Weis Markets, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 198 supermarkets in Pennsylvania and six surrounding states, with approximately 24,000 associates. The company reports one operating segment and sells groceries, pharmacy products, fuel, manufactured products and general merchandise. This unaudited Form 10-Q covers the 13 weeks ended March 27, 2021, compared with the 13 weeks ended March 28, 2020.
Weis Markets remained an essential retailer during the COVID-19 pandemic. Management stated that pandemic-related demand, government stimulus and the closure of other food sources continued to affect sales, while also creating uncertainty related to labor, supply chains, regulation and future customer behavior.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,006.3 million | $985.8 million | 2.1% |
| Gross profit | $267.4 million | $264.1 million | 1.2% |
| Gross margin | 26.6% | 26.8% | Down 20 bps |
| Operating income | $31.8 million | $37.4 million | Down 14.9% |
| Operating margin | 3.2% | 3.8% | Down 60 bps |
| Income before taxes | $32.7 million | $36.1 million | Down 9.5% |
| Net income | $24.3 million | $26.7 million | Down 9.1% |
| Diluted EPS | $0.90 | $0.99 | Down 9.1% |
| Cash dividends per share | $0.31 | $0.31 | Unchanged |
Sales excluding fuel increased 1.7%, comparable-store sales increased 1.4%, and comparable-store sales excluding fuel increased 1.1%. Product sales included grocery of $874.1 million, pharmacy of $95.6 million, fuel of $34.4 million and manufacturing of $2.3 million.
Operating performance weakened despite higher sales. Cost of sales increased 2.4%, while operating, general and administrative expenses increased 3.9% to $235.6 million. Direct store labor increased $4.5 million, or 0.3% of sales, and fixed expenses increased $2.2 million, or 0.1% of sales. Depreciation and amortization increased to $23.4 million from $21.7 million. Lower LIFO expense and improved fresh-department sell-through partly supported gross profit.
Investment income and interest expense improved to income of $1.6 million from a loss of $4.0 million, primarily reflecting favorable changes in equity securities and SERP investments. Other income and expense declined to an expense of $0.8 million from income of $2.7 million. The effective tax rate was 25.8%, compared with 26.0%.
Cash and cash equivalents were $101.2 million at March 27, 2021, compared with $136.6 million at December 26, 2020. Marketable securities totaled $114.7 million, and total current assets were $587.0 million. Total liabilities were $623.7 million and shareholders’ equity was $1.161 billion. The filing does not report outstanding borrowings under the revolving credit facility; management stated that the company had no obligation under the facility since the second quarter of 2018.
Cash Flow, Capital Allocation and Liquidity
- Operating cash flow was $14.9 million, down from $124.8 million, primarily because the company was cycling the immediate COVID-19 impact experienced in Q1 2020, including lower accounts payable and higher inventories in 2021.
- Investing cash outflow was $42.0 million, including $37.0 million of property and equipment purchases versus $24.8 million in the prior-year period.
- Financing cash outflow was $8.3 million for quarterly dividends in both periods.
- The company expects approximately $135 million of capital investment in 2021 for stores, technology, distribution facilities, transportation and related projects.
- The unsecured revolving credit facility matures September 1, 2022, has a $30 million principal limit plus a discretionary $70 million amount, and had $25.1 million of availability after $4.9 million of letters of credit at quarter-end.
- Management expects operating cash flow and available credit to fund working capital, capital expenditures, acquisitions, debt requirements and dividends. The company also has the ability to liquidate its investment portfolio if needed.
- The board approved a $0.31 per-share dividend payable May 24, 2021. Future dividends remain subject to quarterly board approval.
Material Changes, Outlook and Risks
Compared with Q1 2020, sales increased modestly, but operating income and net income declined because of higher labor and fixed costs, a lower gross margin and the absence of the prior-year period’s favorable comparison in investment-related results. Operating cash flow declined sharply as working-capital benefits from the initial pandemic surge did not repeat.
Online ordering through Weis 2 Go increased more than 170% year over year. Curbside pickup was available at 184 locations and Shipt home delivery at 175 locations during the quarter.
Management did not provide formal full-year earnings or sales guidance. It expressed confidence in long-term sales growth but cautioned that COVID-19 effects, economic conditions, inflation or deflation, changing product mix, competition, labor availability, supply-chain interruptions, regulation, litigation and cybersecurity threats could materially affect results. The company also noted that pandemic-related performance may not be indicative of future results.
Approximately 50% of open-store facilities are leased, with lease expirations extending through 2036. The company maintains self-insurance accruals and has exposure to marketable-securities valuation changes. Management reported no material subsequent events, no material changes in market risk and effective disclosure controls as of March 27, 2021.
Important Facts for Investors to Verify
- Whether post-pandemic sales growth and the 170% online-sales increase can be sustained after comparisons normalize.
- Whether labor, occupancy, distribution and other operating costs continue to pressure gross and operating margins.
- The pace and returns of the planned approximately $135 million 2021 capital program.
- Actual borrowings, letters of credit and covenant compliance under the revolving credit agreement as its September 2022 maturity approaches.
- Working-capital trends, particularly inventory and accounts payable, and their effect on operating cash flow.
- The market value and liquidity of the $114.7 million investment portfolio and related earnings volatility.
- The effect of COVID-19 developments, supply-chain disruptions, employee availability, regulation, litigation and cybersecurity events on operations.
- The board’s continued authorization and capacity to pay quarterly dividends and repurchase shares; 752,468 shares remained under the repurchase authorization.