Ingles Markets, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2018; comparative periods ended June 24, 2017. The company operates 200 supermarkets in the Southeast, along with a fluid dairy business and shopping-center rentals. Financial statements are unaudited.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1,034.8 million, up 5.1% | $3,033.1 million, up 4.1% |
| Gross profit / margin | $243.9 million / 23.6% (prior: 24.1%) | $723.7 million / 23.9% (prior: 24.1%) |
| Operating income / margin | $29.8 million / 2.9% (prior: $29.7 million / 3.0%) | $89.2 million / 2.9% (prior: $86.9 million / 3.0%) |
| Income before taxes | $18.5 million (prior: $19.0 million) | $56.1 million (prior: $54.6 million) |
| Income tax (benefit) expense | $(6.0) million (prior: $7.4 million expense) | $(22.9) million (prior: $20.1 million expense) |
| Net income | $24.5 million (prior: $11.5 million) | $78.9 million (prior: $34.5 million) |
| Operating cash flow | Not stated for the quarter | $107.6 million (prior: $106.6 million) |
| Capital expenditures | Not stated for the quarter | $120.5 million (prior: $90.0 million) |
Class A diluted EPS was $1.21 for the quarter and $3.90 for the nine months; Class B diluted EPS was $1.13 and $3.64, respectively. Quarterly dividends remained $0.165 per Class A share and $0.15 per Class B share.
Balance sheet and liquidity
- At June 30, 2018, cash was $11.6 million, total assets $1.81 billion, and stockholders’ equity $580.2 million.
- Total debt was $887.8 million, including $12.8 million current debt. Debt was $870.7 million at June 2017. The company had $20.1 million drawn on its $175 million credit line, which matures in September 2022; $9.6 million of letters of credit were issued.
- Cash declined $12.3 million from fiscal year-end. Operating cash flow was slightly higher year over year, while investing cash use increased to $119.1 million, primarily reflecting higher capital spending and acquisition of previously leased properties. Financing activities used $0.8 million, compared with $16.4 million in the prior period.
Changes, outlook, and risks
- Quarterly sales growth reflected increases across retail categories, particularly gasoline: gasoline sales dollars rose 27.8%, with average retail prices up 23.4% and gallons sold up about 3.6%. Excluding gasoline and the prior-year Easter timing effect, grocery comparable-store sales increased 1.8%. For nine months, comparable-store sales excluding gasoline rose 1.9%.
- Gross margin declined as a percentage of sales, in part reflecting the sales mix. Excluding gasoline, grocery gross margin improved 34 basis points for the quarter and 17 basis points for nine months. Operating and administrative expenses rose in dollars, including higher wages, maintenance, bank charges, and insurance; excluding gasoline-related sales and expenses, operating costs as a share of sales increased.
- Management attributed most of the net-income increase to income tax benefits, not operating growth. The nine-month tax benefit reflects the federal corporate tax rate reduction, tax-calculation changes and prior-year tax return adjustments. A $10.6 million reduction in deferred tax liabilities was recorded in the June quarter; the company also reported a $33.1 million income tax receivable. It had recorded a separate $26.7 million deferred-tax-liability reduction in the December 2017 quarter.
- Fiscal 2018 capital expenditures were expected to total approximately $140–$180 million; management expected net annual capital expenditures of about $100–$160 million going forward. Projects include new stores, remodels, equipment, technology and dairy-plant improvements. Management expects available cash flow and financing to meet foreseeable needs, but notes financing may not be available on acceptable terms.
- Management cited competition, regional economic conditions, food-production and delivery disruptions, gasoline prices, labor and utility costs, financing availability, and execution of store expansion and remodeling as risks. Rising LIBOR contributed to higher interest expense. A $58.5 million interest-rate swap fixed the rate at 3.92% on associated floating-rate debt.
- The company was in compliance with debt covenants at June 30, 2018. Debt agreements include cross-default provisions and restrictions on additional dividends. Management said pending ordinary-course legal claims were not expected to materially affect financial position or results. Self-insurance liabilities totaled $34.2 million and depend on claims estimates.
Important facts for investors to verify
- How much of reported earnings growth is attributable to tax benefits versus recurring operating performance.
- Underlying grocery sales and margins after separating gasoline revenue, fuel-price effects, and Easter timing.
- Execution and returns on the elevated capital-spending program, and resulting borrowing and cash needs.
- Debt-service exposure to floating rates, covenant headroom, and the effect of cross-default or dividend restrictions.
- Potential variability in self-insurance claims and the realization and timing of the reported tax receivable.