Ingles Markets, Inc. — Q3 FY2017 Form 10-Q
Reporting period: 13 weeks ended June 24, 2017; year-to-date figures cover 39 weeks. Comparative periods ended June 25, 2016. Ingles operated 199 supermarkets across six Southeastern states. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $984.4 million | $957.2 million | $2,913.3 million | $2,832.6 million |
| Gross profit | $237.1 million | $232.9 million | $702.3 million | $687.2 million |
| Gross margin | 24.1% | 24.3% | 24.1% | 24.3% |
| Operating income | $29.7 million | $31.9 million | $86.9 million | $96.6 million |
| Net income | $11.5 million | $12.7 million | $34.5 million | $40.0 million |
| Class A diluted EPS | $0.57 | $0.63 | $1.70 | $1.98 |
| Interest expense | $11.7 million | $11.2 million | $34.8 million | $34.4 million |
Q3 sales rose 2.8%, while net income fell about 9.0%. For the nine months, sales rose about 2.9% and net income declined about 13.8%. Operating and administrative expenses increased 4.1% in Q3 and 4.6% year to date, faster than sales; those expenses were 21.1% and 21.2% of sales, respectively, versus 20.8% in both prior-year periods.
For the quarter, excluding gasoline and the effect of Easter timing, grocery comparable-store sales increased 0.8%; excluding gasoline, customer transactions were level and average transaction size increased 2.0%. Year to date, grocery comparable-store sales excluding gasoline increased 0.8%, with transactions up 0.8% and average transaction size up 0.5%. Q3 gasoline sales and gallons sold each increased approximately 3.8%. Easter fell in Q3 this year but in Q2 last year.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $106.6 million, compared with $103.6 million a year earlier. Capital expenditures were $90.0 million, versus $107.8 million; investing cash use was $87.9 million.
- Cash increased to $8.0 million at June 24, 2017, from $5.7 million at September 24, 2016. Financing activities used $16.4 million, including $9.7 million of dividends and $9.5 million of long-term debt principal payments.
- Total debt was $870.7 million at June 24, 2017, comprising $37.1 million current and $833.6 million long-term debt. The company had $700 million of 5.75% senior notes due 2023, facility bonds and other secured debt.
- The $175 million revolving credit line matures in June 2018; $2.8 million was drawn and $9.6 million of letters of credit had been issued. The company said it was pursuing renewal or refinancing of the line and approximately $25.1 million of secured borrowings due in June 2018, and expected completion well before maturity.
- The company reported compliance with debt covenants and said it believed available financing and internally generated funds would meet foreseeable needs. Debt agreements include cross-default provisions; financing availability and terms are not assured.
- Stockholders’ equity was $494.9 million, compared with $470.2 million at September 24, 2016. Current liabilities were $265.3 million and current assets $431.4 million.
Management outlook, risks and notable items
- FY2017 capital expenditure plans were approximately $100–$140 million; expected net annual capital expenditures going forward were approximately $100–$160 million. Construction commitments outstanding were $19.9 million.
- Management expected new and remodeled stores, and maturation of previously opened or expanded stores, to support sales growth. Growth would depend on economic conditions, inflation, gasoline prices and raw milk prices.
- Management expects to continue regular quarterly dividends of $0.165 per Class A share and $0.15 per Class B share, subject to board discretion, financial results and debt restrictions.
- Management attributed expense increases principally to salaries and wages, including additional labor for merchandising changes and increased competition for labor; repairs and maintenance; depreciation from capital projects; and, year to date, bank card-processing charges. Grocery gross margin excluding gasoline declined 64 basis points in Q3 and five basis points year to date.
- Higher LIBOR contributed to increased Q3 interest expense on floating-rate debt, despite lower total debt than in the prior-year quarter. Self-insurance liabilities totaled $35.3 million, including estimates for incurred-but-not-reported claims; the company’s property is largely self-insured for casualty and business interruption losses.
- Q3 included a $0.1 million gain on asset disposals, versus a $1.6 million loss in the prior-year quarter, when buildings were demolished for redevelopment. Year-to-date, asset disposals generated a $1.5 million gain versus a $0.9 million loss. No asset impairments were recorded in the nine-month period.
- The filing identifies competition, economic and climatic conditions, labor and utility costs, gasoline prices, financing availability, expansion execution and real-estate performance as risks. The company was evaluating the effects of new lease and revenue-recognition accounting standards.
Important facts for investors to verify
- Progress and terms of refinancing the credit line and secured borrowings maturing in June 2018.
- Whether sales growth and comparable-store performance persist after separating gasoline, Easter timing and new-store effects.
- Whether operating costs and weaker grocery margins continue to pressure operating income and earnings.
- Delivery and funding of the stated capital expenditure program, including the $19.9 million of construction commitments.
- Debt covenant headroom, floating-rate exposure, and the assumptions underlying self-insurance estimates and recoveries.