Business context and reporting period
Ingles Markets, Incorporated operates 198 supermarkets across six southeastern states, with grocery retail as its primary business and additional fluid dairy and shopping-center rental operations. This unaudited Form 10-Q covers the 13-week quarter and 39 weeks ended June 24, 2023; comparisons are to periods ended June 25, 2022.
Financial results
| Metric | Three months ended June 24, 2023 | Three months ended June 25, 2022 | Nine months ended June 24, 2023 | Nine months ended June 25, 2022 |
|---|---|---|---|---|
| Net sales | $1,433.9 million | $1,458.2 million | $4,307.8 million | $4,226.8 million |
| Gross profit / margin | $338.1 million / 23.6% | $351.9 million / 24.1% | $1,035.2 million / 24.0% | $1,051.0 million / 24.9% |
| Operating income / margin | $67.3 million / 4.7% | $94.6 million / 6.5% | $220.7 million / 5.1% | $280.1 million / 6.6% |
| Net income / net margin | $48.3 million / 3.4% | $67.8 million / 4.6% | $158.2 million / 3.7% | $202.6 million / 4.8% |
| Class A diluted EPS | $2.54 | $3.57 | $8.33 | $10.67 |
Cash flow and investment: For the nine months, operating cash flow was $177.0 million, down from $261.6 million. Capital expenditures were $137.1 million, compared with $73.2 million; investing cash outflow was $135.2 million versus $181.8 million, with no short-term investment purchases in 2023 versus $110.2 million in 2022. Financing cash outflow was $28.2 million, including $19.0 million of debt principal payments and $9.2 million of dividends. Cash increased $13.5 million to $280.7 million.
Balance sheet and liquidity at June 24, 2023: Total assets were $2.407 billion and stockholders’ equity was $1.407 billion. Total debt, including current maturities, was approximately $553.4 million; operating lease liabilities totaled $43.0 million. The $150 million revolving credit line had no borrowings or letters of credit outstanding. Management said available resources, including operating cash flow and the line, should be sufficient for planned capital spending, working capital and debt service for the foreseeable future, while noting financing availability and terms are not assured.
Material changes versus prior comparable periods
- Quarterly sales declined 1.7%, while nine-month sales rose 1.9%. Fuel sales fell about 26% in the quarter and 14% over nine months; excluding fuel, comparable sales increased 3.8% and 4.4%, respectively.
- Profitability weakened: quarterly net income fell 28.8% and nine-month net income fell 21.9%. Gross margin contracted 0.5 percentage points in the quarter and 0.9 points over nine months.
- Management attributed lower earnings mainly to higher inventory/product costs and increased costs to attract and retain associates. Operating and administrative expenses rose 5.3% in the quarter and 5.7% over nine months.
- Nine-month operating cash flow decreased due to lower net income and greater working-capital needs. Debt declined from approximately $575.2 million in June 2022 to $553.4 million in June 2023.
Outlook, risks, and notable items
- Fiscal 2023 capital expenditure guidance was approximately $170–$190 million; $137.1 million had been spent through June 24. The company anticipates annual capital spending of approximately $100–$160 million going forward to maintain and improve its store base.
- The company expects to continue regular quarterly dividends, currently $0.165 per Class A share and $0.150 per Class B share, subject to board approval, results, financial condition, and debt restrictions.
- Management cited inflation, labor and utility costs, competition, fuel-price changes, supply and distribution disruptions, adverse weather affecting food production, and execution of store expansion and real-estate plans as risks. Food-at-home prices rose 4.7% and energy prices fell 16.7% over the 12 months ended June 2023, according to the filing.
- The company reported no asset impairments in the nine-month period. Management said ordinary-course legal proceedings are not expected to have a material effect. LIBOR-based debt and swaps transitioned to SOFR without material reported financial-statement impact. The company was in compliance with financial covenants.
- Interest-rate swaps had an aggregate notional amount of $152.6 million. Their fair-value changes are recorded in other comprehensive income; the filing reported a $14.8 million swap asset at quarter-end.
Important facts for investors to verify
- Whether sales and comparable-store growth excluding fuel can offset continued fuel-sales declines, and whether margin pressure from product and labor costs moderates.
- Execution and funding of the remaining fiscal 2023 capital plan, and whether operating cash flow recovers as working-capital needs change.
- Debt maturities, floating-rate exposure, covenant and dividend restrictions, and the effect of interest rates despite the swaps.
- The filing’s quarterly operating-expense percentage is not fully consistent: the percentage table shows 17.6% for the prior-year quarter, while the MD&A narrative cites 17.7%; confirm against the underlying financial statements.
- Actual results may differ from management’s outlook; the company states that interim results are not necessarily indicative of full-year results.