AMCON Distributing Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2024; comparisons are with the periods ended March 31, 2023. AMCON distributes consumer products to retail outlets and operates 14 natural and health food stores. Sales figures include cigarette and tobacco excise taxes.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Sales | $601.9 million | $585.0 million | $1,246.8 million | $1,151.0 million |
| Gross profit | $42.3 million | $41.1 million | $85.6 million | $76.1 million |
| Gross margin | 7.0% | 7.0% | 6.9% | 6.6% |
| Operating income | $3.3 million | $5.3 million | $7.2 million | $10.8 million |
| Net income available to common shareholders | $0.5 million | $2.1 million | $1.6 million | $4.7 million |
| Diluted EPS | $0.89 | $3.49 | $2.66 | $7.94 |
| Interest expense | $2.2 million | $2.2 million | $4.6 million | $3.9 million |
- Q2 sales grew 2.9%, while operating income fell 37.2% and net income fell 73.9%. For the six-month period, sales increased 8.3%, but operating income decreased 33.9% and net income decreased 65.7%.
- Operating expenses rose 8.8% in Q2 and 20.2% for the six-month period, outpacing gross-profit growth. Management cited Henry’s acquisition costs, compensation and benefits, and higher insurance costs. Interest expense also increased year over year for the six-month period, reflecting higher rates, capital spending, and debt associated with Henry’s.
- Wholesale sales rose 3.0% in Q2 and 8.5% year to date. Cigarette manufacturer price increases and Henry’s contributed to growth, partly offset by lower cigarette-carton volumes. Retail sales declined 1.1% in Q2 but rose 1.4% for six months; five store closures weighed on results, while existing-store sales and the reopening of the Port Charlotte store provided offsets.
- Q2 wholesale gross margin was 6.5%, unchanged year over year; retail gross margin improved to 37.0% from 35.6%. For six months, wholesale margin rose to 6.3% from 6.1%, and retail margin rose to 37.0% from 35.8%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $53.8 million, up from $42.9 million. The filing attributes much of the cash generation to working-capital movements, including a $37.2 million inventory reduction and higher accounts payable.
- Investing cash outflow was $10.9 million, compared with $57.6 million in the prior-year period, which included the Henry’s acquisition. Cash purchases of property and equipment were $11.1 million. Separately, the company disclosed an $8.0 million debt-financed property purchase.
- Financing cash outflow was $42.7 million, largely reflecting net repayment of revolving borrowings. Cash increased $0.2 million to $1.0 million.
- At March 31, current assets were $205.2 million and current liabilities were $82.1 million. Inventory was $121.3 million, down from $158.6 million at September 30, 2023.
- Credit-facility borrowings were $99.2 million; total long-term debt, including current maturities, was $20.5 million. Combined debt was approximately $119.7 million, compared with approximately $154.1 million at September 30, 2023. The facilities’ borrowing-base limit was $191.2 million, leaving $92.0 million available; stated total facility capacity was $300.0 million. The average facility rate was 6.97% at quarter-end.
- The company reported compliance with facility financial covenants and no relevant cross-defaults. It paid $0.4 million in common dividends during the six months, versus $3.3 million in the prior-year period. A $1.5 million letter of credit supports its workers’ compensation program.
Material developments, outlook and risks
- In Q2, AMCON purchased a 250,000-square-foot Colorado distribution facility for $10.0 million, funded with $2.0 million cash and an $8.0 million note. It is being built out for operations. Work also continues on a new 175,000-square-foot Springfield, Missouri facility.
- On April 5, 2024, after quarter-end, AMCON closed its acquisition of substantially all Burklund Distributors’ net operating assets for approximately $19.6 million, funded with $15.7 million cash and a $3.9 million promissory note. Preliminary purchase accounting was not complete when the filing was issued.
- After quarter-end, certain Team Sledd membership interests were redeemed, increasing AMCON’s ownership from approximately 64% to approximately 75%. The filing does not state the redemption amount.
- Management cited inflation, supply-chain disruption, weaker consumer discretionary spending, and sustained labor, equipment, product, and interest-cost pressures. It warned that potential restrictions or bans on cigarette, e-cigarette, tobacco, and vaping products could reduce product availability, demand, revenue, and margins.
- Other disclosed risks include higher interest rates, customer credit and collections, variable-rate debt and facility renewal, acquisition integration, competition, labor availability, cyber incidents, and changing product demand. AMCON does not hedge interest-rate or fuel-cost exposure. Management believes liquidity is adequate for the short and long term, but cautions that a sharp operating change could affect revenue, collections, or access to credit. No quantified financial guidance is provided.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2024.
Important facts for investors to verify
- Whether cigarette volume and product mix stabilize, and how pricing and manufacturer incentives affect wholesale margins.
- Whether operating costs continue to outpace gross-profit growth, particularly compensation, insurance, and interest expense.
- Burklund’s final purchase-price allocation, integration progress, and contribution to results; also the cost and timing of bringing the Colorado and Springfield facilities into service.
- Availability under the borrowing-base facilities, variable-rate exposure, covenant headroom, and ability to maintain liquidity as working capital changes.
- The financial and cash-flow effects of Team Sledd redemptions and the resulting increase in AMCON’s ownership.