Business context and reporting period
Ingles Markets, Inc. operates supermarkets primarily in the southeastern United States, along with a fluid dairy business and shopping-center rentals. This Form 10-Q covers the 13 weeks ended December 30, 2017, the first quarter of fiscal 2018; the comparable period ended December 24, 2016. Results are unaudited.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $1,013.8 million | $982.8 million |
| Gross profit / margin | $244.7 million / 24.1% | $237.1 million / 24.1% |
| Operating income / margin | $35.9 million / 3.5% | $32.2 million / 3.3% |
| Net income / margin | $45.1 million / 4.5% | $13.8 million / 1.4% |
| Operating cash flow | $37.4 million | $17.2 million |
| Capital expenditures | $56.8 million | $29.3 million |
Net sales rose 3.2%. Net income included a $26.7 million benefit from reduced deferred tax liabilities following enactment of the Tax Cuts and Jobs Act; the quarter’s reported earnings increase therefore substantially reflects a tax benefit, not just operating performance. Interest expense was $11.5 million versus $11.3 million. Class A basic and diluted EPS were $2.29 and $2.23; Class B EPS was $2.08 basic and diluted. Quarterly dividends were $0.165 per Class A share and $0.15 per Class B share.
Material changes and operating performance
- Retail sales increased to $983.0 million from $947.6 million. Gasoline sales rose to $136.7 million from $118.5 million, driven by 15% more gallons sold with a relatively flat average price per gallon.
- Excluding gasoline, comparable grocery sales increased 2.2%; customer transactions decreased 0.1% while average transaction size increased 2.2%. The company had 200 stores versus 202 a year earlier; comparable-store counts were 197 and 199, respectively.
- Gross margin was unchanged at 24.1%. Operating and administrative expenses rose 1.2% in dollars but declined to 20.6% of sales from 21.0%. Management cited higher wages and depreciation, partly offset by lower insurance expense.
- Operating cash flow improved, while cash fell to $13.8 million from $23.9 million at September 30, 2017. Inventory increased to $361.6 million from $349.3 million.
- Total debt was approximately $890.5 million at quarter-end, compared with approximately $900.2 million at December 2016. Current and long-term debt totaled $890.5 million; total assets were $1.77 billion and stockholders’ equity was $552.9 million. The current ratio was approximately 1.8.
Liquidity, outlook, risks and unusual items
- The $175 million revolving credit line matures in September 2022; $14.3 million was drawn at quarter-end and $9.9 million of letters of credit had been issued. The company reported compliance with financial covenants and approximately $429 million of additional borrowing capacity under its most restrictive covenant.
- Fiscal 2018 capital expenditure guidance is approximately $120 million to $160 million. The company expects annual capital expenditures of approximately $100 million to $160 million going forward. Quarter spending was unusually high due in part to purchasing two shopping centers where it operated leased stores and opening two new store buildings. Construction commitments were $10.9 million.
- Management expects a 24.5% blended federal corporate tax rate for fiscal 2018. The Tax Act also introduces limits on deductible interest and permits bonus depreciation; the company was evaluating adoption of new revenue-recognition and lease-accounting standards.
- A December 2017 interest-rate swap fixes the rate on $58.5 million notional of floating-rate debt at 3.92%; the swap’s reported fair-value difference was not significant. Management noted LIBOR increases had raised interest costs on floating-rate debt.
- Management expects cash flow, the credit line and financing sources to cover foreseeable working-capital needs and planned capital spending, but cautioned that financing may not be available on acceptable terms. Risks cited include competition, economic conditions, labor and utility costs, gasoline prices, weather-related supply effects, expansion execution and real-estate performance.
- Self-insurance reserves were $37.4 million, including $13.8 million current and $23.6 million long-term liabilities, net of expected recoveries as described in the filing. No asset impairments were recorded in the quarter. The company stated there were no material changes in contractual obligations beyond those disclosed.
Important facts for investors to verify
- How much of the reported net-income increase is attributable to the one-time deferred-tax remeasurement versus recurring operations.
- Whether comparable sales, transaction trends and gasoline volumes persist, particularly given the smaller store count.
- Progress and returns on the $120 million to $160 million fiscal 2018 capital program and planned store investments.
- Debt, borrowing availability, floating-rate exposure and covenant headroom as interest rates and capital needs change.
- Potential effects of the Tax Act’s interest-deduction limits and bonus depreciation, and of adoption of the new accounting standards.