Weis Markets, Inc. 10-Q Summary
Business Context and Reporting Period
Weis Markets, Inc. operates retail food stores, pharmacies, fuel stations and related distribution and manufacturing operations across Pennsylvania and surrounding states. As of September 24, 2016, the Company operated 176 stores and reported as a single segment. This filing covers the 13 and 39 weeks ended September 24, 2016, compared with the corresponding periods ended September 26, 2015. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | 13 Weeks Ended | 39 Weeks Ended |
|---|---|---|
| Net sales | $743.0 million | $2.212 billion |
| Gross profit | $204.9 million | $613.9 million |
| Gross margin | 27.6% | 27.8% |
| Income from operations | $16.0 million | $71.3 million |
| Operating margin | 2.1% | 3.2% |
| Net income | $10.6 million | $46.0 million |
| Net margin | 1.4% | 2.1% |
| Diluted EPS | $0.40 | $1.71 |
| Cash dividends per share | $0.30 | $0.90 |
- Operating cash flow for the first 39 weeks was $111.9 million, compared with $100.5 million in the prior-year period.
- Cash and cash equivalents were $12.5 million at September 24, 2016, compared with $17.6 million at December 26, 2015. Marketable securities were $81.3 million.
- Capital expenditures were $96.7 million, and total investing cash use was $132.9 million, including $47.5 million for acquisitions.
- Long-term debt was $40.1 million, consisting of borrowings under a new $100.0 million unsecured Wells Fargo revolving facility. The Company had approximately $59.9 million available under that facility.
- Total assets were $1.300 billion and shareholders’ equity was $894.3 million at September 24, 2016.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 4.4% and year-to-date sales increased 3.2%. Excluding fuel, sales increased 4.8% and 3.4%, respectively.
- Comparable-store sales increased 2.7% in the quarter and 2.7% year to date; excluding fuel, increases were 3.0% and 2.9%.
- Gross margin improved from 27.3% to 27.6% in the quarter and from 27.5% to 27.8% year to date, aided by a greater mix of grocery sales relative to fuel.
- Third-quarter operating income declined 18.5% to $16.0 million, despite higher sales. Operating expenses increased 8.2%, including acquisition-related costs, higher labor costs, depreciation and amortization, advertising and general liability insurance.
- Year-to-date operating income increased 9.7% and net income increased 7.6%, but third-quarter net income declined 16.9%. Third-quarter EPS fell from $0.48 to $0.40.
- Employee-related costs increased, including an estimated $1.1 million third-quarter and $6.6 million year-to-date impact from the $9 per hour base wage and related wage compression.
- Fuel sales declined 9.9% in the quarter and 11.0% year to date because of lower retail fuel prices, partially offset by higher gallons sold.
Acquisitions, Outlook, Risks and Unusual Items
- On August 1, 2016, Weis acquired five Mars Super Market stores in Maryland for $24.3 million. The stores contributed $13.0 million of third-quarter sales, and the preliminary purchase accounting included $13.2 million of goodwill.
- By September 24, 2016, the Company had acquired and begun operating 10 of 38 planned Food Lion locations in Maryland. Cash paid to date was $23.2 million, including $15.1 million escrowed for the remaining 28 stores. The remaining acquisition was expected to close in the fourth quarter, subject to final purchase accounting.
- The Company planned to acquire Nell’s Family Market in East Berlin, Pennsylvania, in the fourth quarter for approximately $8.7 million excluding inventory.
- Management planned approximately $175.0 million of capital expansion investment in 2016, funded through operating cash flow, cash and marketable securities, and the revolving credit facility.
- The Wells Fargo facility matures September 1, 2019, bears interest at one-month LIBOR plus 0.65%, and includes a minimum EBITDA covenant of $75.0 million. A 100-basis-point change in LIBOR would affect annual interest expense by approximately $0.4 million based on borrowings at period end.
- Management cited competition, pricing pressure, economic conditions, regulatory changes, technology, labor costs, healthcare costs and fuel prices as risks. The Company estimated the Affordable Care Act could increase annual costs by approximately $1.0 million.
- The Company expects adoption of the new revenue recognition standard to have no significant financial statement impact, but expects the new lease standard to significantly affect the balance sheet. No formal earnings guidance was provided.
Investor Verification Points
- Verify completion, purchase accounting and integration costs for the remaining Food Lion stores and the planned Nell’s Family Market acquisition.
- Assess whether the $175.0 million capital expansion plan and acquisition spending can be funded without materially increasing debt.
- Monitor labor, healthcare, insurance and acquisition-related expenses, which reduced third-quarter operating leverage.
- Evaluate the sustainability of comparable-store sales growth and the effect of fuel-price deflation and food-price changes on margins.
- Review compliance with the $75.0 million minimum EBITDA covenant and exposure to LIBOR-based interest costs.
- Consider the potential balance-sheet effects of future lease accounting adoption and the Company’s remaining operating lease commitments through 2033.