Weis Markets, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
Weis Markets operates 205 supermarkets in Pennsylvania and six surrounding states, with more than 23,000 associates. The company sells grocery, pharmacy, fuel, prepared food and general merchandise products and operates as one reportable segment. This unaudited filing covers the 13 weeks ended March 31, 2018, compared with the 13 weeks ended April 1, 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $876.1 million | $852.2 million | 2.8% |
| Gross profit | $234.9 million | $229.0 million | 2.6% |
| Gross margin | 26.8% | 26.9% | Down less than 0.1 percentage point |
| Operating income | $22.8 million | $20.3 million | 12.8% |
| Operating margin | 2.6% | 2.4% | Up 0.2 percentage point |
| Net income | $16.2 million | $11.8 million | 36.8% |
| Net margin | 1.8% | 1.4% | Up 0.4 percentage point |
| Diluted EPS | $0.60 | $0.44 | 36.4% |
| Cash dividends per share | $0.30 | $0.30 | No change |
Net sales consisted primarily of grocery sales of $768.0 million, pharmacy sales of $77.9 million, fuel sales of $28.6 million and manufacturing sales of $1.5 million. Comparable-store sales increased 1.5% after adjusting for the Easter holiday shift, or 1.1% excluding fuel.
Net cash provided by operating activities was $50.8 million, compared with $7.8 million in the prior-year period. Capital expenditures were $21.8 million versus $17.1 million, and net cash used in investing activities was $23.3 million. Dividends paid were $8.1 million, while net cash used in financing activities was $25.1 million, primarily reflecting $17.1 million of debt repayment. Cash and cash equivalents increased to $50.2 million from $47.9 million at December 30, 2017.
At March 31, 2018, marketable securities totaled $61.2 million, total assets were $1.419 billion, total liabilities were $418.0 million and shareholders’ equity was $1.001 billion. Long-term debt was $17.9 million, compared with $35.0 million at December 30, 2017. The revolving credit facility has a $100.0 million commitment, with an additional discretionary $50.0 million, and matures September 1, 2019. Reported unused availability was $63.9 million, and outstanding letters of credit totaled $18.2 million.
Material changes versus the prior comparable period
- Sales increased 2.8%, supported by comparable-store growth, promotional programs, product offerings, fuel-price inflation and an approximately $10.0 million favorable Easter timing impact.
- Management expects the same holiday timing to adversely affect the second-quarter 2018 comparison by approximately $10.0 million.
- Operating income improved 12.8%, as operating, general and administrative expenses increased only 1.6% and declined to 24.2% of sales from 24.5%.
- Net income benefited substantially from tax reform. The effective tax rate fell to 27.4% from 43.8%, primarily because the federal corporate tax rate declined from 35% to 21%.
- Investment income and interest expense changed from income of $0.8 million to expense of $0.5 million, including a $0.8 million unrealized loss on equity securities following adoption of ASU 2016-01.
- Operating cash flow increased by $43.0 million, driven by higher profits, lower inventories and lower management incentive payouts.
- The company adopted revenue-recognition guidance and other accounting standards effective December 31, 2017. Management reported no material impact from revenue-recognition adoption; the lease standard is expected to have a significant future balance-sheet impact.
- The company changed its presentation of qualifying payment-card transactions to cash and cash equivalents and its presentation of advertising costs to cost of sales. Prior-period amounts were reclassified for comparability.
Guidance, outlook, risks and unusual items
Management plans to invest approximately $85.5 million in capital expansion during 2018, including new stores, remodels, site acquisitions, technology and distribution and transportation upgrades. Cash from operations and available revolver capacity are expected to fund working capital, debt obligations, capital expenditures, acquisitions and dividends.
The acquired store group continued to generate positive cash flow, while management expects the adverse cost impact of integrating those stores to lessen over time. Management also noted expected product-cost inflation, particularly in pharmacy, and continued competitive pressure. The company is evaluating acquisition opportunities but reported no pending acquisitions.
Gross margin remained broadly stable despite higher transportation costs and LIFO charges. Non-cash LIFO adjustments changed from $0.1 million of income in Q1 2017 to $0.8 million of expense in Q1 2018. Health-care costs increased because of higher claims and prescription costs, and management remains concerned about the future impact of the Affordable Care Act.
The board approved a quarterly dividend of $0.30 per share payable May 21, 2018. Future dividends remain subject to quarterly board approval and the company’s financial condition and results. A related-party transaction involved the January 2018 purchase of land for $1.1 million from an entity beneficially owned by the chairman and his immediate family; the transaction was supported by an independent appraisal and approved under company policies.
Principal disclosed risks include retail-industry competition, price pressures, economic conditions, regulatory changes, technology changes, capital-expenditure requirements, product-cost inflation and the possibility that actual results will differ from forward-looking statements. Management reported no material changes in market risk and concluded that disclosure controls were effective.
Important facts for investors to verify
- Assess the sustainability of the 36.8% net-income increase after separating the tax-rate benefit, holiday timing benefit and investment-mark valuation effects.
- Verify second-quarter comparability because approximately $10.0 million of Easter-related sales shifted into Q1 2018.
- Monitor execution of the approximately $85.5 million 2018 capital program and the effect of new stores on depreciation, cash flow and returns.
- Review debt maturity, covenant compliance and available revolver capacity, including the $18.2 million of outstanding letters of credit.
- Evaluate the effect of pharmacy and other product-cost inflation, transportation costs and LIFO adjustments on gross margin.
- Consider the future balance-sheet impact of adopting the lease accounting standard.
- Review the related-party land purchase and the company’s disclosure of approval procedures and valuation support.