Business context and reporting period
Ingles Markets, Inc. filed this Form 10-K for the 52-week fiscal year ended September 25, 2021 (not a standalone fourth-quarter report). The company operates 198 supermarkets across six Southeastern states, alongside fuel centers, pharmacies, a fluid dairy business and shopping-center rentals. Grocery retail is its primary business.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $4.988 billion | $4.611 billion |
| Gross profit / margin | $1.303 billion / 26.1% | $1.198 billion / 26.0% |
| Operating income / margin | $350.1 million / 7.0% | $280.9 million / 6.1% |
| Net income / margin | $249.7 million / 5.0% | $178.6 million / 3.9% |
| Operating cash flow | $306.3 million | $350.1 million |
| Capital expenditures | $140.6 million | $122.8 million |
| Total debt | $589.5 million | $605.5 million |
Basic EPS was $13.06 for Class A and $11.87 for Class B, versus $9.06 and $8.24, respectively, in FY2020. Cash and cash equivalents were $70.3 million, with $5.0 million of short-term investments, at year-end; current liabilities were $306.1 million. The $150 million revolving credit line was undrawn. The company reported compliance with its debt covenants.
Changes versus prior year
Sales increased 8.2%; comparable retail sales excluding gasoline rose 5.4%. Excluding gasoline, transaction count increased 0.7% and average transaction size increased 4.8%. Gasoline gallons sold rose 5.7%, while per-gallon prices increased 20.3%. Management attributed elevated grocery sales to pandemic-related at-home consumption, continuing effects of restrictions, new and remodeled stores, and inflation.
Net income increased 39.8%. Operating expenses rose in dollars but declined as a share of sales, from 20.0% to 19.3%, reflecting sales leverage. Operating cash flow fell despite higher earnings, primarily because more cash was used in working capital. Interest expense declined to $24.3 million from $40.5 million, following debt refinancing. FY2021 included a $1.1 million early-extinguishment loss, compared with $7.1 million in FY2020.
Outlook, risks and unusual items
Management expects pandemic effects and inflation to influence FY2022 sales, while noting that the duration and extent are uncertain. Plans include new stores, significant remodeling, and additional fuel stations and pharmacies. FY2022 capital expenditures were estimated at $120–$160 million; management indicated a longer-term annual range of approximately $100–$160 million.
Major risks include the uncertain pandemic impact, food, fuel and labor inflation, labor and truck-driver shortages, supply-chain disruption and product outages, intense competition including online channels, gasoline price volatility, and the company’s concentration in the Southeast. Construction material and labor shortages slowed some development plans. OSHA vaccination-or-testing guidelines for large employers were being challenged in court at the filing date.
In June 2021, the company issued $350 million of 4.00% senior notes due 2031 and redeemed the remaining $295 million of 5.75% notes due 2023 at par. It repurchased approximately 1.3 million Class B shares for $80 million from a trust associated with the estate of its former CEO; the filing identifies this as a related-party transaction. Regular annual dividends were $0.66 per Class A share and $0.60 per Class B share, subject to board discretion and debt restrictions. Robert P. Ingle II held approximately 71% of combined voting power. The auditor gave unqualified opinions on the financial statements and internal controls; vendor allowances were identified as a critical audit matter.
Most important facts for investors to verify
- Whether elevated pandemic-era sales and margins are sustainable as consumer behavior and seasonal patterns normalize.
- Whether inflation, labor scarcity and distribution constraints pressure gross margins, expenses and product availability.
- Cash conversion and working-capital trends, given operating cash flow declined to $306.3 million.
- Debt terms, refinancing effects, covenant restrictions on dividends, and the company’s capacity to fund planned capital spending.
- Details and governance treatment of the $80 million related-party share repurchase, alongside the controlling shareholder’s voting power.
- Vendor allowance accounting and the terms, recognition and sensitivity of these allowances, which were a critical audit matter.