Ingles Markets, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Unaudited fiscal second quarter and first half ended March 28, 2020 (13 and 26 weeks, respectively). Comparisons are with the periods ended March 30, 2019, unless noted.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Net sales | $1,145.5 million | $1,001.8 million | $2,223.8 million | $2,063.7 million |
| Gross profit | $291.6 million | $244.3 million | $549.1 million | $502.7 million |
| Operating income | $63.3 million | $30.7 million | $101.8 million | $70.2 million |
| Net income | $40.3 million | $15.0 million | $58.0 million | $37.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $175.4 million | $108.2 million |
- Q2 sales increased 14.3% and net income rose to $40.3 million from $15.0 million. First-half sales increased 7.8% and net income increased to $58.0 million from $37.2 million.
- Q2 gross, operating and net margins were approximately 25.4%, 5.5% and 3.5%, respectively, versus 24.4%, 3.1% and 1.5%. First-half margins were 24.7%, 4.6% and 2.6%, versus 24.4%, 3.4% and 1.8%.
- Comparable grocery sales excluding gasoline rose 17.5% in Q2 and 9.7% in the first half. Q2 customer transactions increased 2.8% and average transaction size 14.3%, excluding gasoline. Gasoline sales dollars and gallons sold fell amid reduced travel and oversupply.
- First-half operating cash flow increased by $67.1 million year over year, reflecting higher net income and lower inventory balances, including inventory drawdown associated with pandemic-related sales. Investing cash use was $51.5 million, primarily capital expenditures of $56.8 million; financing cash use was $21.0 million. Cash ended the period at $145.0 million, versus $16.7 million a year earlier.
Debt, liquidity and balance sheet
- At March 28, 2020, total debt was approximately $842.1 million, compared with $857.5 million at March 2019. Cash was $145.0 million; the company had no borrowings under its $175 million credit line, which matures in September 2022. $9.1 million of letters of credit had been issued under the facility.
- In December 2019, Ingles refinanced $155 million of 5.75% senior notes with a ten-year amortizing real estate loan carrying floating-rate LIBOR-based interest. The notes were redeemed at 101.917% of par, resulting in $3.7 million of extinguishment costs, including a $3.0 million premium. Management said the refinancing was at significantly lower interest rates. First-half interest expense declined to $22.1 million from $24.2 million.
- Current assets were $556.0 million and current liabilities $294.9 million. The company reported $42.6 million of operating lease liabilities at quarter-end following adoption of the new lease standard; prior-year comparative periods were not restated.
- The company was in compliance with debt covenants. It reported approximately $889.2 million of additional borrowing capacity under the most restrictive covenant calculation, including the credit line, subject to facility terms and availability.
Outlook, risks and unusual items
- Management attributed the late-quarter sales surge to COVID-19 stay-at-home measures and closures of schools, restaurants and other businesses. Higher sales outpaced related operating expense increases. The filing cautions that sales growth for the remainder of FY2020 depends substantially on the duration of restrictions on restaurants and travel.
- Ingles remained open as an essential business, shortened hours, increased sanitation and distancing measures, and hired additional store and distribution-center staff. Management said the pandemic’s duration and effects on customers, suppliers and shopping-center tenants were uncertain. It also noted possible supplier plant closures and transportation disruptions.
- FY2020 capital expenditures were expected to be approximately $120 million to $160 million; management did not then anticipate a pandemic-related adverse effect on those plans. Longer-term annual capital expenditures were expected to be approximately $100 million to $160 million. No earnings or sales guidance was provided.
- The company expects to continue regular quarterly dividends, currently $0.165 per Class A share and $0.15 per Class B share, subject to board discretion, financial results and debt restrictions. Debt agreements limit certain additional dividends.
- Other risks include competition, regional economic conditions, food supply and weather, labor and utility costs, financing availability, and gasoline-price changes. Self-insurance reserves were $33.6 million and depend on claims estimates. Management said pending ordinary-course legal matters were not expected to have a material effect; no asset impairments were recorded in the first half.
- Interest-rate swap fair-value changes produced first-half other comprehensive expense of $8.4 million, net of tax; unrealized swap losses of $12.8 million were recorded as a liability. In November 2019, the company sold two land parcels for $4.3 million to an entity in which its chairman had a financial interest; independent appraisals were obtained and the Audit Committee approved the transactions.
- Management stated that disclosure controls were effective as of March 28, 2020, and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification priorities
- Assess how much of the Q2 and first-half comparable-sales and margin improvement came from temporary pandemic stock-up demand, and whether it persisted after quarter-end.
- Verify the new loan’s floating-rate terms, debt amortization and refinancing savings, along with the company’s covenant headroom and access to its credit line.
- Track cash conversion, inventory normalization, capital spending against the $120 million to $160 million FY2020 plan, and the sustainability of dividends.
- Monitor COVID-19-related labor costs, supplier and transportation disruptions, shopping-center tenant health, and self-insurance reserve developments.
- Review the related-party land sale, swap valuation exposure and the effect of lease obligations on ongoing liquidity.