WMK

Business Context and Reporting Period

Company: Weis Markets, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 28, 2002
Operations: The company operates 160 retail food stores across Pennsylvania, Maryland, New Jersey, New York, Virginia, and West Virginia, as well as 33 pet supply stores under the SuperPetz II, Inc. brand. The company reported operating three fewer stores compared to the same period in the prior year.

Key Financial Metrics

(All figures in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 0.5% in the third quarter and 1.6% year-to-date compared to 2001. Identical store sales rose 0.6% for the quarter and 1.5% year-to-date.
• Profitability: Net income increased 26.9% in the third quarter and 14.8% year-to-date. Earnings per share increased 27.9% for the quarter and 43.2% year-to-date, partially driven by a 34.8% reduction in shares outstanding following a major stock repurchase in 2001.
• Expense Management: Operating expenses as a percentage of sales decreased year-to-date from 23.2% in 2001 to 22.7% in 2002. The 2001 period included $5.3 million in non-recurring expenses related to the stock repurchase.
• Investment Income: Investment income dropped significantly year-to-date, decreasing $9.1 million (93.2%) to $661,000. This decline is attributed to the sale of the majority of the investment portfolio in the second quarter of 2001 to fund the stock repurchase.
• Debt Reduction: The company paid off its $25 million long-term debt during the period, resulting in zero long-term debt on the balance sheet as of September 28, 2002.
• Other Income: Other income increased $3.8 million in the quarter and $5.2 million year-to-date, primarily due to gains from the sale of two closed store properties.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects to invest up to $67.4 million over the next twelve months, primarily for the construction of five new stores (four replacements) and the remodeling or expansion of twelve units.
• Liquidity: The company maintains a $100 million three-year unsecured revolving credit facility. Management believes cash flow from operations is sufficient to finance operations, dividends, and capital expenditures.
• Dividends: A quarterly dividend of $0.27 per share was declared, payable November 15, 2002.
• Tax Contingency: The company's federal income tax returns for 1997-1999 are under audit by the IRS. Preliminary notices of proposed adjustment have been received. While management believes it has meritorious defenses, a proposed deficiency could be material.
• Market Risks: The company faces risks related to a softening economy, deflation in key categories (beef, pork, poultry), intensifying competition, and interest rate fluctuations on its bridge loan (tied to LIBOR).
• Accounting Changes: The adoption of Statement No. 142 eliminated goodwill amortization, expected to increase pre-tax net income by approximately $1.6 million for fiscal 2002.

Investor Verification Checklist

• IRS Audit Status: Verify the current status of the 1997-1999 federal tax audit and the potential magnitude of any proposed deficiency.
• Store Count: Confirm the net reduction of three stores and the impact on future revenue growth targets.
• Capital Allocation: Monitor the execution of the $67.4 million capital expenditure plan against cash flow generation.
• Commodity Prices: Assess the impact of deflation in meat categories on gross margins and pricing strategies.
• Debt Facility: Review the terms of the $100 million revolving credit facility and any covenants that may be triggered by future financial performance.