Ingles Markets, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 26, 2021; comparisons are to the periods ended June 27, 2020. Ingles operated 198 supermarkets across six southeastern states, with 111 in-store pharmacies and 107 fuel centers. Results are unaudited.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1.277 billion, up 7.4% | $3.652 billion, up 7.0% |
| Gross profit / margin | $337.5 million / 26.4%; prior year 27.3% | $962.2 million / 26.3%; prior year 25.6% |
| Operating income | $100.6 million, versus $91.5 million | $251.3 million, versus $193.2 million |
| Net income | $72.0 million, versus $62.8 million | $178.0 million, versus $120.7 million |
| Class A diluted EPS | $3.79, versus $3.10 | $8.98, versus $5.96 |
| Operating cash flow | Not provided for the quarter | $213.9 million, versus $229.0 million |
For the nine months, capital expenditures were $108.0 million. Investing activities used $396.4 million, including $295.0 million placed in short-term investments pending redemption of notes. Financing activities provided $200.1 million. Cash was $24.5 million and short-term investments were $295.0 million at quarter-end.
Liquidity, debt and capital
Total assets were $2.247 billion and stockholders’ equity was $914.3 million at June 26, 2021. Current assets were $800.4 million and current liabilities were $585.6 million. Reported debt totaled approximately $901.2 million, including $295.0 million of 2023 notes classified as current. In June, the company issued $350.0 million of 4.00% senior notes due 2031 and set aside $295.0 million of proceeds to redeem its 5.75% notes due 2023. The 2023 notes were redeemed at par on July 16, 2021; excluding those notes, debt at quarter-end was approximately $606.2 million.
The company had no borrowings under its new $150.0 million revolving credit line at quarter-end and was in compliance with debt covenants. It repurchased approximately 1.3 million Class B shares from a trust associated with the estate of its former CEO for approximately $80.0 million. Cash dividends during the nine months were $0.495 per Class A share and $0.450 per Class B share.
Changes and management commentary
- Quarterly grocery sales excluding gasoline declined 0.5% year over year, while comparable grocery sales excluding gasoline declined 0.9%; they were 23.0% above the comparable pre-pandemic quarter in 2019. More store visits and smaller average transactions accompanied reopening.
- Nine-month comparable grocery sales excluding gasoline increased 5.2%. Gasoline sales benefited from increased travel and higher market prices.
- Nine-month gross margin improved year over year, which management attributed mainly to less discounting and shrink. Quarterly gross margin declined year over year, although retail grocery margin excluding gasoline was 55 basis points higher.
- Interest expense fell to $18.1 million for the nine months from $31.8 million, reflecting debt reduction or refinancing and lower LIBOR. The quarter included a $1.1 million loss from writing off capitalized loan costs.
Outlook, risks and contingencies
Management forecast fiscal 2021 capital expenditures of approximately $120–$140 million and indicated a longer-term annual range of approximately $100–$160 million. It said current financial resources, including operating cash flow and financing availability, should meet planned capital and working-capital needs for the foreseeable future, while noting financing availability and terms are not assured. The company expects to continue quarterly dividends, subject to board decisions, results, financial condition and debt restrictions; no specific earnings or sales guidance was provided.
Management cited labor shortages and wage pressure, product availability disruptions, transportation delays, and rising food and general inflation. It also identified uncertainty from COVID-19 variants, school reopenings and changes to economic assistance programs. Other risks include competition, economic conditions, food supply disruptions, labor and utility costs, financing availability and execution of store expansion plans. Ordinary-course legal claims were not expected by management to materially affect financial position, results or cash flows. Self-insurance reserves were $33.7 million; estimates for incurred-but-not-reported claims may fluctuate.
Important facts for investors to verify
- Post-quarter redemption of the $295.0 million 2023 notes and the resulting debt balance, interest expense and liquidity.
- Whether pandemic-related sales and margin benefits persist as customer behavior normalizes, and the effect of inflation, wage pressure and supply constraints.
- Cash flow conversion and working-capital needs, including inventory levels and the high period capital spending.
- Terms and covenant restrictions under the 2031 notes, revolving credit line and other debt, including limits on additional dividends.
- Related-party share repurchase details and the continuing impact of share count changes on per-share results.