AMCON Distributing Company — Q2 FY2019 Form 10-Q
Business context and period: The unaudited quarter ended March 31, 2019 (three months) and the six months then ended are reported against the comparable 2018 periods. AMCON distributes consumer products to about 4,000 retail outlets and operates 22 natural-food stores. Fiscal year-end is September 30.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Sales | $310.7 million, up 5.3% | $655.4 million, up 7.3% |
| Gross profit / gross margin | $20.6 million / 6.6%, versus $17.1 million / 5.8% | $41.2 million / 6.3%, versus $35.3 million / 5.8% |
| Operating income | $2.6 million, versus $0.9 million | $4.6 million, versus $2.2 million |
| Net income | $1.5 million, versus $0.3 million | $2.8 million, versus $1.8 million |
| Diluted EPS | $2.45, versus $0.49 | $4.44, versus $2.61 |
Quarterly operating expenses increased 11.6% to $18.0 million, and interest expense rose 26.6% to $0.4 million. For the six-month period, operating expenses increased 10.8% to $36.6 million and interest expense increased 39.6% to $0.7 million. Reported sales include excise taxes; gross profit excludes fulfillment and distribution-network costs, which are included in operating expenses.
Cash flow and liquidity: Six-month operating cash flow was $24.6 million, versus $1.3 million, substantially reflecting a $21.0 million cash source from lower inventories. Investing cash outflow was $2.1 million, including $2.2 million of property and equipment purchases. Financing cash outflow was $22.4 million, including net revolving-facility repayments, $3.2 million of share repurchases, and $0.4 million of dividends. Cash was $0.6 million at March 31.
Current assets were $93.7 million and current liabilities $31.2 million. The revolving facility had $17.2 million outstanding against $68.4 million of borrowing capacity, leaving $51.2 million available, subject to collateral-based limits. The average facility rate at quarter-end was 3.87%. Long-term debt, including current maturities, totaled about $4.2 million; total facility and long-term debt was about $21.4 million, down from about $40.2 million at September 30, 2018. Shareholders’ equity was $64.8 million.
Material changes and drivers
- Wholesale sales rose 3.6% for the quarter and 5.8% for six months. Drivers included manufacturer cigarette price increases, higher cigarette excise taxes, and growth in tobacco, confectionery, foodservice, and other products; lower cigarette carton volume and mix partly offset growth.
- Retail sales rose 75.7% for the quarter and 75.3% for six months, principally because of the Earth Origins Market stores acquired at the end of fiscal 2018. Retail gross margin declined to 39.3% for the quarter from 42.2%, and to 40.4% for six months from 42.6%. Existing-store sales and gross profit were lower, according to management.
- Wholesale gross margin improved to 5.3% for the quarter from 4.9%, and to 5.1% for six months from 5.0%. Management cited higher other-product sales and, for the quarter, favorable timing of cigarette manufacturer price increases.
- Net income comparisons reflect tax effects: the six months ended March 2018 included an approximately $0.8 million benefit from the Tax Cuts and Jobs Act, while the 2019 period had $1.2 million of tax expense.
- AMCON repurchased 34,959 shares for $3.2 million in the six-month period. Dividends declared and paid were $0.64 per share, unchanged from the prior-year period.
Outlook, risks, and other matters
The filing provides no specific financial guidance. Management said it believes liquidity will be adequate to sustain operations, while cautioning that a sharp change in operating conditions could affect revenue, collections, or access to bank credit. Cash flow is affected by inventory purchase timing and seasonal inventory needs. The credit facility matures in November 2022; its fixed-charge coverage covenant applies if availability falls below the specified threshold. The company reported that availability had not fallen below that threshold and that its trailing-twelve-month coverage ratio was above 1.0.
Risks highlighted include competition and the retail repositioning strategy; online retail disruption; fuel, labor, commodity, and manufacturer costs; cigarette and tobacco demand, taxation, and regulation; customer credit and inventory risks; and access to capital. The company does not hedge interest-rate or fuel-cost exposure. It reported no material change in risk factors, no legal proceedings, and no off-balance-sheet arrangements. A $0.5 million workers’ compensation letter of credit was outstanding. Management reported disclosure controls effective as of March 31, 2019. Adoption of ASC 606 had no material impact; the company was evaluating the effect of lease accounting requirements expected to apply in fiscal 2020.
Important facts for investors to verify
- Whether improved wholesale gross profit and favorable cigarette-price timing persist, particularly given cigarette volume and mix pressures.
- Earth Origins’ ongoing contribution to revenue and profitability, and performance trends at existing retail stores.
- Whether the sharp inventory reduction and strong operating cash flow are sustainable, considering seasonal inventory requirements.
- Facility availability, collateral-based borrowing limits, interest costs, and compliance with credit-facility terms.
- The effect of share repurchases and the dividend on liquidity and the company’s small share base.