Village Super Market, Inc. — Q1 Fiscal 2018 Form 10-Q
Reporting period: 13 weeks ended October 28, 2017. Unaudited results are compared with the 13 weeks ended October 29, 2016. Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania; substantially all merchandise is purchased from Wakefern, its principal supplier and cooperative affiliate. Amounts below are in millions except per-share data and percentages.
Financial results and position
- Sales: $386.5 million, down 0.8% from $389.7 million. Same-store sales also fell 0.8%.
- Gross profit and margins: Gross profit was $103.9 million versus $104.6 million. Gross margin edged up to 26.88% from 26.85%.
- Operating costs and profit: Operating and administrative expense rose to $92.3 million from $91.1 million; depreciation and amortization increased to $6.2 million from $6.1 million. Operating income declined to $5.4 million from $7.5 million, and operating margin fell to 1.39% from 1.91%.
- Net income and EPS: Net income was $3.0 million, down 27% from $4.1 million. Basic/diluted EPS was $0.23/$0.21 for Class A and $0.15/$0.15 for Class B, versus $0.32/$0.29 and $0.21/$0.21, respectively, a year earlier.
- Cash flow: Operating activities used $2.2 million, compared with $12.3 million used in the prior-year quarter. Investing activities used $7.0 million, including $6.6 million of capital expenditures; financing activities used $3.6 million, including $3.2 million of dividends. Cash declined $12.8 million to $74.6 million.
- Liquidity and debt: Current assets were $152.3 million and current liabilities $90.1 million; working capital was $62.2 million and the current ratio 1.69, down from $85.3 million and 1.89 at July 29, 2017. Long-term debt was $42.4 million, primarily capital and financing lease obligations; current debt and lease obligations were also reported. The filing reports no borrowings under the revolving facility at either balance-sheet date.
- Wakefern balances: Notes receivable totaled $45.1 million. Cash and cash equivalents included $53.8 million in Wakefern demand deposits. Patronage dividend receivable was $17.2 million.
- Other items: Pension liabilities were $14.6 million. Net periodic pension cost was $16,000 versus $148,000 in the prior-year quarter. Comprehensive income was $3.1 million versus $4.4 million.
Changes and management explanation
- Management attributed lower same-store sales primarily to four competitor store openings. Product prices experienced slight inflation, but pharmacy and meat deflation partly offset increases elsewhere.
- Gross margin improved slightly, reflecting favorable product mix and departmental margins, partly offset by higher Wakefern warehouse assessment charges and promotional spending.
- Operating and administrative expense as a percentage of sales increased 0.49 percentage points, primarily due to higher payroll costs and reduced operating leverage, as well as investments in service departments and training. These pressures contributed to lower operating income and net income despite the small gross-margin improvement.
- Operating cash use improved year over year mainly because working-capital changes were less adverse, particularly the timing of estimated tax payments.
- During the quarter, a $22.2 million Wakefern note matured; the company invested $22.0 million of proceeds in new variable-rate Wakefern notes maturing in 2022. Wakefern may prepay these notes.
Outlook, risks and contingencies
- Fiscal 2018 same-store sales guidance was a decrease of 2.0% to flat. Management cited competitor openings and continued competitive pressure on retail price inflation.
- Fiscal 2018 capital expenditures were budgeted at approximately $50 million for a new Bronx store, a replacement store, major and smaller remodels, and technology upgrades. The company expected operating cash flow and other liquidity sources to meet foreseeable needs.
- The board’s stated intention was to continue quarterly dividends at the most recent rates: $0.25 per Class A share and $0.1625 per Class B share.
- Management expected a 41%–42% effective tax rate, approximately $100,000 of net periodic pension cost, and $3.5 million of cash pension contributions in fiscal 2018.
- On November 9, 2017, the company renewed and extended its unsecured $25 million revolving credit line through December 31, 2020, at LIBOR plus 1.25%. The agreement includes financial covenants and permits up to $3 million of letters of credit.
- Key risks include intense competition and narrow supermarket margins; geographic concentration; reliance on Wakefern for merchandise, services, deposits, notes and patronage dividends; collective bargaining and benefit costs (about 91% of employees are covered by collective bargaining agreements); food safety; pension-plan underfunding; insurance and self-insurance exposures; asset impairment; and cyber or information-system disruption.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. The filing also noted that adoption of the new lease standard was expected to significantly increase reported lease assets and liabilities; the full effects were still being evaluated.
Important facts for investors to verify
- Whether same-store sales stabilize within management’s fiscal-year range and how new competitor openings affect pricing, traffic and margins.
- Whether payroll and other operating-cost increases continue to outpace sales, and whether gross-margin improvements can offset them.
- Progress, timing and funding for the approximately $50 million capital program, including the Bronx and replacement stores.
- Wakefern’s financial condition and the company’s exposure through purchases, deposits, notes receivable and patronage dividends.
- Cash generation, dividend sustainability, pension contributions, and compliance with the revolving facility’s covenants.