Weis Markets, Inc. Form 10-Q Summary
Business Context and Reporting Period
Weis Markets, Inc. operated 164 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia as of June 29, 2013. The company reports one operating segment and generates revenue primarily from grocery, pharmacy, fuel, prepared foods and related retail products.
The filing covers the 13-week quarter and 26-week year-to-date periods ended June 29, 2013, compared with the corresponding periods ended June 30, 2012. The financial statements are unaudited.
Key Financial Metrics
| Metric | 13 Weeks Ended June 29, 2013 | Year-to-Date 2013 | Change vs. Prior Comparable Period |
|---|---|---|---|
| Net sales | $662.1 million | $1,344.8 million | (2.2)% quarterly; 0.5% year-to-date |
| Gross profit | $190.3 million | $381.4 million | 1.5% quarterly; 2.9% year-to-date |
| Gross margin | 28.7% | 28.4% | Improved from 27.7% in the financial statements |
| Operating income | $37.6 million | $68.5 million | 6.5% quarterly; 4.3% year-to-date |
| Operating margin | 5.7% | 5.1% | Improved from 5.2% and 4.9%, respectively |
| Net income | $24.2 million | $44.3 million | 4.2% quarterly; 2.5% year-to-date |
| Net margin | 3.7% | 3.3% | Improved from 3.4% and 3.2%, respectively |
| Diluted EPS | $0.90 | $1.65 | 4.7% quarterly; 2.5% year-to-date |
| Cash dividends per share | $0.30 | $0.60 | Unchanged |
Operating, general and administrative expense was $152.7 million in the quarter and $312.9 million year-to-date, increasing 0.3% and 2.6%, respectively. The expense ratio rose to 23.1% quarterly and 23.3% year-to-date from 22.5% and 22.8%.
Net cash provided by operating activities was $78.4 million year-to-date, compared with $64.1 million in the prior year. Capital expenditures were $57.3 million, versus $40.4 million, and net cash used in investing activities was $47.3 million, versus $38.7 million. Dividends paid were $16.1 million in both periods.
Cash and cash equivalents were $36.3 million at June 29, 2013, compared with $21.4 million at December 29, 2012. Marketable securities were $75.3 million, down from $82.5 million. Total current assets were $417.5 million against current liabilities of $185.2 million. The filing does not identify a separate borrowings or debt balance; total liabilities were $301.3 million, including deferred taxes, postretirement obligations and operating liabilities.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined because Easter shifted into the first quarter in 2013 rather than the second quarter in 2012. Management estimated the quarter-to-quarter holiday impact at approximately $8.6 million.
- Comparable store sales decreased 4.8% in the quarter and 2.0% year-to-date; excluding fuel, the decreases were 5.0% and 2.3%.
- Identical customer visits declined 5.0% in the quarter and 3.2% year-to-date, while average sales per transaction increased 0.1% and 1.2%, respectively.
- Pharmacy comparable sales fell 5.2% quarterly and 5.9% year-to-date, including estimated impacts from brand-to-generic conversions of $5.0 million and $11.5 million.
- Comparable petroleum sales declined 9.9% quarterly and 8.3% year-to-date. Comparable meat and frozen food sales also declined, while produce sales increased 1.0% year-to-date.
- Gross profit and margins improved despite lower quarterly sales, supported by lower product cost pressures, promotional activity and inventory-control initiatives.
- Depreciation and amortization increased to $14.2 million in the quarter from $12.4 million and to $28.0 million year-to-date from $24.8 million, reflecting higher capital investment.
- Investment income increased to $1.8 million quarterly and $2.8 million year-to-date, primarily due to higher gains on equity-security sales. The prior-year periods included $414,000 of other income from a bargain purchase gain that did not recur.
- The effective tax rate increased to 38.7% quarterly and 37.9% year-to-date from 37.1% and 36.8%.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2013 capital investment at approximately $135.0 million, including new superstores, remodels, future expansion sites, technology and distribution-facility upgrades.
- The company expects to fund working capital and capital expansion through cash and investment reserves and internally generated operating cash flow.
- Management expected inventory levels to continue declining during 2013 as new purchasing procedures improve freshness, reduce spoilage and shrink, and increase warehouse efficiency.
- Management expected diesel prices to remain fairly steady through the remainder of 2013, but profitability remains exposed to fuel, utility, product-cost and other commodity-price volatility.
- The company continued its “Get Grillin’,” “Price Freeze,” “Gas Rewards” and targeted loyalty programs to address value-focused customers and competitive pressure.
- Management cited slow economic growth, high unemployment, declining household income and cautious consumer spending in several operating regions.
- Future pharmacy sales may remain pressured by additional brand-to-generic conversions, although prior Lipitor and Plavix conversions had cycled by the reporting period.
- The company expressed concern about the potential future effect of the Patient Protection and Affordable Care Act on operating expenses and noted that rising expenses may not be fully recoverable through pricing.
- Outstanding letters of credit totaled $13.5 million, primarily supporting performance, payment, deposit or surety obligations. Management did not expect to draw on them.
- The company had operating lease commitments on store facilities expiring at various dates through 2028. The filing states that no other material capital commitments existed as of June 29, 2013.
- Marketable securities were available-for-sale investments, including municipal bonds and equity securities. Accumulated other comprehensive income declined to $3.9 million from $5.0 million due to marketable-security losses and reclassifications.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the sustainability of improved gross and operating margins as comparable-store traffic remains weak and promotional spending continues.
- Reconcile the filing’s MD&A reference to a 27.2% prior-year gross margin with the consolidated income statements, which show 27.7% for the comparable periods.
- Assess whether operating cash flow can fund the approximately $135.0 million capital program while maintaining dividends and investment reserves.
- Monitor pharmacy sales and margin effects from additional brand-to-generic conversions.
- Review the composition, credit quality, maturities and valuation sensitivity of the $75.3 million marketable-securities portfolio.
- Confirm the absence of funded debt or other financing obligations not separately presented in the extracted balance sheet and notes.
- Evaluate exposure to labor, healthcare, utility, fuel, commodity-cost, competitive and regional economic pressures.
- Consider the impact of lower customer visits, fuel sales and petroleum prices on future revenue trends.