and 36% year to date. Class A basic/diluted EPS was $0.57/$0.47 for the quarter and $1.96/$1.63 year to date; Class B basic/diluted EPS was $0.37/$0.37 and $1.27/$1.26.
Liquidity, debt and cash flow
- At April 28, cash and cash equivalents were $91,084, compared with $91,362 at July 30, 2011. Working capital was $61,532, up from $44,448, and the current ratio was 1.6:1 versus 1.4:1.
- Operating cash flow was $25,277 for the first 39 weeks, down from $45,261. The filing attributes the decline primarily to the pension-liability settlement, lower payables to Wakefern, inventory growth, and a prior-year escrow refund, partly offset by higher net income.
- Year-to-date investing cash outflows included $13,007 of capital expenditures, $4,123 for the Old Bridge acquisition, and $1,047 invested in Wakefern notes. Financing outflows included $6,881 of dividends and $881 of long-term debt principal payments.
- Long-term capital and financing lease obligations were $40,735; notes payable to Wakefern totaled $2,917, including $423 current. The filing reports no current portion of lease obligations. Cash and short-term liquidity were substantial relative to these disclosed borrowings.
- The company held $70,579 in demand deposits at Wakefern earning overnight rates and a $20,559 Wakefern note receivable earning 7%, scheduled to mature May 20, 2013. These balances create Wakefern and interest-rate exposure.
Changes, outlook and risks
- Quarterly and year-to-date results benefited from same-store sales growth, improved departmental gross margins and operating leverage. Competitor store closures and inflation also supported sales, but management said their contribution was moderating.
- The prior-year periods included a $7,028 pretax estimate of liability for withdrawal from a multi-employer pension fund. The obligation was settled in January 2012, producing a $646 pretax benefit in Q2 FY2012. The company may face additional liability if a statutory mass withdrawal occurs within the specified period; such liability could be material.
- The Maryland stores continued to generate losses, with sales below expectations as Village builds market share and brand awareness. Management cited higher operating costs and opening costs at the new stores.
- Management projected fourth-quarter same-store sales growth of 1.5%–3.0%, expected less benefit from competitor closures and inflation, and budgeted $18,000 of FY2012 capital expenditures. It expected a 41.5%–42.5% effective tax rate and an additional $2,575 pension contribution in Q4. Management believed liquidity would be adequate for anticipated needs.
- Risks include intense competition and thin margins; economic weakness, unemployment, energy costs and consumer trading down; dependence on Wakefern for substantially all merchandise and related services; collective bargaining coverage for approximately 92% of employees and potential health-care and pension cost increases; underfunded multi-employer plans; food safety and product-liability exposure; planned replacement-store timing and lease costs; and tax examination or legislative outcomes.
Important facts for investors to verify
- Whether Maryland store sales and profitability improve, and whether the projected fourth-quarter same-store sales range is achieved.
- How much FY2012 cash flow is affected by working-capital movements, pension funding and planned capital spending.
- The potential size and timing of any additional multi-employer pension withdrawal liability and future plan contributions.
- Wakefern-related credit, deposit, purchasing and patronage-dividend exposure, including the terms and maturity of the $20,559 note receivable.
- Progress, costs and lease timing for the two planned replacement stores, and the outcome of relevant tax disputes.