Village Super Market, Inc. — Q3 FY2014 Form 10-Q
Reporting period: 13 and 39 weeks ended April 26, 2014. Dollar amounts are in thousands, except per-share data. Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania.
Financial results
| Metric | 13 weeks ended Apr. 26, 2014 | 13 weeks ended Apr. 27, 2013 | 39 weeks ended Apr. 26, 2014 | 39 weeks ended Apr. 27, 2013 |
|---|---|---|---|---|
| Sales | $372,511 | $359,808 | $1,121,798 | $1,100,134 |
| Gross profit | $100,437 | $97,314 | $299,501 | $295,872 |
| Operating income | $6,397 | $8,150 | $18,503 | $33,070 |
| Income (loss) before taxes | $6,140 | $7,910 | $17,838 | $33,702 |
| Net income (loss) | $3,188 | $4,622 | $(825) | $19,581 |
| Operating margin | 1.72% | 2.27% | 1.65% | 3.01% |
| Gross margin | 26.96% | 27.05% | 26.70% | 26.89% |
- Q3 sales rose 3.5%, including a 0.4% same-store sales increase; nine-month sales rose 2.0%, with same-store sales flat.
- Q3 diluted EPS was $0.23 for Class A and $0.17 for Class B. Nine-month diluted loss per share was $0.06 for Class A and $0.05 for Class B.
- Operating cash flow was $35,845 for the nine months, versus $35,031 a year earlier. Capital expenditures were $41,435; cash dividends were $9,301.
- Cash and cash equivalents were $73,394 at April 26, down from $109,571 at July 27, 2013. Working capital was $21,922, versus $94,299; the current ratio was 1.2:1, versus 1.8:1.
- Capital and financing lease obligations totaled $41,057, and notes payable to Wakefern totaled $1,914, including current portions. The company also held $40,197 in long-term notes receivable from Wakefern.
Changes and management’s explanation
- Q3 net income fell 31%. Excluding Union store pre-opening costs of $316 net of tax and a $440 net-income impact from the tax ruling, management said Q3 net income declined 15%, citing modest same-store growth, lower gross margins and higher operating expenses.
- Nine-month results swung to a net loss, chiefly reflecting a $10,052 tax charge related to New Jersey tax disputes. Management also identified a $2,012 after-tax charge for the Morris Plains store closure and $1,015 of after-tax replacement-store pre-opening costs. Prior-year results included partnership and credit-card lawsuit proceeds and a landlord-settlement charge. Excluding these items, management said nine-month net income declined 27%.
- Gross margin declined 0.09 percentage point in Q3 and 0.19 point year to date, principally due to lower departmental margins; management cited investments in lower prices to address competition.
- Operating and administrative expense increased as a share of sales by 0.39 point in Q3 and 1.10 points year to date. Drivers included payroll, healthcare, repairs and snow removal, replacement-store costs, and, year to date, Morris Plains lease costs and legal and consulting fees.
- Investing activities used $59,211 in cash, including $41,435 of capital spending and Wakefern note investments; financing activities used $12,811, including dividends, debt payments and $2,569 of treasury-share purchases.
Outlook, risks and contingencies
- Fiscal 2014 guidance: same-store sales from a 0.5% decrease to a 0.5% increase; slight retail price inflation; capital expenditures of about $50,000; and an effective tax rate of 47.0%–48.0%, or 41.5%–42.5% excluding interest and penalties on unrecognized tax benefits.
- The board intended to continue quarterly dividends at the most recent rates: $0.25 per Class A share and $0.1625 per Class B share. Management expected cash and operating cash flow to meet anticipated needs.
- The company was appealing an adverse New Jersey Tax Court ruling. Accrued tax liabilities included $26,790 of gross unrecognized tax benefits and $15,473 of accrued interest and penalties. No payment was required until the dispute is definitively resolved; a favorable outcome could reduce gross unrecognized tax benefits by up to $26,790.
- Management expected an additional charge for the Union store replaced on April 30, 2014; remaining lease obligations were approximately $800 before estimated sublease income. The Morris Plains closure liability was $2,988 at quarter-end.
- A Wakefern-led insurance dispute over Superstorm Sandy claims remained unresolved; the related insurance receivable was $2,290. The filing says final resolution could materially affect results.
- Key operating risks include intense price competition and thin margins, the company’s regional concentration, underperformance in Maryland, reliance on Wakefern, collective bargaining and benefit costs, possible multi-employer pension liabilities, food-safety exposure, and potential asset impairments. Management said about 91% of employees were covered by collective bargaining agreements.
- Village had $53,700 in Wakefern demand deposits earning overnight money-market rates and $40,000 in variable-rate Wakefern notes, exposing returns to interest-rate changes. The notes are subject to Wakefern prepayment rights.
Important facts for investors to verify
- Progress and potential financial impact of the New Jersey tax appeal, including possible payments, accrued interest and penalties, and any change to the tax outlook.
- Whether same-store sales and margins meet guidance amid competitor openings and investments in lower prices.
- Completion costs and operating performance of the Hanover Township and Union replacement stores, including the anticipated Union lease charge.
- Capital spending, operating cash generation, cash balances, and continued dividend capacity.
- Resolution of the Sandy insurance litigation and collectability of the recorded receivable; also monitor Wakefern credit exposure and variable-rate note terms.