Ingles Markets, Inc. — Q2 FY2021 Form 10-Q
Business context and period. Unaudited results cover the 13 weeks and 26 weeks ended March 27, 2021, compared with the periods ended March 28, 2020. Ingles operated 198 supermarkets across six southeastern states, with 110 in-store pharmacies and 107 fuel centers. Retail grocery is its primary business; other operations include fluid dairy and shopping center rentals.
Financial results and condition
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $1,184.6m | $1,145.5m | $2,375.0m | $2,223.8m |
| Gross profit | $310.5m | $291.6m | $624.7m | $549.1m |
| Income from operations | $74.3m | $63.3m | $150.8m | $101.8m |
| Net income | $52.2m | $40.3m | $106.0m | $58.0m |
| Operating cash flow | — | $114.7m | $175.4m |
- Growth and margins: Sales rose 3.4% in Q2 and 6.8% for the first half; net income increased 29.5% and 82.8%, respectively. Reported gross margin was 26.2% versus 25.4% in Q2 and 26.3% versus 24.7% for the first half. Operating margin was 6.3% versus 5.5% in Q2 and 6.3% versus 4.6% for the first half.
- Per-share results: Class A basic/diluted EPS was $2.65/$2.58 in Q2 and $5.38/$5.24 for six months, compared with $2.04/$1.99 and $2.94/$2.86, respectively. Class B EPS was $2.41 in Q2 and $4.89 for six months, versus $1.86 and $2.68.
- Cash flow and investment: First-half operating cash flow fell to $114.7m from $175.4m; management attributed the comparison partly to unusually large inventory drawdowns in March 2020. Capital expenditures were $69.4m; investing cash outflow was $68.1m. Financing cash outflow was $44.6m, including approximately $80.0m of share repurchases. Cash increased by $2.0m to $8.9m.
- Debt and liquidity: Total debt was approximately $647.8m at March 27, 2021. This included $295.0m of senior notes, $93.1m drawn on the $175m credit line, and $63.5m of facility bonds, alongside other secured debt. Current assets were $497.0m and current liabilities $294.0m. The company reported covenant compliance and stated it believed available resources would cover planned capital spending, working capital and debt service.
- Shareholder returns: Quarterly dividends were $0.165 per Class A share and $0.15 per Class B share, unchanged from the comparable period. The Board authorized repurchases of up to 2.0m shares; 1,265,400 Class B shares were repurchased for about $80.0m at $63.22 per share by quarter-end. The repurchase was from a trust associated with the estate of former CEO Robert P. Ingle.
Changes, outlook and risks
- Management linked continued grocery demand to the COVID-19 pandemic. First-half grocery comparable-store sales, excluding gasoline, increased 8.6%; Q2 increased 2.6%. Customer transactions declined while average transaction size rose, consistent with customers consolidating trips. Q2 gasoline sales increased, while first-half gasoline sales were lower year over year.
- Management cited less discounting and shrink as drivers of improved gross margin. Pandemic-related cleaning and labor needs, repairs, depreciation and payment-card costs contributed to higher operating expenses in dollars. Interest expense declined as debt was reduced or refinanced and lower LIBOR reduced costs on some borrowings. The prior-year first half included a $3.7m debt-extinguishment loss.
- FY2021 capital expenditure guidance was approximately $120m–$140m; the company indicated a longer-term annual range of approximately $100m–$160m. Projects include store modernization, new stores, equipment, technology, distribution and milk-plant investments. Construction commitments were $10.2m at quarter-end.
- Management expects to continue quarterly cash dividends but noted they remain subject to Board discretion, financial results and debt restrictions. Results are not necessarily indicative of the full fiscal year.
- Key risks identified include pandemic and economic effects, competition and pricing pressure, gasoline prices, labor and utility costs, food distribution disruption, financing availability, execution and performance of new or remodeled stores, real estate outcomes, and weather or other effects on food production and delivery. Self-insurance reserves were $34.3m; management said pending legal matters were not expected to materially affect results. No long-lived asset impairments were recorded in the first half.
- The company used interest-rate swaps with aggregate notional value of $183.5m to hedge floating-rate exposure and disclosed LIBOR-related transition considerations. Management reported disclosure controls were effective at period-end.
Important facts for investors to verify
- How sales, comparable-store trends, margins and customer behavior evolve as pandemic-related demand and restrictions change.
- Whether first-half operating cash flow weakness reflects working-capital timing, and how cash generation compares with planned capital expenditures and debt service.
- Debt-line availability, covenant and dividend restrictions, interest-rate exposure and LIBOR transition effects.
- The terms, related-party review and capital-allocation rationale for the approximately $80m Class B share repurchase, as well as remaining authorization.
- The filing’s Q2 gross-margin comparison is inconsistent: the percentage table reports 25.4% for the prior year, while MD&A narrative reports 25.5%. Confirm against the company’s filed financial statements.