Village Super Market, Inc. — Q2 FY2012 Form 10-Q
Business and period. The filing covers the 13 and 26 weeks ended January 28, 2012; comparative periods ended January 29, 2011. Village operated 28 ShopRite supermarkets in New Jersey, Maryland, and northeastern Pennsylvania. Unless noted otherwise, dollar amounts below are in millions. The company is the second-largest member of Wakefern, its principal supplier and cooperative.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | 26 weeks FY2012 | 26 weeks FY2011 |
|---|---|---|---|---|
| Sales | $362.6 | $329.9 | $705.4 | $637.3 |
| Gross profit | $99.5 | $88.6 | $192.4 | $169.6 |
| Operating income | $16.3 | $12.0 | $28.5 | $19.3 |
| Net income | $9.1 | $6.6 | $15.9 | $10.6 |
| Gross margin | 27.44% | 26.87% | 27.27% | 26.61% |
| Operating margin | 4.49% | 3.62% | 4.03% | 3.03% |
| Net margin | 2.52% | 2.00% | 2.25% | 1.66% |
- Q2 sales rose 9.9% and six-month sales rose 10.7%. Same-store sales increased 6.2% and 7.1%, respectively; growth also reflected two Maryland stores opened in the prior year.
- Q2 net income increased about 38%; six-month net income increased about 51%. Q2 basic/diluted EPS was $0.80/$0.66 for Class A and $0.52/$0.52 for Class B; six-month EPS was $1.39/$1.15 for Class A and $0.90/$0.90 for Class B.
- Gross-margin improvement reflected departmental margins, patronage dividends from Wakefern, and lower Wakefern warehouse assessments; higher promotional spending partly offset the Q2 benefit. Operating expense ratios improved, including from a pension-liability settlement benefit, lower utilities and snow removal, and sales leverage.
Cash flow, liquidity, and obligations
- Six-month operating cash flow was $22.6, down from $31.3. Capital expenditures were $10.1; investing cash use totaled $10.8. Financing cash use was $4.4, including $4.0 of dividends and $0.8 of debt principal payments.
- Cash and cash equivalents were $98.8 at January 28, 2012, versus $91.4 at July 30, 2011. Working capital was $58.9 and the current ratio was 1.6:1, compared with $44.4 and 1.4:1 at fiscal year-end.
- Long-term capital and financing lease obligations were $40.7; Wakefern notes payable totaled $2.4, with $0.4 current. The balance sheet reports no current lease obligation. Management said cash and operating cash flow should meet foreseeable working-capital, capital-spending, and debt requirements.
- Cash flow declined mainly because of settlement of the pension liability, a larger inventory build, and a prior-year escrow refund, partly offset by higher net income. The company had $79.983 of demand deposits at Wakefern earning overnight money-market rates and a $20.206 Wakefern note receivable bearing 7%, scheduled to mature February 20, 2013.
Material developments, outlook, and risks
- Village settled its withdrawal liability from the UFCW Local 152 Retail Meat Pension Fund in January 2012. The $7.028 liability had been recorded in FY2011; settlement produced a $0.646 pretax benefit in Q2. A potential additional liability remains if a statutory mass withdrawal occurs within the specified period, and the filing says it could be material.
- On January 29, 2012, one day after quarter-end, Village acquired the Old Bridge, New Jersey ShopRite’s fixtures, leasehold interests, and other assets for $3.250, plus $1.116 for inventory and other working capital.
- Management expected FY2012 same-store sales growth of 5.0%–6.5%, with smaller increases in the second half as inflation and competitor-closure impacts moderate. It expected continued cautious consumer spending and trading down, and retail price inflation with smaller increases in the second half.
- FY2012 capital expenditures were budgeted at approximately $18.0, including small remodels and solar panels at one store. Management expected an effective tax rate of 41.5%–42.5% and planned an additional $2.891 of pension contributions during the rest of FY2012.
- Key risks include intense price competition and narrow grocery margins; concentration in New Jersey; execution and higher costs in the newer Maryland market; dependence on Wakefern for merchandise, services, and patronage dividends; collective-bargaining, healthcare, and pension costs; potential multi-employer pension exposure; food-safety claims; and risks around planned replacement stores and lease expirations. About 92% of employees were covered by collective bargaining agreements.
- Management stated that disclosure controls were effective and that there were no significant changes in internal controls over financial reporting during the quarter. The filing cautions that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether reported same-store sales growth and margin gains persist as inflation and competitor-closure benefits moderate.
- How the Maryland stores perform against management’s expectations, and the operating and capital costs of the Old Bridge acquisition and planned replacement stores.
- The amount and timing of pension contributions, any additional multi-employer withdrawal exposure, and the sustainability of the Q2 settlement benefit.
- Wakefern-related concentration and exposure, including the substantial demand deposits, note receivable, and dependence on patronage dividends.
- Actual FY2012 capital spending, cash generation, and tax rate versus management’s outlook.