Ingles Markets, Inc. — FY2019 Form 10-K
Business and reporting period. Ingles operates supermarkets in the southeastern United States, alongside fluid dairy and shopping-center rental businesses. This annual report covers the 52-week fiscal year ended September 28, 2019; it is not a standalone fourth-quarter filing. At year-end, the company operated 198 supermarkets, compared with 200 a year earlier.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $4.202 billion | $4.093 billion | +2.7% |
| Gross profit / margin | $1.022 billion / 24.3% | $980.2 million / 24.0% | +4.3% gross profit |
| Operating income / margin | $152.2 million / 3.6% | $124.8 million / 3.1% | +21.9% |
| Income before taxes | $106.6 million | $80.3 million | +32.7% |
| Net income / net margin | $81.6 million / 1.9% | $97.4 million / 2.4% | -16.2% |
| Diluted EPS, Class A | $4.03 | $4.81 | -16.2% |
| Cash from operations | $211.5 million | $161.2 million | +$50.3 million |
Retail comparable sales excluding gasoline increased 3.9%; transactions rose 0.9% and average transaction size rose 2.8%. Gasoline sales were $581.1 million, down from $604.9 million, as gallons sold declined 0.5% and average prices per gallon declined 3.5%. Grocery, non-food and perishables sales increased.
Operating and administrative expenses rose 2.1% to $873.9 million, slower than sales growth; labor costs were the principal increase. Interest expense was nearly unchanged at $47.4 million.
Liquidity, debt and capital
- Cash and cash equivalents were $42.1 million; current assets were $497.1 million and current liabilities $247.6 million.
- Total debt was $852.2 million, down from $865.6 million. No borrowings were outstanding on the $175 million revolving credit line; approximately $166.0 million was available after letters of credit.
- Operating cash flow of $211.5 million funded, in part, $161.8 million of capital expenditures. Investing activities used $152.8 million; financing activities used $27.1 million, primarily for debt repayment and dividends.
- Stockholders’ equity was $662.7 million, versus $595.4 million. Annual dividends remained $0.66 per Class A share and $0.60 per Class B share.
Material changes and unusual items
- FY2019 net income fell despite stronger pretax results because FY2018 included $37.3 million of tax benefits from the federal tax-rate change and an accelerated tax depreciation method. FY2019 income tax expense was $25.0 million, or a 23.5% effective rate; FY2018 recorded a $17.0 million tax benefit.
- FY2019 included a $4.1 million gain from asset sales or disposals; management identified a gain on a former store property as a significant item.
- Cash from operations improved partly because of higher pretax income and income tax refunds collected in FY2019. Refundable current income taxes declined from $36.7 million to $1.0 million.
- In November 2019, the company arranged a $155 million, ten-year amortizing real estate loan and gave notice to redeem the same principal amount of its 5.75% senior notes due 2023. The redemption, at 101.917% of par, was expected to produce approximately $3.0 million of debt-extinguishment costs in the quarter ending December 28, 2019. A related swap fixed the loan rate at 2.95%.
Outlook, risks and contingencies
Management expected non-gasoline sales to be higher in FY2020, anticipated new stores and continued significant remodeling, and planned additional fuel stations and pharmacies. FY2020 capital expenditures were forecast at approximately $120 million to $160 million; longer-term annual net capital expenditures were expected to be approximately $100 million to $160 million. The company also expected to continue quarterly dividends, subject to board discretion, results, financial condition and debt restrictions.
Management highlighted intense grocery competition, labor-market tightness and wage costs, volatile gasoline and energy prices, food and distribution costs, regional economic and weather exposure, store-development execution, food safety, and information-system and data-security risks. The business and its distribution infrastructure are concentrated in the Southeast. Self-insurance reserves were $31.0 million and depend on claims estimates; environmental liabilities may also arise from properties and fuel storage. Ordinary-course legal proceedings were not expected by management to materially affect the company.
The company estimated that adoption of the new lease accounting standard would add approximately $45 million to $55 million of right-of-use assets and lease liabilities, with no material effect expected on income or cash flows. It reported compliance with debt covenants at year-end. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Verify the sustainability of comparable-store growth and margin improvement, including the effect of gasoline prices and product mix.
- Assess the quality and repeatability of FY2019 operating cash flow, particularly the contribution from tax refunds and working-capital changes.
- Review debt maturity and refinancing terms, especially the $700 million senior-note balance due in 2023 before the announced partial redemption, and the company’s leverage and covenant headroom.
- Track FY2020 capital spending, store openings and remodel returns against management’s forecast and stated sales outlook.
- Evaluate labor-cost pressures, self-insurance estimates, regional concentration, and the expected balance-sheet impact of lease-standard adoption.
- Consider governance and control structure: Robert P. Ingle II held approximately 76% of combined voting power, and the company qualified as a NASDAQ controlled company.